<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-37067
333-68711
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 24, 1997)
3,000,000 SHARES
DEVELOPERS DIVERSIFIED REALTY CORPORATION
COMMON SHARES
------------------------
We are a fully integrated real estate company that develops, acquires, owns
and manages shopping centers. We operate as a real estate investment trust for
federal income tax purposes, and we are self-administered and self-managed. We
are offering and selling 3,000,000 common shares with this prospectus supplement
and the accompanying prospectus. We will receive the proceeds from the sale of
the common shares. Our common shares are listed on the New York Stock Exchange
under the symbol "DDR". The last reported sale price for the common shares on
December 10, 1998 was $18 9/16 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE S-3 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price................................... $18.5625 $55,687,500
Underwriting Discount................................... $.95 $2,850,000
Proceeds, before expenses, to Developers Diversified
Realty Corporation.................................... $17.6125 $52,837,500
</TABLE>
The underwriters may also purchase up to an additional 450,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus supplement to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The common shares will be ready for delivery in New York, New York on or
about December 15, 1998.
------------------------
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
------------------------
The date of this prospectus supplement is December 10, 1998.
<PAGE> 2
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Forward-Looking Information................................. S-3
Risk Factors................................................ S-3
The Company................................................. S-4
Recent Developments......................................... S-5
Summary Selected Consolidated Financial Data................ S-6
Use of Proceeds............................................. S-8
Price Range of Common Shares and Distributions.............. S-8
Certain Federal Income Tax Considerations................... S-8
Underwriting................................................ S-9
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
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>
------------------------
You should rely only on the information contained in this prospectus
supplement and the accompanying prospectus. We have not, and the underwriters
have not, authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or sale is not
permitted.
The information in this prospectus supplement may not contain all the
information that may be important to you. You should read the entire prospectus
supplement and the accompanying prospectus, as well as the documents
incorporated by reference in the prospectus, before making an investment
decision. All references to "we," "us" or the "Company" in this prospectus
supplement and the accompanying prospectus mean Developers Diversified Realty
Corporation and all entities owned or controlled by Developers Diversified
Realty Corporation, except where it is made clear that the term means only the
parent company.
S-2
<PAGE> 3
FORWARD-LOOKING INFORMATION
This prospectus supplement and the accompanying prospectus include and
incorporate by reference 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. We intend
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. Forward-looking statements are generally identifiable by use of the
words "believe," "expect," "intend," "anticipate," "plan," "estimate," "project"
or similar expressions. Our ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Actual results could differ
materially from those in forward-looking statements due to, among other reasons,
the factors described under the caption "Risk Factors" herein. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below before purchasing common shares in this offering.
THERE ARE RISKS INHERENT IN OUR REAL ESTATE INVESTMENTS
The Economic Performance and Value of Our Centers Depends on Many Factors.
The economic performance and value of our real estate holdings can be affected
by many factors including the following:
X changes in the national, regional and local economic climate;
X local conditions such as an oversupply of space or a reduction in
demand for real estate in the area;
X the attractiveness of our properties to tenants;
X competition from other available space; and
X increased operating costs.
Our Real Estate Development Activities May Not Be Completed or Be
Profitable. We intend to continue to actively pursue shopping center development
projects, including the expansion of existing centers. Our current projects
generally require the expenditure of capital and various forms of government and
other approvals. We cannot be sure that we will receive such necessary
government and other approvals. Consequently, we cannot be sure that any such
projects will be completed, even after the expenditure of capital, or that such
projects will prove to be profitable.
We Depend on Rental Income from Real Property. Substantially all of our
income is derived from rental income from real property. As a result, our income
and funds for distribution would be negatively affected if a significant number
of our tenants were unable to meet their obligations to us or if we were unable
to lease a significant amount of space in our properties on economically
favorable lease terms. We cannot be sure that any tenant whose lease expires in
the future will renew such lease or that we will be able to re-lease space on
economically advantageous terms.
Our Real Estate Investments Contain Environmental Risks. Under various
federal, state and local laws, ordinances and regulations, we may be considered
an owner or operator of real property or may have arranged for the disposal or
treatment of hazardous or toxic substances. As a result, we may become liable
for the costs of removal or remediation of certain hazardous substances released
on or in our property. We may also be liable for other potential costs that
could relate to hazardous or toxic substances (including governmental fines and
injuries to persons and property). We may incur such liability whether or not we
knew of, or were responsible for, the presence of such hazardous or toxic
substances.
S-3
<PAGE> 4
WE RELY ON MAJOR TENANTS
As of October 1, 1998, the annualized base rental revenues from Wal-Mart
and Kmart stores represented 5.8% and 4.2%, respectively, of the aggregate
annualized shopping center base rental revenues from the properties we owned or
had an interest in. These percentages include anchor tenant leases signed as of
October 1, 1998 relating to approximately 320,000 square feet, under which some
of the tenants have not yet occupied the subject space or commenced rental
payments.
We 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, we could be adversely affected in the event that either
Wal-Mart or Kmart does not renew its leases as they expire.
We could also be adversely affected in the event of a downturn in the
business of other major tenants. However, as of October 1, 1998, we received no
more than 2.7% of our shopping center base rental revenues from any other single
tenant.
OUR ARTICLES OF INCORPORATION CONTAIN LIMITATIONS ON ACQUISITION AND CHANGE IN
CONTROL
Our Articles of Incorporation impose certain restrictions on the ownership
of our common shares so that we can maintain our qualification as a real estate
investment trust. Such restrictions are likely to discourage third parties from
acquiring control of us without consent of our Board of Directors even if a
change in control were in the interest of shareholders.
THERE IS NO LIMITATION IN OUR ORGANIZATIONAL DOCUMENTS ON THE INCURRENCE OF DEBT
We intend 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%. However, our organizational documents do not contain any limitation on the
amount or percentage of indebtedness we may incur. Despite this lack of
limitation, the indenture and credit agreements that govern certain of our
outstanding indebtedness do contain limits on our ability to incur additional
indebtedness.
THERE WOULD BE AN ADVERSE IMPACT ON OUR DISTRIBUTIONS IF WE FAILED TO QUALIFY AS
A REIT
Since our initial public offering in February 1993, we have operated in a
manner to qualify as a real estate investment trust (a "REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"). We intend to continue to
operate in such a manner so we continue to qualify as a REIT under the Code.
Although we believe that we will continue to operate in such a manner, we cannot
be sure that we will remain qualified as a REIT. If we were to fail to qualify
as a REIT in any taxable year, we would not be allowed a deduction for
distributions to shareholders in computing taxable income. We would also be
subject to federal income tax (including any applicable alternative minimum tax)
on our taxable income at regular corporate rates.
THE COMPANY
We are a self-administered and self-managed REIT that was formed in
November 1992 by the principals of the entities 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. We believe that our portfolio of shopping center properties is
one of the largest (measured by amount of total gross leasable area ("GLA"))
currently held by any publicly traded REIT. At October 1, 1998, we owned or had
an interest in:
X 159 shopping centers (the "Properties"), encompassing
approximately 40.4 million square feet of GLA, of which we own
32.1 million square feet; and
S-4
<PAGE> 5
X several parcels of undeveloped land for future development which
are typically located adjacent to shopping centers we own.
In addition to the properties we own or in which we have an interest, we
manage 22 properties owned by third parties containing an aggregate of
approximately 2.4 million square feet of GLA.
Our shopping center properties are located in 35 states, principally in the
East and Midwest, with significant concentrations in Ohio, Florida, Utah,
Michigan and North Carolina.
RECENT DEVELOPMENTS
We have entered into a definitive agreement to make a series of strategic
investments in American Industrial Properties ("AIP"). AIP's common shares are
listed on the New York Stock Exchange under the symbol "IND". Under the terms of
a share purchase agreement effective July 30, 1998, we purchased 949,147 newly
issued common shares of AIP for approximately $14.7 million. Under the terms of
a separate agreement, also effective as of July 30, 1998, we acquired an
additional 1,258,471 newly issued AIP shares in exchange for five light
industrial properties valued at approximately $19.5 million. 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.
On November 20, 1998, the shareholders of AIP approved additional purchases
by us of up to 5,226,583 newly issued shares of AIP for approximately $81.0
million. We purchased 2,815,192 of these additional shares for approximately
$43.6 million on November 20, 1998 and another 606,452 of the additional shares
for approximately $9.4 million on December 8, 1998. Combined, our acquired
shares represent approximately 34% of AIP's total outstanding shares. Pursuant
to the agreement, AIP may, under certain circumstances and subject to certain
limitations, exercise a put right that would require us to purchase additional
common or convertible preferred shares of AIP for a total amount not to exceed
$200 million at a price not to exceed $15.50 and $14.00 per share, respectively.
AIP can only exercise its right to put these additional shares for the purpose
of financing property acquisitions approved by AIP's Board of Trust Managers.
On November 19, 1998, we announced that we had increased the size of our
primary unsecured line of credit to $375 million from $300 million. The revised
line of credit continues to contain a competitive bid feature and bears interest
at a rate equal to the London Interbank Offered Rate (LIBOR) plus 0.85%. This
line of credit matures in May 2001.
On November 19, 1998, we also announced that the eleven members of our
executive committee, either through the exercise of previously granted stock
options or the direct purchase of unissued shares had acquired 974,663 of our
common shares. This acquisition of shares by the executive committee raised the
ownership of our common shares by our senior management to 3.8% of our
outstanding shares. A five-year personal loan program at market interest rates
from First Chicago/Bank One financed the exercise of options and the purchase of
unissued shares. Participants in the program are responsible for repayment of
these personal loans and have fully indemnified us in light of our guarantee
that the loans will be repaid.
On December 9, 1998, we announced the private placement of $35 million of
preferred equity securities and a warrant to purchase our common or preferred
shares with AEW Targeted Securities Fund, L.P., an investment partnership
managed by AEW Capital Management, L.P. ("AEW"). Our proceeds from this private
placement were used to repay amounts outstanding on our unsecured lines of
credit. These preferred equity securities are structured as 8.5% cumulative
redeemable preferred units of DDRC Great Northern L.P., a partnership we
control. AEW also has the option to convert its preferred units into our common
shares at a price of $21 5/8 per share. The preferred units are redeemable by
DDRC Great Northern L.P. after five years. In addition, if the warrant is
exercised we have the right to redeem the preferred units. Generally, the
warrant has a perpetual term, but will expire upon redemption of the preferred
units.
S-5
<PAGE> 6
SUMMARY 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 Annual Report on Form 10-K
for the year ended December 31, 1997 and its Quarterly Report on Form 10-Q for
the nine-month period ended September 30, 1998, incorporated by reference in
this prospectus supplement.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues from rental operations......... $165,782 $120,992 $169,040 $130,905 $107,805 $81,974 $54,531
Expenses:
Rental operation expenses............. 43,023 33,055 47,017 35,123 28,069 22,802 16,863
Depreciation and amortization......... 31,638 23,509 32,313 25,062 21,865 16,211 10,393
Interest expense...................... 41,917 25,460 35,558 29,888 29,595 21,423 15,060
-------- -------- -------- -------- -------- ------- -------
Total............................. 116,578 82,024 114,888 90,073 79,529 60,436 42,316
-------- -------- -------- -------- -------- ------- -------
Income from operations................ 49,204 38,968 54,152 40,832 28,276 21,538 12,215
Equity in net income (loss) of joint
ventures............................ 10,323 8,535 10,893 8,710 486 (186) (347)
Minority equity interests............. (1,628) (787) (1,049) -- -- -- --
Gain (loss) on sales of real estate... (36) 3,526 3,526 -- 300 -- 122
Non-recurring charges(1).............. -- -- -- -- -- -- (2,641)
-------- -------- -------- -------- -------- ------- -------
Income before extraordinary item...... 57,863 50,242 67,522 49,542 29,062 21,352 9,349
Extraordinary items(2)................ (882) -- -- -- (3,557) (216) (731)
-------- -------- -------- -------- -------- ------- -------
Net income............................ $ 56,981 $ 50,242 $ 67,522 $ 49,542 $ 25,505 $21,136 $ 8,618
======== ======== ======== ======== ======== ======= =======
Net income applicable to common
shareholders.......................... $ 43,872 $ 39,592 $ 53,322 $ 35,342 $ 24,250 $21,136 $ 8,618
======== ======== ======== ======== ======== ======= =======
Per share data:(3)
Earnings per share data -- Basic
Income before extraordinary item...... $ .79 $ .78 $ 1.03 $ .84 $ .74 $ .68 $ .41
Net income............................ $ .78 $ .78 $ 1.03 $ .84 $ .65 $ .67 $ .38
Weighted average number of common
shares.............................. 56,500 50,844 51,760 42,294 37,560 31,612 22,766
Earnings per share data -- Diluted
Income before extraordinary item...... $ .76 $ .77 $ 1.03 $ .84 $ .74 $ .67 $ .41
Net income............................ $ .75 $ .77 $ 1.03 $ .84 $ .64 $ .67 $ .38
Weighted average number of common
shares.............................. 57,855 51,872 52,124 42,372 37,818 31,832 22,788
Cash distributions per common share..... $ .9825 $ .945 $ 1.26 $ 1.20 $ 1.08 $ .96 $ .71
Supplemental information:
Funds From Operations(4)
Net income applicable to common
shareholders........................ $ 43,872 $ 39,592 $ 53,322 $ 35,342 $ 24,250 $21,136 $ 8,618
Depreciation and amortization......... 31,243 23,249 31,955 24,832 21,706 16,211 10,393
Equity in net (income) loss of joint
ventures............................ (10,323) (8,535) (10,893) (8,710) (486) 186 347
Joint ventures Funds From
Operations.......................... 14,805 12,206 16,077 13,172 1,364 217 105
Minority interest expense (OP
units).............................. 1,411 -- 10 -- -- -- --
Loss (gain) on sales of real estate... 36 (3,526) (3,526) -- (300) -- (122)
Non-recurring and extraordinary
items............................... 882 -- -- -- 3,557 216 3,372
-------- -------- -------- -------- -------- ------- -------
$ 81,926 $ 62,986 $ 86,945 $ 64,636 $ 50,091 $37,966 $22,713
======== ======== ======== ======== ======== ======= =======
Income before interest, depreciation and
amortization, gain (loss) on sales of
real estate, equity in net income of
joint ventures, minority equity
interests, non-recurring charges and
extraordinary items..................... $122,759 $ 87,937 $122,023 $ 95,782 $ 79,736 $59,172 $37,668
Company GLA (square feet at end of
period)................................. 32,095 24,371 25,190 21,104 19,932 13,773 10,358
Percent of Company GLA leased............. 95.9% 96.0% 96.1% 94.8% 95.8% 97.2% 96.5%
Number of shopping center and business
center properties (at end of period).... 159 121 123 112 113 91 76
</TABLE>
- ---------------
(1) The non-recurring charges relate to costs incurred in connection with the
transfer to the Company of its initial portfolio as part of the Company's
initial public offering (primarily transfer taxes and title insurance
costs).
(2) The extraordinary items relate to debt prepayment fees and write-off of
deferred finance costs.
S-6
<PAGE> 7
(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) Industry analysts generally consider funds from operations ("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>
SEPTEMBER 30, DECEMBER 31,
-------------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------- ---------- ---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate, before accumulated
depreciation........................ $1,857,746 $1,242,178 $1,325,742 $991,647 $848,373 $686,890 $459,049
Real estate, net...................... 1,665,984 1,078,625 1,154,005 849,608 728,333 586,839 375,183
Advances to and investments in joint
ventures............................ 231,835 122,996 136,267 106,796 83,190 8,710 9,078
Total assets.......................... 1,986,705 1,230,753 1,391,918 975,126 830,060 611,116 395,942
Total debt............................ 975,178 523,569 668,521 478,432 405,726 394,435 184,534
Shareholders equity................... 840,124 652,440 669,050 469,336 404,161 203,058 197,118
Total Market Equity (1)............... 1,117,803 1,083,142 1,208,800 954,728 714,443 502,440 455,366
</TABLE>
- ---------------
(1) Represents number of common shares and operating partnership units
outstanding multiplied by the last reported sale price on the NYSE Composite
Tape on the respective dates plus preferred shares at liquidation value.
S-7
<PAGE> 8
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the common shares of
approximately $52.8 million (approximately $60.7 million if the underwriters'
over-allotment option is exercised in full). We presently intend to use the net
proceeds to reduce the outstanding balance on our unsecured lines of credit,
which have been used to fund acquisitions, developments and expansions. Our
unsecured lines of credit had an aggregate of $177.1 million outstanding on
December 9, 1998, bearing interest at LIBOR plus 0.85%.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
Our common shares are listed on the New York Stock Exchange under the
symbol "DDR". The following table sets forth the high and low sale prices of our
common shares for certain periods and the distributions paid per share during
those periods. All share price and distribution information has been adjusted to
reflect the effect of the two-for-one split of our common shares which was
effected in the form of a share distribution paid on August 3, 1998 to
shareholders of record on July 27, 1998. The following table reflects the stock
split. Our Board of Directors has declared a distribution on our common shares
of $0.3275 per share payable to shareholders of record on December 18, 1998,
which will be paid on or about January 4, 1999. Consequently, holders of common
shares purchased in this offering will receive such distribution.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
-------- --------- -------------
<S> <C> <C> <C>
1996
First Quarter....................................... $15.6875 $ 14.0625 $ 0.30
Second Quarter...................................... 16 14.0625 0.30
Third Quarter....................................... 16.5625 15.25 0.30
Fourth Quarter...................................... 18.625 16.0625 0.30
1997
First Quarter....................................... 19.3125 17.125 0.315
Second Quarter...................................... 20 17.9375 0.315
Third Quarter....................................... 20.125 19.125 0.315
Fourth Quarter...................................... 20.625 18.65625 0.315
1998
First Quarter....................................... 20.438 18.313 0.3275
Second Quarter...................................... 21.156 18.75 0.3275
Third Quarter....................................... 20.50 16.375 0.3275
Fourth Quarter (through December 10, 1998).......... 19.25 16.375 --
</TABLE>
The last reported sale price of our common shares on the New York Stock
Exchange on December 10, 1998 was $18 9/16 per share. As of December 3, 1998, we
had 426 registered holders of common shares.
We have paid regular and uninterrupted distributions since our initial
public offering in 1993. We intend to continue to declare quarterly
distributions on our common shares. However, we cannot be sure about the amounts
of future distributions because they depend on our cash flow from operations,
earnings, financial condition, capital requirements and other factors that our
Board of Directors believes are important.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For a discussion of material federal income tax consequences applicable to
distributions to shareholders and our election to be taxed as a REIT, see
"Federal Income Tax Considerations" in the accompanying prospectus.
S-8
<PAGE> 9
Prospective purchasers should be aware that, as discussed in the
accompanying prospectus, the recently enacted Taxpayer Relief Act of 1997 (the
"1997 Act") altered the taxation of capital gain income. Under the 1997 Act,
individuals, trusts and estates that hold certain investments for more than 18
months may be taxed at a maximum long-term capital gain rate of 20% on the sale
or exchange of those investments. Individuals, trusts and estates that hold
certain assets for more than one year but not more than 18 months may be taxed
at a maximum long-term capital gain rate of 28% on the sale or exchange of those
investments. The 1997 Act also provides a maximum rate of 25% for "unrecaptured
section 1250 gain" for individuals, trusts and estates, special rules for
"qualified 5-year gain" and other changes to prior law. The recently enacted
Internal Revenue Service Restructuring and Reform Act of 1998 (the "IRS
Restructuring Act"), however, reduced the holding period requirement established
by the 1997 Act for the application of the 20% and 25% capital gain tax rates to
12 months from 18 months for dispositions of capital gain assets occurring after
December 31, 1997. The 1997 Act provides the Internal Revenue Service with
authority to issue regulations that could, among other things, apply these rates
to dispositions of capital assets by "pass through entities" (including REITs
such as the Company) and to dispositions of interests in "pass through
entities." Neither the 1997 Act nor the IRS Restructuring Act changed the
taxation of capital gains of corporations.
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 under which a foreign
shareholder that 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 rules (discussed in
the accompanying prospectus) with respect to the portion of the distribution
designated by the REIT as a 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
We and our shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which we or they
transact business or reside. The state and local tax treatment of us and our
shareholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective purchasers of the common shares should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in us.
UNDERWRITING
Subject to the terms and conditions contained in the terms agreement and
related underwriting agreement, we have agreed to sell to Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Prudential Securities Incorporated and Salomon
Smith Barney Inc. as underwriters, and the underwriters have agreed to purchase
from us, the amount of common shares set forth opposite their respective names
below. The
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<PAGE> 10
obligations of the underwriters are subject to certain conditions. The
underwriters must purchase all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 1,000,000
Prudential Securities Incorporated.......................... 1,000,000
Salomon Smith Barney Inc.................................... 1,000,000
---------
Total.......................................... 3,000,000
=========
</TABLE>
The underwriters have advised us that they propose initially to offer the
common 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 $.10 per share to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
We have granted an option to the underwriters, exercisable during the
30-day period after the date of this prospectus supplement, to purchase up to an
aggregate of 450,000 additional common shares at the public offering price set
forth on the cover page of this prospectus supplement, less the underwriting
discount. The underwriters may exercise this option only to cover
over-allotments, if any.
The following table shows the per share and total underwriting discount we
will pay to the underwriters. The amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase 450,000 additional
common shares.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ----------- -----------
<S> <C> <C> <C>
Public Offering Price........................ $18.5625 $55,687,500 $64,040,625
Underwriting Discount........................ $.95 $2,850,000 $3,277,500
</TABLE>
We expect to incur expenses of approximately $65,000 in connection with
this offering for Securities and Exchange Commission registration fees, legal
fees, accounting fees, New York Stock Exchange listing fees and other expenses.
Until the distribution of the common shares is completed, certain rules of
the Securities and Exchange Commission may limit the ability of the underwriters
to bid for and purchase our common shares. As an exception to these rules, the
underwriters are permitted to engage in certain transactions that stabilize the
price of the common shares. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the common shares.
If the underwriters create a short position in the common shares in
connection with this offering (i.e., if they sell more common shares than are
set forth on the cover page of this prospectus supplement), the underwriters may
reduce that short position by purchasing shares in the open market. The
underwriters may also elect to reduce any short position through the exercise of
all or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither we nor the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
might have on the price of the shares. In addition, neither we nor the
underwriters make any representation that the underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or if indemnification is not
allowed, to contribute to payments the underwriters may be required to make
because of those liabilities.
S-10
<PAGE> 11
We have agreed that for a period of 30 days from the date of this
prospectus supplement we will not, without the prior and written consent of the
underwriters, offer, sell or otherwise dispose of any common shares or any other
security convertible into or exercisable for common shares (except pursuant to
our stock option or dividend reinvestment plans and certain other agreements).
The underwriters from time to time provide investment banking and financial
advisory services to us. Prudential Securities Incorporated arranged the private
placement of the shares that we purchased in AIP.
S-11
<PAGE> 12
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3,000,000 SHARES
DEVELOPERS DIVERSIFIED REALTY CORPORATION
DEVELOPERS DIVERSIFIED LOGO
COMMON SHARES
------------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------------
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
DECEMBER 10, 1998
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