<PAGE> 1
Filed pursuant to Rule 424(b)(2)
Registration No. 33-80169
PROSPECTUS SUPPLEMENT
(To Prospectus Dated December 27, 1995)
1,300,000 COMMON SHARES
ASSOCIATED ESTATES REALTY CORPORATION [LOGO]
------------------------
Associated Estates Realty Corporation (the "Company") is a fully integrated real
estate company which develops, acquires, owns and manages multifamily
residential properties ("Multifamily Properties") in Ohio, Michigan
and Western Pennsylvania. The Company currently owns, directly or
as a joint venture partner, 84 Multifamily Properties containing
15,838 suites. The Company operates as and is qualified as
a self-administered and self-managed real estate
investment trust (a "REIT") for Federal income tax
purposes.
------------------------
All of the common shares of the Company, without par value (the "Common
Shares"), offered hereby are being sold by the Company. Upon completion of
the Offering, directors and executive officers of the Company
will own approximately 16.4% of the outstanding Common
Shares of the Company. The Company intends to apply
the net proceeds of this Offering to repay
indebtedness. See "Use of Proceeds."
------------------------
The Company's Common Shares are listed on the New York Stock Exchange under the
symbol "AEC." On December 11, 1996, the last reported sale price of
the Common Shares on the New York Stock
Exchange Composite Tape was
$22 3/8.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-3 FOR A DISCUSSION OF CERTAIN
FACTORS RELATING TO AN INVESTMENT IN THE COMMON SHARES.
------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE $22.375 $1.11 $21.265
TOTAL (3) $29,087,500 $1,443,000 $27,644,500
==============================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting expenses payable by the Company estimated at $75,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to an
additional 195,000 Common 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 Company will be $33,450,625, $1,659,450 and
$31,791,175, respectively. See "Underwriting."
------------------------
The Common Shares are offered by the Underwriter when, as and if received
and accepted by the Underwriter, subject to its right to reject orders in whole
or in part and subject to certain other conditions. It is expected that delivery
of the Common Shares will be made in New York, New York on or about December 17,
1996.
DEAN WITTER REYNOLDS INC.
December 11, 1996
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Risk Factors.......................................................................... S-3
The Company........................................................................... S-4
Recent Operating Results.............................................................. S-4
Use of Proceeds....................................................................... S-5
Price Range of Common Shares and Distributions........................................ S-5
Underwriting.......................................................................... S-6
Legal Matters......................................................................... S-6
PROSPECTUS
Available Information................................................................. 2
Incorporation of Certain Documents by Reference....................................... 2
The Company........................................................................... 3
Ratio of Earnings to Fixed Charges.................................................... 4
Use of Proceeds....................................................................... 4
Description of Debt Securities........................................................ 4
Description of Common Shares.......................................................... 20
Description of Common Share Warrants.................................................. 22
Description of Preferred Shares....................................................... 23
Description of Depositary Shares...................................................... 30
Certain Anti-Takeover Provisions of Ohio Law.......................................... 33
Federal Income Tax Considerations..................................................... 33
Plan of Distribution.................................................................. 40
Experts............................................................................... 41
Legal Matters......................................................................... 41
</TABLE>
S-2
<PAGE> 3
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below before purchasing Common Shares in the Offering.
GEOGRAPHIC CONCENTRATION OF THE PROPERTIES
All of the Company's Multifamily Properties are located in Ohio, Michigan
and Western Pennsylvania. The Company's performance, therefore, is linked to
economic conditions and the market for available rental housing in these
regions. A decline in the market for available rental housing in Ohio, or to a
lesser extent, in Michigan or Western Pennsylvania, may adversely affect the
Company's results of operations and, therefore, the ability of the Company to
make distributions to shareholders.
GENERAL REAL ESTATE INVESTMENT RISKS
Risks of Development Activities. The Company intends to continue to
actively pursue multifamily residential rental apartment facilities projects,
including the expansion of existing apartment facilities. Such projects
generally require the expenditure of capital as well as various forms of
government and other approvals, which approvals 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.
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.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Following the consummation of the offering, directors and executive
officers of the Company will beneficially own approximately 16.4% of the
Company's Common Shares (assuming no exercise of the Underwriter's
over-allotment option). Accordingly, such persons should continue to have
substantial influence over the Company and on the outcome of matters submitted
to the Company's shareholders for approval.
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, including the Company's proportionate share of indebtedness from
its unconsolidated joint venture properties) 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. The indentures under
which the Company has outstanding certain indebtedness contain limits on the
Company's ability to incur indebtedness. Nonetheless, the Company could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect the Company's ability to make expected distributions to
shareholders and in an increased risk of default on its obligations.
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
With certain limited exceptions, the Company's Amended and Restated
Articles of Incorporation prohibit ownership of more than 4% 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 of the Company even if a change in control
were in the interest of shareholders.
S-3
<PAGE> 4
ADVERSE IMPACT ON DISTRIBUTIONS OF FAILURE TO QUALIFY AS A REIT
Since the Company's initial public offering in November 1993 (the "IPO"),
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.
THE COMPANY
The Company is a fully integrated real estate company formed in July 1993
to continue the business of the Associated Estates Group ("AEG") of developing,
acquiring, owning and managing multifamily residential rental apartment
facilities. The Company completed the IPO of its Common Shares in November 1993
and currently owns or is a joint venture partner in 15,838 suites in 84
Multifamily Properties (the "Properties").
Of the Company's 15,838 suites, 13,780 suites (approximately 87%) are
contained in conventional, market-rate properties and 1,888 suites
(approximately 12%) are contained in properties the rents of which are
subsidized by the United States Department of Housing and Urban Development. The
remaining 170 suites (approximately 1%) in the Company's portfolio are contained
in apartment communities for elderly persons that provide residents with one
daily meal, housekeeping, laundry and other services and recreational and
educational activities. Approximately 94.2% of the suites in the Properties
owned at September 30, 1996 were leased as of that date.
The Company is a self-administered and self-managed REIT and, accordingly,
does not engage or pay for a REIT advisor. The Company manages all of the
Properties, and either AEG or the Company has managed all of the Properties
continuously since their acquisition or development by the Company or AEG. Of
the Company's 84 Multifamily Properties, 43 were developed by AEG, two were
acquired by AEG prior to the IPO and 39 were acquired (for an aggregate purchase
price of $304.9 million) by the Company after the IPO. Subsequent to the IPO,
the Company has also acquired the remaining 50% interest in two of the
Multifamily Properties included in the Company's portfolio at the time of the
IPO which were previously owned by joint ventures (together with the 39
properties referred to above, the "Acquired Properties"). The 39 Multifamily
Properties acquired since the IPO contain 6,914 suites. Nine of the Acquired
Properties are located in Northern Ohio, 22 are located in Central Ohio, one is
located in Western Pennsylvania and nine are located in Michigan. The Company
may acquire Multifamily Properties in other areas of the Midwest as
opportunities arise. There can be no assurance; however, that Multifamily
Properties desirable to the Company will be available or that the Company will
be successful in obtaining such properties.
The Company also currently manages 7,052 residential suites and eight
commercial properties (containing an aggregate of approximately 825,000 square
feet of gross leasable area), not owned by the Company. In addition, the Company
owns substantially all of the economic interests in five corporations which
provide management and other services for the Company.
The Company's executive offices are located at 5025 Swetland Court,
Richmond Heights, Ohio 44143-1467, and its telephone number is (216) 261-5000.
RECENT OPERATING RESULTS
On October 22, 1996, the Company announced that its Funds From Operations
("FFO"), a widely accepted measure of REIT performance, grew 10.5% to $7.4
million for the third quarter of 1996, as compared to the third quarter of 1995
of $6.7 million. Net income before extraordinary item for the third quarter of
1996 increased 15.0% to $5.0 million as compared to $4.3 million for the same
period in 1995. Net income for the third quarter of 1996 was $5.0 million as
compared to $3.4 million for the same period in 1995.
S-4
<PAGE> 5
FFO for the nine months ended September 30, 1996 grew 5.3% to $21.5
million. Net income before extraordinary item for the nine months ended
September 30, 1996 increased 17.0% to $14.7 million as compared to $12.6 million
for the same period in 1995. Net income for the nine months ended September 30,
1996 was $14.7 million as compared to $11.7 million for the same period in 1995.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Shares offered
hereby, after payment of expenses related to the Offering and underwriting
discounts and commissions, are estimated to be approximately $27,569,500
(assuming no exercise of the Underwriter's over-allotment option). The Company
expects to use the net proceeds of the Offering to repay indebtedness then
outstanding under its $75 million unsecured revolving credit facility which will
provide additional availability under the facility to finance future
acquisitions. Pending such use, which the Company anticipates will occur
concurrently with or shortly following the consummation of the offering, the
Company will invest such proceeds in short-term income-producing investments
such as investment grade commercial paper, government securities, government
agency securities or money market funds that invest in government securities or
repurchase agreements that are secured by government securities.
On December 11, 1996, the weighted average interest rate on the
indebtedness assumed to be repaid with the proceeds of the offering, and the
weighted average maturity of such indebtedness, were approximately 6.875% and 21
months, respectively.
If the Underwriter's over-allotment option is exercised, the Company plans
to use the net proceeds therefrom to repay additional indebtedness of the
Company or for general corporate purposes.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Company's Common Shares have been listed on the New York Stock Exchange
since November 11, 1993, under the symbol "AEC." The following tables set forth
the high and low closing sale prices for the Common Shares for the fiscal
periods indicated as reported by the New York Stock Exchange Composite Tape and
the distributions declared by the Company with respect to each such period.
<TABLE>
<CAPTION>
1993 HIGH LOW DISTRIBUTIONS
---- ---- -------------
<S> <C> <C> <C> <C>
November 11, 1993 through December 31, 1993............. $21 7/8 $19 7/8 $0.19(1)
1994
First Quarter........................................... 24 3/8 19 5/8 0.40
Second Quarter.......................................... 23 3/4 21 1/4 0.40
Third Quarter........................................... 22 3/8 19 0.40
Fourth Quarter.......................................... 21 18 5/8 0.40
1995
First Quarter........................................... 21 3/8 18 5/8 0.43
Second Quarter.......................................... 21 7/8 19 1/8 0.43
Third Quarter........................................... 21 1/2 19 5/8 0.43
Fourth Quarter.......................................... 21 1/2 18 3/4 0.43
1996
First Quarter........................................... 21 7/8 20 1/2 0.45
Second Quarter.......................................... 21 1/2 20 1/8 0.45
Third Quarter........................................... 21 1/8 20 0.45
Fourth Quarter through December 11, 1996................ 22 3/4 20 1/8 0.45
</TABLE>
- ---------------
(1) The dividend for the fourth quarter of 1993 was declared and paid in the
first quarter of 1994.
S-5
<PAGE> 6
On December 11, 1996, the last reported sale price of a Common Share on the
New York Stock Exchange was $22 3/8 per share.
The Board of Directors of the Company has declared a dividend on the Common
Shares payable to shareholders of record on December 31, 1996, which will be
paid on or about January 31, 1997. Shares purchased in this offering will be
entitled to receive such dividend.
The payment of distributions by the Company has been, and will continue to
be, at the discretion of the Board of Directors and will depend on numerous
factors including the actual cash flow of the Company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Directors deems
relevant.
UNDERWRITING
Subject to the terms contained in the terms agreement and the related
underwriting agreement between Dean Witter Reynolds Inc. (the "Underwriter") and
the Company (collectively, the "Underwriting Agreement"), the Underwriter has
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriter, 1,300,000 Common Shares.
The Underwriter is committed to purchase all the Common Shares offered to
the public if any such shares are purchased.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Common Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus Supplement and to
certain dealers at such public offering price less a concession not to exceed
$.65 per share. After the Offering, the public offering price and the concession
to dealers may be changed by the Underwriter.
The Company has granted the Underwriter an option, exercisable within 30
days from the date of this Prospectus Supplement to purchase up to an additional
195,000 Common Shares at the same price per share as the 1,300,000 Common Shares
offered to the public hereby, less underwriting discounts and commissions. The
Underwriter may exercise the option only for the purpose of covering
over-allotments, if any, made in connection with the distribution of the Common
Shares to the public.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriter may be required to make in respect
thereof.
The Company has agreed that until 90 days after the date of this Prospectus
Supplement, it will not, without the prior written consent of Dean Witter
Reynolds Inc., sell, offer to sell, issue, distribute or otherwise dispose of
any Common Shares or register for sale under the Securities Act of 1933, as
amended, any Common Shares except for the Common Shares offered hereby.
LEGAL MATTERS
The legality of the Common Shares offered hereby will be passed upon for
the Company by Baker & Hostetler, Cleveland, Ohio, and certain legal matters
will be passed upon for the Underwriter by Brown & Wood LLP, New York, New York.
Albert T. Adams, a director of the Company, is a partner in Baker & Hostetler.
S-6
<PAGE> 7
PROSPECTUS
ASSOCIATED ESTATES REALTY CORPORATION
$308,750,000
DEBT SECURITIES, PREFERRED SHARES,
DEPOSITARY SHARES, COMMON SHARES AND COMMON SHARE WARRANTS
Associated Estates 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 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
$308,750,000, 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 initial
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 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.
------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
December 27, 1995
<PAGE> 8
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"). These 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. In addition, the Company's Common Shares are listed
on the New York Stock Exchange and these reports, proxy statements and other
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 or incorporated by reference
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference and the exhibits and schedules thereto. For
further information regarding the Company and the 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,
1994;
b. Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 1995, June 30, 1995 and September 30, 1995;
c. Current Reports on Form 8-K dated December 28, 1994, June 12, 1995
and September 21, 1995;
d. The description of the Company's Common Shares contained in the
Company's Form 8-A dated October 14, 1993;
e. The Statements of Revenue and Certain Expenses for the Acquired
Properties and Proposed Acquisition Properties for the year ended
December 31, 1993 (audited) and the six months ended June 30, 1994
(unaudited), the Unaudited Pro Forma Condensed Consolidated
Financial Statements and the Unaudited Estimated Twelve Month Pro
Forma Statement of Taxable Net
2
<PAGE> 9
Operating Income and Operating Funds Available contained in the
Company's Registration Statement on Form S-11 (No. 33-80950) dated
June 30, 1994.
All reports and other 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 Associated Estates Realty Corporation, 5025
Swetland Court, Richmond Heights, Ohio 44143-1467, Attn: Dennis Bikun, Chief
Financial Officer (216) 261-5000.
THE COMPANY
Associated Estates Realty Corporation (the "Company"), a fully integrated
real estate company, was formed in July 1993 to continue the business of the
Associated Estates Group ("AEG") of developing, acquiring, rehabilitating,
owning, managing, financing and leasing multifamily residential rental apartment
facilities ("Multifamily Properties"). The Company completed the initial public
offering of its Common Shares in November 1993 (the "IPO") and currently owns
14,437 suites in 78 Multifamily Properties (the "Properties").
Of the Company's 14,437 suites, 12,379 suites (approximately 85.7%) are
contained in conventional high-rise, mid-rise townhome or garden apartment
properties and 1,888 suites (approximately 13.1%) are contained in properties
the rents of which are subsidized by the United States Department of Housing and
Urban Development (the "Government-Assisted Properties"). Of the 1,888 suites
contained in the Government Assisted Properties, 1,095 suites are tenanted
primarily by lower-income senior citizens or physically impaired individuals and
793 suites are tenanted primarily by lower-income families or individuals. The
remaining 170 suites (approximately 1.2%) in the Company's portfolio are
contained in apartment communities for elderly persons that provide residents
with one daily meal, housekeeping, laundry and other services and recreational
and educational activities ("Congregate Care Facilities"). Approximately 95.6%
of the suites in the Properties owned at September 30, 1995 were leased as of
that date.
The Company is a self-administered and self-managed real estate investment
trust (a "REIT") and, accordingly, does not engage or pay for a REIT advisor.
The Company manages all of the Properties, and either AEG or the Company has
managed all of the Properties continuously since their acquisition or
development by the Company or AEG. Of the Company's 78 Multifamily Properties,
43 were developed by AEG, two were acquired by AEG prior to the IPO and 33 were
acquired (for an aggregate purchase price of $242.2 million) by the Company
after the IPO. Subsequent to the IPO, the Company has also acquired the
remaining 50% interest in two of the Multifamily Properties included in the
Company's Portfolio at the time of the IPO which were previously owned by joint
ventures (together with the 33 properties referred to above, the "Acquired
Properties"). Seven of the Acquired Properties are located in Northern Ohio, 20
are located in Central Ohio and six are located in Michigan. The 33 Multifamily
Properties acquired since the IPO contain 5,625 suites. The Company also
currently manages 7,027 Multifamily Properties suites and eight commercial
properties (containing an aggregate of approximately 825,000 square feet of
gross leasable area), not owned by
3
<PAGE> 10
the Company. In addition, the Company owns substantially all of the economic
interests in five corporations which provide management and other services to
the Company (the "Service Companies").
The Company's executive offices are located at 5025 Swetland Court,
Richmond Heights, Ohio 44143-1467, and its telephone number is (216) 261-5000.
<TABLE>
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
FISCAL YEAR ENDED(1) NINE MONTHS ENDED
------------------------------------------------------------------------ -----------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1990 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges.................. 1.02 1.03 1.29 1.34 2.91 2.14
<FN>
- ---------------
(1) Except for the fiscal year ended December 31, 1994, the ratio of earnings to
fixed charges includes results of operations of AEG.
</TABLE>
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest) to income before taxes and
extraordinary items. Fixed charges consist of preferred dividends accrued,
interest costs, whether expensed or capitalized, the interest component of
rental expense, the interest component of ground rent and the amortization of
debt discounts and issue costs, whether expensed or capitalized.
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,
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 (the "Senior
Indenture") between the Company and National City Bank, as Trustee. The
Subordinated Securities will be issued under an Indenture (the "Subordinated
Indenture") between the Company and 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 filed 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 Chemical Bank, 450 West 33rd
Street, 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 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 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
4
<PAGE> 11
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 they 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;
(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 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 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 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;
5
<PAGE> 12
(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 special U.S. federal income tax,
accounting and other considerations applicable to Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.
Except as hereinafter set forth under the caption "Certain
Covenants -- Limitation on Incurrence of Debt," 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 the
event of a highly leveraged or similar transaction involving the Company or in
the event of a change of control. 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).
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 Chemical Bank, 450 West 33rd
Street, 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).
6
<PAGE> 13
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 (a) 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; (b) 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 become such an Event of
Default, shall have occurred and be continuing, and (c) 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 may not, and may not permit
any Subsidiary to, incur any Debt (as defined below) if, immediately after
giving effect to the incurrence of such 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 Total Assets (as defined below)
as of the end of the calendar quarter 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 Debt (Section 1004 of
the Senior Indenture).
7
<PAGE> 14
In addition, the Company may not, and may not permit any Subsidiary to,
incur any Debt if the ratio of the Consolidated Income Available for Debt
Service to the Maximum Annual Service Charge (in each case defined below) for
the four consecutive fiscal quarters most recently ended prior to the date such
additional Debt is to be incurred shall have been less than 1.5 to 1 on a pro
forma basis after giving effect thereto and the application of proceeds
therefrom. (Section 1004 of the Senior Indenture).
Further, the Company will not incur any secured Debt if immediately after
giving effect to the incurrence of that Debt, the aggregate principal amount of
all outstanding secured debt of the Company on a consolidated basis is greater
than 40% of the sum of (i) the Company's Total Assets as of the end of the most
recent calendar quarter prior to the incurrence of such additional Debt and (ii)
the purchase price of any real estate assets acquired by the Company after the
end of that calendar quarter, including those obtained in the connection with
incurrence of such additional Debt.
Restrictions on Dividends and Other Distributions. The Company may not, in
respect of any shares of any class of its capital stock, (a) declare or pay any
dividends (other than dividends payable in capital stock of the Company)
thereon, (b) apply any of its property or assets to the purchase, redemption or
other acquisition or retirement thereof, (c) set apart any sum for the purchase,
redemption or other acquisition or retirement thereof, or (d) 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
exceeds the sum of (i) Funds from Operations (as defined below) from December
31, 1994 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 (ii) $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 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 are not prevented from
selling or disposing of for value their properties in the ordinary course of
business (Section 1007 of the Senior Indenture).
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<PAGE> 15
Insurance. The Company must, and must cause each of its Subsidiaries to,
keep all of its and their insurable properties insured against loss or damage in
amounts at least equal to their then full insurable value with financially sound
and reputable insurance companies (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 is not 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 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 150% 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 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 as 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
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<PAGE> 16
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, gains or losses from extraordinary items, gains
or losses on sales of real estate, gains or losses on investments in marketable
securities or any provision or benefit for income taxes for such period, 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 on 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 the 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.
"Total Assets" as of any date means the sum of (i) the Company's
Undepreciated Real Estate Assets and (ii) all other assets of the Company
determined in accordance with generally accepted accounting principles (but
excluding accounts receivable and total assets intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) 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.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (a) default for
30 days in the payment of any installment of interest on any Debt Security of
such series; (b) default in the payment of the principal of (or premium, if any,
on) any Debt Security of such series at its Maturity, (c) default in making any
sinking fund payment as required for any Debt Security of such series; (d)
default in the performance of any other covenant of the Company contained
10
<PAGE> 17
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; (e) 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; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company of any
Significant Subsidiary or of the respective property of either, and (g) 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 (a) 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 (b) 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 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).
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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, (a) change the Stated Maturity of the principal of, or any
installment of interest (or premium, if any) on, any such Debt Security, (b)
reduce the principal amount of, or the rate or amount of interest on, or any
premium payable on redemption of, any such Debt Security, or reduce the amount
of principal of an Original Issue Discount Security that would be due and
payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the Holder
of any such Debt Security, (c) 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, (d) impair the right to institute suit for the enforcement
of any payment on or with respect to any such Debt Security, (e) reduce the
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 (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holder of such Debt Security
(Section 902 of 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
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
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<PAGE> 19
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 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 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
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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 (a) 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 (b) to be released from its obligations
relating to (i) 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 (ii) 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"), 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 (Section 1403 of the Indentures).
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 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
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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,
(a) 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 (b) a Conversion Event (as defined below) occurs in respect of the
currency, currency unit or composite currency in which such deposit has been
made, the indebtedness represented by such Debt Security shall be deemed to have
been, and will be, fully discharged and satisfied through the payment of the
principal of (and premium, if any) and interest on such Debt Security as they
become due out of the proceeds yielded by converting the amount so deposited in
respect of such 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 (i) 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, (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Communities or (iii) any currency unit or composite currency other than the ECU
for the purposes for which it was established. Unless otherwise 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 (d) 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 (g) under "Events of Default, Notice and Waiver" with
respect to any other covenant as to which there has been covenant defeasance,
the amount in such currency, currency unit or composite currency in which such
Debt Securities are payable, and Government Obligations on deposit with the
applicable 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.
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.
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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 (a) 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 proceedings 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 (b) 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 (c) 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 (a) or (b),
the holders of all Senior Indebtedness and in the circumstance described in
the foregoing clause (c), 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;
(2) if upon any payment or distribution contemplated in clause (1)
after giving effect to the subordination provisions contemplated therein
there shall remain any amounts of cash, property or securities of the
Company available for payment or distribution in respect of Subordinated
Securities, then the amount of such cash, property or securities shall be
shared ratably among the Holders of all Subordinated Securities issued
under the Subordinated Indenture and any subordinated indebtedness ranking
on a parity therewith;
(3) 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
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entitled except for the provisions of Article XVII 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
(4) 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 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
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accompanied by payment of any 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 4.0% of the outstanding capital stock of the Company
(Section 1602 of the Subordinated Indenture). Pursuant to the terms of the
Indentures, 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." Fractional Common Shares
will not be issued upon conversion, but, in lieu thereof, the Company will pay a
cash adjustment based upon the closing price per share of Common Shares on the
day of conversion (Section 1606 of the Subordinated Indenture).
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 Stock or other equity securities of the Company, as the case may be
(Section 1108 of the Indentures).
Reference is made to the section captioned "Description of Common Shares,"
"Description of Preferred Shares" and "Description of Depositary Shares," as
applicable, for a general description of the Common Shares or other equity
securities of the Company to be acquired upon the conversion of Convertible Debt
Securities, including a description of certain restrictions on the ownership of
the Common Shares.
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 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. In any such event, one fully registered Debt Security certificate will
be issued with respect to each $150 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. 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.
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
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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.
If DTC is at any time unwilling or unable to continue as depository or if
at any time 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, the Company will issue individual Debt Securities in certificated form in
exchange for the Global Securities. In addition, the Company may at any time,
and in its sole discretion, determine not to have any Debt Securities
represented by one or more Global Securities, and, in such event, will issue
individual Debt Securities in certificated form in exchange for the relevant
Global Securities. In any such instance, an owner of a beneficial interest in a
Global Security 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 its name. 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 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 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 of its
holdings, from the Direct or Indirect Participant through which such Beneficial
Owner entered into the action. 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.
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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
are made 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.
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.
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, any underwriter or agent, 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 COMMON SHARES
GENERAL
The Amended and Restated Articles of Incorporation of the Company (the
"Articles") authorize the issuance of up to 41,000,000 Common Shares, without
par value. As of December 1, 1995, there were 13,869,381 Common Shares issued
and outstanding. In addition, up to 543,093 Common Shares have been reserved for
issuance upon the exercise of options under the Company's employee share option
plan (the "Stock Option Plan"), and 125,000 Common Shares have been reserved for
issuance upon the exercise of options granted to the Company's independent
directors. The Common Shares are listed on the NYSE under the symbol "AEC."
National City Bank, Cleveland, Ohio, is the transfer agent and registrar of the
Common Shares.
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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 do not
have cumulative voting rights in the election of directors and do not have
preemptive rights.
All of the Common Shares now outstanding are, and any Common Shares offered
hereby when issued will be, fully paid and nonassessable. The Company's Articles
provide that except in certain specified instances, no director of the Company
will be personally liable to the Company or any of its shareholders for monetary
damages for breach of any fiduciary duty as a director. However, this provision
may not limit the availability of monetary relief for violations of securities
laws and does not limit the availability of non-monetary relief.
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 4% (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 hereafter adopted 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, since 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 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 and the Company's tax counsel 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.
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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 attempt to qualify, or 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 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
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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, when applicable, the following: (1) the title of such Common Share
Warrants; (2) the aggregate number of such Common Share Warrants; (3) the price
or prices at which such Common Share Warrants will be issued; (4) the number of
Common Shares purchasable upon exercise of such Common Share Warrants; (5) 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; (6) the date, if any, on and after which such
Common Share Warrants and the related Common Shares will be separately
transferable; (7) the price at which each Common Share purchasable upon exercise
of such Common Shares Warrants may be purchased; (8) the date on which the right
to exercise such Common Share Warrants shall commence and the date on which such
right shall expire; (9) the minimum or maximum amount of such Common Share
Warrants which may be exercised at any one time; (10) information with respect
to book-entry procedures, if any; (11) a discussion of certain federal income
tax considerations; and (12) 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 the Common Shares. Common Shares that may be acquired upon the
exercise of Common Share Warrants directly or constructively held by an
investor, but not Common Shares issuable with respect to the exercise of Common
Share Warrants held by others, are deemed to be outstanding (a) at the time of
acquisition of the Common Share Warrants, and (b) prior to the exercise of the
Common Share Warrants, for purposes of determining the percentage ownership of
Common Shares held by such investor.
DESCRIPTION OF PREFERRED SHARES
The Articles authorize the issuance of up to (i) 3,000,000 Class A
Cumulative Preferred Shares, without par value (the "Class A Shares"), (ii)
3,000,000 Class B Cumulative Preferred Shares, without par value (the "Class B
Shares"), and (iii) 3,000,000 Noncumulative Preferred Shares, without par value
(the "Noncumulative Shares") (the Class A Shares, the Class B Shares and the
Noncumulative Shares, collectively the "Preferred Shares"). As of December 1,
1995, there were 225,000 9 3/4% Class A Cumulative Redeemable Preferred Shares
($250 liquidation preference per share) issued and outstanding.
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 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 and the Class B 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
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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: (a)
the designation of the series which may be by distinguishing number, letter or
title, (b) 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), (c) the dividend rate
or rates of the series, including the means by which such rates may be
established, (d) with respect to the Class A Shares and the Class B 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, (e) redemption rights and prices, if
any, (f) the terms and amounts of the sinking fund, if any, (g) 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, (h)
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 adjustments thereof and all other terms and conditions upon which
such conversion may be made, and (i) 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.
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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.
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 and Class B 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
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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.
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.
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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 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
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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 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 above 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
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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 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, but not Common Shares issuable with respect to the conversion of
Convertible Preferred Shares held by others, are deemed to be outstanding (a) at
the time of purchase of the Convertible Preferred Shares, and (b) 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.
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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 shares of
any series of 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") 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).
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, and the following summary of the form thereof filed as an exhibit to
the Registration Statement of which this Prospectus is a part is qualified in
its entirety by reference thereto. As of December 1, 1995 the Company has issued
Depositary Receipts representing 2,250,000 Depositary Shares, each Depositary
Share representing one-tenth of a share of 9 3/4% Class A Cumulative Redeemable
Preferred Shares.
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
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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 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
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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 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
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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.
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 (a)
such transactions are approved by the directors prior to the 10% Shareholder
becoming a 10% Shareholder, (b) the acquisition of 10% of the voting power is
approved by the directors prior to the 10% Shareholder becoming a 10%
Shareholder, or (c) 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 50 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 securityholders relating to the Offered
Securities and the treatment of the Company as a REIT. It 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.
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
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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 made an election to be taxed as a REIT commencing with its
taxable year ended December 31, 1993. The Company believes that it is organized
and operates in such a manner as to qualify for taxation as a REIT under the
Code and the Company intends to continue to operate in such a manner in the
future. No assurance can be given, however, that the Company will operate in a
manner so as to remain qualified as a REIT.
In the opinion of Baker & Hostetler, based on certain assumptions and
representations, the Company has qualified as a REIT for its taxable years ended
December 31, 1993, and December 31, 1994, and the Company is organized in
conformity with the requirements for qualification as a REIT and its method of
operation has enabled the Company to meet, and will enable it to continue to
meet, the requirements for qualification and taxation 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. Accordingly, no
assurance can be given that the actual results of the Company's operation for
any one 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. 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: (1) 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 (2) 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: (1) 85% of its REIT ordinary income for
such year, (2) 95% of its REIT capital gain net income for such year, and (3)
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 (a) the fair market value of such asset as of
the beginning of such period over (b) 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.
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REQUIREMENTS FOR QUALIFICATION
A REIT is defined in the Code as a corporation, trust or association: (1)
which is managed by one or more trustees or directors; (2) the beneficial
ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest; (3) which would be taxable as a domestic
corporation, but for Sections 856 through 859 of the Code; (4) which is neither
a financial institution nor an insurance company subject to certain provisions
of the Code; (5) the beneficial ownership of which is held by 100 or more
persons; (6) 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 (7) which meets certain income and asset tests described below.
Conditions (1) through (4) above, must be met during the entire taxable year and
condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
However, conditions (5) and (6) do not apply until after the first taxable year
for which an election is made to be taxed as a REIT.
The Company has satisfied the "100 shareholder" and "five or fewer" stock
ownership requirements set forth above. In addition, the Company's Articles of
Incorporation provide restrictions regarding the transfer of its shares which
are intended to assist the Company in continuing to satisfy those requirements.
In the case of a REIT which is a partner in a partnership or which owns the
shares of a qualified REIT subsidiary, Treasury Regulations provide that the
REIT will be deemed to own its proportionate share of the assets of such
partnership or subsidiary, as the case may be, and will be deemed to be entitled
to the income of the partnership attributable to such share and the income of
such subsidiary. In addition, the character of the assets and gross income of
the partnership and subsidiary 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 asset tests (as discussed below). Thus, the Company's
proportionate share of the assets and items of income of the joint ventures in
which the Company has an interest and the assets, liabilities and items of
income of its qualified REIT subsidiaries will be treated as assets, liabilities
and items of the Company for purposes of applying the requirements described
herein. See "The Company."
INCOME TESTS
In order to maintain qualification as a REIT, the Company annually must
satisfy three gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from sale or disposition of stock or securities (or from any combination of the
foregoing). Third, short-term gain from the sale or other disposition of stock
or securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a 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
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<PAGE> 42
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue; provided, however, the Company
may directly perform certain services that are "usually or customarily rendered"
in connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. The Company does not and
will not 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. The Company has received a ruling from the IRS that
the performance of such services will not cause the rents received with respect
to such leases to fail to qualify as "rents from real property."
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.
The Company will receive certain types of non-qualifying income, such as
the income derived from coin-operated laundry equipment as well as dividends
received from the Service Companies. The dividends from the Service Companies
will be qualifying income for purposes of the 95% gross income test, but will
not be qualifying income for purposes of the 75% gross income test. The Company
believes, however, that the aggregate amount of such non-qualifying income in
any taxable year will not cause the Company to exceed the limits on
non-qualifying income under the 75% or 95% tests.
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 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.
The Company owns 100% of the non-voting preferred shares and 1% of the
voting common shares of each of the Service Companies. See "The Company."
Accordingly, the Company will not own more than 10% of the voting securities of
any of the Service Companies. In addition, based upon its analysis of the
estimated value of the equity securities of the Service Companies owned by the
Company relative to the estimated value of the other assets owned by it, the
Company believes that such securities owned by it do not exceed 5% of the total
value of the Company's assets. No independent appraisals will be obtained to
support this conclusion, and Baker & Hostetler, in rendering its opinion as to
the qualification of the Company as a REIT, is relying on the Company's
representation with respect to the value of each of the Service Companies. After
reasonable inquiry, Baker & Hostetler is not aware of any facts inconsistent
with these conclusions. Moreover, if the joint ventures in which the Company
owns interests were treated as associations taxable as corporations for federal
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income tax purposes, the Company could be deemed to own more than 10% of the
voting securities in such entities. However, in the opinion of Baker & Hostetler
such joint ventures will be treated as partnerships for federal income tax
purposes.
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: (1) 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 (2) 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: (1) 85% of
its REIT ordinary income for such year, (2) 95% of its REIT capital gain income
for such year, and (3) 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. 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 (1) the actual receipt of income and the actual
payment of deductible expenses and (2) 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 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 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 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
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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.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and to the IRS the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder: (1) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (2) provides a
taxpayer identification number, certifies to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with a
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their non-foreign status to the Company. See "-- Taxation of Foreign
Shareholders."
TAXATION OF PENSION TRUSTS
For purposes of the "five or fewer" test described above, beneficiaries of
a domestic pension trust that owns shares in the Company generally will be
treated as owning such shares in proportion to their actuarial interests in the
trust. In addition, amounts distributed by the Company to a tax-exempt pension
trust generally do not constitute "unrelated business taxable income" ("UBTI")
to such trust unless the trust owns more than ten percent of the Company's
Common Shares, in which case a portion of such amounts distributed may be
treated as UBTI.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals or foreign corporations, foreign partnerships and other
foreign shareholders (collectively, "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,
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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: (1) a
lower treaty rate applies and the Non-U.S. Shareholder files certain information
evidencing its entitlement to such lower treaty rate, or (2) the Non-U.S.
Shareholder files 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, these 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 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.
DIVIDEND REINVESTMENT PLAN
Shareholders participating in the dividend reinvestment plan adopted by the
Company will be deemed to have received the gross amount of any cash
distributions which would have been paid by the Company to such shareholders had
they not elected to participate. These deemed distributions will be treated as
actual distributions from the Company to the participating shareholders and will
retain the character and tax effects applicable to distributions from the
Company generally. See "-- Taxation of Taxable Domestic Shareholders" and
"-- Taxation of Foreign Shareholders." Participants in the dividend reinvestment
plan are subject to federal income tax on the amount of the deemed distributions
to the extent that such distributions represent dividends or gains, even though
they receive no cash. Common Shares received under the plan will have a holding
period beginning with the day after purchase and a tax basis equal to their cost
(which is the gross amount of the deemed distribution).
OTHER TAX 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.
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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, at prices 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 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.
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EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K of the Company for the fiscal year ended December
31, 1994, the audited historical financial statements included on pages F-37 to
F-43 of the Company's Registration Statement on Form S-11 (No. 33-80950) dated
June 30, 1994 and as amended thereafter, the historical financial statements
included on pages F-1 through F-4 of the Company's Current Report on Form 8-K
dated December 28, 1994, the historical financial statements included on pages
F-1 through F-4 of the Company's Current Report on Form 8-K dated June 12, 1995,
and the historical financial statements included on pages F-1 through F-4 of the
Company's Current Report on Form 8-K dated September 21, 1995 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 will be passed upon for the Company
by Baker & Hostetler, Cleveland, Ohio and for any underwriters, dealers or
agents by Brown & Wood, New York, New York.
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ASSOCIATED ESTATES
REALTY
CORPORATION
[LOGO}
1,300,000
COMMON SHARES
PROSPECTUS SUPPLEMENT
DEAN WITTER REYNOLDS INC.
DECEMBER 11, 1996
