1
Filed Pursuant To Rule 424(B)(5)
Registration No. 333-22419
PROSPECTUS SUPPLEMENT
(To Prospectus Dated March 7, 1997)
$102,500,000 [LOGO]
Associated Estates Realty Corporation
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MEDIUM-TERM NOTES
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Due Nine Months or More From Date of Issue
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Associated Estates Realty Corporation (the "Company") may offer from time
to time up to $102,500,000 aggregate initial offering price, or the equivalent
thereof in one or more foreign or composite currencies, of its Medium-Term Notes
Due Nine Months or More From Date of Issue (the "Notes"). Such aggregate initial
offering price is subject to reduction as a result of the sale by the Company of
other Offered Securities described in the accompanying Prospectus. Each Note
will mature on any day nine months or more from the date of issue, as specified
in the applicable pricing supplement hereto (each, a "Pricing Supplement"), and
may be subject to redemption at the option of the Company or repayment at the
option of the Holder thereof, in each case, in whole or in part, prior to its
Stated Maturity Date, as specified in the applicable Pricing Supplement. The
Notes will be either Senior Notes or Subordinated Notes (referred to in the
accompanying Prospectus as "Senior Securities" and "Subordinated Securities,"
respectively). In addition, each Note may be denominated and/or payable in
United States dollars or a foreign or composite currency, as specified in the
applicable Pricing Supplement. The Notes, other than Foreign Currency Notes,
will be issued in minimum denominations of $1,000 and integral multiples
thereof, unless otherwise specified in the applicable Pricing Supplement, while
Foreign Currency Notes will be issued in the minimum denominations specified in
the applicable Pricing Supplement.
The Company may issue notes that will bear interest at fixed rates ("Fixed
Rate Notes") or at floating rates ("Floating Rate Notes"). The applicable
Pricing Supplement will specify whether a Floating Rate Note is a Regular
Floating Rate Note, a Floating Rate/Fixed Rate Note or an Inverse Floating Rate
Note and whether the rate of interest thereon is determined by reference to one
or more of the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh
District Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate or
the Treasury Rate (each, an "Interest Rate Basis"), or any other interest rate
basis or formula, as adjusted by any Spread and/or Spread Multiplier. Interest
on each Floating Rate Note will accrue from its date of issue and, unless
otherwise specified in the applicable Pricing Supplement, will be payable
monthly, quarterly, semiannually or annually in arrears, as specified in the
applicable Pricing Supplement, and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the rate of interest on each
Floating Rate Note will be reset daily, weekly, monthly, quarterly, semiannually
or annually, as specified in the applicable Pricing Supplement. Interest on each
Fixed Rate Note will accrue from its date of issue and, unless otherwise
specified in the applicable Pricing Supplement, will be payable semiannually in
arrears on March 15 and September 15 of each year and on the Maturity Date. The
Company my also issue Discount Notes, Indexed Notes and Amortizing Notes.
The interest rate, or formula for the determination of the interest rate, if
any, applicable to each Note and the other variable terms thereof will be
established by the Company on the date of issue of such Note and will be
specified in the applicable Pricing Supplement. Interest rates or formulas and
other terms of Notes are subject to change by the Company, but no such change
will affect any Note previously issued or as to which an offer to purchase has
been accepted by the Company.
Each Note will be issued in book-entry form (a "Book-Entry Note") or in fully
registered certificated form (a "Certificated Note"), as specified in the
applicable Pricing Supplement. Each Book-Entry Note will be represented by one
or more fully registered global securities (the "Global Securities") deposited
with or on behalf of The Depository Trust Company (or such other depositary
identified the applicable Pricing Supplement) (the "Depositary") and registered
in the name of the Depositary or the Depositary's nominee. Interests in the
Global Securities will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary (with respect to its participants)
and the Depositary's participants (with respect to beneficial owners). Except in
limited circumstances, Book-Entry Notes will not be exchangeable for
Certificated Notes.
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See "Risk Factors" on page S-3 for a discussion of certain risks that should
be considered in connection with an investment in the Notes offered hereby.
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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, THE PROSPECTUS OR ANY
SUPPLEMENT HERETO. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Agents' Discounts Proceeds to
Public(1) and Commissions(1)(2) Company(1)(3)
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Per Note................................................. 100% .125% - .750% 99.875% - 99.250%
Total(4)................................................. $102,500,000 $128,125 - $768,750 $102,371,875 - $101,731,250
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(1) Morgan Stanley & Co. Incorporated, Alex. Brown & Sons Incorporated, First
Chicago Capital Markets, Inc., Lehman Brothers Inc. and J.P. Morgan
Securities Inc. (the "Agents") may purchase the Notes, as principal, from
the Company, for resale to investors and other purchasers at varying prices
relating to prevailing market prices at the time of resale as determined by
the applicable Agent, or, if so specified in the applicable Pricing
Supplement, for resale at a fixed offering price. Unless otherwise specified
in the applicable Pricing Supplement, any Note sold to an Agent as principal
will be purchased by such Agent at a price equal to 100% of the principal
amount thereof less a percentage of the principal amount equal to the
commission applicable to an agency sale (as described below) of a Note of
identical maturity and rank. If agreed to by the Company and an Agent, such
Agent may utilize its reasonable efforts on an agency basis to solicit
offers to purchase the Notes at 100% of the principal amount thereof, unless
otherwise specified in the applicable Pricing Supplement. The Company will
pay a commission to an Agent, ranging from .125% to .750% of the principal
amount of any Senior Note, depending upon its stated maturity, sold through
an Agent. The schedule of commissions payable in connection with Senior
Notes will also apply to sales of Subordinated Notes unless otherwise agreed
to by the Company and an Agent. Commissions with respect to Notes with
stated maturities in excess of 30 years that are sold through such Agent
will be negotiated between the Company and such Agent at the time of such
sale. See "Plan of Distribution."
(2) The Company has agreed to indemnify the Agents against, and to provide
contribution with respect to, certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Plan of Distribution."
(3) Before deducting expenses payable by the Company estimated at $150,000.
(4) Or the equivalent thereof in one or more foreign or composite currencies.
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The Notes are being offered on a continuing basis by the Company to or through
the Agents. Unless otherwise specified in the applicable Pricing Supplement, the
Notes will not be listed on any securities exchange. There is no assurance that
the Notes offered hereby will be sold or, if sold, that there will be a
secondary market for the Notes or liquidity in the secondary market if one
develops. The Company reserves the right to cancel or modify the offer made
hereby without notice. The Company or an Agent, if it solicits the offer on an
agency basis, may reject any offer to purchase Notes in whole or in part. See
"Plan of Distribution."
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MORGAN STANLEY & CO.
Incorporated
ALEX. BROWN & SONS
Incorporated
FIRST CHICAGO CAPITAL MARKETS, INC.
LEHMAN BROTHERS
April 30, 1997 J.P. MORGAN & CO.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SPECIFICALLY,
THE AGENTS OR MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR,
AND PURCHASE, THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Risk Factors.......................................................................... S-3
Description of Notes.................................................................. S-4
Special Provisions Relating to Foreign Currency Notes................................. S-20
Certain United States Federal Income Tax Considerations............................... S-23
Plan of Distribution.................................................................. S-31
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.......................................................... 21
Description of Common Share Warrants.................................................. 23
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
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RISK FACTORS
THIS PROSPECTUS SUPPLEMENT DOES NOT DESCRIBE ALL OF THE RISKS OF AN
INVESTMENT IN NOTES, WHETHER RESULTING FROM SUCH NOTES BEING DENOMINATED OR
PAYABLE IN OR DETERMINED BY REFERENCE TO A CURRENCY OR COMPOSITE CURRENCY OTHER
THAN UNITED STATES DOLLARS OR TO ONE OR MORE INTEREST RATE, CURRENCY OR OTHER
INDICES OR FORMULAS, OR OTHERWISE. THE COMPANY AND THE AGENTS DISCLAIM ANY
RESPONSIBILITY TO ADVISE PROSPECTIVE INVESTORS OF SUCH RISKS AS THEY EXIST AT
THE DATE OF THIS PROSPECTUS SUPPLEMENT OR AS THEY CHANGE FROM TIME TO TIME.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN FINANCIAL AND LEGAL ADVISORS AS
TO THE RISKS ENTAILED BY AN INVESTMENT IN SUCH NOTES AND THE SUITABILITY OF
INVESTING IN SUCH NOTES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. SUCH NOTES
ARE NOT AN APPROPRIATE INVESTMENT FOR INVESTORS WHO ARE UNSOPHISTICATED WITH
RESPECT TO FOREIGN CURRENCY TRANSACTIONS OR TRANSACTIONS INVOLVING THE
APPLICABLE INTEREST RATE OR CURRENCY INDEX OR OTHER INDICES OR FORMULAS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, AMONG OTHER FACTORS, THE
MATTERS DESCRIBED BELOW.
STRUCTURE RISKS
An investment in Notes indexed, as to principal, premium, if any, and/or
interest, if any, to one or more interest rate, currency (including exchange
rates and swap indices between currencies or composite currencies) or other
indices or formulas, either directly or inversely, entails significant risks
that are not associated with similar investments in a conventional fixed rate or
floating rate debt security. Such risks include, without limitation, the
possibility that such indices or formulas may be subject to significant changes,
that no interest will be payable in respect of such Notes or will be payable at
a rate lower than one applicable to a conventional fixed rate or floating rate
debt security issued by the Company at the same time, that repayment of the
principal and/or premium, if any, in respect of such Notes may occur at times
other than that expected by the Holders (as defined in the accompanying
Prospectus), and that the Holders could lose all or a substantial portion of
principal and/or premium, if any, payable with respect to such Notes on the
Maturity Date (as defined under "Description of Notes -- General"). Such risks
depend on a number of interrelated factors, including economic, financial and
political events, over which the Company has no control. Additionally, if the
formula used to determine the amount of principal, premium, if any, and/or
interest, if any, payable with respect to such Notes contains a multiplier or
leverage factor, the effect of any change in the applicable index or indices or
formula or formulas will be magnified. In recent years, values of certain
indices and formulas have been highly volatile and such volatility may be
expected to continue in the future. Fluctuations in the value of any particular
index or formula that have occurred in the past are not necessarily indicative,
however, of fluctuations that may occur in the future.
Any optional redemption feature of Notes might affect the market value of
such Notes. Since the Company may be expected to redeem such Notes when
prevailing interest rates are relatively low, Holders generally will not be able
to reinvest the redemption proceeds in a comparable security at an effective
interest rate as high as the interest rate on such Notes.
The Notes will not have an established trading market when issued, and
there can be no assurance of a secondary market for the Notes or the liquidity
of the secondary market if one develops. See "Plan of Distribution."
The secondary market, if any, for Notes will be affected by a number of
factors independent of the creditworthiness of the Company and the value of the
applicable index or indices or formula or formulas, including the complexity and
volatility of each such index or formula, the method of calculating the
principal, premium, if any, and/or interest, if any, in respect of such Notes,
the time remaining to the maturity of such Notes, the outstanding amount of such
Notes, any redemption features of such Notes, the amount of other debt
securities linked to such index or formula and the level, direction and
volatility of market interest rates
S-3
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generally. Such factors also will affect the market value of such Notes. In
addition, certain Notes may be designed for specific investment objectives or
strategies and, therefore, may have a more limited secondary market and
experience more price volatility than conventional debt securities. Holders may
not be able to sell such Notes readily or at prices that will enable them to
realize their anticipated yield. No investor should purchase Notes unless such
investor understands and is able to bear the risk that such Notes may not be
readily saleable, that the value of such Notes will fluctuate over time and that
such fluctuations may be significant.
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in Foreign Currency Notes (as defined under "Description of
Notes -- General") entails significant risks that are not associated with a
similar investment in a debt security denominated and payable in United States
dollars. Such risks include, without limitation, the possibility of significant
changes in the rate of exchange between the United States dollar and the
Specified Currency (as defined under "Description of Notes -- General") and the
possibility of the imposition or modification of exchange controls by the
applicable governments or monetary authorities. Such risks generally depend on
factors over which the Company has no control, such as economic, financial and
political events and the supply and demand for the applicable currencies or
composite currencies. In addition, if the formula used to determine the amount
of principal, premium, if any, and/or interest, if any, payable with respect to
Foreign Currency Notes contains a multiplier or leverage factor, the effect of
any change in the applicable currencies or composite currencies will be
magnified. In recent years, rates of exchange between the United States dollar
and foreign or composite currencies have been highly volatile and such
volatility may be expected to continue in the future. Fluctuations in any
particular exchange rate that have occurred in the past are not necessarily
indicative, however, of fluctuations that may occur in the future. Depreciation
of the Specified Currency applicable to a Foreign Currency Note against the
United States dollar would result in a decrease in the United States dollar-
equivalent yield of such Foreign Currency Note, in the United States
dollar-equivalent value of the principal and premium, if any, payable on the
Maturity Date of such Foreign Currency Note, and, generally, in the United
States dollar-equivalent market value of such Foreign Currency Note.
Governments or monetary authorities have imposed from time to time, and may
in the future impose or revise, exchange controls at or prior to the date on
which any payment of principal of, or premium, if any, or interest on, if any, a
Foreign Currency Note is due, which could affect exchange rates as well as the
availability of the Specified Currency on such date. Even if there are no
exchange controls, it is possible that the Specified Currency would not be
available on the applicable payment date due to other circumstances beyond the
control of the Company. In such cases, the Company will be entitled to satisfy
its obligations in respect of such Foreign Currency Note in United States
dollars. See "Special Provisions Relating to Foreign Currency Notes
- -- Availability of Specified Currency."
CREDIT RATINGS
The credit ratings assigned to the Company's medium-term note program may
not reflect the potential impact of all risks related to structure and other
factors on the value of the Notes. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in the Notes and the suitability of investing in such Notes in light
of their particular circumstances.
DESCRIPTION OF NOTES
The Notes will be either Senior Notes or Subordinated Notes (referred to in
the accompanying Prospectus as "Senior Securities" and "Subordinated
Securities," respectively). The Senior Notes will be issued as a series of Debt
Securities under an Indenture, dated as of March 31, 1995, as amended and
modified from time to time (the "Senior Indenture"), between the Company and
National City Bank, as trustee (the "Senior Trustee"). The Subordinated Notes
will be issued as a series of Debt Securities under an Indenture, dated as of
March 31, 1995, as amended and modified from time to time (the "Subordinated
Indenture"), between the Company and The Chase Manhattan Bank (formerly Chemical
Bank), as trustee (the "Subordinated Trustee"). The Senior Indenture and the
Subordinated Indenture are collectively referred
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to herein as the "Indentures" and each individually as an "Indenture." The
Senior Trustee and the Subordinated Trustee are collectively referred to herein
as the "Trustees" and each individually as a "Trustee." The Indentures are
subject to, and governed by, the Trust Indenture Act of 1939, as amended. The
following summary of certain provisions of the Notes and the Indentures does not
purport to be complete and is qualified in its entirety by reference to the
actual provisions of the Notes and the Indentures. Capitalized terms used but
not defined herein shall have the meanings given to them in the accompanying
Prospectus, the Notes or the Indentures, as the case may be. The term "Debt
Securities," as used in this Prospectus Supplement, refers to all debt
securities, including the Notes, issued and issuable from time to time under the
Indentures. The following description of Notes will apply to each Note offered
hereby unless otherwise specified in the applicable Pricing Supplement.
GENERAL
All Debt Securities, including the Notes, issued and to be issued under the
Indentures will be unsecured general obligations of the Company. The Senior
Notes will rank pari passu with all other unsecured and unsubordinated
indebtedness of the Company from time to time outstanding. The Senior Notes are
effectively subordinated to mortgages and other secured indebtedness of the
Company (approximately $85.3 million at March 31, 1997 including the Company's
share of mortgage indebtedness relating to the unconsolidated joint ventures of
approximately $18.0 million at March 31, 1997), which encumber certain assets of
the Company. The Subordinated Notes will be subordinated to all existing and
future Senior Indebtedness (as defined in the accompanying Prospectus) of the
Company. At March 31, 1997, the outstanding Senior Indebtedness of the Company,
exclusive of guarantees and other contingent obligations, was approximately
$271.4 million including the Company's share of Senior Indebtedness relating to
the unconsolidated joint ventures of approximately $18.0 million at March 31,
1997. See "Description of Debt Securities -- Subordination of Subordinated
Securities" in the accompanying Prospectus. On April 29, 1997 the Company issued
a Senior Note in the principal amount of $15.0 million, the proceeds of which
were used to repay amounts borrowed on the Company's line of credit.
The Indentures do not limit the aggregate initial offering price of Debt
Securities that may be issued thereunder and Debt Securities may be issued
thereunder from time to time in one or more series up to the aggregate initial
offering price from time to time authorized by the Company for each series. The
Company may, from time to time, without the consent of the Holders of the Notes,
provide for the issuance of Notes or other Debt Securities under the Indentures
in addition to the $117,500,000 aggregate initial offering price of Notes
offered hereby.
The Notes are currently limited to up to $102,500,000 aggregate initial
offering price, or the equivalent thereof in one or more foreign or composite
currencies. Each Note will mature on any day nine months or more from its date
of issue (the "Stated Maturity Date"), as specified in the applicable Pricing
Supplement, unless the principal thereof (or any installment of principal
thereof) becomes due and payable prior to the Stated Maturity Date, whether by
the declaration of acceleration of maturity, notice of redemption at the option
of the Company, notice of the Holder's option to elect repayment or otherwise
(the Stated Maturity Date or such prior date, as the case may be, is herein
referred to as the "Maturity Date" with respect to the principal of such Note
repayable on such date). Unless otherwise specified in the applicable Pricing
Supplement, interest-bearing Notes will either be Fixed Rate Notes or Floating
Rate Notes, as specified in the applicable Pricing Supplement. The Company may
also issue Discount Notes, Indexed Notes and Amortizing Notes (as such terms are
hereinafter defined).
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will be denominated in, and payments of principal, premium, if any, and/or
interest, if any, in respect thereof will be made in, United States dollars. The
Notes also may be denominated in, and payments of principal, premium, if any,
and/or interest, if any, in respect thereof may be made in, one or more foreign
currencies or composite currencies ("Foreign Currency Notes"). See "Special
Provisions Relating to Foreign Currency Notes -- Payment of Principal, Premium,
if any, and Interest, if any." The currency or composite currency in which a
particular Note is denominated (or, if such currency or composite currency is no
longer legal tender for the payment of public and private debts, such other
currency or composite currency of the relevant country which is then legal
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tender for the payment of such debts) is herein referred to as the "Specified
Currency." References herein to "United States dollars," "U.S. dollars" or "$"
are to the lawful currency of the United States of America (the "United
States").
Unless otherwise specified in the applicable Pricing Supplement, purchasers
are required to pay for the Notes in the applicable Specified Currencies. At the
present time, there are limited facilities in the United States for the
conversion of United States dollars into foreign or composite currencies and
vice versa, and commercial banks do not generally offer non-United States dollar
checking or savings account facilities in the United States. The Agent from or
through which a Foreign Currency Note is purchased will be prepared to arrange
for the conversion of United States dollars into the Specified Currency in order
to enable the purchaser to pay for the related Foreign Currency Note, provided
that a request is made to such Agent on or prior to the fifth Business Day (as
hereinafter defined) preceding the date of delivery of such Foreign Currency
Note, or by such other day as determined by such Agent. Each such conversion
will be made by such Agent on such terms and subject to such conditions,
limitations and charges as such Agent may from time to time establish in
accordance with its regular foreign exchange practices. All costs of exchange
will be borne by the purchaser of each such Foreign Currency Note. See "Special
Provisions Relating to Foreign Currency Notes."
Interest rates offered by the Company with respect to the Notes may differ
depending upon, among other factors, the aggregate principal amount of Notes
purchased in any single transaction. Notes with different variable terms other
than interest rates may also be offered concurrently to different investors.
Interest rates or formula and other terms of Notes are subject to change by the
Company from time to time, but no such change will affect any Note previously
issued or as to which an offer to purchase has been accepted by the Company.
Each Note will be issued as a Book-Entry Note represented by one or more
fully registered Global Securities or as a fully registered Certificated Note.
The minimum denominations of each Note other than a Foreign Currency Note will
be $1,000 and integral multiples thereof, unless otherwise specified in the
applicable Pricing Supplement, while the minimum denominations of each Foreign
Currency Note will be specified in the applicable Pricing Supplement.
Payments of principal of, and premium, if any, and interest, if any, on,
Book-Entry Notes will be made by the Company through the applicable Trustee to
the Depositary. See "-- Book-Entry Notes." In the case of Certificated Notes,
payment of principal and premium, if any, due on the Maturity Date will be made
in immediately available funds upon presentation and surrender thereof (and, in
the case of any repayment on an Optional Repayment Date, upon submission of a
duly completed election form in accordance with the provisions described below)
at the office or agency maintained by the Company for such purpose in the
Borough of Manhattan, The City of New York. Such office or agency for Senior
Notes and Subordinated Notes is maintained currently by the Senior Trustee at
120 Broadway, 33rd Floor, New York, New York 10271, and by the Subordinated
Trustee at its corporate trust office located at 450 West 33rd Street, New York,
New York 10001-2697, respectively. An additional office or agency for the Senior
Notes is maintained currently at the corporate trust office of the Senior
Trustee located at 1900 East Ninth Street, Corporate Trust Division, Cleveland,
OH 44114. Payment of interest, if any, due on the Maturity Date of a
Certificated Note will be made to the person to whom payment of the principal
thereof and premium, if any, thereon shall be made. Payment of interest, if any,
due on a Certificated Note on any Interest Payment Date (as hereinafter defined)
other than the Maturity Date will be made by check mailed to the address of the
Holder entitled thereto as such address shall appear in the Security Register of
the Company. Notwithstanding the foregoing, a Holder of $10,000,000 (or, if the
Specified Currency is other than United States dollars, the equivalent thereof
in such Specified Currency) or more in aggregate principal amount of
Certificated Notes (whether having identical or different terms and provisions)
will be entitled to receive interest payments, if any, on any Interest Payment
Date other than the Maturity Date by wire transfer of immediately available
funds if appropriate wire transfer instructions have been received in writing by
the applicable Trustee not less than 15 calendar days prior to such Interest
Payment Date. Any such wire transfer instructions received by the applicable
Trustee shall remain in effect until revoked by such Holder. For special payment
terms applicable
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to Foreign Currency Notes, see "Special Provisions Relating to Foreign Currency
Notes -- Payment of Principal, Premium, if any, and Interest, if any."
As used herein, "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close in The
City of New York; provided, however, that, with respect to Foreign Currency
Notes, such day is also not a day on which banking institutions are authorized
or required by law, regulation or executive order to close in the Principal
Financial Center (as hereinafter defined) of the country issuing the Specified
Currency (unless the Specified Currency is European Currency Units ("ECU"), in
which case such day is also not a day that appears as an ECU non-settlement day
on the display designated as "ISDE" on the Reuter Monitor Money Rates Service
(or is not a day designated as an ECU non-settlement day by the ECU Banking
Association) or, if ECU non-settlement days do not appear on that page (and are
not so designated), a day that is not a day on which payments in ECU cannot be
settled in the international interbank market); provided, further, that, with
respect to Notes as to which LIBOR is an applicable Interest Rate Basis, such
day is also a London Business Day (as hereinafter defined). "London Business
Day" means a day on which dealings in the Designated LIBOR Currency (as
hereinafter defined) are transacted in the London interbank market.
"Principal Financial Center" means (i) the capital city of the country
issuing the Specified Currency (except as described in the immediately preceding
paragraph with respect to ECU) or (ii) the capital city of the country to which
the Designated LIBOR Currency, if applicable, relates (or, in the case of ECU,
Luxembourg), except, in each case, that with respect to United States dollars,
Australian dollars, Canadian dollars, Deutsche marks, Dutch guilders, Italian
lire and Swiss francs, the "Principal Financial Center" shall be The City of New
York, Sydney, Toronto, Frankfurt, Amsterdam, Milan (solely in the case of clause
(i) above) and Zurich, respectively.
Book-Entry Notes may be transferred or exchanged only through the
Depositary. See "-- Book-Entry Notes." Registration of transfer or exchange of
Certificated Notes will be made at the office or agency maintained by the
Company for such purpose in the Borough of Manhattan, The City of New York. No
service charge will be made by the Company or the Trustee for any such
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith (other than exchanges pursuant to the
Indenture not involving any transfer).
REDEMPTION AT THE OPTION OF THE COMPANY
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will not be subject to any sinking fund. The Notes will be redeemable at the
option of the Company prior to the Stated Maturity Date only if an Initial
Redemption Date is specified in the applicable Pricing Supplement. If so
specified, the Notes will be subject to redemption at the option of the Company
on any date on and after the applicable Initial Redemption Date in whole or from
time to time in part in increments of $1,000 or such other minimum denomination
specified in such Pricing Supplement (provided that any remaining principal
amount thereof shall be at least $1,000 or such minimum denomination), at the
applicable Redemption Price (as hereinafter defined), together with unpaid
interest accrued thereon to the date of redemption, on written notice given to
the Holders thereof not more than 60 nor less than 30 calendar days prior to the
date of redemption and in accordance with the provisions of the Indenture.
"Redemption Price," with respect to a Note, means an amount equal to the Initial
Redemption Percentage, if any, specified in the applicable Pricing Supplement
(as adjusted by the Annual Redemption Percentage Reduction, if applicable)
multiplied by the unpaid principal amount to be redeemed. The Initial Redemption
Percentage, if any, applicable to a Note shall decline at each anniversary of
the Initial Redemption Date by an amount equal to the applicable Annual
Redemption Percentage Reduction, if any, until the Redemption Price is equal to
100% of the unpaid principal amount to be redeemed. For a discussion of the
redemption of Discount Notes, see "-- Discount Notes."
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REPAYMENT AT THE OPTION OF THE HOLDER
The Notes will be repayable by the Company at the option of the Holders
thereof prior to the Stated Maturity Date only if one or more optional repayment
dates ("Optional Repayment Dates") are specified in the applicable Pricing
Supplement. If so specified, the Notes will be subject to repayment at the
option of the Holders thereof on any Optional Repayment Date in whole or from
time to time in part in increments of $1,000 or such other minimum denomination
specified in the applicable Pricing Supplement (provided that any remaining
principal amount thereof shall be at least $1,000 or such other minimum
denomination), at a repayment price equal to 100% of the unpaid principal amount
to be repaid, together with unpaid interest accrued thereon to the date of
repayment. For any Note to be repaid, such Note must be received, together with
the form thereon entitled "Option to Elect Repayment" duly completed, by the
applicable Trustee at its Corporate Trust Office (or such other address of which
the Company shall from time to time notify the Holders) not more than 60 nor
less than 30 calendar days prior to the date of repayment. Exercise of such
repayment option by the Holder will be irrevocable. For a discussion of the
repayment of Discount Notes, see "-- Discount Notes."
Only the Depositary may exercise the repayment option in respect of Global
Securities representing Book-Entry Notes. Accordingly, Beneficial Owners (as
hereinafter defined) of Global Securities that desire to have all or any portion
of the Book-Entry Notes represented by such Global Securities repaid must
instruct the Participant (as hereinafter defined) through which they own their
interest to direct the Depositary to exercise the repayment option on their
behalf by delivering the related Global Security and duly completed election
form to the Trustee as aforesaid. In order to ensure that such Global Security
and election form are received by the Trustee on a particular day, the
applicable Beneficial Owner must so instruct the Participant through which it
owns its interest before such Participant's deadline for accepting instructions
for that day. Different firms may have different deadlines for accepting
instructions from their customers. Accordingly, Beneficial Owners should consult
the Participants through which they own their interest for the respective
deadlines for such Participants. All instructions given to Participants from
Beneficial Owners of Global Securities relating to the option to elect repayment
shall be irrevocable. In addition, at the time such instructions are given, each
such Beneficial Owner shall cause the Participant through which it owns its
interest to transfer such Beneficial Owner's interest in the Global Security or
Securities representing the related Book-Entry Notes, on the Depositary's
records, to the applicable Trustee. See "-- Book-Entry Notes."
If applicable, the Company will comply with the requirements of Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated thereunder and any other securities laws or
regulations in connection with any such repayment.
The Company may at any time purchase Notes at any price or prices in the
open market or otherwise. Notes so purchased by the Company may, at the
discretion of the Company, be held, resold or surrendered to the applicable
Trustee for cancellation.
INTEREST
General
Unless otherwise specified in the applicable Pricing Supplement, each
interest-bearing Note will bear interest from its date of issue at the rate per
annum, in the case of a Fixed Rate Note, or pursuant to the interest rate
formula, in the case of a Floating Rate Note, in each case as specified in the
applicable Pricing Supplement, until the principal thereof is paid or duly made
available for payment. Unless otherwise specified in the applicable Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will be made in an amount equal to the amount of interest accrued from and
including the immediately preceding Interest Payment Date in respect of which
interest has been paid or duly made available for payment (or from and including
the date of issue, if no interest has been paid or duly made available for
payment), to but excluding the applicable Interest Payment Date or the Maturity
Date, as the case may be (each, an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the
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first payment of interest on any such Note originally issued between a Record
Date (as hereinafter defined) and the next succeeding Interest Payment Date will
be made on the Interest Payment Date immediately following the next succeeding
Record Date to the Holder on such next succeeding Record Date. Unless otherwise
specified in the applicable Pricing Supplement, a "Record Date" shall be the
fifteenth calendar day (whether or not a Business Day) immediately preceding the
related Interest Payment Date.
Fixed Rate Notes
Unless otherwise specified in the applicable Pricing Supplement, interest
on Fixed Rate Notes will be payable on March 15 and September 15 of each year
(each, an "Interest Payment Date") and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, interest on Fixed Rate Notes
will be computed on the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note
falls on a day that is not a Business Day, the required payment of principal,
premium, if any, and/or interest will be made on the next succeeding Business
Day as if made on the date such payment was due, and no interest will accrue on
such payment for the period from and after such Interest Payment Date or the
Maturity Date, as the case may be, to the date of such payment on the next
succeeding Business Day.
Floating Rate Notes
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may, as described
below, include (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds Rate,
(vi) LIBOR, (vii) the Prime Rate, (viii) the Treasury Rate, or (ix) such other
Interest Rate Basis or interest rate formula as may be specified in the
applicable Pricing Supplement. The applicable Pricing Supplement will specify
certain terms with respect to which each Floating Rate Note is being delivered,
including: whether such Floating Rate Note is a "Regular Floating Rate Note," a
"Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," the Fixed
Rate Commencement Date, if applicable, Fixed Interest Rate, if applicable,
Interest Rate Basis or Bases, Initial Interest Rate, if any, Initial Interest
Reset Date, Interest Payment Dates, Index Maturity, Maximum Interest Rate and/or
Minimum Interest Rate, if any, and Spread and/or Spread Multiplier, if any, as
such terms are defined below. If one or more of the applicable Interest Rate
Bases is LIBOR or the CMT Rate, the applicable Pricing Supplement will also
specify the Designated LIBOR Currency and Designated LIBOR Page or the
Designated CMT Maturity Index and Designated CMT Telerate Page, respectively, as
such terms are defined below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note" or an "Inverse Floating Rate Note" or as having an
Addendum attached or having "Other/Additional Provisions" apply, in each
case relating to a different interest rate formula, such Floating Rate Note
will be designated as a "Regular Floating Rate Note" and, except as
described below or in the applicable Pricing Supplement, will bear interest
at the rate determined by reference to the applicable Interest Rate Basis
or Bases (a) plus or minus the applicable Spread, if any, and/or (b)
multiplied by the applicable Spread Multiplier, if any. Commencing on the
Initial Interest Reset Date, the rate at which interest on such Regular
Floating Rate Note shall be payable shall be reset as of each Interest
Reset Date; provided, however, that the interest rate in effect for the
period, if any, from the date of issue to the Initial Interest Reset Date
will be the Initial Interest Rate.
(ii) If such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note," then, except as described below or in the applicable
Pricing Supplement, such Floating Rate Note will bear interest at the rate
determined by reference to the applicable Interest Rate Basis or Bases (a)
plus or minus the applicable Spread, if any, and/or (b) multiplied by the
applicable Spread Multiplier, if any. Commencing on the Initial Interest
Reset Date, the rate at which interest on such Floating Rate/Fixed Rate
Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that (y) the interest rate in effect for the period, if
any, from the date of issue to the Initial Interest Reset Date will be the
Initial
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Interest Rate and (z) the interest rate in effect for the period commencing
on the Fixed Rate Commencement Date to the Maturity Date shall be the Fixed
Interest Rate, if such rate is specified in the applicable Pricing
Supplement or, if no such Fixed Interest Rate is specified, the interest
rate in effect thereon on the day immediately preceding the Fixed Rate
Commencement Date.
(iii) If such Floating Rate Note is designated as an "Inverse Floating
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the Fixed
Interest Rate minus the rate determined by reference to the applicable
Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if
any, and/or (b) multiplied by the applicable Spread Multiplier, if any;
provided, however, that, unless otherwise specified in the applicable
Pricing Supplement, the interest rate thereon will not be less than zero.
Commencing on the Initial Interest Reset Date, the rate at which interest
on such Inverse Floating Rate Note shall be payable shall be reset as of
each Interest Reset Date; provided, however, that the interest rate in
effect for the period, if any, from the date of issue to the Initial
Interest Reset Date will be the Initial Interest Rate.
The "Spread" is the number of basis points to be added to or subtracted
from the related Interest Rate Basis or Bases applicable to such Floating Rate
Note. The "Spread Multiplier" is the percentage of the related Interest Rate
Basis or Bases applicable to such Floating Rate Note by which such Interest Rate
Basis or Bases will be multiplied to determine the applicable interest rate on
such Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the related Interest Rate Basis
or Bases will be calculated.
Unless otherwise specified in the applicable Pricing Supplement, the
interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Pricing Supplement, the interest rate in effect on each day shall
be (i) if such day is an Interest Reset Date, the interest rate determined as of
the Interest Determination Date (as hereinafter defined) immediately preceding
such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
The applicable Pricing Supplement will specify whether the rate of interest
on the related Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually or on such other specified basis (each, an
"Interest Reset Period") and the dates on which such rate of interest will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Dates will be, in the case of
Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Floating Rate Notes
as to which the Treasury Rate is an applicable Interest Rate Basis, which will
reset the Tuesday of each week, except as described below); (iii) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating Rate
Notes as to which the Eleventh District Cost of Funds Rate is an applicable
Interest Rate Basis, which will reset on the first calendar day of the month);
(iv) quarterly, the third Wednesday of March, June, September and December of
each year; (v) semiannually, the third Wednesday of the two months specified in
the applicable Pricing Supplement; and (vi) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement; provided however, that,
with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon
will not reset after the applicable Fixed Rate Commencement Date. If any
Interest Reset Date for any Floating Rate Note would otherwise be a day that is
not a Business Day, such Interest Reset Date will be postponed to the next
succeeding Business Day, except that in the case of a Floating Rate Note as to
which LIBOR is an applicable Interest Rate Basis and such Business Day falls in
the next succeeding calendar month, such Interest Reset Date will be the
immediately preceding Business Day.
The interest rate applicable to each Interest Reset Period commencing on
the related Interest Reset Date will be the rate determined by the Calculation
Agent as of the applicable Interest Determination Date and calculated on or
prior to the Calculation Date (as hereinafter defined), except with respect to
LIBOR and the Eleventh District Cost of Funds Rate, which will be calculated on
such Interest Determination Date. The "Interest Determination Date" with respect
to the CD Rate, the CMT Rate, the Commercial Paper Rate, the Federal Funds Rate
and the Prime Rate will be the second Business Day immediately preceding the
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applicable Interest Reset Date; the "Interest Determination Date" with respect
to the Eleventh District Cost of Funds Rate will be the last working day of the
month immediately preceding the applicable Interest Reset Date on which the
Federal Home Loan Bank of San Francisco (the "FHLB of San Francisco") publishes
the Index (as hereinafter defined); and the "Interest Determination Date" with
respect to LIBOR will be the second London Business Day immediately preceding
the applicable Interest Reset Date, unless the Designated LIBOR Currency is
British pounds sterling, in which case the "Interest Determination Date" will be
the applicable Interest Reset Date. With respect to the Treasury Rate, the
"Interest Determination Date" will be the day in the week in which the
applicable Interest Reset Date falls on which day Treasury Bills (as hereinafter
defined) are normally auctioned (Treasury Bills are normally sold at an auction
held on Monday of each week, unless that day is a legal holiday, in which case
the auction is normally held on the following Tuesday, except that such auction
may be held on the preceding Friday); provided, however, that if an auction is
held on the Friday of the week preceding the applicable Interest Reset Date, the
"Interest Determination Date" will be such preceding Friday; provided, further,
that if the Interest Determination Date would otherwise fall on an Interest
Reset Date, then such Interest Reset Date will be postponed to the next
succeeding Business Day. The "Interest Determination Date" pertaining to a
Floating Rate Note the interest rate of which is determined by reference to two
or more Interest Rate Bases will be the most recent Business Day which is at
least two Business Days prior to the applicable Interest Reset Date for such
Floating Rate Note on which each Interest Rate Basis is determinable. Each
Interest Rate Basis will be determined as of such date, and the applicable
interest rate will take effect on the applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note may also have either or
both of the following: (i) a Maximum Interest Rate, or ceiling, that may accrue
during any Interest Period and (ii) a Minimum Interest Rate, or floor, that may
accrue during any Interest Period. In addition to any Maximum Interest Rate that
may apply to any Floating Rate Note, the interest rate on Floating Rate Notes
will in no event be higher than the maximum rate permitted by Ohio law in the
case of the Senior Notes or by New York law, in the case of the Subordinated
Notes, as the same may be modified by United States law of general application.
Except as provided below or in the applicable Pricing Supplement, interest
will be payable, in the case of Floating Rate Notes which reset: (i) daily,
weekly or monthly, on the third Wednesday of each month or on the third
Wednesday of March, June, September and December of each year, as specified in
the applicable Pricing Supplement; (ii) quarterly, on the third Wednesday of
March, June, September and December of each year, (iii) semiannually, on the
third Wednesday of the two months of each year specified in the applicable
Pricing Supplement; and (iv) annually, on the third Wednesday of the month of
each year specified in the applicable Pricing Supplement (each, an "Interest
Payment Date" with respect to Floating Rate Notes) and, in each case, on the
Maturity Date. If any Interest Payment Date other than the Maturity Date for any
Floating Rate Note would otherwise be a day that is not a Business Day, such
Interest Payment Date will be postponed to the next succeeding Business Day,
except that in the case of a Floating Rate Note as to which LIBOR is an
applicable Interest Rate Basis and such Business Day falls in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding Business Day. If the Maturity Date of a Floating Rate Note falls on a
day that is not a Business Day, the required payment of principal, premium, if
any, and interest will be made on the next succeeding Business Day as if made on
the date such payment was due, and no interest will accrue on such payment for
the period from and after the Maturity Date to the date of such payment on the
next succeeding Business Day.
All percentages resulting from any calculation on Floating Rate Notes will
be rounded to the nearest one hundred-thousandth of a percentage point, with
five-one millionths of a percentage point rounded upwards (e.g., 9.876545% (or
.09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in
or resulting from such calculation on Floating Rate Notes will be rounded, in
the case of United States dollars, to the nearest cent or, in the case of a
foreign or composite currency, to the nearest unit (with one-half cent or unit
being rounded upwards).
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying its principal amount by an accrued interest factor. Such accrued
interest factor is computed by adding the interest factor calculated for each
day in the applicable Interest Period. Unless otherwise specified in the
applicable Pricing Supplement, the interest factor for each such day will be
computed by dividing the interest rate applicable to
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such day by 360, in the case of Floating Rate Notes for which an applicable
Interest Rate Basis is the CD Rate, the Commercial Paper Rate, the Eleventh
District Cost of Funds Rate, the Federal Funds Rate, LIBOR or the Prime Rate, or
by the actual number of days in the year in the case of Floating Rate Notes for
which an applicable Interest Rate Basis is the CMT Rate or the Treasury Rate.
Unless otherwise specified in the applicable Pricing Supplement, the interest
factor for Floating Rate Notes for which the interest rate is calculated with
reference to two or more Interest Rate Bases will be calculated in each period
in the same manner as if the applicable Interest Rate Basis applied as specified
in the applicable Pricing Supplement applied.
Unless otherwise specified in the applicable Pricing Supplement, National
City Bank will be the "Calculation Agent" with respect to any Floating Rate Note
that is a Senior Note and Chemical Bank will be the "Calculation Agent" with
respect to any Floating Rate Note that is a Subordinated Note. Upon request of
the Holder of any Floating Rate Note, the Calculation Agent will disclose the
interest rate then in effect and, if determined, the interest rate that will
become effective as a result of a determination made for the next succeeding
Interest Reset Date with respect to such Floating Rate Note. Unless otherwise
specified in the applicable Pricing Supplement, the "Calculation Date," if
applicable, pertaining to any Interest Determination Date will be the earlier of
(i) the tenth calendar day after such Interest Determination Date, or, if such
day is not a Business Day, the next succeeding Business Day or (ii) the Business
Day immediately preceding the applicable Interest Payment Date or the Maturity
Date, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, the
Calculation Agent shall determine each Interest Rate Basis in accordance with
the following provisions.
CD Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CD Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CD Rate (a "CD Rate Interest Determination Date"), the rate on such date for
negotiable United States dollar certificates of deposit having the Index
Maturity specified in the applicable Pricing Supplement as published by the
Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)")
under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M.,
New York City time, on the related Calculation Date, the rate on such CD Rate
Interest Determination Date for negotiable United States dollar certificates of
deposit of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary market
offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest
Determination Date, of three leading nonbank dealers in negotiable United States
dollar certificates of deposit in The City of New York (which may include the
Agents or their affiliates) selected by the Calculation Agent for negotiable
United States dollar certificates of deposit of major United States money center
banks for negotiable certificates of deposit with a remaining maturity closest
to the Index Maturity specified in the applicable Pricing Supplement in an
amount that is representative for a single transaction in that market at that
time; provided, however, that if the dealers so selected by the Calculation
Agent are not quoting as mentioned in this sentence, the CD Rate determined as
of such CD Rate Interest Determination Date will be the CD Rate in effect on
such CD Rate Interest Determination Date.
CMT Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CMT Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on
the Designated CMT Telerate Page under the caption "...Treasury Constant
Maturities...Federal Reserve Board Release H.15...Mondays Approximately 3:45
P.M.," under the column for the Designated CMT Maturity Index for (i) if the
Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest
Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the
weekly or monthly
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average, as specified in the applicable Pricing Supplement, for the week or the
month, as applicable, ended immediately preceding the week or the month, as
applicable, in which the related CMT Rate Interest Determination Date falls. If
such rate is no longer displayed on the relevant page or is not displayed by
3:00 P.M., New York City time, on the related Calculation Date, then the CMT
Rate for such CMT Rate Interest Determination Date will be such treasury
constant maturity rate for the Designated CMT Maturity Index as published in
H.15(519). If such rate is no longer published or is not published by 3:00 P.M.,
New York City time, on the related Calculation Date, then the CMT Rate on such
CMT Rate Interest Determination Date will be such treasury constant maturity
rate for the Designated CMT Maturity Index (or other United States Treasury rate
for the Designated CMT Maturity Index) for the CMT Rate Interest Determination
Date with respect to such Interest Reset Date as may then be published by either
the Board of Governors of the Federal Reserve System or the United States
Department of the Treasury that the Calculation Agent determines to be
comparable to the rate formerly displayed on the Designated CMT Telerate Page
and published in H.15(519). If such information is not provided by 3:00 P.M.,
New York City time, on the related Calculation Date, then the CMT Rate on the
CMT Rate Interest Determination Date will be calculated by the Calculation Agent
and will be a yield to maturity, based on the arithmetic mean of the secondary
market offered rates as of approximately 3:30 P.M., New York City time, on such
CMT Rate Interest Determination Date reported, according to their written
records, by three leading primary United States government securities dealers
(each, a "Reference Dealer") in The City of New York (which may include the
Agents or their affiliates) (each, a "Reference Dealer") selected by the
Calculation Agent (from five such Reference Dealers selected by the Calculation
Agent and eliminating the highest quotation (or, in the event of equality, one
of the highest) and the lowest quotation (or, in the event of equality, one of
the lowest)), for the most recently issued direct noncallable fixed rate
obligations of the United States ("Treasury Notes") with an original maturity of
approximately the Designated CMT Maturity Index and a remaining term to maturity
of not less than such Designated CMT Maturity Index minus one year. If the
Calculation Agent is unable to obtain three such Treasury Note quotations, the
CMT Rate on such CMT Rate Interest Determination Date will be calculated by the
Calculation Agent and will be a yield to maturity based on the arithmetic mean
of the secondary market offered rates as of approximately 3:30 P.M., New York
City time, on such CMT Rate Interest Determination Date of three Reference
Dealers in The City of New York (from five such Reference Dealers selected by
the Calculation Agent and eliminating the highest quotation (or, in the event of
equality, one of the highest) and the lowest quotation (or, in the event of
equality, one of the lowest)), for Treasury Notes with an original maturity of
the number of years that is the next highest to the Designated CMT Maturity
Index and a remaining term to maturity closest to the Designated CMT Maturity
Index and in an amount of at least $100 million. If three or four (and not five)
of such Reference Dealers are quoting as described above, then the CMT Rate will
be based on the arithmetic mean of the offered rates obtained and neither the
highest nor the lowest of such quotes will be eliminated; provided however, that
if fewer than three Reference Dealers so selected by the Calculation Agent are
quoting as mentioned herein, the CMT Rate determined as of such CMT Rate
Interest Determination Date will be the CMT Rate in effect on such CMT Rate
Interest Determination Date. If two Treasury Notes with an original maturity as
described in the second preceding sentence have remaining terms to maturity
equally close to the Designated CMT Maturity Index, the Calculation Agent will
obtain quotations for the Treasury Note with the shorter remaining term to
maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in the applicable
Pricing Supplement (or any other page as may replace such page on such service
(or any successor service)) for the purpose of displaying Treasury Constant
Maturities as reported in H.15(519). If no such page is specified in the
applicable Pricing Supplement, the Designated CMT Telerate Page shall be 7052
for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of
the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified in the applicable Pricing Supplement with respect to which the CMT
Rate will be calculated or, if no such maturity is specified in the applicable
Pricing Supplement, two years.
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Commercial Paper Rate. Unless otherwise specified in the applicable
Pricing Supplement, "Commercial Paper Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Commercial Paper Rate (a "Commercial Paper
Rate Interest Determination Date"), the Money Market Yield (as hereinafter
defined) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in H.15(519) under
the heading "Commercial Paper." In the event that such rate is not published by
3:00 P.M., New York City time, on the related Calculation Date, then the
Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date
will be the Money Market Yield of the rate for commercial paper having the Index
Maturity specified in the applicable Pricing Supplement as published in
Composite Quotations under the heading "Commercial Paper" (with an Index
Maturity of one month or three months being deemed to be equivalent to an Index
Maturity of 30 days or 90 days, respectively). If such rate is not yet published
in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on
the related Calculation Date, then the Commercial Paper Rate on such Commercial
Paper Rate Interest Determination Date will be calculated by the Calculation
Agent and will be the Money Market Yield of the arithmetic mean of the offered
rates at approximately 11:00 A.M., New York City time, on such Commercial Paper
Rate Interest Determination Date of three leading dealers of commercial paper in
The City of New York (which may include the Agents or their affiliates) selected
by the Calculation Agent for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement placed for an industrial issuer
whose bond rating is "AA," or the equivalent, from a nationally recognized
statistical rating organization; provided, however, that if the dealers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Commercial Paper Rate determined as of such Commercial Paper Rate Interest
Determination Date will be the Commercial Paper Rate in effect on such
Commercial Paper Rate Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage) calculated
in accordance with the following formula:
D x 360 X 100
-------------
Money Market Yield = 360 - (D x M)
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable Interest Reset Period.
Eleventh District Cost of Funds Rate. Unless otherwise specified in the
applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate Note
for which the interest rate is determined with reference to the Eleventh
District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest
Determination Date"), the rate equal to the monthly weighted average cost of
funds for the calendar month immediately preceding the month in which such
Eleventh District Cost of Funds Rate Interest Determination Date falls, as set
forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M.,
San Francisco time, on such Eleventh District Cost of Funds Rate Interest
Determination Date. If such rate does not appear on Telerate Page 7058 on such
Eleventh District Cost of Funds Rate Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds
Rate Interest Determination Date shall be the monthly weighted average cost of
funds paid by member institutions of the Eleventh Federal Home Loan Bank
District that was most recently announced (the "Index") by the FHLB of San
Francisco as such cost of funds for the calendar month immediately preceding
such Eleventh District Cost of Funds Rate Interest Determination Date. If the
FHLB of San Francisco fails to announce the Index on or prior to such Eleventh
District Cost of Funds Rate Interest Determination Date for the calendar month
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date, the Eleventh District Cost of Funds Rate determined as of
such Eleventh District Cost of Funds Rate Interest Determination Date will be
the Eleventh District Cost of Funds Rate in effect on such Eleventh District
Cost of Funds Rate Interest Determination Date.
Federal Funds Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Federal Funds Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the
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interest rate is determined with reference to the Federal Funds Rate (a "Federal
Funds Rate Interest Determination Date"), the rate on such date for United
States dollar federal funds as published in H.15(519) under the heading "Federal
Funds (Effective)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the rate on such Federal Funds Rate Interest
Determination Date as published in Composite Quotations under the heading
"Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate
Interest Determination Date will be calculated by the Calculation Agent and will
be the arithmetic mean of the rates for the last transaction in overnight United
States dollar federal funds arranged by three leading brokers of federal funds
transactions in The City of New York (which may include the Agents or their
affiliates) selected by the Calculation Agent prior to 9:00 A.M., New York City
time, on such Federal Funds Rate Interest Determination Date; provided, however,
that if the brokers so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Federal Funds Rate determined as of such Federal
Funds Rate Interest Determination Date will be the Federal Funds Rate in effect
on such Federal Funds Rate Interest Determination Date.
LIBOR. Unless otherwise specified in the applicable Pricing Supplement,
"LIBOR" means the rate determined by the Calculation Agent in accordance with
the following provisions:
(i) With respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference
to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be either: (a)
if "LIBOR Reuters" is specified in the applicable Pricing Supplement, the
arithmetic mean of the offered rates (unless the Designated LIBOR Page, as
defined herein) by its terms provides only for a single rate, in which case
such single rate shall be used) for deposits in the Designated LIBOR
Currency having the Index Maturity specified in such Pricing Supplement,
commencing on the applicable Interest Reset Date, that appear (or, if only
a single rate is required as aforesaid, appears) on the Designated LIBOR
Page as of 11:00 A.M., London time, on such LIBOR Interest Determination
Date, or (b) if "LIBOR Telerate" is specified in the applicable Pricing
Supplement or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified
in the applicable Pricing Supplement as the method for calculating LIBOR,
the rate for deposits in the Designated LIBOR Currency having the Index
Maturity specified in such Pricing Supplement, commencing on such Interest
Reset Date, that appears on the Designated LIBOR Page as of 11:00 A.M.,
London time, on such LIBOR Interest Determination Date. If fewer than two
such offered rates appear, or if no such rate appears, as applicable, LIBOR
on such LIBOR Interest Determination Date will be determined in accordance
with the provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which
fewer than two offered rates appear, or no rate appears, as the case may
be, on the Designated LIBOR Page as specified in clause (i) above, the
Calculation Agent will request the principal London offices of each of four
major reference banks (which may include affiliates of the Agents) in the
London interbank market, as selected by the Calculation Agent, to provide
the Calculation Agent with its offered quotation for deposits in the
Designated LIBOR Currency for the period of the Index Maturity specified in
the applicable Pricing Supplement, commencing on the applicable Interest
Reset Date, to prime banks in the London interbank market at approximately
11:00 A.M., London time, on such LIBOR Interest Determination Date and in a
principal amount that is representative for a single transaction in such
Designated LIBOR Currency in such market at such time. If at least two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, then LIBOR on such LIBOR Interest Determination
Date will be the arithmetic mean of the rates quoted at approximately 11:00
A.M., in the applicable Principal Financial Center, on such LIBOR Interest
Determination Date by three major banks (which may include affiliates of
the Agents) in such Principal Financial Center selected by the Calculation
Agent for loans in the Designated LIBOR Currency to leading European banks,
having the Index Maturity specified in the applicable Pricing Supplement
and in a principal amount that is representative for a single transaction
in such Designated LIBOR Currency in such market at such time; provided,
however, that if the banks so selected by the Calculation Agent are not
quoting as mentioned in this sentence, LIBOR determined as
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of such LIBOR Interest Determination Date will be LIBOR in effect on such
LIBOR Interest Determination Date.
"Designated LIBOR Currency" means the currency or composite currency
specified in the applicable Pricing Supplement as to which LIBOR shall be
calculated. If no such currency or composite currency is specified in the
applicable Pricing Supplement, the Index Currency shall be United States
dollars.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Pricing Supplement, the display on the Reuter Monitor Money Rates
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service (or any
successor service)) for the purpose of displaying the London interbank rates of
major banks for the applicable Designated LIBOR Currency, or (b) if "LIBOR
Telerate" is specified in the applicable Pricing Supplement or neither "LIBOR
Reuters" nor "LIBOR Telerate" is specified in the applicable Pricing Supplement
as the method for calculating LIBOR, the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service (or any
successor service)) for the purpose of displaying the London interbank rates of
major banks for the Designated LIBOR Currency.
Prime Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Prime Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Interest Determination Date"), the
rate on such date as such rate is published in H.15(519) under the heading "Bank
Prime Loan." If such rate is not published prior to 3:00 P.M., New York City
time, on the related Calculation Date, then the Prime Rate shall be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such
bank's prime rate or base lending rate as in effect for such Prime Rate Interest
Determination Date. If fewer than four such rates appear on the Reuters Screen
USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime
Rate shall be the arithmetic mean of the prime rates or base lending rates
quoted on the basis of the actual number of days in the year divided by a
360-day year as of the close of business on such Prime Rate Interest
Determination Date by four major money center banks (which may include
affiliates of the Agents) in The City of New York selected by the Calculation
Agent. If fewer than four such quotations are so provided, then the Prime Rate
shall be the arithmetic mean of four prime rates quoted on the basis of the
actual number of days in the year divided by a 360-day year as of the close of
business on such Prime Rate Interest Determination Date as furnished in The City
of New York by the major money center banks, if any, that have provided such
quotations and by a reasonable number of substitute banks or trust companies
(which may include affiliates of the Agents) as necessary in order to obtain
four such prime rate quotations, provided such substitute banks or trust
companies are organized and doing business under the laws of the United States,
or any State thereof, each having total equity capital of at least $500 million
and being subject to supervision or examination by Federal or State authority,
selected by the Calculation Agent to provide such rate or rates; provided,
however, that if the banks or trust companies so selected by the Calculation
Agent are not quoting as mentioned in this sentence, the Prime Rate determined
as of such Prime Rate Interest Determination Date will be the Prime Rate in
effect on such Prime Rate Interest Determination Date.
"Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor
Money Rates Service (or any such successor service) designated as the "USPRIME1"
page (or such other page as may replace the USPRIME1 page on such service) for
the purpose of displaying prime rates or base lending rates of major United
States banks.
Treasury Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Treasury Rate" means, with respect to any Interest Determination
Date relating to a Floating Rate Note for which the interest rate is determined
by reference to the Treasury Rate (a "Treasury Rate Interest Determination
Date"), the rate from the auction held on such Treasury Rate Interest
Determination Date (the "Auction") of direct obligations of the United States
("Treasury Bills") having the Index Maturity specified in the applicable Pricing
Supplement, as such rate is published in H.15(519) under the heading "Treasury
Bills -- auction average (investment)" or, if not published by 3:00 P.M., New
York City time, on the related Calculation Date, the auction average rate of
such Treasury Bills (expressed as a bond equivalent on the basis of a year of
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365 or 366 days, as applicable, and applied on a daily basis) as otherwise
announced by the United States Department of the Treasury. In the event that the
results of the Auction of Treasury Bills having the Index Maturity specified in
the applicable Pricing Supplement are not reported as provided by 3:00 P.M., New
York City time, on the related Calculation Date, or if no such Auction is held,
then the Treasury Rate will be calculated by the Calculation Agent and will be a
yield to maturity (expressed as a bond equivalent on the basis of a year of 365
or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean
of the secondary market bid rates, as of approximately 3:30 P.M., New York City
time, on such Treasury Rate Interest Determination Date, of three leading
primary United States government securities dealers (which may include the Agent
or its affiliates) selected by the Calculation Agent, for the issue of Treasury
Bills with a remaining maturity closest to the Index Maturity specified in the
applicable Pricing Supplement; provided, however, that if the dealers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Treasury Rate determined as of such Treasury Rate Interest Determination
Date will be the Treasury Rate in effect on such Treasury Rate Interest
Determination Date.
OTHER/ADDITIONAL PROVISIONS; ADDENDUM
Any provisions with respect to the Notes, including the specification and
determination of one or more Interest Rate Bases, the calculation of the
interest rate applicable to a Floating Rate Note, the Interest Payment Dates,
the Stated Maturity Date, any redemption or repayment provisions or any other
term relating thereto, may be modified and/or supplemented as specified under
"Other/Additional Provisions" on the face thereof or in an Addendum relating
thereto, if so specified on the face thereof and described in the applicable
Pricing Supplement.
DISCOUNT NOTES
The Company may offer Notes ("Discount Notes") from time to time that have
an Issue Price (as specified in the applicable Pricing Supplement) that is less
than 100% of the principal amount thereof (i.e., par) by more than a percentage
equal to the product of 0.25% and the number of full years to the Stated
Maturity Date. Discount Notes may not bear any interest currently or may bear
interest at a rate that is below market rates at the time of issuance. The
difference between the Issue Price of a Discount Note and par is referred to
herein as the "Discount." In the event of redemption, repayment or acceleration
of maturity of a Discount Note, the amount payable to the Holder of such
Discount Note will be equal to the sum of (i) the Issue Price (increased by any
accruals of Discount) and, in the event of any redemption of such Discount Note
(if applicable), multiplied by the Initial Redemption Percentage specified in
the applicable Pricing Supplement (as adjusted by the Annual Redemption
Percentage Reduction, if applicable) and (ii) any unpaid interest accrued
thereon to the date of such redemption, repayment or acceleration of maturity.
Unless otherwise specified in the applicable Pricing Supplement, for
purposes of determining the amount of Discount that has accrued as of any date
on which a redemption, repayment or acceleration of maturity occurs for a
Discount Note, such Discount will be accrued using a constant yield method. The
constant yield will be calculated using a 30-day month, 360-day year convention,
a compounding period that, except for the Initial Period (as hereinafter
defined), corresponds to the shortest period between Interest Payment Dates for
the applicable Discount Note (with ratable accruals within a compounding
period), a coupon rate equal to the initial coupon rate applicable to such
Discount Note and an assumption that the maturity of such Discount Note will not
be accelerated. If the period from the date of issue to the initial Interest
Payment Date for a Discount Note (the "Initial Period") is shorter than the
compounding period for such Discount Note, a proportionate amount of the yield
for an entire compounding period will be accrued. If the Initial Period is
longer than the compounding period, then such period will be divided into a
regular compounding period and a short period with the short period being
treated as provided in the preceding sentence. The accrual of the applicable
Discount may differ from the accrual of original issue discount for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), certain Discount
Notes may not be treated as having original issue discount within the meaning of
the Code, and Notes other than Discount Notes may be treated as issued with
original issue discount for federal income tax purposes. See "Certain United
States Federal Income Tax Considerations -- U.S. Holders."
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INDEXED NOTES
The Company may from time to time offer Notes ("Indexed Notes") with the
amount of principal, premium and/or interest payable in respect thereof to be
determined with reference to the price or prices of specified commodities or
stocks, to the exchange rate of one or more designated currencies (including a
composite currency such as the ECU) relative to an indexed currency or to other
items, in each case, as specified in the applicable Pricing Supplement. In
certain cases, Holders of Indexed Notes may receive a principal payment on the
Maturity Date that is greater than or less than the principal amount of such
Indexed Notes depending upon the relative value on the Maturity Date of the
specified indexed item. Information as to the method for determining the amount
of principal, premium, if any, and/or interest, if any, payable in respect of
Indexed Notes, certain historical information with respect to the specified
indexed item and any material tax considerations associated with an investment
in Indexed Notes will be specified in the applicable Pricing Supplement. See
also "Risk Factors."
AMORTIZING NOTES
The Company may from time to time offer Notes ("Amortizing Notes") with the
amount of principal thereof and interest thereon payable in installments over
the term of such Notes. Unless otherwise specified in the applicable Pricing
Supplement, interest on each Amortizing Note will be computed on the basis of a
360-day year consisting of twelve 30-day months. Payments with respect to
Amortizing Notes will be applied first to interest due and payable thereon and
then to the reduction of the unpaid principal amount thereof. Further
information concerning additional terms and provisions of Amortizing Notes will
be specified in the applicable Pricing Supplement, including a table setting
forth repayment information for such Amortizing Notes.
BOOK-ENTRY NOTES
The Company has established a depositary arrangement with The Depository
Trust Company with respect to the Book-Entry Notes, the terms of which are
summarized below. Any additional or differing terms of the depositary
arrangement with respect to the Book-Entry Notes will be described in the
applicable Pricing Supplement.
Upon issuance, all Book-Entry Notes of like tenor and terms up to
$200,000,000 aggregate principal amount will be represented by a single Global
Security. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, the Depositary and will be registered in the name of the
Depositary or a nominee of the Depositary. No Global Security may be transferred
except as a whole by a nominee of the Depositary to the Depositary or to another
nominee of the Depositary, or by the Depositary or such nominee to a successor
of the Depositary or a nominee of such successor.
So long as the Depositary or its nominee is the registered owner of a
Global Security, the Depositary or its nominee, as the case may be, will be the
sole Holder of the Book-Entry Notes represented thereby for all purposes under
the Indenture. Except as otherwise provided below, the Beneficial Owners of the
Global Security or Securities representing Book-Entry Notes will not be entitled
to receive physical delivery of Certificated Notes and will not be considered
the Holders thereof for any purpose under the Indenture, and no Global Security
representing Book-Entry Notes shall be exchangeable or transferable.
Accordingly, each Beneficial Owner must rely on the procedures of the Depository
and, if such Beneficial Owner is not a Participant, on the procedures of
Participant through which such Beneficial Owner owns its interest in order to
exercise any rights of a Holder under such Global Security or the Indenture. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and laws
may impair the ability to transfer beneficial interests in a Global Security
representing Book-Entry Notes.
Unless otherwise specified in the applicable Pricing Supplement, each
Global Security representing Book-Entry Notes will be exchangeable for
Certificated Notes of like tenor and terms and of differing authorized
denominations in a like aggregate principal amount, only if (i) the Depositary
notifies the Company that it is unwilling or unable to continue as Depositary
for the Global Securities or the Company becomes aware that the Depositary has
ceased to be a clearing agency registered under the Exchange Act and,
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in any such case, the Company shall not have appointed a successor to the
Depositary within 60 days thereafter, (ii) the Company, in its sole discretion,
determines that the Global Securities shall be exchangeable for Certificated
Notes or (iii) an Event of Default shall have occurred and be continuing with
respect to the Notes under the Indenture. Upon any such exchange, the
Certificated Notes shall be registered in the names of the Beneficial Owners of
the Global Security or Securities representing Book-Entry Notes, which names
shall be provided by the Depositary's relevant Participants (as identified by
the Depositary) to the Trustee.
The following is based on information furnished by the Depositary:
The Depositary will act as securities depository for the Book-Entry
Notes. The Book-Entry Notes will be issued as fully registered securities
registered in the name of Cede & Co. (the Depositary's partnership
nominee). One fully registered Global Security will be issued for each
issue of Book-Entry Notes, each in the aggregate principal amount of such
issue, and will be deposited with the Depositary. If, however, the
aggregate principal amount of any issue exceeds $200,000,000, one Global
Security will be issued with respect to each $200,000,000 of principal
amount and an additional Global Security will be issued with respect to any
remaining principal amount of such issue.
The Depositary 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. The Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary
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 of the Depositary ("Direct Participants")
include securities brokers and dealers (including the Agents), banks, trust
companies, clearing corporations and certain other organizations. The
Depositary 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 Depositary's
system is also available to others such as securities brokers and dealers,
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 the Depositary and its
Participants are on file with the Securities and Exchange Commission.
Purchases of Book-Entry Notes under the Depositary's system must be
made by or through Direct Participants, which will receive a credit for
such Book-Entry Notes on the Depositary's records. The ownership interest
of each actual purchaser of each Book-Entry Note represented by a Global
Security ("Beneficial Owner") is in turn to be recorded on the records of
Direct Participants and Indirect Participants. Beneficial Owners will not
receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their
holdings, from the Direct Participants or Indirect Participants through
which such Beneficial Owner entered into the transaction. Transfers of
ownership interests in a Global Security representing Book-Entry Notes are
to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners of a Global Security
representing Book-Entry Notes will not receive Certificated Notes
representing their ownership interests therein, except in the event that
use of the book-entry system for such Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Securities representing
Book-Entry Notes which are deposited with, or on behalf of, the Depositary
are registered in the name of the Depositary's nominee, Cede & Co. The
deposit of Global Securities with, or on behalf of, the Depositary and
their registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depositary has no knowledge of the actual Beneficial Owners
of the Global Securities representing the Book-Entry Notes; the
Depositary's records reflect only the identity of the Direct Participants
to whose accounts such Book-Entry
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Notes are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners will
be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consents or vote with
respect to the Global Securities representing the Book-Entry Notes. Under
its usual procedures, the Depositary mails an Omnibus Proxy to the Company
as soon as possible after the applicable record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Book-Entry Notes are credited on the
applicable record date (identified in a listing attached to the Omnibus
Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
Global Securities representing the Book-Entry Notes will be made in
immediately available funds to the Depositary. The Depositary's practice is
to credit Direct Participants' accounts on the applicable payment date in
accordance with their respective holdings shown on the Depositary's records
unless the Depositary has reason to believe that it will not receive
payment on such date. Payments by Participants to Beneficial Owners will be
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 will be the responsibility of such
Participant and not of the Depositary, the 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/or interest, if any, to
the Depositary is the responsibility of the Company and the Trustee,
disbursement of such payments to Direct Participants shall be the
responsibility of the Depositary, and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct Participants and
Indirect Participants.
If applicable, redemption notices shall be sent to Cede & Co. If less
than all of the Book-Entry Notes of like tenor and terms are being
redeemed, the Depositary's practice is to determine by lot the amount of
the interest of each Direct Participant in such issue to be redeemed.
A Beneficial Owner shall give notice of any option to elect to have
its Book-Entry Notes repaid by the Company, through its Participant, to the
Trustee, and shall effect delivery of such Book-Entry Notes by causing the
Direct Participant to transfer the Participant's interest in the Global
Security or Securities representing such Book-Entry Notes, on the
Depositary's records, to the Trustee. The requirement for physical delivery
of Book-Entry Notes in connection with a demand for repayment will be
deemed satisfied when the ownership rights in the Global Security or
Securities representing such Book-Entry Notes are transferred by Direct
Participants on the Depositary's records.
The Depositary may discontinue providing its services as securities
depository with respect to the Book-Entry Notes at any time by giving
reasonable notice to the Company or the Trustee. Under such circumstances,
in the event that a successor securities depository is not obtained,
Certificated Notes are required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through the Depositary (or a successor securities depository). In
that event, Certificated Notes will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's system has been obtained from sources that the Company believes to
be reliable, but the Company takes no responsibility for the accuracy thereof.
SPECIAL PROVISIONS RELATING TO FOREIGN CURRENCY NOTES
GENERAL
Unless otherwise specified in the applicable Pricing Supplement, Foreign
Currency Notes will not be sold in, or to residents of, the country issuing the
applicable currency. The information set forth in this Prospectus
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Supplement is directed to prospective purchasers who are United States residents
and, with respect to Foreign Currency Notes, is by necessity incomplete. The
Company and the Agents disclaim any responsibility to advise prospective
purchasers who are residents of countries other than the United States with
respect to any matters that may affect the purchase, holding or receipt of
payments of principal of, and premium, if any, and interest, if any, on, Foreign
Currency Notes. Such persons should consult their own financial and legal
advisors with regard to such matters. See "Risk Factors -- Exchange Rates and
Exchange Controls."
PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST, IF ANY
Unless otherwise specified in the applicable Pricing Supplement, the
Company is obligated to make payments of principal of, and premium, if any, and
interest, if any, on, a Foreign Currency Note in the Specified Currency. Any
such amounts payable by the Company in the Specified Currency will be converted
by the exchange rate agent named in the applicable Pricing Supplement (the
"Exchange Rate Agent") named in the applicable Pricing Supplement into United
States dollars for payment to Holders unless otherwise specified in the
applicable Pricing Supplement or the Holder of such Foreign Currency Note
elects, in the manner hereinafter described, to receive such amounts in the
Specified Currency.
Any United States dollar amount to be received by a Holder of a Foreign
Currency Note will be based on the highest bid quotation in The City of New York
received by the Exchange Rate Agent at approximately 11:00 A.M., New York City
time, on the second Business Day preceding the applicable payment date from
three recognized foreign exchange dealers (one of whom may be the Exchange Rate
Agent) selected by the Exchange Rate Agent and approved by the Company for the
purchase by the quoting dealer of the Specified Currency for United States
dollars for settlement on such payment date in the aggregate amount of such
Specified Currency payable to all Holders of Foreign Currency Notes scheduled to
receive United States dollar payments and at which the applicable dealer commits
to execute a contract. All currency exchange costs will be borne by the Holders
of such Foreign Currency Notes by deductions from such payments. If three such
bid quotations are not available, payments will be made in the Specified
Currency.
Holders of Foreign Currency Notes may elect to receive all or a specified
portion of any payment of principal, premium, if any, and/or interest, if any,
in the Specified Currency, such Foreign Currency Note in the applicable foreign
currency or composite currency by submitting a written request for such payment
to the applicable Trustee at its corporate trust office in The City of New York
on or prior to the applicable Record Date or at least fifteen calendar days
prior to the Maturity Date, as the case may be. Such written request may be
mailed or hand delivered or sent by cable, telex or other form of facsimile
transmission. Holders of Foreign Currency Notes may elect to receive all or a
specified portion of all future payments in the Specified Currency and need not
file a separate election for each payment. Such election will remain in effect
until revoked by written notice to the Trustee, but written notice of any such
revocation must be received by the Trustee on or prior to the applicable Record
Date or at least fifteen calendar days prior to the Maturity Date, as the case
may be. Holders of Foreign Currency Notes to be held in the name of a broker or
nominee should contact such broker or nominee to determine whether and how an
election to receive payments in the Specified Currency may be made.
Unless otherwise specified in the applicable Pricing Supplement, if the
Specified Currency is other than United States dollars, a Beneficial Owner of
the related Global Security or Securities which elects to receive payments of
principal, premium, if any, and/or interest, if any, in the Specified Currency
must notify the Participant through which it owns its interest on or prior to
the applicable Record Date or at least fifteen calendar days prior to the
Maturity Date, as the case may be, of such Beneficial Owner's election. Such
Participant must notify the Depositary of such election on or prior to the third
Business Day after such Record Date or at least twelve calendar days prior to
the Maturity Date, as the case may be, and the Depositary will notify the
Trustee of such election on or prior to the fifth Business Day after such Record
Date or at least ten calendar days prior to the Maturity Date, as the case may
be. If complete instructions are received by the Participant from the Beneficial
Owner and forwarded by the Participant to the Depositary, and by the Depositary
to the Trustee, on or prior to such dates, then such Beneficial Owner will
receive payments in the Specified Currency.
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Payments of the principal of, and premium, if any, and/or interest, if any,
on, Foreign Currency Notes which are to be made in United States dollars will be
made in the manner specified herein with respect to Notes denominated in United
States dollars. See "Description of Notes -- General." Payments of interest, if
any, on Foreign Currency Notes which are to be made in the Specified Currency on
an Interest Payment Date other than the Maturity Date will be made by check
mailed to the address of the Holders of such Foreign Currency Notes as they
appear in the Security Register, subject to the right to receive such interest
payments by wire transfer of immediately available funds under the circumstances
described under "Description of Notes -- General." Payments of principal of, and
premium, if any, in respect thereof if any, and/or interest on, Foreign Currency
Notes which are to be made in the Specified Currency on the Maturity Date will
be made by wire transfer of immediately available funds to an account with a
bank designated at least fifteen calendar days prior to the Maturity Date by
each Holder thereof, provided that such bank has appropriate facilities therefor
and that the applicable Foreign Currency Note is presented and surrendered at
the principal corporate trust office of the Trustee in time for the Trustee to
make such payments in such funds in accordance with its normal procedures.
AVAILABILITY OF SPECIFIED CURRENCY
Except as set forth below, if the Specified Currency for a Foreign Currency
Note is not available for the required payment, if any, in respect thereof due
to the imposition of exchange controls or other circumstances beyond the control
of the Company, the Company will be entitled to satisfy its obligations to the
Holder of such Foreign Currency Note by making such payment in United States
dollars on the basis of the Market Exchange Rate, as hereinafter defined,
computed by the Exchange Rate Agent, on the second Business Day prior to such
payment or, if such Market Exchange Rate is not then available, on the basis of
the most recently available Market Exchange Rate, or as otherwise specified in
the applicable Pricing Supplement.
If the Specified Currency for a Foreign Currency Note is a composite
currency that is not available for the required payment of principal, premium,
if any, in respect thereof due to the imposition of exchange controls or other
circumstances beyond the control of the Company, the Company will be entitled to
satisfy its obligations to the Holder of such Foreign Currency Note by making
such payment in United States dollars on the basis of the equivalent of the
composite currency in United States dollars. The amount of each such payment in
United States dollars shall be computed by the Exchange Rate Agent on the basis
of the equivalent of the composite currency in United States dollars. The
component currencies of the composite currency for this purpose (collectively,
the "Component Currencies" and each, a "Component Currency") shall be the
currency amounts that were components of the composite currency as of the last
day on which the composite currency was used. The equivalent of the composite
currency in United States dollars shall be calculated by aggregating the United
States dollar equivalents of the Component Currencies. The United States dollar
equivalent of each of the Component Currencies shall be determined by the
Exchange Rate Agent on the basis of the Market Exchange Rate on the second
Business Day prior to the required payment or, if such Market Exchange Rate is
not then available, on the basis of the most recently available Market Exchange
Rate for each such Component Currency, or as otherwise specified in the
applicable Pricing Supplement.
If the official unit of any Component Currency is altered by way of
combination or subdivision, the number of units of the currency as a Component
Currency shall be divided or multiplied in the same proportion. If two or more
Component Currencies are consolidated into a single currency, the amounts of
those currencies as Component Currencies shall be replaced by an amount in such
single currency equal to the sum of the amounts of the consolidated Component
Currencies expressed in such single currency. If any Component Currency is
divided into two or more currencies, the amount of the original Component
Currency shall be replaced by the amounts of such two or more currencies, the
sum of which shall be equal to the amount of the original Component Currency.
The "Market Exchange Rate" for a Specified Currency other than United
States dollars means the noon dollar buying rate in The City of New York for
cable transfers for such Specified Currency as certified for customs purposes
(or, if not so certified, as otherwise determined) by the Federal Reserve Bank
of New York. Any payment made in United States dollars under such circumstances
where the required payment is in a
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Specified Currency other than United States dollars will not constitute an Event
of Default under the Indenture with respect to the Notes.
All determinations referred to above made by the Exchange Rate Agent shall
be at its sole discretion and shall, in the absence of manifest error, be
conclusive for all purposes and binding on the Holders of the Foreign Currency
Notes.
GOVERNING LAW; JUDGMENTS
The Senior Notes provide that they will be governed by and construed in
accordance with the laws of the State of Ohio. A court applying current Ohio law
would render a judgment on Foreign Currency Notes in the applicable foreign or
composite currency, and such judgment would be payable, at the option of the
judgment debtor, in foreign or composite currency or United States dollars.
Current Ohio law provides that, if the judgment debtor elected to pay the
judgment in United States dollars, the judgment would be converted from the
applicable foreign or composite currency at the bank-offered spot rate at the
close of business on the banking day immediately preceding the day of payment.
Accordingly, under Ohio law Holders of Senior Notes that are Foreign Currency
Notes that convert a judgment paid in United States dollars into the foreign or
composite currency in which such Foreign Currency Note was denominated will bear
the risk of exchange rate fluctuations until such time as the judgment debtor
makes payment. In this regard, the judgment debtor may make payment at a time
when currency exchange rates are less favorable to such holder.
The Subordinated Notes provide that they will be governed by and construed
in accordance with the laws of the State of New York. Under current New York
law, a state court in the State of New York rendering a judgment in respect of a
Foreign Currency Note would be required to render such judgment in the Specified
Currency, and such foreign currency judgment would be converted into United
States dollars at the exchange rate prevailing on the date of entry of such
judgment. Accordingly, the Holder of Subordinated Notes that are Foreign
Currency Notes would be subject to exchange rate fluctuations between the date
of entry of such foreign currency judgment and the time the amount of such
foreign currency judgment is paid to such Holder in United States dollars and
converted by such Holder into the Specified Currency. It is not certain,
however, whether a non-New York state court would follow the same rules and
procedures with respect to conversions of foreign currency judgments.
The Company will indemnify the Holder of any Note against any loss incurred
by such Holder as a result of any judgment or order being given or made for any
amount due under such Note and such judgment or order requiring payment in a
currency or composite currency (the "Judgment Currency") other than the
Specified Currency, and as a result of any variation between (i) the rate of
exchange at which the Specified Currency amount is converted into the Judgment
Currency for the purpose of such judgment or order, and (ii) the rate of
exchange at which the Holder of such Note, on the date of payment of such
judgment or order, is able to purchase the Specified Currency with the amount of
the Judgment Currency actually received by such Holder, as the case may be.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. It deals only with Notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding Notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
functional currency is not the United States dollar. It also does not deal with
holders other than original purchasers (except where otherwise specifically
noted). Persons considering the purchase of the Notes should consult their own
tax advisors concerning the application of United States Federal income tax laws
to their particular situations as well as any consequences of the purchase,
ownership and disposition of the Notes arising under the laws of any other
taxing jurisdiction.
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As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to United
States Federal income taxation regardless of its source, (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust, or (v) any other
person whose income or gain in respect of a Note is effectively connected with
the conduct of a United States trade or business. As used herein, the term "non-
U.S. Holder" means a beneficial owner of a Note that is not a U.S. Holder.
U.S. HOLDERS
Payments of Interest
Payments of interest on a Note generally will be taxable to a U.S. Holder
as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting).
Original Issue Discount
The following summary is a general discussion of the United States Federal
income tax consequences to U.S. Holders of the purchase, ownership and
disposition of Notes issued with original issue discount ("Original Issue
Discount Notes"). The following summary is based upon final Treasury regulations
(the "OID Regulations") released by the Internal Revenue Service ("IRS") on
January 27, 1994, as amended on June 11, 1996, under the original issue discount
provisions of the Code.
For United States Federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a Note over its issue
price, if such excess equals or exceeds a de minimis amount (generally 1/4 of 1%
of the Note's stated redemption price at maturity multiplied by the number of
complete years to its maturity from its issue date or, in the case of a Note
providing for the payment of any amount other than qualified stated interest (as
hereinafter defined) prior to maturity, multiplied by the weighted average
maturity of such Note). The issue price of each Note in an issue of Notes equals
the first price at which a substantial amount of such Notes has been sold
(ignoring sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents, or wholesalers). The
stated redemption price at maturity of a Note is the sum of all payments
provided by the Note other than "qualified stated interest" payments. The term
"qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property (other than debt instruments of the
issuer) at least annually at a single fixed rate. In addition, under the OID
Regulations, if a Note bears interest for one or more accrual periods at a rate
below the rate applicable for the remaining term of such Note (e.g., Notes with
teaser rates or interest holidays), and if the greater of either the resulting
foregone interest on such Note or any "true" discount on such Note (i.e., the
excess of the Note's stated principal amount over its issue price) equals or
exceeds a specified de minimis amount, then the stated interest on the Note
would be treated as original issue discount rather than qualified stated
interest.
Payments of qualified stated interest on a Note are taxable to a U.S.
Holder as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting). A U.S. Holder of an Original Issue Discount Note must include
original issue discount in income as ordinary interest for United States Federal
income tax purposes as it accrues under a constant yield method in advance of
receipt of the cash payments attributable to such income, regardless of such
U.S. Holder's regular method of tax accounting. In general, the amount of
original issue discount included in income by the initial U.S. Holder of an
Original Issue Discount Note is the sum of the daily portions of original issue
discount with respect to such Original Issue Discount Note for each day during
the taxable year (or portion of the taxable year) on which such U.S. Holder held
such Original Issue Discount Note. The "daily portion" of original issue
discount on any Original Issue Discount Note is determined by allocating to each
day in any accrual period a ratable portion of the original issue discount
allocable to that accrual period. An "accrual period" may be of any length and
the accrual periods may vary in length over the term of the
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Original Issue Discount Note, provided that each accrual period is no longer
than one year and each scheduled payment of principal or interest occurs either
on the final day of an accrual period or on the first day of an accrual period.
The amount of original issue discount allocable to each accrual period is
generally equal to the difference between (i) the product of the Original Issue
Discount Note's adjusted issue price at the beginning of such accrual period and
its yield to maturity (determined on the basis of compounding at the close of
each accrual period and appropriately adjusted to take into account the length
of the particular accrual period) and (ii) the amount of any qualified stated
interest payments allocable to such accrual period. The "adjusted issue price"
of an Original Issue Discount Note at the beginning of any accrual period is the
sum of the issue price of the Original Issue Discount Note plus the amount of
original issue discount allocable to all prior accrual periods minus the amount
of any prior payments on the Original Issue Discount Note that were not
qualified stated interest payments. Under these rules, U.S. Holders generally
will have to include in income increasingly greater amounts of original issue
discount in successive accrual periods.
A U.S. Holder who purchases an Original Issue Discount Note for an amount
that is greater than its adjusted issue price as of the purchase date and less
than or equal to the sum of all amounts payable on the Original Issue Discount
Note after the purchase date other than payments of qualified stated interest,
will be considered to have purchased the Original Issue Discount Note at an
"acquisition premium." Under the acquisition premium rules, the amount of
original issue discount which such U.S. Holder must include in its gross income
with respect to such Original Issue Discount Note for any taxable year (or
portion thereof in which the U.S. Holder holds the Original Issue Discount Note)
will be reduced (but not below zero) by the portion of the acquisition premium
properly allocable to the period.
Under the OID Regulations, Floating Rate Notes and Indexed Notes ("Variable
Notes") are subject to special rules whereby a Variable Note will qualify as a
"variable rate debt instrument" if (a) its issue price does not exceed the total
noncontingent principal payments due under the Variable Note by more than a
specified de minimis amount and (b) it provides for stated interest, paid or
compounded at least annually, at current values of (i) one or more qualified
floating rates, (ii) a single fixed rate and one or more qualified floating
rates, (iii) a single objective rate, or (iv) a single fixed rate and a single
objective rate that is a qualified inverse floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Note is denominated. Although a multiple of a qualified floating rate
will generally not itself constitute a qualified floating rate, a variable rate
equal to the product of a qualified floating rate and a fixed multiple that is
greater than .65 but not more than 1.35 will constitute a qualified floating
rate. A variable rate equal to the product of a qualified floating rate and a
fixed multiple that is greater than .65 but not more than 1.35, increased or
decreased by a fixed rate, will also constitute a qualified floating rate. In
addition, under the OID Regulations, two or more qualified floating rates that
can reasonably be expected to have approximately the same values throughout the
term of the Variable Note (e.g., two or more qualified floating rates with
values within 25 basis points of each other as determined on the Variable Note's
issue date) will be treated as a single qualified floating rate. Notwithstanding
the foregoing, a variable rate that would otherwise constitute a qualified
floating rate but which is subject to one or more restrictions such as a maximum
numerical limitation (i.e., a cap) or a minimum numerical limitation (i.e., a
floor) may, under certain circumstances, fail to be treated as a qualified
floating rate under the OID Regulations unless such cap or floor is fixed
throughout the term of the Note. An "objective rate" is a rate that is not
itself a qualified floating rate but which is determined using a single fixed
formula and which is based upon objective financial or economic information. A
rate will not qualify as an objective rate if it is based on information that is
within the control of the issuer (or a related party) or that is unique to the
circumstances of the issuer (or a related party), such as dividends, profits or
the value of the issuer's stock (although a rate does not fail to be an
objective rate merely because it is based on the credit quality of the issuer).
A "qualified inverse floating rate" is any objective rate where such rate is
equal to a fixed rate minus a qualified floating rate, as long as variations in
the rate can reasonably be expected to inversely reflect contemporaneous
variations in the qualified floating rate. The OID Regulations also provide that
if a Variable Note provides for stated interest at a fixed rate for an initial
period of one year or less followed by a variable rate that is either a
qualified floating rate or an objective rate and if the variable rate on the
Variable Note's issue date is intended to approximate the fixed rate (e.g., the
value of the variable rate
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on the issue date does not differ from the value of the fixed rate by more than
25 basis points), then the fixed rate and the variable rate together will
constitute either a single qualified floating rate or objective rate, as the
case may be.
If a Variable Note that provides for stated interest at either a single
qualified floating rate or a single objective rate throughout the term thereof
qualifies as a "variable rate debt instrument" under the OID Regulations and if
interest on such Note is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually, then all stated interest on
such Note will constitute qualified stated interest and will be taxed
accordingly. Thus, a Variable Note that provides for stated interest at either a
single qualified floating rate or a single objective rate throughout the term
thereof and that qualifies as a "variable rate debt instrument" under the OID
Regulations will generally not be treated as having been issued with original
issue discount unless the Variable Note is issued at a "true" discount (i.e., at
a price below the Note's stated principal amount) in excess of a specified de
minimis amount. The amount of qualified stated interest and the amount of
original issue discount, if any, that accrues during an accrual period on such
Variable Note is determined under the rules applicable to fixed rate debt
instruments by assuming that the variable rate is a fixed rate equal to (i) in
the case of a qualified floating rate or qualified inverse floating rate, the
value as of the issue date, of the qualified floating rate or qualified inverse
floating rate, or (ii) in the case of an objective rate (other than a qualified
inverse floating rate), a fixed rate that reflects the yield that is reasonably
expected for the Variable Note. The qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
during the accrual period pursuant to the foregoing rules.
In general, any other Variable Note that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Variable Note. The OID Regulations
generally require that such a Variable Note be converted into an "equivalent"
fixed rate debt instrument by substituting any qualified floating rate or
qualified inverse floating rate provided for under the terms of the Variable
Note with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Variable Note's
issue date. Any objective rate (other than a qualified inverse floating rate)
provided for under the terms of the Variable Note is converted into a fixed rate
that reflects the yield that is reasonably expected for the Variable Note. In
the case of a Variable Note that qualifies as a "variable rate debt instrument"
and provides for stated interest at a fixed rate in addition to either one or
more qualified floating rates or a qualified inverse floating rate, the fixed
rate is initially converted into a qualified floating rate (or a qualified
inverse floating rate, if the Variable Note provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Variable Note as of the Variable Note's issue date
is approximately the same as the fair market value of an otherwise identical
debt instrument that provides for either the qualified floating rate or
qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Variable Note is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Variable Note is converted into an "equivalent" fixed rate debt
instrument pursuant to the foregoing rules, the amount of original issue
discount and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the general original issue
discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder
of the Variable Note will account for such original issue discount and qualified
stated interest as if the U.S. Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Variable Note during the accrual period.
If a Variable Note does not qualify as a "variable rate debt instrument"
under the OID Regulations, then the Variable Note would be treated as a
contingent payment debt obligation. U.S. Holders should be aware that on June
11, 1996 the Treasury Department issued final regulations (the "CPDI
Regulations") concerning the proper United States Federal income tax treatment
of contingent payment debt instruments. In general,
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the CPDI Regulations cause the timing and character of income, gain or loss
reported on a contingent payment debt instrument to substantially differ from
the timing and character of income, gain or loss reported on a contingent
payment debt instrument under general principles of prior United States Federal
income tax law. Specifically, the CPDI Regulations generally require a U.S.
Holder of such an instrument to include future contingent and noncontingent
interest payments in income as such interest accrues based upon a projected
payment schedule. Moreover, in general, under the CPDI Regulations, any gain
recognized by a U.S. Holder on the sale, exchange, or retirement of a contingent
payment debt instrument will be treated as ordinary income and all or a portion
of any loss realized could be treated as ordinary loss as opposed to capital
loss (depending upon the circumstances). The CPDI Regulations apply to debt
instruments issued on or after August 13, 1996. The proper United States Federal
income tax treatment of Variable Notes that are treated as contingent payment
debt obligations will be more fully described in the applicable Pricing
Supplement. Furthermore, any other special United States Federal income tax
considerations, not otherwise discussed herein, which are applicable to any
particular issue of Notes will be discussed in the applicable Pricing
Supplement.
Certain of the Notes (i) may be redeemable at the option of the Company
prior to their stated maturity (a "call option") and/or (ii) may be repayable at
the option of the holder prior to their stated maturity (a "put option"). Notes
containing such features may be subject to rules that differ from the general
rules discussed above. Investors intending to purchase Notes with such features
should consult their own tax advisors, since the original issue discount
consequences will depend, in part, on the particular terms and features of the
purchased Notes.
U.S. Holders may generally, upon election, include in income all interest
(including stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions.
Short-Term Notes
Notes that have a fixed maturity of one year or less ("Short-Term Notes")
will be treated as having been issued with original issue discount. In general,
an individual or other cash method U.S. Holder is not required to accrue such
original issue discount unless the U.S. Holder elects to do so. If such an
election is not made, any gain recognized by the U.S. Holder on the sale,
exchange or maturity of the Short-Term Note will be ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or upon
election under the constant yield method (based on daily compounding), through
the date of sale or maturity, and a portion of the deductions otherwise
allowable to the U.S. Holder for interest on borrowings allocable to the
Short-Term Note will be deferred until a corresponding amount of income is
realized. U.S. Holders who report income for United States Federal income tax
purposes under the accrual method, and certain other holders including banks and
dealers in securities, are required to accrue original issue discount on a
Short-Term Note on a straight-line basis unless an election is made to accrue
the original issue discount under a constant yield method (based on daily
compounding).
Market Discount
If a U.S. Holder purchases a Note, other than an Original Issue Discount
Note, for an amount that is less than its issue price (or, in the case of a
subsequent purchaser, its stated redemption price at maturity) or, in the case
of an Original Issue Discount Note, for an amount that is less than its adjusted
issue price as of the purchase date, such U.S. Holder will be treated as having
purchased such Note at a "market discount," unless such market discount is less
than a specified de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat
any partial principal payment (or, in the case of an Original Issue Discount
Note, any payment that does not constitute qualified stated interest) on, or any
gain realized on the sale, exchange, retirement or other disposition of, a Note
as ordinary income to the extent of the lesser of (i) the amount of such payment
or realized gain or (ii) the market
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discount which has not previously been included in income and is treated as
having accrued on such Note at the time of such payment or disposition. Market
discount will be considered to accrue ratably during the period from the date of
acquisition to the maturity date of the Note, unless the U.S. Holder elects to
accrue market discount on the basis of semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Note with market discount until the maturity of the Note or
certain earlier dispositions, because a current deduction is only allowed to the
extent the interest expense exceeds an allocable portion of market discount. A
U.S. Holder may elect to include market discount in income currently as it
accrues (on either a ratable or semiannual compounding basis), in which case the
rules described above regarding the treatment as ordinary income of gain upon
the disposition of the Note and upon the receipt of certain cash payments and
regarding the deferral of interest deductions will not apply. Generally, such
currently included market discount is treated as ordinary interest for United
States Federal income tax purposes. Such an election will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the first
taxable year to which such election applies and may be revoked only with the
consent of the IRS.
Premium
If a U.S. Holder purchases a Note for an amount that is greater than the
sum of all amounts payable on the Note after the purchase date other than
payments of qualified stated interest, such U.S. Holder will be considered to
have purchased the Note with "amortizable bond premium" equal in amount to such
excess. A U.S. Holder may elect to amortize such premium using a constant yield
method over the remaining term of the Note and may offset interest otherwise
required to be included in respect of the Note during any taxable year by the
amortized amount of such excess for the taxable year. However, if the Note may
be optionally redeemed after the U.S. Holder acquires it at a price in excess of
its stated redemption price at maturity, special rules would apply which could
result in a deferral of the amortization of some bond premium until later in the
term of the Note. Any election to amortize bond premium applies to all taxable
debt instruments then owned and thereafter acquired by the U.S. Holder on or
after the first day of the first taxable year to which such election applies and
may be revoked only with the consent of the IRS.
Disposition of a Note
Except as discussed above, upon the sale, exchange or retirement of a Note,
a U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement
(other than amounts representing accrued and unpaid interest) and such U.S.
Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in a
Note generally will equal such U.S. Holder's initial investment in the Note
increased by any original issue discount included in income (and accrued market
discount, if any, if the U.S. Holder has included such market discount in
income) and decreased by the amount of any payments, other than qualified stated
interest payments, received and amortizable bond premium taken with respect to
such Note. Such gain or loss generally will be long-term capital gain or loss if
the Note were held for more than one year.
NOTES DENOMINATED, OR IN RESPECT OF WHICH INTEREST IS PAYABLE, IN A FOREIGN
CURRENCY
As used herein, "Foreign Currency" means a currency or composite currency
other than U.S. dollars.
Payments of Interest in a Foreign Currency
Cash Method. A U.S. Holder who uses the cash method of accounting for
United States Federal income tax purposes and who receives a payment of interest
on a Note (other than original issue discount or market discount) will be
required to include in income the U.S. dollar value of the Foreign Currency
payment (determined on the date such payment is received) regardless of whether
the payment is in fact converted to U.S. dollars at that time, and such U.S.
dollar value will be the U.S. Holder's tax basis in such Foreign Currency.
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Accrual Method. A U.S. Holder who uses the accrual method of accounting
for United States Federal income tax purposes, or who otherwise is required to
accrue interest prior to receipt, will be required to include in income the U.S.
dollar value of the amount of interest income (including original issue discount
or market discount and reduced by amortizable bond premium to the extent
applicable) that has accrued and is otherwise required to be taken into account
with respect to a Note during an accrual period. The U.S. dollar value of such
accrued income will be determined by translating such income at the average rate
of exchange for the accrual period or, with respect to an accrual period that
spans two taxable years, at the average rate for the partial period within the
taxable year. A U.S. Holder may elect, however, to translate such accrued
interest income using the rate of exchange on the last day of the accrual period
or, with respect to an accrual period that spans two taxable years, using the
rate of exchange on the last day of the taxable year. If the last day of an
accrual period is within five business days of the date of receipt of the
accrued interest, a U.S. Holder may translate such interest using the rate of
exchange on the date of receipt. The above election will apply to other debt
obligations held by the U.S. Holder and may not be changed without the consent
of the IRS. A U.S. Holder should consult a tax advisor before making the above
election. A U.S. Holder will recognize exchange gain or loss (which will be
treated as ordinary income or loss) with respect to accrued interest income on
the date such income is received. The amount of ordinary income or loss
recognized will equal the difference, if any, between the U.S. dollar value of
the Foreign Currency payment received (determined on the date such payment is
received) in respect of such accrual period and the U.S. dollar value of
interest income that has accrued during such accrual period (as determined
above).
Purchase, Sale and Retirement of Notes
A U.S. Holder who purchases a Note with previously owned Foreign Currency
will recognize ordinary income or loss in an amount equal to the difference, if
any, between such U.S. Holder's tax basis in the Foreign Currency and the U.S.
dollar fair market value of the Foreign Currency used to purchase the Note,
determined on the date of purchase.
Except as discussed above with respect to Short-Term Notes, upon the sale,
exchange or retirement of a Note, a U.S. Holder will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement and such U.S. Holder's adjusted tax basis in the Note. Such gain
or loss generally will be capital gain or loss (except to the extent of any
accrued market discount not previously included in the U.S. Holder's income) and
will be long-term capital gain or loss if at the time of sale, exchange or
retirement the Note has been held by such U.S. Holder for more than one year. To
the extent the amount realized represents accrued but unpaid interest, however,
such amounts must be taken into account as interest income, with exchange gain
or loss computed as described in "Payments of Interest in a Foreign Currency"
above. If a U.S. Holder receives Foreign Currency on such a sale, exchange or
retirement the amount realized will be based on the U.S. dollar value of the
Foreign Currency on the date the payment is received or the Note is disposed of
(or deemed disposed of as a result of a material change in the terms of such
Note). In the case of a Note that is denominated in Foreign Currency and is
traded on an established securities market, a cash basis U.S. Holder (or, upon
election, an accrual basis U.S. Holder) will determine the U.S. dollar value of
the amount realized by translating the Foreign Currency payment at the spot rate
of exchange on the settlement date of the sale. A U.S. Holder's adjusted tax
basis in a Note will equal the cost of the Note to such holder, increased by the
amounts of any market discount or original issue discount previously included in
income by the holder with respect to such Note and reduced by any amortized
acquisition or other premium and any principal payments received by the holder.
A U.S. Holder's tax basis in a Note, and the amount of any subsequent
adjustments to such holder's tax basis, will be the U.S. dollar value of the
Foreign Currency amount paid for such Note, or of the Foreign Currency amount of
the adjustment, determined on the date of such purchase or adjustment.
Gain or loss realized upon the sale, exchange or retirement of a Note that
is attributable to fluctuations in currency exchange rates will be ordinary
income or loss which will not be treated as interest income or expense. Gain or
loss attributable to fluctuations in exchange rates will equal the difference
between the U.S. dollar value of the Foreign Currency principal amount of the
Note, determined on the date such payment is received or the Note is disposed
of, and the U.S. dollar value of the Foreign Currency principal amount of the
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Note, determined on the date the U.S. Holder acquired the Note. Such Foreign
Currency gain or loss will be recognized only to the extent of the total gain or
loss realized by the U.S. Holder on the sale, exchange or retirement of the
Note.
Original Issue Discount
In the case of an Original Issue Discount Note or Short-Term Note, (i)
original issue discount is determined in units of the Foreign Currency, (ii)
accrued original issue discount is translated into U.S. dollars as described in
"Payments of Interest in a Foreign Currency -- Accrual Method" above and (iii)
the amount of Foreign Currency gain or loss on the accrued original issue
discount is determined by comparing the amount of income received attributable
to the discount (either upon payment, maturity or an earlier disposition), as
translated into U.S. dollars at the rate of exchange on the date of such
receipt, with the amount of original issue discount accrued, as translated
above.
Premium and Market Discount
In the case of a Note with market discount, (i) market discount is
determined in units of the Foreign Currency, (ii) accrued market discount taken
into account upon the receipt of any partial principal payment or upon the sale,
exchange, retirement or other disposition of the Note (other than accrued market
discount required to be taken into account currently) is translated into U.S.
dollars at the exchange rate on such disposition date (and no part of such
accrued market discount is treated as exchange gain or loss) and (iii) accrued
market discount currently includible in income by a U.S. Holder for any accrual
period is translated into U.S. dollars on the basis of the average exchange rate
in effect during such accrual period, and the exchange gain or loss is
determined upon the receipt of any partial principal payment or upon the sale,
exchange, retirement or other disposition of the Note in the manner described in
"Payments of Interest in a Foreign Currency -- Accrual Method" above with
respect to computation of exchange gain or loss on accrued interest.
With respect to a Note issued with amortizable bond premium, such premium
is determined in the relevant Foreign Currency and reduces interest income in
units of the Foreign Currency. Although not entirely clear, a U.S. Holder should
recognize exchange gain or loss equal to the difference between the U.S. dollar
value of the bond premium amortized with respect to a period, determined on the
date the interest attributable to such period is received, and the U.S. dollar
value of the bond premium determined on the date of the acquisition of the Note.
Exchange of Foreign Currencies
A U.S. Holder will have a tax basis in any Foreign Currency received as
interest or on the sale, exchange or retirement of a Note equal to the U.S.
dollar value of such Foreign Currency, determined at the time the interest is
received or at the time of the sale, exchange or retirement. Any gain or loss
realized by a U.S. Holder on a sale or other disposition of Foreign Currency
(including its exchange for U.S. dollars or its use to purchase Notes) will be
ordinary income or loss.
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original issue
discount, if any) on a Note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of the Company, a controlled foreign corporation
related to the Company or a bank receiving interest described in section
881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (i) is signed by the beneficial owner of the
Note under penalties of perjury, (ii) certifies that such owner is not a U.S.
Holder and (iii) provides the name and address of the beneficial owner. The
statement may be made on an IRS Form W-8 or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any
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change in the information on the statement within 30 days of such change. If a
Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide a signed
statement to the Withholding Agent. However, in such case, the signed statement
must be accompanied by a copy of the IRS Form W-8 or the substitute form
provided by the beneficial owner to the organization or institution. The
Treasury Department is considering implementation of further certification
requirements aimed at determining whether the issuer of a debt obligation is
related to holders thereof.
Generally, a non-U.S. Holder will not be subject to Federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Note, provided the gain is not effectively connected with the conduct of a trade
or business in the United States by the non-U.S. Holder. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual is a direct or indirect 10% or greater shareholder of the Company
or, at the time of such individual's death, payments in respect of the Notes
would have been effectively connected with the conduct by such individual of a
trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Notes to registered owners who are not
"exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would establish
an exemption from backup withholding for those non-U.S. Holders who are not
exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, in the required manner, certain identifying information
and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S.
Holder (and certain other conditions are met). Such a sale must also be reported
by the broker to the IRS, unless either (i) the broker determines that the
seller is an exempt recipient or (ii) the seller certifies its non-U.S. status
(and certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8 under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
PLAN OF DISTRIBUTION
The Notes are being offered on a continuous basis for sale by the Company
to or through Morgan Stanley & Co. Incorporated, Alex. Brown & Sons
Incorporated, First Chicago Capital Markets, Inc., Lehman Brothers Inc. and J.P.
Morgan Securities Inc. (the "Agents"). The Agents may purchase Notes, as
principal, from the Company from time to time for resale to investors and other
purchasers at varying prices relating to prevailing market prices at the time of
resale as determined by the applicable Agent, or, if so specified in the
applicable Pricing Supplement, for resale at a fixed offering price. If agreed
to by the Company and an Agent, such Agent may also utilize its reasonable
efforts on an agency basis to solicit offers to purchase the Notes at 100% of
the principal amount thereof, unless otherwise specified in the applicable
Pricing Supplement. The Company will pay a commission to an Agent, ranging from
.125% to .750% of the principal amount of each Senior Note, depending upon its
stated maturity, sold through an Agent. The schedule of commissions payable in
connection with sales of Senior Notes will also apply to sales of Subordinated
Notes unless otherwise agreed to by the Company and the applicable Agent.
Commissions with respect to Notes with stated
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maturities in excess of 30 years that are sold through such Agent will be
negotiated between the Company and such Agent at the time of such sale.
Unless otherwise specified in the applicable Pricing Supplement, any Note
sold to an Agent as principal will be purchased by such Agent at a price equal
to 100% of the principal amount thereof less a percentage of the principal
amount equal to the commission applicable to an agency sale of a Note of
identical maturity and rank. An Agent may sell Notes it has purchased from the
Company as principal to other dealers for resale to investors and other
purchasers, and may allow any portion of the discount received in connection
with such purchase from the Company to such dealers. After the initial offering
of Notes, the offering price (in the case of Notes to be resold on a fixed price
basis), the concession and the discount may be changed.
The Company reserves the right to withdraw, cancel or modify the offer made
hereby without notice and may reject offers in whole or in part (whether placed
directly with the Company or through the Agents). Each Agent will have the
right, in its discretion reasonably exercised, to reject in whole or in part any
offer to purchase Notes received by it on an agency basis.
Unless otherwise specified in the applicable Pricing Supplement, payment of
the purchase price of the Notes will be required to be made in immediately
available funds in the Specified Currency in The City of New York on the date of
settlement. See "Description of Notes -- General."
In order to facilitate the offering of the Notes, the Agents may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Agents may overallot in connection with the offering,
creating a short position in the Notes for their own account. In addition, to
cover overallotments or to stabilize the price of the Notes, the Agents may bid
for, and purchase, the Notes in the open market. Finally, the Agents may reclaim
selling concessions allowed to any agent or a dealer for distributing the Notes
in the offering, if the Agents repurchase previously distributed Notes in
transactions to cover syndicate short positions in stabilization.
Upon issuance, the Notes will not have an established trading market. The
Notes will not be listed on any securities exchange. The Agents may from time to
time purchase and sell Notes in the secondary market, but the Agents are not
obligated to do so, and there can be no assurance that there will be a secondary
market for the Notes or that there will be liquidity in the secondary market if
one develops. From time to time, the Agents may make a market in the Notes, but
the Agents are not obligated to do so and may discontinue any market-making
activity at any time.
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). The Company has
agreed to indemnify the Agents against certain liabilities (including
liabilities under the Securities Act), or to contribute to payments the Agents
may be required to make in respect thereof. The Company has agreed to reimburse
the Agents for certain other expenses.
In the ordinary course of their respective business, the Agents and their
affiliates may engage in investment and commercial banking transactions with the
Company and certain of its affiliates.
Concurrently with the offering of Notes described herein, the Company may
issue other Offered Securities described in the accompanying Prospectus.
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PROSPECTUS
ASSOCIATED ESTATES REALTY CORPORATION
$368,806,250
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
$368,806,250, 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 to which this Prospectus
relates 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.
March 7, 1997
34
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, 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 and at the Commission's site on the World Wide Web
located at http://www.sec.gov. 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 year ended December 31, 1995;
b. Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996, June 30, 1996 and September 30, 1996;
c. Current Report on Form 8-K dated February 1, 1996;
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
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Statements and the Unaudited Estimated Twelve Month Pro Forma
Statement of Taxable Net 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: Barbara E. Hasenstab,
Director of Investor Relations, (216) 473-8798.
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
16,066 suites in 85 Multifamily Properties (the "Properties").
Of the Company's 16,066 suites, 14,008 suites (approximately 87.2%) are
contained in conventional high-rise, mid-rise townhome or garden apartment
properties and 1,888 suites (approximately 11.7%) 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 1.1%) 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 ("Congregate Care Facilities"). Approximately 93.7%
of the suites in the Properties owned at December 31, 1996 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 85 Multifamily Properties,
43 were developed by AEG, two were acquired by AEG prior to the IPO and 40 were
acquired (for an aggregate purchase price of $317.5 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 40 properties referred to above, the "Acquired
Properties"). Nine of the Acquired Properties are located in Northern Ohio, 22
are located in Central Ohio, nine are located in Michigan, one is located in
Indiana and one is located in Pennsylvania. The 40 Multifamily Properties
acquired since the IPO contain 7,142 suites. In addition to the Acquired
Properties, the Company acquired six undeveloped land parcels containing an
aggregate of 132.7 acres. The Company
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also currently manages 7,052 Multifamily Properties 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 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.
RATIO OF EARNINGS TO FIXED CHARGES
FISCAL YEAR ENDED(1) NINE MONTHS ENDED
------------------------------------------------------------------------ -----------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------ -----------------
Ratio of earnings to fixed
charges.................. 1.03 1.29 1.34 2.91 1.98 1.57
- ---------------
(1) The ratio of earnings to fixed charges includes results of operations of AEG
for the fiscal years ended December 31, 1991, 1992 and 1993.
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 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 The Chase Manhattan Bank (formerly 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." As of February 25, 1997, the Company had
$142,500,000 aggregate principal amount of Senior Securities outstanding and no
Subordinated Securities outstanding.
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 The Chase Manhattan 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
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37
more series, in each case as established from time to time in or pursuant to
authority granted by a resolution of the Board of Directors of the Company or as
established in one or more indentures supplemental to the applicable Indenture.
All Debt Securities of one series need not be issued at the same time and,
unless otherwise provided, a series may be reopened, without the consent of the
Holders of the Debt Securities of such series, for issuances of additional Debt
Securities of such series (Section 301 of the Indentures). Any Trustee under
either Indenture may resign or be removed with respect to one or more series of
Debt Securities issued under such Indenture, and a successor Trustee may be
appointed to act with respect to such series.
Reference is made to each Prospectus Supplement for the specific terms of
the series of Debt Securities being offered thereby, including:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of the
principal amount of such Debt Securities which is convertible into Common
Shares or other equity securities of the Company, or the method by which
any such portion shall be determined;
(4) if such Debt Securities are convertible, any limitation on the
ownership or transferability of the Common Shares or other equity
securities of the Company into which 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,
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formula or method may, but need not be, based on a currency, currencies,
currency unit or units or composite currency or currencies) and the manner
in which such amounts shall be determined;
(13) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default or covenants set
forth in the applicable Indenture;
(14) whether such Debt Securities will be issued in certificated or
book-entry form;
(15) whether such Debt Securities will be in registered or bearer form
or both and, if and to the extent in registered form, the denominations
thereof if other than $1,000 and any integral multiple thereof and, if and
to the extent in bearer form, the denominations thereof and terms and
conditions relating thereto;
(16) the applicability, if any, of the defeasance and covenant
defeasance provisions of Article XIV of the applicable Indenture;
(17) the terms, if any, upon which such Debt Securities may be
convertible into Common Shares or other equity securities of the Company
(and the class thereof) and the terms and conditions upon which such
conversion will be effected, including, without limitation, the initial
conversion price or rate and the conversion period;
(18) whether and under what circumstances the Company will pay
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Company will have
the option to redeem such Debt Securities in lieu of making such payment;
and
(19) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Any 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 Chase Manhattan 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).
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Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
applicable Trustee, notice of which shall be given to the Holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner, all as more completely described in the
applicable Indenture (Section 307 of the Indentures).
Subject to certain limitations applicable to Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Trustee. In
addition, subject to certain limitations applicable to Debt Securities issued in
book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the corporate trust office of
the applicable Trustee. Every Debt Security surrendered for conversion,
registration of transfer or exchange must be duly endorsed or accompanied by a
written instrument of transfer. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith (Section 305 of the Indentures). If the
applicable Prospectus Supplement refers to any transfer agent (in addition to
the Trustee) initially designated by the Company with respect to any series of
Debt Securities, the Company may at any time rescind the designation of any such
transfer agent or approve a change in the location at which any such transfer
agent acts, except that the Company will be required to maintain a transfer
agent in each Place of Payment for such series. The Company may at any time
designate additional transfer agents with respect to any series of Debt
Securities (Section 1002 of the Indentures).
Neither the Company nor any Trustee will be required (i) to issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) to register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) to issue, register the transfer of or exchange any Debt Security
which has been surrendered for repayment at the option of the Holder, except the
portion, if any, of such Debt Security not to be so repaid (Section 305 of the
Indentures).
MERGER, CONSOLIDATION OR SALE
Each Indenture provides that the Company may consolidate with, or sell,
lease or convey all or substantially all of its assets to, or merge with or
into, any other corporation, provided that (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:
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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).
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
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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).
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.
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42
"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 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.
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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 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
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institute proceedings in respect of an Event of Default from the Holders of not
less than 25% in principal amount of the Outstanding Debt Securities of such
series, as well as an offer of reasonable indemnity (Section 507 of the
Indentures). This provision will not prevent, however, any Holder of Debt
Securities from instituting suit for the enforcement of payment of the principal
of (and premium, if any) and interest on the Debt Securities held by that Holder
at the respective due dates thereof (Section 508 of the Indentures).
Subject to provisions in the applicable Indenture relating to its duties in
case of default, the Trustee thereunder is under no obligation to exercise any
of its rights or powers under such Indenture at the request or direction of any
Holders of any series of Debt Securities then Outstanding under such Indenture,
unless such Holders shall have offered to such Trustee reasonable security or
indemnity (Section 602 of the Indentures). The Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
(or of each series of Debt Securities then Outstanding under such Indenture, as
the case may be) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to such Trustee, or of
exercising any trust or power conferred upon such Trustee. However, such Trustee
may refuse to follow any direction which is in conflict with any law or such
Indenture, which may involve such Trustee in personal liability or which may be
unduly prejudicial to the Holders of Debt Securities of such series not joining
therein (Section 512 of the Indentures).
Within 120 days after the close of each fiscal year, the Company must
deliver to each Trustee under the Indentures a certificate, signed by one of
several specified officers, stating whether such officer has knowledge of any
default under the applicable Indenture and, if so, specifying each such default
and the nature and status thereof (Section 1012 of the Senior Indenture and
Section 1004 of the Subordinated Indenture).
MODIFICATION OF THE INDENTURES
Modifications and amendments of either Indenture may be made only with the
consent of the Holders of not less than a majority in principal amount of all
Outstanding Debt Securities issued thereunder which are affected by such
modification or amendment; provided however, that no such modification or
amendment may, without the consent of the Holder of each such Debt Security
affected thereby, (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
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issued thereunder, (iv) to add or change any provisions of such Indenture to
facilitate the issuance of, or to liberalize certain terms of, Debt Securities
issued thereunder in bearer form, or to permit or facilitate the issuance of
such Debt Securities in uncertificated form, provided that such action shall not
adversely affect the interests of the Holders of such Debt Securities of any
series in any material respect; (v) to change or eliminate any provision of such
Indenture, provided that any such change or elimination shall become effective
only when there are no Debt Securities Outstanding of any series issued
thereunder created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities issued thereunder, (vii) to
establish the form or terms of Debt Securities of any series issued thereunder,
including the provisions and procedures, if applicable, for the conversion of
such Debt Securities into Common Shares 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
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percentage in principal amount of the Outstanding Debt Securities of such series
will constitute a quorum (Section 1504 of the Indentures).
Notwithstanding the provisions described above, if any action is to be
taken at a meeting of Holders of Debt Securities of any series with respect to
any request, demand, authorization, direction, notice, consent, waiver or other
action that the applicable Indenture expressly provides may be made, given or
taken by the Holders of a specified percentage in principal amount of all
Outstanding Debt Securities affected thereby, or of the Holders of such series
and one or more additional series: (i) there shall be no minimum quorum
requirement for such meeting and (ii) the principal amount of the Outstanding
Debt Securities of such series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other action shall be taken
into account in determining whether such request, demand, authorization,
direction, notice, consent, waiver or other action has been made, given or taken
under such Indenture (Section 1504 of the Indentures).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Company may discharge certain obligations to Holders of any series of
Debt Securities that have not already been delivered to the applicable Trustee
for cancellation and that either have become due and payable or will become due
and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with such Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in which
such Debt Securities are payable in an amount sufficient to pay the entire
indebtedness on such Debt Securities in respect of principal (and premium, if
any) and interest to the date of such deposit (if such Debt Securities have
become due and payable) or to the Stated Maturity or Redemption Date, as the
case may be (Section 401 of the Indentures).
Each Indenture provides that, if the provisions of Article Fourteen thereof
(relating to defeasance and covenant defeasance) are made applicable to the Debt
Securities of or within any series issued thereunder pursuant to Section 301 of
such Indenture, the Company may elect either (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
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ruling of the Internal Revenue Service or a change in applicable United States
federal income tax law occurring after the date of such Indenture (Section 1404
of the Indentures).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the Foreign
Currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged, or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which issued
the Foreign Currency in which the Debt Securities of such series are payable,
the payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America or such other government, which, in
either case, are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the account of the holder of a depository receipt, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the Government Obligation or
the specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt (Section 101 of the Indentures).
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(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.
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The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
SENIOR SECURITIES AND SENIOR INDEBTEDNESS
Each series of Senior Securities will constitute Senior Indebtedness (as
described below) and will rank equally with each other series of Senior
Securities and other Senior Indebtedness. All subordinated indebtedness
(including, but not limited to, all Subordinated Securities issued under the
Subordinated Indenture) will be subordinated to the Senior Securities and other
Senior Indebtedness.
Senior Indebtedness is defined in the Subordinated Indenture to mean (i)
the principal of and premium, if any, and unpaid interest on indebtedness for
money borrowed, (ii) purchase money and similar obligations, (iii) obligations
under capital leases, (iv) guarantees, assumptions or purchase commitments
relating to, or other transactions as a result of which the Company is
responsible for the payment of, such indebtedness of others, (v) renewals,
extensions and refunding of any such indebtedness, (vi) interest or obligations
in respect of any such indebtedness accruing after the commencement of any
insolvency or bankruptcy proceedings, and (vii) obligations associated with
derivative products such as interest rate and currency exchange contracts,
foreign exchange contracts, commodity contracts, and similar arrangements,
unless, in each case, the instrument by which the Company incurred, assumed or
guaranteed the indebtedness or obligations described in clauses (i) through
(vii) expressly provides that such indebtedness or obligation is subordinate or
junior in right of payment to any other indebtedness or obligations of the
Company.
SUBORDINATION OF SUBORDINATED SECURITIES
Subordinated Indenture. The payment of the principal of (and premium, if
any) and interest on the Subordinated Securities will be subordinated as set
forth in the Subordinated Indenture to the Senior Indebtedness of the Company
whether outstanding on the date of the Subordinated Indenture or thereafter
incurred (Section 1701 of the Subordinated Indenture).
Ranking. No class of Subordinated Securities is subordinated to any other
class of subordinated debt securities. See "Subordination Provisions" below.
Subordination Provisions. In the event (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;
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(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 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
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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 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 1603 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
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certificate will be issued with respect to each $200 million of principal amount
of the Debt Securities of a series, and an additional certificate will be issued
with respect to any remaining principal amount of such series. 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 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 transaction. Transfers of ownership interests in Debt
Securities are accomplished by entries made on the books of Participants acting
on behalf of Beneficial Owners. Beneficial Owners do not receive certificates
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representing their ownership interests in Debt Securities, except in the event
that use of the book-entry system for the Debt Securities is discontinued.
To facilitate subsequent transfers, the Debt Securities are registered in
the name of DTC's partnership nominee, Cede & Co. The deposit of the Debt
Securities with DTC and their registration in the name of Cede & Co. will effect
no change in beneficial ownership. DTC has no knowledge of the actual Beneficial
Owners of the Debt Securities; DTC records reflect only the identity of the
Direct Participants to whose accounts Debt Securities are credited, which may or
may not be the Beneficial Owners. The Participants remain responsible for
keeping account of their holdings on behalf of their customers.
Delivery of notices and other communications by DTC to Direct Participants,
by Direct Participants to Indirect Participants, and by Direct Participants and
Indirect Participants to Beneficial Owners are governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. consents or votes with respect to the Debt
Securities. Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy")
to the issuer as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Debt Securities are credited on the record date (identified
on a list attached to the Omnibus Proxy).
Principal, premium, if any, and interest payments on the Debt Securities
are made to Cede & Co., as nominee of DTC. DTC's practice is to credit Direct
Participants' accounts upon DTC's receipt of funds in accordance with their
respective holdings as shown on DTC's records. 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.
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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 February 21, 1997, there were 15,322,391 Common Shares issued
and outstanding. In addition, up to 543,083 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 20,000 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.
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
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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.
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
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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 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 February 21,
1997, 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
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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 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;
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(14) Any limitations on issuance of securities ranking senior to or on
a parity with such Preferred Shares as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; and
(15) Any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve
the status of the Company as a REIT.
The Preferred Shares will, when issued, be fully paid and nonassessable and
will have no preemptive rights.
RANK
All Preferred Shares will, when issued, rank (i) on a parity with all other
Preferred Shares with respect to dividend rights (subject to dividends on
Noncumulative Shares being noncumulative) and rights upon liquidation,
dissolution or winding up of the Company, (ii) senior to all classes of Common
Shares of the Company and to all other equity securities ranking junior to such
Preferred Shares with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company; (iii) on a parity with all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank on a parity with the Preferred Shares with respect
to dividend rights and rights upon liquidation, dissolution or winding up of the
Company; and (iv) junior to all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank senior to
the Preferred Shares, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company.
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
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Preferred Shares received by the Company subsequent to the date of first
issuance of such series of Preferred Shares, unless (i) all accrued and unpaid
dividends on all classes of Preferred Shares then outstanding, including the
full dividends for all current dividend periods (except, with respect to
Noncumulative Shares, for the then current dividend period only), shall have
been declared and paid or a sum sufficient for payment thereof set apart, and
(ii) there shall be no arrearages with respect to the redemption of any series
of any class of Preferred Shares from any sinking fund provided for such class
in accordance with the Articles.
The foregoing restrictions on the payment of dividends or other
distributions on, or on the purchase, redemption, retirement or other
acquisition of, Common Shares or any other shares ranking on a parity with or
junior to any class of Preferred Shares will be inapplicable to (i) any payments
in lieu of issuance of fractional shares, whether upon any merger, conversion,
stock dividend or otherwise, (ii) the conversion of Preferred Shares into Common
Shares, or (iii) the exercise by the Company of its rights to repurchase shares
of its capital stock in order to preserve its status as a REIT under the Code.
When dividends are not paid in full (or a sum sufficient for such full payment
is not so set apart) upon the Preferred Shares of any series and the shares of
any other series of Preferred Shares ranking on a parity as to dividends with
such series, all dividends declared upon Preferred Shares of such series and any
other series of Preferred Shares ranking on a parity as to dividends with such
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on the shares of such series of Preferred Shares shall in all
cases bear to each other the same ratio that accrued dividends per share on the
Preferred Shares of such series (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods for Noncumulative Shares)
and such other series bear to each other. No interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payment or payments on
Preferred Shares of such series which may be in arrears.
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
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each holder. If notice of redemption of any Preferred Shares has been given and
if the funds necessary for such redemption have been set aside by the Company in
trust for the benefit of the holders of the Preferred Shares so called for
redemption, then from and after the redemption date dividends will cease to
accrue on such Preferred Shares, and such holders will cease to be shareholders
with respect to such shares and such holders shall have no right or claim
against the Company with respect to such shares, except only the right to
receive the redemption price without interest or to exercise before the
redemption date any unexercised privileges of conversion.
LIQUIDATION PREFERENCE
In the event of any voluntary liquidation, dissolution or winding up of the
affairs of the Company, the holders of any series of any class of Preferred
Shares shall be entitled to receive in full out of the assets of the Company,
including its capital, before any amount shall be paid or distributed among the
holders of the Common Shares or any other shares ranking junior to such series,
the amounts fixed by the Board of Directors with respect to such series and set
forth in the applicable Prospectus Supplement plus an amount equal to all
dividends accrued and unpaid thereon (except, with respect to Noncumulative
Shares, dividends for the current dividend period only) to the date of payment
of the amount due pursuant to such liquidation, dissolution or winding up the
affairs of the Company. After payment to the holders of the Preferred Shares of
the full preferential amounts to which they are entitled, the holders of
Preferred Shares, as such, shall have no right or claim to any of the remaining
assets of the Company.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital stock 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
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change the authorized or outstanding number of a class of Preferred Shares
or of any shares ranking on a parity with or junior to such class of
Preferred Shares nor the amendment of the provisions of the Code of
Regulations so as to change the number or classification of directors of
the Company shall be deemed to affect adversely and materially preferences
or voting or other rights of the holders of such class of Preferred Shares.
Without limiting the provisions described above, under Ohio law, holders of
each class of Preferred Shares will be entitled to vote as a class on any
amendment to the Articles, whether or not they are entitled to vote thereon by
the Articles, if the amendment would (i) increase or decrease the par value of
the shares of such class, (ii) change the issued shares of such class into a
lesser number of shares of such class or into the same or different number of
shares of another class, (iii) change the express terms or add express terms of
the shares of the class in any manner substantially prejudicial to the holders
of such class, (iv) change the express terms of issued shares of any class
senior to the particular class in any manner substantially prejudicial to the
holders of shares of the particular class, (v) authorize shares of another class
that are convertible into, or authorize the conversion of shares of another
class into, shares of the particular class, or authorize the directors to fix or
alter conversion rights of shares of another class that are convertible into
shares of the particular class, (vi) reduce or eliminate the stated capital of
the Company, (vii) substantially change the purposes of the Company, or (viii)
change the Company into a nonprofit corporation.
If, and only to the extent, that (i) a class of Preferred Shares is issued
in more than one series and (ii) Ohio law permits the holders of a series of a
class of capital stock to vote separately as a class, the affirmative vote of
the holders of at least two-thirds of each series of such class of Preferred
Shares at the time outstanding, voting separately as a class, given in person or
by proxy either in writing or at a meeting called for 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.
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To assure that five or fewer individuals do not own more than 50% in value
of the Company's outstanding Preferred Shares, the Articles provide that,
subject to certain exceptions, no holder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% (the "Preferred Shares
Ownership Limit") of any series of any class of the Company's outstanding
Preferred Shares. In addition, as discussed above under "Description of Common
Shares -- Restriction on Ownership," because rent from a Related Party Tenant
(any tenant 10% of which is owned, directly or constructively, by a REIT,
including an owner of 10% or more of a REIT) is not qualifying rent for purposes
of the gross income tests under the Code, the Articles provide that no
individual or entity may own, or be deemed to own by virtue of the attribution
provisions of the Code (which differ from the attribution provisions applied to
the Preferred Shares Ownership Limit), in excess of 9.8% of the outstanding
shares of any series of any class of Preferred Shares (the "Preferred Shares
Related Party Limit"). The Board of Directors may waive the Preferred Shares
Ownership Limit and the Preferred Shares Related Party Limit if the Board of
Directors obtains such representations and undertakings from the applicant with
respect to preserving the REIT status of the Company as are reasonably necessary
to ascertain that such ownership will not jeopardize the Company's status as a
REIT.
The foregoing restrictions on transferability and ownership of Preferred
Shares may not apply if the Board of Directors determines that it is no longer
in the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT. The Preferred Shares Ownership Limit and the Preferred
Shares Related Party Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Any change in the Preferred Shares Ownership Limit would require an
amendment to the Articles, even if the Board of Directors determines that
maintenance of REIT status is no longer in the best interests of the Company.
Amendments to the Company's Articles require the affirmative vote of holders
owning not less 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
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("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.
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 February 21, 1997 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.
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WITHDRAWAL OF SHARES
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Shares Depositary (unless the related Depositary Shares have
previously been called for redemption), the holders thereof will be entitled to
delivery at such office, to or upon such holder's order, of the number of whole
or fractional Preferred Shares and any money or other property represented by
the Depositary Shares evidenced by such Depositary Receipts. Holders of
Depositary Receipts will be entitled to receive whole or fractional shares of
the related Preferred Shares on the basis of the proportion of Preferred Shares
represented by each Depositary Share as specified in the applicable Prospectus
Supplement, but holders of such Preferred Shares will not thereafter be entitled
to receive Depositary Shares therefor. If the Depositary Receipts delivered by
the holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares representing the number of Preferred Shares to be withdrawn,
the Preferred Shares Depositary will deliver to such holder at the same time a
new Depositary Receipt evidencing such excess number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems Preferred Shares held by the Preferred Shares
Depositary, the Preferred Shares Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Preferred
Shares so redeemed, provided the Company shall have paid in full to the
Preferred Shares Depositary the redemption price of the Preferred Shares to be
redeemed plus an amount equal to any accrued and unpaid dividends (except, with
respect to Noncumulative Shares, dividends for the current dividend period only)
thereon to the date fixed for redemption. The redemption price per Depositary
Share will be equal to the redemption price and any other amounts per share
payable with respect to the Preferred 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.
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CONVERSION OF PREFERRED SHARES
The Depositary Shares, as such, are not convertible into Common Shares or
any other securities or property of the Company. Nevertheless, if so specified
in the applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
Preferred Shares Depositary with written instructions to the Preferred Shares
Depositary to instruct the Company to cause conversion of the Preferred Shares
represented by the Depositary Shares evidenced by such Depositary Receipts into
whole Common Shares, other Preferred Shares of the Company or other shares of
capital stock, and the Company has agreed that upon receipt of such instructions
and any amounts payable in respect thereof, it will cause the conversion thereof
utilizing the same procedures as those provided for delivery of Preferred Shares
to effect such conversion. If the Depositary Shares evidenced by a Depositary
Receipt are to be converted in part only, one or more new Depositary Receipts
will be issued for any Depositary Shares not to be converted. No fractional
Common Shares will be issued upon conversion, and if such conversion will result
in a fractional share being issued, an amount will be paid in cash by the
Company equal to the value of the fractional interest based upon the closing
price of the Common Shares on the last business day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Shares and any provision of the Deposit Agreement may at
any time be amended by agreement between the Company and the Preferred Shares
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts will not be effective unless such
amendment has been 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
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resignation or removal and must be a bank or trust company having its principal
office in the United States and having a combined capital and surplus of at
least $50,000,000.
MISCELLANEOUS
The Preferred Shares Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Shares Depositary with respect to the related Preferred Shares.
Neither the Preferred Shares Depositary nor the Company will be liable if
it is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under the Deposit Agreement. The obligations
of the Company and the Preferred Shares Depositary under the Deposit Agreement
will be limited to performing their duties thereunder in good faith and without
negligence, gross negligence or willful misconduct, and the Company and the
Preferred Shares Depositary will not be obligated to prosecute or defend any
legal proceeding in respect of any Depositary Receipts, Depositary Shares or
Preferred Shares represented thereby unless satisfactory indemnity is furnished.
The Company and the Preferred Shares Depositary may rely on written advice of
counsel or accountants, or information provided by persons presenting Preferred
Shares represented thereby for deposit, holders of Depositary Receipts or other
persons believed to be competent to give such information, and on documents
believed to be genuine and signed by a proper party.
If the Preferred Shares Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, the Preferred Shares Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
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 United States 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
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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 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 LLP, based on certain assumptions and
representations made by the Company, the Company has qualified as a REIT for its
taxable years ended December 31, 1993, December 31, 1994 and December 31, 1995,
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 LLP. 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
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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.
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
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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 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.
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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 LLP, 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.
However, in its opinion, Baker & Hostetler LLP has advised the Company that it
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 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 LLP 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
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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 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
twelve 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.
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Shareholders should consult with their own tax advisors to determine the impact
of federal, state and local income tax laws with regard to an investment in the
Common Shares, including any reporting requirements.
It is currently anticipated that the Company will qualify as a
"domestically controlled REIT" (i.e., a REIT in which at all times during a
specified testing period less than 50% of the value of the capital stock of
which is owned directly or indirectly by Non-U.S. Shareholders) and therefore
gain from the sale of Common Shares by a Non-U.S. Shareholder will not be
subject to United States taxation unless such gain is treated as "effectively
connected" with the Non-U.S. Shareholder's United States trade or business.
Distributions that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (and are not designated
as capital gain dividends) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions generally will be subject to a United States
withholding tax equal to 30% of the gross amount of the distribution, subject to
reduction or elimination under an applicable tax treaty. However, if dividends
from the investment in the shares are treated as "effectively connected" with
the Non-U.S. Shareholder's conduct of a United States trade or business, such
dividends will be subject to regular U.S. income taxation (foreign corporations
may also be subject to the 30% branch profits tax). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends paid to a Non-U.S. Shareholder unless: (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
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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.
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, 1995, 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 February 1, 1996 have been so incorporated in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Offered Securities as well as certain legal matters
described under "Federal Income Tax Considerations" will be passed upon for the
Company by Baker & Hostetler LLP, Cleveland, Ohio and for any underwriters,
dealers or agents by Brown & Wood LLP, New York, New York. Albert T. Adams, a
director of the Company, is a partner in Baker & Hostetler LLP.
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Associated Estates
Realty Corporation
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