AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MONARCH PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
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MARYLAND 52-2086276
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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8889 PELICAN BAY BOULEVARD, NAPLES, FLORIDA 34108, (941) 598-5601
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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JOHN B. POOLE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MONARCH PROPERTIES, INC.
8889 PELICAN BAY BOULEVARD, SUITE 501, NAPLES, FLORIDA 34108, (941) 598-5605,
(941) 566-6082 (FAX)
(Name, address, including zip code, and telephone, including area code, of
agent for service)
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COPIES TO:
JOHN R. FALLON, JR. BRAD S. MARKOFF
THOMAS L. FAIRFIELD Alston & Bird LLP
LeBoeuf, Lamb, Greene & MacRae, L.L.P. 3605 Glenwood Avenue, Suite 310
125 West 55th Street Raleigh, North Carolina 27622
New York, New York 10019-5389 (919) 420-2200
(212) 424-8000 (919) 881-3175 (Fax)
(212) 424-8500 (Fax)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.001 par value per share......... $ 396,750,000.00 $ 117,041.25
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 27, 1998
PROSPECTUS
, 1998
SHARES
MONARCH PROPERTIES, INC.
COMMON STOCK
Monarch Properties, Inc., a Maryland corporation (together with its
subsidiaries, "Monarch" or the "Company"), has been formed to capitalize on the
growing demand from providers of facility-based healthcare services for flexible
and innovative real estate financing structures. The Company will be
self-administered and self-managed and expects to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. Monarch's initial
portfolio will consist of 47 healthcare facilities located in 15 states (the
"Initial Properties"), 44 of which will be purchased from Integrated Health
Services, Inc. ("IHS"), a leading national provider of post-acute healthcare
services. The aggregate purchase price of the Initial Properties is
approximately $382.4 million, of which approximately $371.0 million will be paid
to IHS. The Company will also have options to acquire up to 10 additional
healthcare facilities from IHS for an aggregate purchase price of approximately
$104.7 million (the "Option Properties"). The Company will lease 42 of the
Initial Properties (the "Lyric Properties") and, if acquired, all of the Option
Properties, to Lyric Health Care Holdings III, Inc. ("Lyric III"). IHS
indirectly owns 50% of Lyric III and will manage the Lyric Properties. Following
completion of the Offering, Robert N. Elkins, M.D., who is Chairman, Chief
Executive Officer and President of IHS, will also be Chairman of the Board of
Directors of the Company.
All of the shares of common stock, $.001 par value per share, of the
Company (the "Common Stock") offered hereby (the "Offering") are being sold by
the Company. Concurrently with the sale of Common Stock to the public in the
Offering, Robert N. Elkins, M.D., certain executive officers and employees of
the Company and certain officers of IHS will purchase shares of Common Stock
directly from the Company at a price equal to the price to the public less the
underwriting discount (the "Concurrent Offering").
Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Company
intends to apply for the listing of the Common Stock on the New York Stock
Exchange under the symbol "MPZ."
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR CERTAIN RISK FACTORS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING:
o The dependence of the Company on Lyric III as lessee and IHS as manager of
the Lyric Properties;
o Conflicts of interest between the Company, IHS and Lyric Health Care LLC,
including the lack of arm's length negotiations and benefits to be derived
by IHS, resulting in the risk that the consideration to be paid for the
Initial Properties acquired from IHS may exceed their fair market values
and that the master lease of the Lyric Properties to Lyric III may not
reflect market terms;
o The credit risks which may be associated with the Company's customized
investment or financing structures, including products that limit recourse
to the operator or provide funding to early stage facility-based healthcare
service providers;
o The possibility that the Company may not be able to effectively manage its
intended rapid growth, the Company's lack of operating history and
management's lack of experience in operating a REIT;
o Operating risks inherent in the highly regulated healthcare industry which
may affect the financial condition of lessees and operators;
o Limitations on stockholders' ability to change control of the Company,
including a prohibition on actual or constructive ownership by individual
stockholders of shares of Common Stock in excess of 9.9% of the Company's
outstanding capital stock; and
o Taxation of the Company as a regular corporation if it fails to qualify or
maintain its qualification as a REIT.
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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. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
THE PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share
Public Offering ............. $ $ $
Concurrent Offering ......... $ $ $
Total(3) ...................... $ $ $
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(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company estimated at approximately
$ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of additional shares of Common Stock, solely to
cover overallotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds
to the Company will be $ , $ , and $
, respectively. See "Underwriting."
The Common Stock is offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, subject to approval of
certain legal matters by counsel to the Underwriters and certain other
conditions. The Underwriters reserve the right to reject orders in whole or in
part. It is expected that delivery of the shares of Common Stock will be made
against payment therefor in New York, New York on or about , 1998.
Joint Book-Running Managers
DONALDSON, LUFKIN & JENRETTE SALOMON SMITH BARNEY
SECURITIES CORPORATION
BT ALEX. BROWN LEGG MASON WOOD WALKER MORGAN STANLEY DEAN WITTER
INCORPORATED
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[INSERT MAP AND TABLE]
The map is captioned "Monarch Owned Properties." Each state will appear in
black outline and the states in which the Company will own properties will
appear in color. Each of these states also will be marked with a pointer line
and an annotation indicating the number of properties to be owned:
MONARCH NUMBER
OWNED PROPERTIES OF BEDS
------------------ --------
Arkansas ....................... 3 303
Colorado ....................... 1 155
Florida ........................ 10 1,200
Georgia ........................ 1 128
Idaho .......................... 2 224
Illinois ....................... 1 165
Iowa ........................... 1 93
Michigan ....................... 1 99
Missouri ....................... 1 176
New Hampshire .................. 1 68
New Mexico ..................... 1 85
Ohio ........................... 2 196
Oklahoma ....................... 2 204
Pennsylvania ................... 2 553
Texas .......................... 18 2,446
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TOTAL .......................... 47 6,095
== =====
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY ................................................... 1
The Company ....................................................... 1
Risk Factors ...................................................... 3
Business and Growth Strategies .................................... 3
The Initial Properties ............................................ 7
Company Structure ................................................. 9
Transactions With and Benefits to Related Parties. 13
The Offering ...................................................... 13
Distributions ..................................................... 14
Tax Status of the Company ......................................... 14
Selected Historical and Pro Forma Financial Infor-
mation .......................................................... 15
RISK FACTORS ......................................................... 16
Dependence on Lyric III, Lyric and IHS for the
Company's Revenues and Ability to Make Dis-
tributions ...................................................... 16
Conflicts of Interest ............................................. 16
Lack of Operating History and Inexperience of
Management in Operating a REIT Could Affect
REIT Qualification .............................................. 17
No Assurance that the Company Will Be Able to
Effectively Manage its Intended Rapid Growth..................... 17
Failure to Qualify as a REIT Would Cause the
Company to be Taxed as a Corporation ............................ 18
Risks Associated With Owning Healthcare Facilities
in the Highly Regulated Healthcare Industry ..................... 19
Risks Associated With Debt Financing and Inter-
est Rates ....................................................... 21
Risks Associated With the Real Estate Industry .................... 22
The Ability of Stockholders to Effect a Change in
Control of the Company is Limited ............................... 23
Liability for Environmental Matters Could Ad-
versely Affect the Company's Financial Condi-
tion ............................................................ 25
Competition ....................................................... 26
Dependence on Key Personnel ....................................... 26
Dilution .......................................................... 27
Valuation ......................................................... 27
Absence of a Prior Public Market for the Common
Stock ........................................................... 27
Sales of a Substantial Number of Shares of Com-
mon Stock, or the Perception That Such Sales
Could Occur and Could Adversely Affect Pre-
vailing Market Prices of the Common Stock ....................... 27
Changes in Market Conditions Could Adversely
Affect the Common Stock Price ................................... 27
Effect on Common Stock Price of Changes in
Earnings and Cash Distributions ................................. 28
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PAGE
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Effect on Common Stock Price of Changes in
Market Interest Rates ........................................... 28
Dependence on External Sources of Capital Could
Adversely Affect Common Stock Price ............................. 28
ERISA Risks ....................................................... 29
THE COMPANY .......................................................... 30
Industry Overview ................................................. 31
BUSINESS AND GROWTH STRATEGIES ....................................... 33
Customer Segments ................................................. 33
Growth Strategies ................................................. 33
Financial Products ................................................ 35
USE OF PROCEEDS ...................................................... 37
DISTRIBUTIONS ........................................................ 38
CAPITALIZATION ....................................................... 41
DILUTION ............................................................. 42
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL INFORMATION ............................................. 43
MANAGEMENT'S DISCUSSION AND ANALY-
SIS OF FINANCIAL CONDITION AND RE-
SULTS OF OPERATIONS ............................................... 44
Overview .......................................................... 44
Results of Operations ............................................. 44
Pro Forma Results of Operations For the Year
Ended December 31, 1997 ......................................... 44
Liquidity and Capital Resources ................................... 44
Non-Cash Compensation Expense ..................................... 45
Funds from Operations ............................................. 45
Year 2000 Compliance .............................................. 45
BUSINESS OF THE COMPANY AND ITS
PROPERTIES ........................................................ 47
General ........................................................... 47
Skilled Nursing Facilities ........................................ 47
Speciality Hospitals .............................................. 48
Lyric Transaction ................................................. 49
Trans Health Transaction .......................................... 49
Peak Medical Transaction .......................................... 50
The Initial Properties ............................................ 51
Option Properties ................................................. 53
Additional Information Regarding Description of
Significant Initial Properties .................................. 54
Right of First Offer Agreement .................................... 56
Other Acquisitions ................................................ 56
Government Regulation ............................................. 57
Competition ....................................................... 60
Legal Proceedings ................................................. 60
Office Lease ...................................................... 61
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PAGE
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Employees .......................................................... 61
KEY AGREEMENTS ....................................................... 62
Facilities Purchase Agreement ..................................... 62
Master Lease ...................................................... 62
Lyric Guaranty .................................................... 64
Master Management Agreement and Facility Man-
agement Agreements .............................................. 64
Master Franchise Agreement and Facility Fran-
chise Agreements ................................................ 65
Pledge Agreements ................................................. 66
Security Agreement ................................................ 66
Escrow Agreement .................................................. 66
Consent and Subordination Agreement ............................... 66
MANAGEMENT ........................................................... 68
Directors, Director Nominees And Executive Of-
ficers .......................................................... 68
Committees of the Board of Directors .............................. 70
Compensation of the Board of Directors ............................ 70
Executive Compensation ............................................ 70
1998 Omnibus Securities and Incentive Plan ........................ 71
Employment and Non-Competition Agreements ......................... 73
Incentive Compensation ............................................ 74
Limitation of Liability and Indemnification ....................... 74
Indemnification Agreements ........................................ 75
STRUCTURE AND FORMATION OF THE
COMPANY ........................................................... 76
TRANSACTIONS WITH AND BENEFITS TO
RELATED PARTIES ................................................... 78
VALUATION OF INITIAL PROPERTIES ...................................... 79
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES ........................................................ 79
Investment Policies ............................................... 79
Financing Policies ................................................ 80
Lending Policies .................................................. 81
Conflict of Interest Policies ..................................... 81
Policies With Respect to Other Activities ......................... 81
OPERATING PARTNERSHIP AGREEMENT ...................................... 82
Management ........................................................ 82
Removal of the General Partner; Transfer of the
General Partner's Interest ...................................... 82
Amendments of the Operating Partnership Agree-
ment ............................................................ 82
Transfer of Units; Substitute Limited Partners .................... 83
Redemption of Units ............................................... 83
Issuance of Additional Limited Partnership Inter-
ests ............................................................ 83
Extraordinary Transactions ........................................ 83
Exculpation and Indemnification of the General
Partner ......................................................... 84
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PAGE
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Tax Matters ....................................................... 84
Term .............................................................. 84
PRINCIPAL STOCKHOLDERS ............................................... 85
DESCRIPTION OF CAPITAL STOCK OF THE
COMPANY ........................................................... 86
General ........................................................... 86
Common Stock ...................................................... 86
Preferred Stock ................................................... 87
Restrictions on Transfers ......................................... 87
Transfer Agent and Registrar ...................................... 88
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S CHARTER AND
BYLAWS ............................................................ 89
Business Combinations ............................................. 89
Control Share Acquisitions ........................................ 89
Amendment of Charter and Bylaws ................................... 90
Dissolution of the Company ........................................ 90
Meetings of Stockholders .......................................... 90
The Board of Directors ............................................ 91
Limitation of Liability and Indemnification ....................... 91
Indemnification Agreements ........................................ 92
SHARES ELIGIBLE FOR FUTURE SALE ...................................... 93
FEDERAL INCOME TAX CONSIDERATIONS..................................... 95
Taxation of the Company ........................................... 95
Requirements for Qualification as a REIT .......................... 96
Failure of the Company to Qualify as a REIT ....................... 102
Taxation of Taxable U.S. Stockholders of the Com-
pany Generally .................................................. 102
Backup Withholding for Company Distributions ...................... 104
Taxation of Tax-Exempt Stockholders of the Com-
pany ............................................................ 104
Taxation of Non-U.S. Stockholders of the Com-
pany ............................................................ 105
Tax Risks Associated with Partnerships ............................ 108
Other Tax Consequences for the Company and its
Stockholders .................................................... 108
ERISA CONSIDERATIONS ................................................. 109
Employment Benefit Plans, Tax-Qualified Pension,
Profit Sharing or Stock Bonus Plans and IRAs..................... 109
Status of the Company and the Operating Partner-
ship under ERISA ................................................ 109
UNDERWRITING ......................................................... 111
EXPERTS .............................................................. 113
LEGAL MATTERS ........................................................ 113
ADDITIONAL INFORMATION ............................................... 113
GLOSSARY ............................................................. 114
INDEX TO FINANCIAL STATEMENTS ........................................ F-1
ii
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FORWARD-LOOKING STATEMENTS
Information contained in or delivered in connection with this Prospectus
contains "forward-looking statements" relating to, without limitation, future
economic performance, plans and objectives of management for future operations
and projections of revenue and other financial items, which can be identified by
the use of forward-looking terminology such as "may," "will," "should,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. These forward-looking
statements are based on a number of assumptions and estimates which are subject
to significant risks and uncertainties, many of which are beyond the control of
the Company and reflect future business decisions which are subject to change.
The cautionary statements set forth under the caption "Risk Factors" and
elsewhere in the Prospectus identify important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such
forward-looking statements. The Company undertakes no obligation to publicly
release the results of any revisions to such forward-looking statements that may
be made to reflect events or circumstances after the date hereof, or thereof, as
the case may be, or to reflect the occurrence of unanticipated events.
iii
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements included elsewhere in this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus assumes
that: (i) the initial public offering price is $ ____ per share (the midpoint of
the price range set forth on the cover page of this Prospectus); (ii) the
transactions described under "Structure and Formation of the Company" are
consummated; and (iii) the Underwriters' overallotment option is not exercised.
As used herein, the "Company" and "Monarch" mean Monarch Properties, Inc., a
Maryland corporation, and one or more of its subsidiaries (including: (a)
Monarch Properties, LP, a Delaware limited partnership, and one or more of its
subsidiaries (the "Operating Partnership"); (b) MP Operating, Inc., a Delaware
corporation ("MP Operating"), which will be the General Partner of the Operating
Partnership; and (c) MP Properties LP, Inc., a Delaware corporation ("MP LP"),
which will be the Limited Partner of the Operating Partnership), or, as the
context may require, the Company or Monarch only or the Operating Partnership
only. See "Glossary" for the meanings of other terms used herein. Upon
completion of the Offering, the Company will initially own 100% of the limited
partnership interests in the Operating Partnership through MP Operating and MP
LP, and the Company will conduct all of its operations through the Operating
Partnership. An investment in the Common Stock offered hereby is not an
investment in Lyric Health Care LLC ("Lyric"), Integrated Health Services, Inc.
("IHS") or any of their respective subsidiaries.
THE COMPANY
Monarch was formed to capitalize on the growing demand from providers of
facility-based healthcare services for flexible and innovative real estate
financing structures. Monarch's strategy is to offer traditional and customized
sale and leaseback structures and other financing products that address the
differing needs of both established and emerging operators of skilled nursing,
specialty hospital, assisted living and other healthcare facilities. The Company
believes that the customized products it has developed offer operators
significant advantages over traditional sale and leaseback structures and will
generate sufficient customer demand to justify premium yields. The Company will
be self-administered and self-managed and expects to qualify as a real estate
investment trust ("REIT") for federal income tax purposes.
Monarch will focus on meeting the needs of two primary customer segments:
(i) large, established operators of facility-based healthcare services, which
are typically publicly traded corporations; and (ii) emerging operators with
strong growth prospects run by experienced and entrepreneurial management teams
with proven track records. While Monarch will offer traditional REIT investment
products (such as sale and leaseback structures and, to a lesser extent,
mortgage financing), management expects that a substantial portion of its
revenues will be derived from innovative products which are customized for
individual operators. Monarch's products are generally structured to enhance the
financial flexibility of the operator while providing enhanced yields and
appropriate security to the Company. Monarch believes that its focus on
providing customized products will differentiate it from many of its REIT
competitors who are focused on more traditional investment products. Monarch
believes this strategy will enable it to grow its asset base through accretive
investments that will earn premium yields.
The Company's initial portfolio will consist of 47 healthcare facilities
located in 15 states (the "Initial Properties"), 44 of which will be purchased
from IHS. The aggregate purchase price of the Initial Properties is
approximately $382.4 million, of which approximately $371.0 million will be paid
to IHS. The three other Initial Properties will be purchased from an
unaffiliated third party for an aggregate purchase price of approximately $11.5
million. Of the 47 Initial Properties, 42 are skilled nursing facilities with a
total of approximately 5,914 beds and five are specialty hospitals with a total
of approximately 181 beds. In addition, the Company will have options to
purchase up to 10 additional skilled nursing facilities with a total of
approximately 1,683 beds from IHS for an aggregate purchase price of
approximately $104.7 million, and will have a right of first offer during the
next four years to purchase or finance any healthcare facilities IHS acquires or
develops and elects to either sell and leaseback or
1
<PAGE>
to finance in a transaction of the type normally engaged in by the Company.
Forty-two of the properties to be acquired from IHS (the "Lyric Properties"),
with an aggregate purchase price of approximately $359.7 million, will be leased
on a portfolio basis to Lyric Health Care Holdings III, Inc. ("Lyric III")
pursuant to a master lease (the "Master Lease"). Lyric III will sublease the
Lyric Properties to separate wholly owned subsidiaries of Lyric III
(collectively, the "Facility Subtenants") pursuant to individual subleases
(collectively, the "Facility Subleases"). The remaining Initial Properties will
be leased to two independent healthcare facility operators.
The Lyric Properties will be leased on a triple net basis with initial
terms ranging from nine to thirteen years. The initial annual base portfolio
rent for the Lyric Properties equals the purchase price multiplied by the
greater of: (i) 10.0%; or (ii) the average yield on the 10-year U.S. Treasury
Note over the 20 trading days preceding the date of the Offering plus 450 basis
points. The base portfolio rent is subject to annual increases equal to the
lesser of two times the increase in the Consumer Price Index ("CPI") or 3%, but
shall in no event be lower than the prior year's rent. The Master Lease may be
renewed by Lyric III for up to three renewal periods of 10 years each. Lyric
III will enter into a management agreement and a franchise agreement with IHS
subject to the Master Lease. All management and franchise fees payable to IHS
will be subordinated to payments under the Master Lease. Monarch will have the
benefits of cross default provisions and effective cross collateralization
protection under the Master Lease by virtue of the availability of the aggregate
rent payments of all of the Facility Subtenants to satisfy the obligations of
Lyric III under the Master Lease. In addition, Lyric III will deposit with the
Company as a security deposit a letter of credit in an amount equal to six
months of the estimated rents payable with respect to the Master Lease. Rent
payments and the performance of Lyric III under the Master Lease and the
Facility Subtenants under the Facility Subleases will be guaranteed by Lyric
(the "Lyric Guaranty").
IHS is a NYSE listed, leading national provider of post-acute healthcare
services, operating or managing approximately 312 geriatric care facilities
across the United States. IHS will not guarantee or have any other obligation to
Monarch with respect to the payment or performance obligations of Lyric III
under the Master Lease.
The other five Initial Properties will be leased to unaffiliated parties on
a triple net basis with initial terms ranging from 11 to 12 years. The initial
base portfolio rents for these five properties equal the purchase price
multiplied by the yield on the 10-year U.S. Treasury Note at the closing of the
Offering plus 375 to 400 basis points. Each of the base rents is subject to
annual increases equal to the lesser of the increase in the CPI or 5%, subject
to a minimum annual increase of 2%.
Monarch will focus its investment efforts on the long-term care sector of
the healthcare industry. Long-term care encompasses a broad range of specialty
services for elderly and other patients with medically complex needs who do not
require acute care services but are unable to be cared for at home. Services
provided by long-term care facility operators range from meals and
transportation to assistance with activities of daily living such as eating,
dressing and medication reminders to intensive medical care. The real estate
asset types in this sector include assisted living, long-term care and subacute
care facilities and specialty hospitals. A significant portion of Monarch's
portfolio will be leased to healthcare operators who are focused on residents
needing a higher level of care.
There is a significant market for the financing of healthcare facilities.
The U.S. Census Bureau estimates that healthcare construction expenditures are
approximately $14 billion per year. A study conducted by Price Waterhouse
estimates that the gross capital size of the senior living and long-term care
market will grow from $86 billion in 1996 to $126 billion in 2005 and $490
billion in 2030. Despite the strong projected growth in demand for healthcare
facilities, the Company believes that Certificate of Need statutes and other
licensure requirements in many markets will prevent overbuilding, thereby
preserving the value of its portfolio of properties. In addition, the Company
believes that consolidation in the industry has increased the demand for
flexible financing which the Company will offer.
2
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RISK FACTORS
An investment in the shares of Common Stock involves various risks, and
prospective investors should carefully consider these and other matters
discussed under "Risk Factors" prior to making an investment in the Company.
Such risks include:
o The dependence of the Company's revenues and ability to make
distributions on Lyric III as lessee and IHS as manager of the Lyric
Properties and the lack of a guaranty from IHS of the payments due
under the Master Lease;
o Conflicts of interest between the Company, IHS and Lyric, including:
(i) the role of Robert N. Elkins, M.D. as Chairman of the Board, Chief
Executive Officer and President of IHS and Chairman of the Board of
the Company; (ii) IHS' 50% ownership interest in Lyric; (iii) the 50%
beneficial ownership of Lyric by Timothy F. Nicholson, a director of
IHS; (iv) the lack of arm's length negotiations in connection with the
acquisition of 44 of the Initial Properties from IHS and the leasing
of the 42 Lyric Properties to Lyric III; and (v) the benefits to be
derived by IHS from such transactions, resulting in the risks that the
consideration to be paid for the Initial Properties acquired from IHS,
may exceed their fair market values and that the Master Lease of the
Lyric Properties to Lyric III may not reflect market terms;
o The credit risks which may be associated with the Company's customized
investment or financing structures, including products that limit
recourse to the operator or provide funding to early stage
facility-based healthcare service providers;
o The possibility that the Company may not be able to manage effectively
its intended rapid growth, the Company's lack of operating history and
management's lack of experience in operating a REIT;
o Operating risks inherent in the highly regulated healthcare industry
which may affect the financial condition of lessees and operators;
o Limitations on stockholders' ability to change control of the Company,
including a prohibition on actual or constructive ownership by
individual stockholders in excess of 9.9% of the Company's outstanding
capital stock; and
o Taxation of the Company as a regular corporation if it fails to
qualify or maintain its qualification as a REIT.
BUSINESS AND GROWTH STRATEGIES
The Company's principal objectives are to maximize total stockholder
returns through a combination of growth in funds from operations per share and
enhancement of the value of its investment portfolio. To achieve these
objectives, Monarch intends to offer a broad mix of traditional and innovative
financing products to meet the specific needs of its primary customer segments.
The Company believes that its success in acquiring properties will be based on
management and the Chairman's network of relationships within the healthcare
industry and its ability to provide tailored financial products which meet the
needs of individual operators. Monarch intends to continue to develop strong
relationships with a number of leading or emerging healthcare providers that
will enable it to diversify its portfolio of properties and lessees and achieve
continued asset growth.
The Company's business and growth strategy is based on management's 30
years of experience in the healthcare industry as operators and acquirors of
long-term care facilities, including structuring and negotiating numerous
financial transactions on behalf of both emerging and established companies. As
operators of facilities similar to those to be acquired by Monarch, management
has recognized the significant demand for financing which provides flexibility
currently
3
<PAGE>
unavailable in the market. To respond to this underserved need for flexible
financing, the Company has developed several financing alternatives that can be
customized to meet the specific demands of individual customers.
The acquisition of the Lyric Properties from IHS and the lease of such
properties to Lyric III, with IHS providing management services, is
representative of the Company's innovative financing structures. In this type of
transaction, the Company will offer a sale and leaseback structure where the
lessee is not majority-owned by the seller/manager and the lease is not
guaranteed by the seller/manager (the "Intermediate Lessee Structure"). This
structure may allow large established operators to improve financial flexibility
and reduce leverage through the realization of substantial proceeds from the
sale of facilities and the elimination of obligations for future lease payments.
In addition, this structure enables the seller to generate revenues from the
operation of the facilities through the provision of fee-based management
services and franchising fees.
The Company has also developed a customized construction "take-out"
financing structure where the operator may be able to minimize the losses
incurred during the construction phase of new facilities. The Company's
customized construction financing structure will typically be used to "take-out"
traditional bank construction facilities for the period from certification of a
new facility through break-even occupancy of the facility. The Company believes
that this product will provide operators with enhanced financing flexibility
during the "fill-up" period of a new facility in exchange for premium yields
compared to traditional construction take-out financing.
The Company believes the Intermediate Lessee Structure and the customized
construction loan "take-out" financing structure, along with other innovative
product offerings, will enable the Company to realize premium yields on those
offerings compared to traditional product offerings and compete favorably for
investment and financing opportunities among its target operators. The Company
believes this strategy, will produce returns on its total portfolio (which will
include some traditional product offerings), that will be higher than the
portfolio returns of competing REITs.
The Company intends to manage credit risks associated with its investment
and financing activities on both a transaction-specific and on a portfolio
basis. The Company's risk management program will include:
o Utilizing underwriting criteria which emphasize the operator's
management capabilities and track record, the historical and projected
operating results and cash flows of the facility, facility appraisals,
competitive position within the market and demographics;
o Subordinating management and franchise fees to lease payments,
utilizing cross collateralization and cross default provisions,
employing master lease structures that effectively create a pledge of
all of the revenues from the facilities under the master lease to
support the master lease obligation, stock pledges, financial
covenants and regular financial reporting; and
o Diversifying the Company's asset base by operator, geographic
location, investment type and healthcare sector. In transactions where
the Company does not obtain a financial guaranty from the operator, it
will secure the lessee's obligations with the value of all of the
leased facilities, including obtaining pledges of the stock of the
lessees or other appropriate security.
4
<PAGE>
CUSTOMER SEGMENTS
The Company will target two primary customer segments which it believes
currently have significant unmet needs for flexible and innovative financing:
ESTABLISHED PUBLIC OPERATORS. Monarch believes that large established
operators of healthcare facilities, such as IHS, will be a major source of
ongoing investment opportunities. Sale and leaseback structures allow these
operators to focus on optimizing the performance of the facilities they operate
without evaluating or being subject to real estate risks. Sale and leaseback
structures can have benefits, including reduced leverage and depreciation
charges. The Company believes there is significant demand in this market for
customized lease structures, such as the Intermediate Lessee Structure, that
will justify premium yields. These products offer the operator significantly
greater financial flexibility by eliminating the operator's obligations for
future lease payments and improving operating margins. The Company will also
offer traditional sale and leaseback structures.
EMERGING OPERATORS. The Company believes that there is a substantial
opportunity to provide financing for emerging operators run by strong management
teams with extensive experience operating healthcare facilities. These operators
often have limited access to attractive capital sources despite having extensive
experience and well-developed growth strategies. Monarch intends to identify and
target quality operators with the goal of providing financing to these select
customers throughout their growth cycles. The Company also believes that this
customer segment is presently underserved by existing public healthcare REITs,
whose primary focus is to provide facility-based financing to large operators on
a secured basis utilizing the corporate guarantees of the operators.
Monarch has developed several products tailored to target the capital needs
of emerging operators that may provide long-term cost savings to the operator as
compared with venture capital or other financing alternatives. The Company's
innovative lease or financing structures for such operators may not require a
personal guaranty from the owner and may include agreements to purchase
facilities upon completion of their construction at a predetermined purchase
price and to leaseback such facilities to the operator. The Company may also
enter into agreements to provide limited short-term working capital financing
and offer financing at higher loan to value ratios than may be available from
traditional mortgage lenders. In return for this flexibility, the Company
expects to obtain higher returns through premium yields, stock warrants or other
instruments which provide the Company with an opportunity to share in the growth
of the emerging operator's enterprise value, subject to compliance with
applicable REIT rules.
GROWTH STRATEGIES
The Company believes that it can achieve its principal growth objectives
through: (i) the acquisition of high quality healthcare properties operated by
experienced management teams; (ii) the generation of internal growth in rental
and other income; and (iii) the employment of a conservative and flexible
capital structure.
INVEST IN HIGH QUALITY HEALTHCARE PROPERTIES OPERATED BY EXPERIENCED
MANAGEMENT TEAMS. Monarch's strategy is to invest in or finance quality
healthcare properties operated or managed by experienced operators in order to
achieve attractive investment returns. The Company's initial portfolio will
consist primarily of skilled nursing facilities. In addition to skilled nursing
facilities, the Company also intends to invest in other healthcare delivery
facilities across the United States. Monarch intends to offer a mix of
traditional and innovative financing products to both large established
operators and to select emerging operators. Senior management believes its
experience operating and growing start-up healthcare ventures positions it to
target and underwrite quality emerging operators who will benefit from the
Company's product offerings. Senior management's and the Chairman's extensive
network of relationships with healthcare facility operators and the Company's
ability to provide flexible financing will be instrumental in developing a
series of im-
5
<PAGE>
portant operator/lessee relationships. Finally, the Company has developed
specific investment evaluation criteria and a disciplined underwriting process
to analyze historical and projected performance of potential investments as well
as competitive positioning and market demographics.
INTERNAL GROWTH. The Company's strategy is to achieve internal growth
through increased income from: (i) increases to base rent under leases with
annual fixed rate or CPI escalators; (ii) increased interest income from
participating mortgage loans or shared appreciation mortgage loans; and (iii)
subject to applicable REIT rules, gains from stock warrants, shared appreciation
mortgages or other instruments related to the operator's enterprise value or the
underlying asset value. In addition, the Company may receive increases in rental
income payable under any leases that it may enter into in the future having a
rent component based on a percentage of facility revenues.
EMPLOY CONSERVATIVE AND FLEXIBLE CAPITAL STRUCTURE. The Company's strategy
is to employ a conservative and flexible capital structure that will allow
Monarch to pursue investment opportunities aggressively. Upon completion of the
Offering, the Company's pro forma debt to total market capitalization ratio
(i.e., total debt of the Company as a percentage of its equity market value plus
total debt) will be__%. The Company intends to maintain a debt to total market
capitalization ratio after the Offering of less than 50%. In addition, the
Company will be structured as an umbrella partnership REIT ("UPREIT") in order
to permit the use of limited partnership units in the Operating Partnership
("Units") as currency to make acquisitions of properties and to enable the
Company to offer certain tax advantages to the real estate sellers. These Units
are redeemable for cash equal to the fair market value of one share of Common
Stock, or, at the election of the Company, exchangeable for one share of Common
Stock of the Company. In this type of transaction, the seller exchanges assets
for Units and any capital gains taxes are generally deferred until the seller
redeems the Units.
6
<PAGE>
THE INITIAL PROPERTIES
The following tables set forth certain information regarding the Initial
Properties. The Initial Properties are comprised of 42 skilled nursing
facilities with 5,914 beds and five specialty hospitals with 181 beds. The
aggregate purchase price of the Initial Properties is approximately $382.4
million. The Company has a purchase option to acquire 10 additional skilled
nursing facilities from IHS for an aggregate purchase price of approximately
$104.7 million. See "Business of the Company and its Properties" for a
description of the Initial Properties and "Selected Historical and Pro Forma
Financial Information" for a quantification of the base rents for the Initial
Properties.
<TABLE>
<CAPTION>
YEAR NUMBER
BUILT/ OF 1997
PROPERTY (LOCATION) RENOVATED BEDS(1) OCCUPANCY(2)
<S> <C> <C> <C>
SKILLED NURSING FACILITIES (FORTY-TWO):
IHS HISTORICAL PROPERTIES (4)
IHS of Colorado Springs
(Colorado Springs, CO) ............................. 1986 155 73%
IHS at Brandon (Brandon, FL) ........................ 1990 120 91
IHS at Central Park Village (Orlando, FL) ........... 1984 120 89
IHS at Vero Beach (Vero Beach, FL) .................. 1981 110 91
IHS of Florida at Auburndale
(Auburndale, FL) ................................... 1972 120 90
IHS of Florida at Clearwater (Clearwater, FL) ....... 1982 150 96
IHS of Florida at Fort Pierce (Fort Pierce, FL) ..... 1981 107 95
IHS at Briarcliff Haven (Atlanta, GA) ............... 1973 128 93
IHS of Lakeland at Oakbridge (Lakeland, FL) ......... 1991 120 94
IHS of Sarasota at Beneva (Sarasota, FL) ............ 1982 120 93
IHS of Iowa at Des Moines (Des Moines, IA) .......... 1967 93 81
IHS at Brentwood (Burbank, IL) ...................... 1965 165 81
IHS of St. Louis at Big Bend Woods
(Valley Park, MO) .................................. 1940 176 94
IHS of New Hampshire at Manchester
(Manchester, NH) ................................... 1982 68 89
IHS at Whitemarsh (Whitemarsh, PA) .................. 1967 247 97
IHS of Pennsylvania at Broomall
(Broomall, PA) ..................................... 1959 306 95
IHS of Amarillo (Amarillo, TX) (5) .................. 1985 153 90
IHS of Texoma at Sherman (Sherman, TX) .............. 1981 179 86
IHS of West Palm Beach
(West Palm Beach, FL) .............................. 1993 120 97
Vintage Health Care Center (Denton, TX) ............. 1985 110 96
----- --
SUBTOTAL/ WEIGHTED AVERAGE ........................ 2,867 91
----- --
HHC PROPERTIES (6)
Horizon Healthcare & Specialty Center
(Daytona Beach, FL) ................................ 1964 113 90
Meadowview Care Center (Seville, OH) ................ 1981 100 83
Washington Square (Warren, OH) ...................... 1975 96 96
Midwest City Nursing (Midwest City, OK) ............. 1989 174 60
Lynwood Manor (Adrian, MI) .......................... 1969 99 93
Ruidoso Care Center (Ruidoso, NM) ................... 1975 85 97
Doctors Healthcare Center (Dallas, TX) .............. 1964 325 75
Harbor View Care Center
(Corpus Christi, TX) ............................... 1968 116 90
Heritage Estates (Ft. Worth, TX) .................... 1975 149 95
Heritage Gardens (Carrollton, TX) ................... 1972 152 94
Heritage Manor Longview (Longview, TX) .............. 1977 150 84
Heritage Manor Plano (Plano, TX) .................... 1976 188 88
Heritage Place of Grand Prairie
(Grand Prairie, TX) ................................ 1984 164 92
Horizon Healthcare-El Paso (El Paso, TX) ............ 1970 182 92
Longmeadow Care Center (Justin, TX) ................. 1988 120 88
Parkwood Place (Lubkin, TX) ......................... 1919/1980 157 74
Silver Springs Nursing and Rehabilitation
Center (Houston, TX) ............................... 1974 150 80
----- --
SUBTOTAL/WEIGHTED AVERAGE ......................... 2,520 85
----- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INITIAL
PURCHASE PERCENTAGE LEASE
PRICE OF INITIAL TERM
PROPERTY (LOCATION) ($ IN THOUSANDS) PROPERTIES (YEARS)(3)
<S> <C> <C> <C>
SKILLED NURSING FACILITIES (FORTY-TWO):
IHS HISTORICAL PROPERTIES (4)
IHS of Colorado Springs
(Colorado Springs, CO) ............................. $ 9,129 2.4% 9
IHS at Brandon (Brandon, FL) ........................ 9,563 2.5 10
IHS at Central Park Village (Orlando, FL) ........... 7,297 1.9 10
IHS at Vero Beach (Vero Beach, FL) .................. 7,821 2.0 10
IHS of Florida at Auburndale
(Auburndale, FL) ................................... 8,535 2.2 11
IHS of Florida at Clearwater (Clearwater, FL) ....... 11,482 3.0 10
IHS of Florida at Fort Pierce (Fort Pierce, FL) ..... 5,922 1.5 9
IHS at Briarcliff Haven (Atlanta, GA) ............... 9,944 2.6 13
IHS of Lakeland at Oakbridge (Lakeland, FL) ......... 9,843 2.6 11
IHS of Sarasota at Beneva (Sarasota, FL) ............ 8,939 2.3 13
IHS of Iowa at Des Moines (Des Moines, IA) .......... 3,787 1.0 11
IHS at Brentwood (Burbank, IL) ...................... 43,692 11.4 11
IHS of St. Louis at Big Bend Woods
(Valley Park, MO) .................................. 6,713 1.9 10
IHS of New Hampshire at Manchester
(Manchester, NH) ................................... 6,569 1.7 9
IHS at Whitemarsh (Whitemarsh, PA) .................. 21,192 5.5 12
IHS of Pennsylvania at Broomall
(Broomall, PA) ..................................... 35,923 9.4 11
IHS of Amarillo (Amarillo, TX) (5) .................. 9,720 2.5 13
IHS of Texoma at Sherman (Sherman, TX) .............. 8,358 2.2 13
IHS of West Palm Beach
(West Palm Beach, FL) .............................. 13,200 3.5 13
Vintage Health Care Center (Denton, TX) ............. 4,839 1.3 12
-------- ---- --
SUBTOTAL/ WEIGHTED AVERAGE ........................ 242,468 63.4 11.2
-------- ---- ----
HHC PROPERTIES (6)
Horizon Healthcare & Specialty Center
(Daytona Beach, FL) ................................ 4,385 1.1 9
Meadowview Care Center (Seville, OH) ................ 2,923 0.8 9
Washington Square (Warren, OH) ...................... 4,038 1.1 10
Midwest City Nursing (Midwest City, OK) ............. 3,921 1.0 11
Lynwood Manor (Adrian, MI) .......................... 6,008 1.6 12
Ruidoso Care Center (Ruidoso, NM) ................... 2,657 0.7 10
Doctors Healthcare Center (Dallas, TX) .............. 7,537 2.0 11
Harbor View Care Center
(Corpus Christi, TX) ............................... 3,963 1.0 13
Heritage Estates (Ft. Worth, TX) .................... 6,889 1.8 13
Heritage Gardens (Carrollton, TX) ................... 6,856 1.8 12
Heritage Manor Longview (Longview, TX) .............. 8,315 2.2 10
Heritage Manor Plano (Plano, TX) .................... 12,676 3.3 9
Heritage Place of Grand Prairie
(Grand Prairie, TX) ................................ 5,107 1.3 12
Horizon Healthcare-El Paso (El Paso, TX) ............ 3,055 0.8 12
Longmeadow Care Center (Justin, TX) ................. 2,677 0.7 13
Parkwood Place (Lubkin, TX) ......................... 3,519 0.9 12
Silver Springs Nursing and Rehabilitation
Center (Houston, TX) ............................... 7,451 1.9 13
-------- ---- ----
SUBTOTAL/WEIGHTED AVERAGE ......................... 91,977 24.0 11.1
-------- ---- ----
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
INITIAL
YEAR NUMBER PURCHASE PERCENTAGE LEASE
BUILT/ OF 1997 PRICE OF INITIAL TERM
PROPERTY (LOCATION) RENOVATED BEDS(1) OCCUPANCY(2) ($ IN THOUSANDS) PROPERTIES (YEARS)(3)
<S> <C> <C> <C> <C> <C> <C>
PEAK MEDICAL PROPERTIES (7)
Idaho Falls Care Center (Idaho Falls, ID) ..... 1990 108 93% $ 6,500 1.7% 12
Twin Falls Care Center (Twin Falls, ID) ....... 1989 116 77 4,800 1.3 12
-- -------- ---- --
SUBTOTAL/WEIGHTED AVERAGE ................... 224 85 11,300 3.0 12
--- -- -------- ---- --
TRANS HEALTH PROPERTIES (8)
Fulton County Nursing and Rehab Center
(Salon, AR) .................................. 1962/1991 125 93 3,343 0.9 11
Lakeland Lodge Nursing Center
(Heber Springs, AR) .......................... 1962 102 93 2,957 0.8 11
Pioneer Nursing and Rehab Center
(Melbourne, AR) .............................. 1996 76 93 5,175 1.3 11
-- -------- ---- --
SUBTOTAL/WEIGHTED AVERAGE ................... 303 93 11,475 3.0 11
--- -- -------- ---- --
TOTAL/WEIGHTED AVERAGE SKILLED NURSING
FACILITIES ................................. 5,914 88 357,220 93.4 11.2
----- -- -------- ---- ----
SPECIALITY HOSPITALS (FIVE):
IHS HISTORICAL PROPERTIES (4)
IHS Hospital at Houston (Houston, TX) ......... 1963 59 77 19,679 5.1 9
-- -------- ---- ----
HHC PROPERTIES (6)
HSH-Midwest City (Midwest City, OK) ........... 1989 30 47 354 0.1 11
HSH-El Paso (El Paso, TX) ..................... 1970 31 81 1,227 0.3 12
HSH-Plano (Plano Specialty Hospital)
(Plano, TX) .................................. 1976 30 40 2,255 0.6 9
HSH-Corpus Christi (Corpus Christi, TX) ....... 1968 31 57 1,704 0.5 13
-- -------- ---- ----
SUBTOTAL/WEIGHTED AVERAGE ................... 122 57 5,540 1.5 11.0
----- -- -------- ---- ----
TOTAL/WEIGHTED AVERAGE SPECIALTY
HOSPITALS ................................. 181 63.2 25,218 6.6 9.4
----- ---- -------- ---- ----
TOTAL INITIAL PROPERTIES ................... 6,095 87.5% $382,439 100% 11.1
===== ==== ======== ==== ====
</TABLE>
- -----------
(1) Based on the number of private and semi-private beds currently available.
(2) Based on weighted average occupancy for the 12 months ended December 31,
1997.
(3) Represents the initial lease term under each of the leases for these
facilities, which leases will be entered into as of the closing of the
Offering and excludes all renewal options.
(4) "IHS Historical Properties" means the Initial Properties which have been
owned and managed by IHS for more than one year. All of the IHS Historical
Properties will be leased to Lyric III, pursuant to the Master Lease, and
subleased to wholly owned subsidiaries of Lyric III.
(5) Facility also includes a specialty hospital consisting of 33 beds.
(6) "HHC Properties" means the Initial Properties which were owned and managed
by Horizon/CMS Healthcare Corporation ("HHC") prior to December 31, 1997
and were acquired by IHS effective December 31, 1997, and will be leased to
Lyric III, pursuant to the Master Lease and subleased to wholly owned
subsidiaries of Lyric III.
(7) "Peak Medical Properties" means the Initial Properties which were owned and
managed by HHC prior to December 31, 1997, and were acquired by IHS
effective December 31, 1997, and will be leased to and managed by Peak
Medical of Idaho, Inc. ("Peak Medical Tenant"), a wholly owned subsidiary
of Peak Medical Corporation ("Peak Medical").
(8) "Trans Health Properties" means the Initial Properties to be acquired from
an unaffiliated third party. The Trans Health Properties will be leased to
a subsidiary of Trans Healthcare, Inc. ("Trans Health").
8
<PAGE>
COMPANY STRUCTURE
The Company will be structured as an UPREIT, which means that at the
completion of the Offering, substantially all of the Company's assets will be
owned by, and its operations conducted through, the Operating Partnership. The
Company will contribute the net proceeds of the Offering to the Operating
Partnership in exchange for a number of Units equal to the number of shares of
Common Stock sold by the Company in the Offering. Following the Offering, the
Operating Partnership may issue Units to third parties who will contribute
properties in exchange for Units. Pursuant to the Operating Partnership
Agreement, the General Partner will have full, exclusive and complete
responsibility and discretion in the management, operation and control of the
Operating Partnership, including the ability to cause the Operating Partnership
to enter into certain major transactions, including acquisitions, developments,
and dispositions of properties and refinancings of existing and future
indebtedness. The Company will manage the business and affairs of the Operating
Partnership through its control of the board of directors of the General
Partner, which will be comprised of the same members as the board of directors
of the Company. Because of limitations imposed by the rules applicable to REITs,
the Company is not permitted to operate its own facilities. The Company's
activities will consist of monitoring its investments, developing investment and
lending opportunities, performing underwriting, analysis, negotiating and
closing activities with respect to future investment or financing transactions
and performing administrative functions.
FORMATION TRANSACTIONS. The formation transactions (the "Formation
Transactions") include the following transactions which have occurred or will
occur prior to or concurrent with the consummation of the Offering:
o The Company was incorporated in Maryland in February 1998 at which
time the Company issued 100 shares to Dr. Robert N. Elkins which was
all of the outstanding shares of Common Stock. The Operating
Partnership was formed as a Delaware limited partnership in April 1998
as a wholly owned subsidiary of the Company, with MP Operating as the
general partner and MP LP as the limited partner. Lyric was previously
formed in May 1997 as a Delaware limited liability company.
o The Company has received a non-binding proposal for and anticipates
entering into a three-year unsecured credit facility of up to $150
million from SouthTrust Bank, National Association, as agent for a
group of lenders (the "Credit Facility"). The Credit Facility will be
used to: (i) finance a portion of the purchase price and acquisition
costs of the Initial Properties; (ii) facilitate future acquisitions
or financings; and (iii) for working capital and other general
corporate purposes. No assurance can be given that the Company will
enter into the Credit Facility.
o The Company will acquire the Lyric Properties from IHS for
approximately $359.7 million. The Company will lease all of the Lyric
Properties to Lyric III pursuant to the Master Lease. Lyric III will
sublease the Lyric Properties to the Facility Subtenants pursuant to
the individual Facility Subleases. Rent payments and the performance
of Lyric III under the Master Lease and the Facility Subtenants under
the Facility Subleases will be guaranteed by Lyric. IHS will manage
all of the Lyric Properties under a management agreement with Lyric.
See "Risk Factors -- Dependence on Lyric III, Lyric and IHS for the
Company's Revenues and Ability to Make Distributions," "-- Risks
Associated with Owning Healthcare Facilities in the Highly Regulated
Healthcare Industry" and "Business of the Company and its Properties."
o The Company will acquire the Peak Medical Properties from IHS for
approximately $11.3 million, subject to existing leases at each
facility with the Peak Medical Tenant. The leases are substantially
similar to the Master Lease and are cross defaulted. Peak Medical will
guaranty the payment and performance of the Peak Medical Tenant under
the leases.
9
<PAGE>
o The Company will acquire the Trans Health Properties from an
unaffiliated third party for approximately $11.5 million and lease the
Trans Health Properties to wholly owned subsidiaries of Trans Health
under a master lease substantially similar to the Master Lease. Trans
Health will guaranty the payment and performance of all obligations
under the master lease for the Trans Health Properties.
o As the sole stockholder of the General Partner and the Limited
Partner, the Company will initially indirectly own 100% of the
ownership interests in the Operating Partnership and the Operating
Partnership will own the Initial Properties. Following the Offering,
the Operating Partnership may issue Units to third parties who will
contribute properties in exchange for Units.
o The Company and IHS will enter into a purchase option agreement
pursuant to which the Company will be granted options to purchase up
to 10 skilled nursing facilities (the "Option Properties") currently
owned or leased (with a purchase option) by IHS for a total purchase
price of approximately $104.7 million (the "Purchase Option
Agreement"). The Purchase Option Agreement will have an initial term
of two years, with the Company granted three successive renewal
options of one year each. It is currently anticipated that all
facilities acquired by the Company under the Purchase Option Agreement
will be leased to Lyric III and its consolidated subsidiaries and
managed by a subsidiary of IHS. See "Business of the Company and its
Properties" and "Risk Factors - Conflicts of Interest."
o In addition to the Purchase Option Agreement, the Company and IHS will
enter into a right of first offer agreement for a period of four years
from the closing of the Offering (subject to annual renewals
thereafter), pursuant to which IHS must offer the Company the
opportunity to purchase or finance any healthcare facilities IHS
acquires or develops and elects to sell and leaseback or finance in a
transaction of the type normally engaged in by the Company (the "Right
of First Offer Agreement"). The Company will be offered the
opportunity to acquire or finance the IHS facility on terms and
conditions that, should the Company decline to pursue the proposed
transaction, must be offered to any other third parties by IHS. If IHS
is only able to sell and leaseback or finance the IHS facility on
better terms with a third party than previously offered to the
Company, then the Company must again be offered those new terms and
conditions for consideration prior to IHS finalizing a transaction
with the third party. See "Risk Factors - Conflicts of Interest" and
"Business of the Company and its Properties -- Right of First Offer
Agreement."
o Following the completion of the Offering and the purchase of the
Initial Properties, the Company will have approximately $ million
available under the Credit Facility for general corporate purposes,
including acquisitions of additional properties.
o Upon completion of the Offering, the purchasers of the shares of
Common Stock sold in the Offering will own __% of the issued and
outstanding shares of Common Stock (excluding shares purchased in the
Concurrent Offering), or __% assuming the exercise of all outstanding
stock options granted pursuant to the 1998 Omnibus Securities and
Incentive Plan.
10
<PAGE>
The following diagram depicts the beneficial ownership of the Company and
the Initial Properties following the completion of the Offering:
[GRAPHIC OMITTED]
- -----------
(1) Assumes ____ shares of Common Stock are purchased by directors and
executive officers in the Concurrent Offering. Excludes shares of Common
Stock issuable pursuant to stock options to be granted prior to or
contemporaneously with the Offering. If all such options were exercised as
of the date of the Offering, the Company's executive officers and directors
would own ____% of the Common Stock and the public stockholders would own
____% of the Common Stock.
(2) 100% of the economic interest in all of the Properties will be owned
through the Operating Partnership.
11
<PAGE>
LYRIC STRUCTURE. Lyric was formed in May 1997 as a Delaware limited
liability company and is presently owned 50% by IHS and 50% by TFN Healthcare
Investors, LLC ("TFN"), a Delaware limited liability company, which is 100%
beneficially owned by Timothy F. Nicholson, a director of IHS. Through other of
its consolidated subsidiaries, Lyric currently leases 10 healthcare facilities
from an unaffiliated publicly traded healthcare REIT. After the sale of the
Lyric Properties, IHS will contribute the shares of stock in Lyric III to Lyric
and the shares of stock in the Facility Subtenants to Lyric III. Thereafter,
Lyric will own 100% of the stock of Lyric III and Lyric III will own 100% of the
stock of each of the Facility Subtenants. IHS will manage all of the Lyric
Properties.
[GRAPHIC OMITTED]
- -----------
(1) The properties are leased pursuant to a master lease and subleased to
wholly owned subsidiaries.
12
<PAGE>
TRANSACTIONS WITH AND BENEFITS TO RELATED PARTIES
In connection with the Formation Transactions and the Offering, the Company
will enter into transactions with Dr. Elkins, IHS and Lyric, which transactions
may benefit Dr. Elkins, IHS and Lyric or result in conflicts of interest between
the Company and Dr. Elkins, IHS or Lyric, including the following:
o Dr. Elkins will simultaneously serve as Chairman of the Board of
Directors of the Company and Chairman of the Board of Directors, Chief
Executive Officer and President of IHS. See "Management" and
"Transactions With and Benefits to Related Parties."
o IHS and TFN will each beneficially own 50% of Lyric. Timothy F.
Nicholson, a director of IHS, beneficially owns 100% of TFN.
o The Company will: (i) grant to Dr. Elkins options to purchase 315,681
shares of Common Stock; (ii) grant to its executive officers and
certain other employees options to purchase an aggregate of 112,361
shares of Common Stock; and (iii) grant to each of the four
non-employee director nominees, at the time they become directors,
options to purchase 21,402 shares of Common Stock, all under the
Company's 1998 Omnibus Securities and Incentive Plan. All such options
will have an exercise price of $.001 per share and will be exercisable
immediately. See "Management -- 1998 Omnibus Securities and Incentive
Plan."
o Dr. Elkins, the executive officers and certain employees of the
Company and certain officers of IHS will purchase Common Stock in the
Concurrent Offering representing up to __% of the outstanding Common
Stock.
o The Company will pay to IHS approximately $371.0 million as the
purchase price for the Lyric Properties and the Peak Medical
Properties, plus approximately $__ million as repayment of advances
made by IHS to the Company in connection with the Formation
Transactions and the Company's operations prior to the Offering.
Following the Offering, the Company will be prohibited by the terms of its
Bylaws from acquiring additional properties from, or providing financing on
properties involving, IHS or the Company's directors and officers or affiliates
thereof without the approval of a majority of the Company's disinterested
directors, including any properties to be acquired pursuant to the Right of
First Offer Agreement, and any properties to be acquired pursuant to the
Purchase Option Agreement.
THE OFFERING
All of the shares of Common Stock offered hereby are being offered by the
Company.
COMMON STOCK OFFERED(1)... _______________ shares
COMMON STOCK OUTSTANDING
AFTER THE OFFERING(2)... ________________ shares
USE OF PROCEEDS.......... The net proceeds of the Offering will be used by the
Company to acquire the Initial Properties, to pay
formation expenses and for general corporate
purposes. See "Use of Proceeds" and "Structure and
Formation of the Company."
PROPOSED NYSE SYMBOL..... "MPZ"
- -----------
(1) Excludes 800,000 shares of Common Stock to be sold to certain directors,
executive officers and employees of the Company and certain officers of IHS
in the Concurrent Offering.
(2) Includes: (i) the 800,000 shares to be sold in the Concurrent Offering; and
(ii) 513,650 shares of Common Stock issuable pursuant to stock options that
will be exercisable immediately at a price per share of $.001.
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DISTRIBUTIONS
The Company intends to make regular quarterly distributions to holders of
its Common Stock. The initial distribution, covering a partial quarter
commencing on the date of the closing of the Offering and ending on June 30,
1998, is expected to be $___ per share, which represents a pro rata distribution
based upon a full quarterly distribution of $___ per share and an annual
distribution of $____ per share (or an annual distribution rate of approximately
__% based on the initial public offering price). See "Distributions."
The Company intends initially to distribute annually approximately __% of
estimated cash available for distribution. The Company's estimate of cash
available for distribution ("Cash Available for Distribution") for the twelve
months following the closing of the Offering is based upon pro forma funds from
operations ("Funds from Operations") for the 12 months ended December 31, 1997,
with certain adjustments as described in "Distributions." The Company
anticipates that approximately __% (or $____ per share) of the distributions
intended to be paid by the Company for the 12-month period following the
completion of Offering will represent a return of capital for Federal income tax
purposes and in such event will not be subject to Federal income tax under
current law to the extent such distributions do not exceed a stockholder's basis
in the Common Stock. The Company intends to maintain its initial distribution
rate for the 12-month period following the completion of the Offering unless
actual results of operations, economic conditions or other factors differ
materially from the assumptions used in its estimate. Distributions by the
Company will be determined by the Board of Directors and will be dependent upon
a number of factors, including revenue received from the Company's properties,
the operating expenses of the Company, interest expense, the ability of tenants
at the Company's properties to meet their financial obligations and
unanticipated capital expenditures. The Company believes that its estimate of
Cash Available for Distribution is reasonable; however, no assurance can be
given that the estimate will prove accurate, and actual distributions may
therefore be significantly different from expected distributions. The Company
does not intend to reduce the expected distribution per share if the
Underwriters' overallotment option is exercised. See "Distributions."
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ending December 31, 1998, and believes its
organization and proposed method of operation will enable it to meet the
requirements for qualification as a REIT. To maintain REIT status, an entity
must meet a number of organizational and operational requirements. In order to
maintain its qualification as a REIT under the Code, the Company generally will
be required each year to distribute at least 95% of its net taxable income. As a
REIT, the Company generally will not be subject to federal income tax on net
income it distributes currently to its stockholders. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates. Even if the Company qualifies for taxation as a
REIT, the Company will be subject to certain federal, state and local taxes on
its income and property. See "Risk Factors -- Failure to Qualify as a REIT Would
Cause the Company to be Taxed as a Corporation" and "Federal Income Tax
Considerations -- Failure of the Company to Qualify as a REIT."
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth financial information for the Company which
is derived from the Balance Sheet and Pro Forma Balance Sheet and Statement of
Operations included elsewhere in this Prospectus. The adjustments for the
Offering assume an initial public offering price of $___ per share of Common
Stock and that the Underwriters' overallotment option is not exercised.
Pro forma operating data are presented for the year ended December 31, 1997
as if the Offering, the acquisitions of the Initial Properties and the Formation
Transactions had occurred, and as if the respective leases were in effect, on
January 1, 1997. The pro forma balance sheet is presented as of December 31,
1997 as if the Offering and the acquisitions of the Initial Properties and
related transactions had occurred on December 31, 1997.
<TABLE>
<CAPTION>
PRO FORMA AT OR FOR
THE YEAR ENDED
HISTORICAL(1) DECEMBER 31, 1997
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
PRO FORMA OPERATING DATA:
Revenues ....................................... $ -- $ 38,820
Net income ..................................... -- 21,704
Earnings per share, diluted .................... $ -- $ 1.22
PRO FORMA BALANCE SHEET DATA:
Properties ..................................... -- 382,439
Other assets ................................... -- 528
Total assets ................................... -- 382,967
Credit Facility ................................ -- 63,041
Other liabilities .............................. -- 2,026
Total stockholders' equity ..................... -- 317,900
OTHER DATA:
Funds from Operations (2) ...................... -- 32,553
Weighted average number of shares of
common stock outstanding - diluted(3) ......... -- 17,813,650
</TABLE>
- -----------
(1) The Company was formed on February 20, 1998 and was capitalized with the
issuance of 100 shares of Common Stock for an aggregate purchase price of
$100.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT, in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and after adjustments for unconsolidated partnerships and
joint ventures. The White Paper also provides for other adjustments to net
income in deriving Funds from Operations, including adjustments for
extraordinary, unusual, or non-recurring items. For a more detailed
description of the definition of Funds from Operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Includes shares of Common Stock issuable upon exercise of stock options to
be granted contemporaneously with the Offering.
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RISK FACTORS
An investment in the shares of Common Stock involves various risks.
Prospective investors should carefully consider the following information before
making a decision to purchase Common Stock in the Offering. See "Forward-Looking
Statements."
DEPENDENCE ON LYRIC III, LYRIC AND IHS FOR THE COMPANY'S REVENUES AND ABILITY TO
MAKE DISTRIBUTIONS
Lyric III will be the lessee of 42 of the Initial Properties, which account
for 94% of the aggregate purchase price of the Initial Properties, and if
acquired, all of the Option Properties. The Company's revenues and ability to
make expected distributions to stockholders, therefore, will depend in
significant part upon rental payments received from Lyric III under the Master
Lease and, in the event of a default by Lyric III, from Lyric pursuant to its
guaranty of Lyric III's obligations under the Master Lease. Lyric III's ability
to make rental payments depends on the revenues derived from IHS' successful
management of the facilities leased by Lyric III. IHS has not guaranteed Lyric
III's obligations under the Master Lease. Accordingly, there can be no assurance
that Lyric III will be able to meet its obligations under the Master Lease in
the event that IHS fails to successfully manage the Lyric Properties.
Due to the Company's initial dependence on Lyric III's rental payments as
the principal source of the Company's revenues, the Company may be limited in
its ability to fully enforce its rights under the Master Lease or to terminate
the Master Lease. Failure by Lyric III to materially comply with the terms of
the Master Lease could require the Company to identify another lessee to which
to lease such properties since, as a REIT, the Company is generally precluded
from operating its properties. In the event of a default by Lyric III, Lyric or
any Facility Subtenants, the Company could be materially and adversely affected
by a decrease or cessation of rental payments under the Master Lease.
Additionally, there can be no assurance that Lyric III will elect to renew the
Master Lease upon the expiration of its initial term, which would also force the
Company to identify a suitable replacement lessee. In either circumstance, due
to the nature of the facility based healthcare service industry, the Company may
be unable to identify a suitable lessee or to attract such a lessee, and may,
therefore, be required to reduce the rent, which would have the effect of
reducing the Company's Cash Available for Distribution. See "Key Agreements --
Master Lease" and "Risk Factors -- Conflicts of Interest."
CONFLICTS OF INTEREST
Several conflicts of interest exist between the Company and its directors
and officers, IHS and its directors and officers and Lyric and its directors and
officers. The following description sets forth the principal conflicts of
interest and the relationships through which they arise.
AFFILIATED DIRECTORS. Dr. Elkins, the Company's Chairman of the Board, is
Chairman of the Board, Chief Executive Officer and President of IHS and will
continue to serve in such capacity following completion of the Offering. In
addition, each of the Company's executive officers was formerly associated with
IHS, including John B. Poole, President and Chief Executive Officer and a
director of the Company, who previously served as Executive Vice President and
Special Assistant to the Chief Executive Officer of IHS. Lyric is owned 50% by
IHS and 50% by TFN, which is 100% beneficially owned by Timothy F. Nicholson, a
member of IHS' Board of Directors. At March 1, 1998, Dr. Elkins beneficially
owned approximately 7.6% of the outstanding common stock of IHS and, upon
consummation of the Offering, he will beneficially own __% of the outstanding
Common Stock of the Company. Because he serves as Chairman of the Boards of both
IHS and the Company, Dr. Elkins will have a conflict of interest with respect to
his obligations as a director of the Company with respect to enforcing: (i) the
terms of the Facilities Purchase Agreement, the Purchase Option Agreement and
the Right of First Offer Agreement (collectively, the "IHS Agreements") as they
relate to the various IHS properties being acquired by the Company or that may
be acquired or financed by the Company in the future; (ii) the Master Lease to
be entered into by the Company and Lyric III; and (iii) the Lyric Guaranty from
Lyric to the Company. The failure to enforce material terms of the IHS
Agreements, the Master Lease and the Lyric Guaranty could result in a monetary
loss to the Company, which loss could have a
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<PAGE>
material adverse effect on the Company's financial condition and results of
operations. The Company's ongoing dependence on IHS as the manager of a
substantial portion of the Initial Properties may deter the Company from
vigorously enforcing the terms of the IHS Agreements, the Master Lease and the
Lyric Guaranty.
PURCHASE PRICE OF INITIAL PROPERTIES. The purchase price to be paid to IHS
by the Company for the Initial Properties was not determined as a result of
arm's length negotiations. The purchase price was determined on the basis of
negotiations between the Company and IHS based on a variety of factors,
including, but not limited to, independent appraisals, comparable transactions,
historical and projected operating results and industry cash flow coverage
ratios. Although it is intended that the Company pay fair market value for the
Initial Properties, there can be no assurance that the appraisers have
accurately determined the fair market value of the Initial Properties. IHS will
receive substantial economic benefits as a result of consummation of the
Formation Transactions and the Offering. Accordingly, there can be no assurance
that the consideration to be paid by the Company for the Initial Properties
represents the fair market value thereof. See "Transactions with and Benefits to
Related Parties" and "Valuation of Initial Properties."
TERMS OF THE MASTER LEASE. Lyric will receive substantial economic benefits
as a result of entering the Master Lease. The terms and conditions of the Master
Lease to be entered into by the Operating Partnership and Lyric III were
determined by negotiations between the Company and Lyric and were not negotiated
on an arm's length basis. The rental rate under the Master Lease was based on an
agreed upon yield intended to be competitive in the marketplace. No independent
valuation or assessment of the terms and conditions of the Master Lease was
obtained by the Company. Accordingly, there can be no assurance that the Master
Lease reflects market terms. See "Transactions with and Benefits to Related
Parties."
COMPETITION FROM IHS. The Company will experience ongoing competition from
and conflicts with IHS. The Company's healthcare facilities (whether or not
managed by IHS) may compete with healthcare facilities owned, leased or managed
by IHS in certain markets. As a result, IHS will have a conflict of interest due
to the operation of certain competing healthcare facilities and its management
of a substantial portion of the facilities owned by the Company.
EXECUTIVE OFFICERS OF THE COMPANY WILL HAVE SUBSTANTIAL INFLUENCE. Certain
of the executive officers of the Company are purchasing shares of Common Stock
in the Concurrent Offering and will be granted stock options which will be
exercisable at the time of the Offering. Upon completion of the Offering , Dr.
Elkins, the executive officers and certain employees of the Company will own
approximately % of the total issued and outstanding shares of Common Stock
(inlcuding shares issuable pursuant to exercisable stock options). Accordingly,
such persons will have substantial influence on the Company, which influence may
not be consistent with the interests of other stockholders. See "Principal
Stockholders."
LACK OF OPERATING HISTORY AND INEXPERIENCE OF MANAGEMENT IN OPERATING A REIT
COULD AFFECT REIT QUALIFICATION
The Company has been recently organized and has no operating history. The
Company will be self-administered and self-managed and expects to qualify as a
REIT for Federal income tax purposes. The Company's Board of Directors and
executive officers will have overall responsibility for management of the
Company. Although certain of the Company's executive officers and directors have
extensive experience in the acquisition, development and financing of real
properties and in the operation of healthcare facilities and publicly owned
corporations, none of the management of the Company has prior experience in
operating a business in accordance with the Code requirements for maintaining
REIT qualification. Failure to maintain REIT status would have an adverse effect
on the Company's ability to make anticipated distributions to stockholders.
There can be no assurance that the past experience of management will be
appropriate to the business of the Company. See "Management."
NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO EFFECTIVELY MANAGE ITS INTENDED
RAPID GROWTH
The Company intends to grow rapidly. The Company's ability to manage its
growth effectively will require it successfully to identify, structure and
manage new investments. Other than the Initial Properties (which will be
purchased using the net proceeds from the Offering concurrently with or within a
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<PAGE>
short time following the closing of the Offering), the Company has not completed
any acquisitions or dispositions. Although the Company has options to purchase
the Option Properties, there can be no assurances that the Company will be
successful in consummating the acquisition of any such properties. Furthermore,
there can be no assurances that additional acquisition and development
opportunities on terms that meet the Company's investment criteria will be
available to the Company or that the Company will be successful in capitalizing
on such opportunities.
FAILURE TO QUALIFY AS A REIT WOULD CAUSE THE COMPANY TO BE TAXED AS A
CORPORATION
The Company will be treated as a corporation if it fails to qualify as a
REIT. The Company intends to operate so as to qualify as a REIT under the Code,
commencing with its taxable year ending December 31, 1998. Although management
believes that the Company will be organized and will operate in such a manner,
no assurance can be given that the Company will be organized or will be able to
operate in a manner so as to qualify or remain so qualified. Qualification as a
REIT involves the satisfaction of numerous requirements (some on an annual and
some on a quarterly basis) established under highly technical and complex Code
provisions for which there are only limited judicial and administrative
interpretations, and involves the determination of various factual matters and
circumstances not entirely within the Company's control. For example, in order
to qualify as a REIT, at least 95% of the Company's gross income in any year
must be derived from qualifying sources, and the Company must pay distributions
to stockholders aggregating annually at least 95% of its REIT taxable income
(excluding capital gains and certain non-cash income). The complexity of these
provisions and of the applicable Treasury regulations that have been promulgated
under the Code (the "Treasury Regulations") is greater in the case of a REIT,
such as the Company, that holds its assets in limited liability company form. No
assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification.
LeBoeuf, Lamb, Greene & MacRae, L.L.P., tax counsel to the Company, has
rendered an opinion to the effect that the Company is organized in conformity
with the requirements for qualification as a REIT and its proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT. Such legal opinion, however, is based on various assumptions and
factual representations by the Company regarding the Company's business and
assets and the Company's ability to meet the various requirements for
qualification as a REIT, and no assurance can be given that actual operating
results will meet these requirements. Such legal opinion is not binding on the
Internal Revenue Service (the "IRS") or any court. Moreover, the Company's
qualification and taxation as a REIT will depend 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, the
results of which will not be reviewed by tax counsel to the Company. See
"Federal Income Tax Considerations -- Taxation of the Company."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to Federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. This treatment
would significantly reduce the net earnings of the Company available for
investment or distribution to stockholders because of the additional tax
liability to the Company for the years involved. In addition, distributions to
stockholders would no longer be required to be made. See "Federal Income Tax
Considerations -- Failure of the Company to Qualify as a REIT."
Certain special considerations will apply due to the nature of the
Company's assets. The manner in which the Company will derive income from the
skilled nursing facilities and other healthcare facilities will be governed by
special considerations in satisfying the requirements for REIT qualification.
Because the Company would not qualify as a REIT if it directly operated a
skilled nursing facility or other healthcare facility, the Company will lease
such facilities to a healthcare provider, such as the subsidiaries of Lyric,
that will operate the facilities. It is essential to the Company's qualification
as a REIT that
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<PAGE>
these arrangements be respected as leases for Federal income tax purposes and
that the lessees (including the subsidiaries of Lyric and IHS) not be regarded
as "related parties" of the Company (as determined under the applicable Code
provisions). In the event the leases expire and are not renewed, the Company
will have to find a new "unrelated" lessee to lease and operate the properties
in order to continue to qualify as a REIT. In the event of a default on either a
lease of, or a mortgage secured by, a skilled nursing facility or other
healthcare facility, the Company, to maintain its REIT qualification, would have
to engage a new healthcare provider (which could not include Lyric or its
subsidiaries or IHS) to operate the facility after the Company takes possession
of the facility. This requirement could deter the Company from exercising its
remedies in the event of a default even though such exercise otherwise would be
in the Company's best interests. Although the Company would be permitted to
operate the facility for 90 days after taking possession of the facility
pursuant to applicable Treasury Regulations without jeopardizing its REIT
status, the fact that the facility licenses will be held by lessees or borrowers
may preclude the Company from doing so under applicable healthcare regulatory
requirements. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Income Tests."
Other tax liabilities could adversely affect the Company's cash flows. Even
if the Company qualifies as a REIT, it will be subject to certain federal, state
and local taxes on its income and property. See "Federal Income Tax
Considerations -- Other Tax Consequences for the Company and its Stockholders."
RISKS ASSOCIATED WITH OWNING HEALTHCARE FACILITIES IN THE HIGHLY REGULATED
HEALTHCARE INDUSTRY
Any failure by the Company's lessees or borrowers to comply with applicable
government regulations in the highly regulated healthcare industry could
adversely affect their ability to make lease or loan payments to the Company.
The long-term care segment of the healthcare industry is highly regulated.
Operators of skilled nursing facilities and other healthcare facilities are
subject to federal, state and local laws relating to the delivery and adequacy
of medical and nursing care, nutrition, condition of the physical facility,
residents' rights, distribution of pharmaceuticals, personnel, operating
policies, fire prevention, rate-setting and compliance with building and safety
codes and environmental laws. The failure to obtain or maintain any required
regulatory approvals or licenses or the failure to comply with various licensure
standards and Medicare and Medicaid conditions of participation could prevent an
operator from offering services or adversely affect its ability to receive
reimbursement for services and could result in the denial of reimbursement,
suspension of admission of new patients, suspension or decertification from the
Medicaid or Medicare programs, restrictions on the ability to acquire new
facilities or expand existing facilities and, in extreme cases, revocation of
the facility's license or closure of the facility. Separate civil law claims
brought by the states against skilled nursing facilities for alleged threats to
skilled nursing facility residents' health and safety, alleged abuse or neglect,
or consumer-type actions for alleged violations of regulatory standards
interpreted to be deceptive trade practices could also result in fines or damage
awards against any lessee. There can be no assurance that lessees of healthcare
facilities owned by the Company, or the provision of services and supplies by
such lessees, will meet or continue to meet the requirements for participation
in the Medicaid or Medicare programs or the requirements of state licensing
authorities or that regulatory authorities will not adopt changes, new laws or
new interpretations of existing regulations that would adversely affect the
ability of lessees or borrowers to make rental or loan payments to the Company.
Risks exist relating to the reliance on government and other third party
reimbursement by operators of skilled nursing facilities. A significant portion
of the revenue derived from the 42 skilled nursing facilities included in the
Initial Properties is attributable to government reimbursement programs such as
Medicare and Medicaid. The Medicaid program is a federally-mandated, state-run
program providing benefits to low income and other eligible persons and is
funded through a combination of state and federal funding. The method of
reimbursement for skilled nursing care under Medicaid varies from state to
state, but is typically based on rates set by the state. Under Medicare and many
state Medicaid programs, rates for skilled nursing facilities are based on
facilities' costs as reported to the applicable federal or state agency.
However, there is a trend toward converting such reimbursement systems to a
prospective rate system, as will be phased in for Medicare over four years
beginning July 1, 1998. The
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facilities' costs for services purchased from an organization related by
ownership or control are limited to the costs (not charges) of the related
organization. Any failure to comply with these requirements could have a variety
of adverse consequences on the operator of the skilled nursing facility,
including recoupment of amounts overpaid and other sanctions under false claim
laws. Future budget reductions in government-financed programs could
significantly reduce reimbursement payments, and there can be no assurance that
future payment rates will be sufficient to cover the costs of providing services
to residents of such facilities. The Medicare and Medicaid programs are highly
regulated and subject to frequent and substantial changes. In recent years,
changes in the Medicare and Medicaid programs have resulted in reduced levels of
payment for a substantial portion of healthcare services. Although lease and
loan payments to the Company are not directly linked to the level of government
and private reimbursement, to the extent that changes in these programs have a
material adverse effect on the revenues from such facilities, such changes could
have a material adverse impact on the ability of lessees and mortgagors to make
lease and loan payments. Healthcare facilities also have experienced increasing
pressures from private payors attempting to control healthcare costs that in
some instances have reduced reimbursement to levels approaching that of
government payors. There can be no assurance that future actions by private
third party payors, including cost control measures adopted by managed care
organizations, will not result in further reductions in reimbursement levels, or
that future reimbursements from any payor will be sufficient to cover the costs
of the facilities' operations. There can be no assurance that reimbursement
levels will not be further reduced in future periods. See "Business of the
Company and its Properties -- Government Regulation."
Healthcare operators also are subject to federal and state
anti-remuneration laws and regulations, such as the federal Medicare/Medicaid
anti-kickback law (the "Anti-Kick Back Law") and the "Stark Law" which govern
certain financial arrangements among healthcare providers and others who may be
in a position to refer or recommend patients to such providers. The
Anti-Kickback Law prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients or the purchasing, leasing, ordering or
arranging for any goods, facilities, services or items for which payment can be
made under Medicare or Medicaid. A violation of the federal Anti-Kickback Law
could result in the loss of eligibility to participate in Medicare or Medicaid,
or in civil or criminal penalties. The Stark Law restricts a physician from
making a referral of a Medicare or Medicaid patient to any entity with which
such physician (or an immediate family member) has a financial relationship for
certain designated health services. Any entity which accepts a referral
prohibited by the Stark Law may not bill for the service provided pursuant to
such prohibited referral. A violation of the Stark Law could result in civil
monetary penalties and exclusion from Medicare and Medicaid. The Federal False
Claims Act (the "False Claims Act") has been used widely by the federal
government to prosecute Medicare fraud in in areas such as coding errors,
billing for services not rendered, submitting false cost reports, or billing for
care which is not medically necessary. In addition, many states have passed laws
similar to the Anti-Kickback Law and the Stark Law, and such state laws may
apply regardless of the source of payment for the healthcare services. The
federal Health Insurance Portability Act and Accountability Act of 1996
("HIPAA"), among other things, amends existing crimes and criminal penalties for
Medicare fraud, creates new federal healthcare fraud crimes, expands the
Anti-Kickback Law to apply to all federal healthcare programs, and prohibits any
person or entity from knowingly and willfully committing a federal healthcare
offense relating to a healthcare benefit program. Penalties for violation of
HIPAA include civil and criminal sanctions. The federal government, private
insurers and various state enforcement agencies have increased their scrutiny of
providers, business practices and claims in an effort to identify and prosecute
fraudulent and abusive practices. In addition, the federal government has issued
fraud alerts concerning matters including nursing services, double billing, home
health services, nursing facility arrangements with hospices, and the provision
of medical supplies to nursing facilities; accordingly, these areas may come
under closer scrutiny by the government. Possible sanctions for violation of any
of these restrictions or prohibitions include loss of licensure or eligibility
to participate in reimbursement programs and civil and criminal penalties. State
laws vary from state to state, are often vague and have seldom been interpreted
by the courts or regulatory agencies. There can be no assurance that these
federal and state laws will ultimately be interpreted in a manner consistent
with the practices of the Company's lessees or borrowers. See "Business of the
Company and its Properties -- Government Regulation."
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Potential delays may be encountered in substituting lessees or operators
due to the fact that licenses will be held by lessees and borrowers and not by
the Company. A loss of license or Medicare/Medicaid certification by a lessee of
the Company, or a default by lessees under leases or borrowers under loans, made
by the Company, could result in the Company having to obtain another lessee or
substitute operator for the affected facility or facilities. Because the
facility licenses for the Initial Properties will be held by lessees and not the
Company and because under the REIT tax rules the Company would have to find a
new "unrelated" lessee to operate the properties, the Company may encounter
delays in exercising its remedies under leases and loans made by the Company or
substituting a new lessee or operator in the event of any loss of licensure or
Medicare/Medicaid certification by a prior lessee or operator. No assurances can
be given that the Company could contract with a new lessee or successor operator
on a timely basis or on acceptable terms and a failure of the Company to do so
could have a material adverse effect on the Company's financial condition and
results of operations.
A shortage of qualified healthcare personnel to provide services at the
healthcare facilities could result in significant increases in labor costs or
otherwise adversely affect the facilities' operations and licensure or
certification status. While the Company believes that its lessees and borrowers
have been able to adequately staff the healthcare facilities, any shortage of
qualified healthcare personnel in the future could adversely affect the ability
of lessees or borrowers to operate the facilities and in turn to make required
lease or loan payments to the Company.
Transfers of certain healthcare facilities require regulatory notices,
approvals, and/or applications not required for transfers of other types of
commercial operations or real estate. In addition, many states have adopted
Certificate of Need programs or similar laws which require approvals for, among
other things, establishing or acquiring healthcare facilities or effecting
certain changes to existing health facilities, such as increases in the number
of beds. Alternative uses of healthcare facilities are limited, and
substantially all of the healthcare facilities included in the Initial
Properties are special purpose facilities that may not be easily adapted for
non-healthcare related uses.
Proximity to hospitals and other healthcare facilities may affect the
Company's ability to renew leases and attract new tenants in the event of
relocation or closure of a hospital or other healthcare facility. Many of the
skilled nursing facilities included in the Initial Properties are in close
proximity to one or more hospitals. The relocation or closure of a hospital
could make the Company's skilled nursing facilities in such area less desirable
and affect the Company's ability to renew leases and attract new tenants. See
"Business of the Company and its Properties -- Government Regulation."
RISKS ASSOCIATED WITH DEBT FINANCING AND INTEREST RATES
USE OF DEBT FINANCING. The required repayment of debt or interest thereon
could adversely affect the Company's financial condition. The Company will be
subject to risks normally associated with debt financing, including the risk
that the Company's cash flow will be insufficient to pay distributions at
expected levels and meet required payments of principal and interest. Upon
consummation of the Offering, the Company expects to have $___ million
outstanding under its Credit Facility. If principal payments due at maturity
cannot be refinanced, extended or paid with proceeds of other capital
transactions, such as new equity capital, the Company expects that its cash flow
will not be sufficient in all years to pay distributions at expected levels and
to repay such maturing debt. Furthermore, if prevailing interest rates or other
factors at the time of refinancing (such as the reluctance of lenders to make
commercial real estate loans) result in higher interest rates upon refinancing,
the interest expense relating to such refinanced indebtedness would increase,
which would adversely affect the Company's cash flow and the amount of
distributions it can make to investors. If a property or properties are
mortgaged to secure payment of indebtedness and the Company is unable to meet
mortgage payments, the property could be foreclosed by or otherwise transferred
to the mortgagee with a consequent loss of income and asset value to the
Company.
ABSENCE OF LIMITATION ON DEBT. The absence of a limitation on debt could
result in the Company becoming highly leveraged and adversely affect the
Company's cash flow. Upon completion of the Offering, the Company's debt to
market capitalization ratio including amounts expected to be drawn under the
Credit Facility is expected to be approximately __% (__% if the Underwriters'
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overallotment option is exercised in full). The Company currently intends to
maintain a debt to total market capitalization ratio (i.e., total debt of the
Company as a percentage of equity market value plus total debt) of less than
50%. The Board of Directors of the Company may, however, from time to time
reevaluate this policy and decrease or increase this ratio accordingly. The
Company will determine its financing policies in light of then current economic
conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors. Accordingly,
the Company could become more highly leveraged, resulting in an increase in debt
service that could adversely affect the Company's cash flow and, consequently,
the amount available for distribution to stockholders, and could increase the
risk of default on the Company's indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
INCREASING INTEREST RATES. Rising interest rates and variable rate debt
could adversely affect the Company's cash flow. Upon consummation of the
Offering, the Company, through the Operating Partnership, expects to enter into
the Credit Facility. Advances under the Credit Facility totaling $___ million at
the closing of the Offering and draws in the future are expected to bear
interest at variable rates based upon a specified spread over the one month
London Interbank Offered Rate ("LIBOR"). The Company, through the Operating
Partnership, may incur other variable rate indebtedness in the future. Increases
in interest rates on such indebtedness could increase the Company's interest
expense, which would adversely affect the Company's cash flow and its ability to
pay expected distributions to investors. Accordingly, the Company may in the
future engage in other transactions to further limit its exposure to rising
interest rates as appropriate and cost effective. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY
GENERAL. The Initial Properties and subsequently acquired properties will
be subject to various real estate-related risks. The acquisition of additional
properties may be subject to the ability of the Company to borrow amounts
sufficient to pay the purchase price therefor. There can be no assurance that
the value of any property acquired by the Company will appreciate or that the
value of properties securing mortgage loans will not depreciate. Additional
risks of investing in real estate include the possibilities that the real estate
will not generate income sufficient to meet operating expenses, will generate
income and capital appreciation, if any, at rates lower than those anticipated
or will yield returns lower than those available through investment in
comparable real estate or other investments. Income from properties and yields
from investments in such properties may be affected by many factors, including
changes in government regulation (such as zoning laws), general or local
economic conditions (such as fluctuations in interest rates and employment
conditions), the available local supply of and demand for improved real estate,
a reduction in rental income as the result of the inability to maintain
occupancy levels, natural disasters (such as earthquakes and floods) or similar
factors. Further, equity investments in real estate are relatively illiquid,
and, therefore, the ability of the Company to vary its portfolio in response to
changed conditions will be limited.
UNINSURABLE LOSS. The Company's financial condition could be adversely
affected due to uninsurable loss. It is the intention of the Company to secure,
or to require the Lyric subsidiaries and other lessees, tenants and borrowers to
secure adequate comprehensive property and liability insurance that covers the
Company as well as the lessee, tenant or borrower. Certain risks may, however,
be uninsurable or not economically insurable, and there can be no assurance that
the Company or a lessee, tenant or borrower will have adequate funds to cover
all contingencies itself. Should such an uninsurable loss occur, the Company
could lose both its invested capital, including its equity interests, and any
anticipated profits relating to such property.
LEASE AND LOAN DEFAULTS AND NON-RENEWAL OF LEASES. Leases and loan defaults
and failure to renew leases could adversely affect the Company's financial
condition and results of operations. Any lease arrangement, such as the Master
Lease between the Company and Lyric III for the Lyric Properties and leases
involving subsequently acquired properties, creates the possibility that a
lessee may either default on the lease or fail to exercise an option to renew
the lease, and, in such event, the Company
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may be unable to lease such property to another lessee on a timely basis or at
all. Even if the Company could lease such property to another lessee, any such
replacement lease may be on less favorable terms than those of the original
lease. In such an instance, the Company would continue to be responsible for
payment of any indebtedness it had incurred with respect to such property. Any
such default or non-renewal could result in a reduction in revenue derived from
the affected lease and defaults or non-renewals under several leases at the same
time or defaults under one or more of the mortgage loans could have a material
adverse effect on the Company's financial condition and results of operations.
LACK OF INDUSTRY DIVERSIFICATION. Lack of industry diversification will
subject the Company to the risks associated with investments in a single
industry. While the Company is authorized to invest in various types of
income-producing real estate, its current strategy is to acquire and hold, for
long-term investment, healthcare-related properties only. Consequently, the
Company currently has chosen not to include in the Initial Properties any
non-healthcare related real estate assets, and, therefore, will be subject to
the risks associated with investments in a single industry.
SALE AND LEASEBACK TRANSACTIONS. The Company intends to engage in sale and
leaseback transactions. In the event of a default under a lease, the Company
will have no practical recourse other than regaining possession of the property.
In addition, the financial failure of a tenant could cause the tenant to become
the subject of bankruptcy proceedings. Under bankruptcy law, a tenant has the
option of assuming (continuing) or rejecting (terminating) an unexpired lease.
If the tenant assumes its lease with the Company, the tenant must cure all
defaults under the lease and provide the Company with adequate assurance of its
future performance under the lease. If the tenant rejects the lease, the
Company's claim for breach of the lease would (absent collateral securing the
claim) be treated as a general unsecured claim. The amount of the claim would be
capped at the amount owed for unpaid pre-petition lease payments unrelated to
the rejection, plus the greater of one year's lease payments or 15% of the
remaining lease payments payable under the lease (but not to exceed the amount
of three years' lease payments). Although the Company believes that each of its
sale and leaseback transactions will result in a "true lease" for purposes of
bankruptcy law, depending on the terms of the sale and leaseback transaction,
including the length of the lease and terms providing for the repurchase of a
property by the seller/tenant, it is possible that a bankruptcy court could
re-characterize a sale and leaseback transaction as a secured lending
transaction. If a transaction were re-characterized as a secured lending
transaction, the Company would not be treated as the owner of the property, but
might have certain additional rights as a secured creditor.
CONSTRUCTION LENDING. Although the Company will not initially offer
construction financing, it may make construction loans in the future. Lending on
development projects is generally considered to involve greater risks than
financing operating properties. Risks associated with such lending activities
include that development activities may be abandoned, construction costs of a
facility may exceed original estimates possibly making the facility
uneconomical, occupancy rates and rents at a completed facility may not be
sufficient to cover loan or lease payments, permanent financing may not be
available on favorable terms and construction and lease-up may not be completed
on schedule resulting in increased debt service expense and construction costs.
In addition, construction lending activities typically will require a
substantial portion of management's time and attention. Such activities also are
subject to risks relating to the borrower's inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations. Further, there can be no
assurance that the construction loans (once funded) will be repaid.
LOANS FOR WORKING CAPITAL. Subject to applicable REIT income tax rules, the
Company intends to offer working capital financing in limited circumstances to
operators of healthcare facilities, which may include some of the Initial
Properties subject to the Master Lease with Lyric III. Working capital loans
will be secured primarily by secured mortgages on healthcare facilities and
their accounts receivable. Risks associated with such lending activities include
that the borrower may be unable to generate sufficient funds to repay the loans,
that such loans are not repaid, and that any security for such loans may not be
sufficient to cover the Company's losses.
THE ABILITY OF STOCKHOLDERS TO EFFECT A CHANGE IN CONTROL OF THE COMPANY IS
LIMITED
PROVISIONS IN THE COMPANY'S CHARTER AND BYLAWS COULD PREVENT CHANGES IN
CONTROL. Certain provisions of the Company's charter ("Charter") and bylaws
("Bylaws") may have the effect of delaying, defer-
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ring or preventing a change in control of the Company or other transaction that
could provide the holders of Common Stock with the opportunity to realize a
premium over the then-prevailing market price of such Common Stock. The
Ownership Limit described under "-- Possible Adverse Consequences of Ownership
Limit for Federal Income Tax Purposes Could Inhibit Changes in Control" also may
have the effect of delaying, deferring or preventing a change in control of the
Company or other transaction even if such a change in control or transaction
were in the best interests of some, or a majority, of the Company's
stockholders. The Board of Directors will consist of six members immediately
following the closing of the Offering who will be classified into three classes
with each class serving a three-year term. The staggered terms of the members of
the Board of Directors may adversely affect the stockholders' ability to effect
a change in control of the Company, even if a change in control were in the best
interests of some, or a majority, of the Company's stockholders. The Charter
authorizes the Board of Directors to cause the Company to issue up to 20,000,000
preferred shares of stock, $.001 par value per share ("Preferred Stock"), in
series, and to establish the preferences, rights and other terms of any series
of Preferred Stock so issued. Such Preferred Stock may be issued by the Board of
Directors without stockholder approval, and the preferences, rights and other
terms of any such Preferred Stock may adversely affect the stockholders' ability
to effect a change in control of the Company, even if a change in control were
in the best interests of some, or a majority, of the Company's stockholders. See
"Management -- Directors, Director Nominees and Executive Officers" and
"Description of the Capital Stock of the Company -- Restrictions on Transfers."
CERTAIN PROVISIONS OF MARYLAND LAW COULD INHIBIT CHANGES IN CONTROL. Under
provisions of the Maryland General Corporation Law, as amended ("MGCL"), certain
"business combinations" (including certain issuances of equity securities)
between a Maryland corporation and any person who beneficially owns 10% or more
of the voting power of the corporation's then outstanding stock or an affiliate
of the corporation who, at any time within the two-year period prior to the date
in question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting shares of stock (an "Interested Stockholder") or an
affiliate of the Interested Stockholder are prohibited for five years after the
most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be approved by the
affirmative vote of at least: (i) 80% of all the votes entitled to be cast by
holders of the outstanding voting shares; and (ii) two-thirds of the votes
entitled to be cast by holders of voting shares held by the Interested
Stockholder who is (or whose affiliate is) a party to the business combination
unless, among other conditions, the corporation's common stockholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its common stock. The Board of Directors of the Company has not
opted out of the business combination provisions of the MGCL (except with
respect to business combinations involving Dr. Robert Elkins, or current or
future affiliates, associates or other persons acting in concert as a group with
any of them). Consequently, the five-year prohibition and the super-majority
vote requirements will apply to a business combination involving the Company
(except as provided in the preceding sentence).
POSSIBLE ADVERSE CONSEQUENCES OF OWNERSHIP LIMIT FOR FEDERAL INCOME TAX
PURPOSES COULD INHIBIT CHANGES IN CONTROL. To maintain its qualification as a
REIT for federal income tax purposes, not more than 50% in value of the
outstanding shares of stock of the Company may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code, to include certain
entities). In addition, for the Company to maintain REIT status, neither Lyric
nor any entity which constructively owns 9.9% or more of the outstanding stock
of Lyric or any other lessee entity may own actually or constructively 9.9% or
more, in value or voting rights, of the outstanding shares of stock of the
Company, the Charter generally will prohibit ownership, directly or by virtue of
the attribution provisions of the Code, by any single stockholder of 9.9% or
more of the issued and outstanding Common Stock and generally will prohibit
ownership, directly or by virtue of the attribution provisions of the Code, by
any single stockholder of 9.9% or more of the issued and outstanding shares of
any class or series of the Company's Preferred Stock (collectively, the
"Ownership Limit"). The Board of Directors, in its sole discretion, may waive
the ownership limitations with respect to a holder if the Board is satisfied,
based on the advice of counsel or a ruling from the Internal Revenue Service,
that such holder's ownership will not then or in the future jeopardize the
Company's status as a REIT. In view, however, of the potential risks posed to
the Company if a stockholder who owned 10% or more of the Company also were
considered to own 10% or more of Lyric or any other tenant entity, the Board of
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Directors will have less flexibility, as a practical matter, to grant waivers
and exemptions than would be the case if a substantial portion of the Company's
properties were not leased to a single tenant. Absent any such exemption or
waiver, Common Stock acquired or held in violation of the Ownership Limit will
be transferred to a trust for the benefit of transferees to whom such Common
Stock ultimately may be transferred without violating the Ownership Limit, with
the person who acquired such Common Stock in violation of the Ownership Limit
not entitled to receive any distributions thereon, to vote such Common Stock, or
to receive any proceeds from the subsequent sale thereof in excess of the lesser
of the price paid therefor or, if no consideration was paid for such Common
Stock by the original transferee stockholder, the average closing price for the
Common Stock for the ten days immediately preceding such sale or gift. A
transfer of Common Stock to a person who, as a result of the transfer, violates
the Ownership Limit may be void under certain circumstances. The Ownership Limit
may have the effect of delaying, deferring or preventing a change in control
and, therefore, could adversely affect the stockholder's ability to realize a
premium over the then-prevailing market price for the Common Stock in connection
with such a transaction. See "Federal Income Tax Considerations -- Requirements
for Qualification as a REIT -- Organizational Requirements" and "Description of
Capital Stock of the Company -- Restrictions on Transfers."
LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL CONDITION
Under certain federal, state and local laws and regulations relating to
protection of the environment and workplace health and safety ("Environmental
Laws"), a current or previous owner or operator of real estate or a facility may
be required to investigate and clean up hazardous or toxic substances or
petroleum product releases at such property and may be held liable to a
governmental entity or to third parties for personal injury, property damage
and/or for investigation and clean-up costs incurred by such parties in
connection with the contamination. Such Environmental Laws typically impose
clean-up responsibility and liability without regard to whether the owner or
operator knew of or caused the presence of the contaminants, and the liability
under such laws has been interpreted to be strict, joint and several unless the
harm is divisible and there is a reasonable basis for allocation of
responsibility. In addition, the owner or operator of real estate or a facility
may be subject to claims by third parties based on damages and costs resulting
from environmental contamination emanating from a site.
The Company is subject to a variety of Environmental Laws relating to land
use and development and to environmental, health and safety compliance and
permitting (including those related to the use, storage, discharge, emission and
disposal of hazardous materials and hazardous and non-hazardous wastes). Failure
to comply with these Environmental Laws could result in the need for capital
expenditures and/or the imposition of severe penalties or restrictons on
operations that could adversely effect the present or future liquidity, results
of operations, or business or financial condition of the Company. In addition,
such Environmental Laws could change in a manner that adversely effects the
Company's ability to conduct its business or to implement desired expansions and
improvements at its facilities.
Environmental Laws also govern the presence, maintenance and removal of
asbestos-containing materials ("ACM"). Such laws require that ACM be properly
managed and maintained, that those who conduct certain activities that could
disturb ACM be adequately apprised or trained and that special precautions,
including removal or other abatement, be undertaken in the event ACM would be
disturbed during renovation or demolition of a building. Such Environmental Laws
may impose fines and penalties on building owners or operators for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos
fibers. ACM is suspected in approximately 27 of the Initial Properties based on
visual inspection and isolated sampling. Most of these buildings contain only
minor amounts of ACM in good condition and nearly all of it is non-friable. The
Company believes that all ACM is currently being properly managed and maintained
and other requirements relating to ACM are being followed. However, there can be
no assurance that the Company's ACM management program will be successful or
that the Company's business, financial condition or results of operations will
not be materially and adversely affected as a result of: (i) further discovery
of ACM in the Initial Properties, the Option Properties or other properties
acquired by the Company; or (ii) the Company's failure to comply with all
applicable Environmental Laws relating to the presence, maintenance and removal
of ACM.
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Underground storage tanks ("USTs") have been identified at eight of the
Initial Properties based upon Phase I Environmental Site Assessments conducted
in April 1998. The Company believes that most of the USTs identified were in
good condition and present no material risks or liabilities. However, USTs
identified at a few of the Initial Properties may require additional
investigation work to ensure that they are properly registered and do not
present an environmental threat. There can be no assurance that the Phase I
Environmental Site Assessments identified all USTs at the Initial Properties or
that the Company's evaluation of the condition of such USTs is complete and
accurate. Should the Company's evaluation of the condition of such USTs prove
incomplete or inaccurate or should the Company discover additional USTs at the
Initial Properties, the Option Properties or other properties acquired by the
Company, the Company's business, financial condition and results of operations
could be materially and adversely affected.
At four of the Initial Properties, potential off-site sources of
contamination, such as USTs (near Harbor View Care Center), a junk/used car
dealer (near Integrated Health Services of Auburndale), a closed municipal solid
waste landfill (near Integrated Health Services of Lakeland at Oakbridge) and an
industrial site (near Integrated Health Services of St. Louis at Big Bend) have
been identified. The Company does not believe that any such off-site sources of
contamination should present material risks or liabilities. However, should the
Company's evaluation of such off-site sources of contamination prove inaccurate
or should additional sources of off-site contamination at the Initial
Properties, the Option Properties or other properties acquired by the Company,
the Company's business, financial condition and results of operations could be
materially and adversely affected.
Ancillary to the operation of healthcare facilities are, in various
combinations, the handling, use, storage, transportation, disposal and/or
discharge of hazardous, infectious, toxic, radioactive, flammable and other
hazardous materials, wastes, pollutants or contaminants. Such activities may
result in damage to individuals, property or the environment; may interrupt
operations and/or increase their costs; may result in legal liability, damages,
injunctions or fines; may result in administrative, civil or criminal
investigations, proceedings, penalties or other governmental agency actions; and
may not be covered by insurance. There can be no assurance that lessees or
borrowers of the Company will not encounter such risks, and such risks may have
a material adverse effect on their ability to make lease or loan payments to the
Company.
COMPETITION
The Company will compete with other healthcare REITs, non-healthcare REITs,
real estate partnerships, healthcare providers and other investors, including,
but not limited to, banks and insurance companies, in the acquisition, leasing,
managing and financing of healthcare facilities. Certain of these investors may
have greater resources than the Company. IHS and other lessees or managers
operating properties that the Company will own or that secure loans to be made
by the Company compete on a local and regional basis with operators of other
facilities that provide comparable services. Operators or managers compete for
residents based on quality of care, reputation, physical appearance of
facilities, services offered, family preferences, physicians, staff and price.
In general, regulatory and other barriers to competitive entry in the skilled
nursing and geriatric care industry assisted living industry are not
substantial. Moreover, if the development of new skilled nursing facilities or
other healthcare facilities outpaces demand for these facilities in certain
markets, such markets may become saturated. Such an oversupply of facilities
could cause operators of Company-owned facilities to experience decreased
occupancy, depressed margins and lower operating results, which could have a
material adverse effect on their ability to make lease or loan payments to the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its Chairman, Robert N. Elkins,
M.D., and its executive officers, Messrs. Poole and Listman. The loss of the
services of any such individuals could have an adverse effect on the operations
of the Company. Dr. Elkins presently expects to devote time to the Company, but
will not have an employment agreement and will have no specific obligations to
do so. To the extent Dr. Elkins is unwilling to devote a certain amount of time
to the Company, the Company
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could be adversely affected. Each of the executive officers will enter into
Employment Agreements with the Company and Dr. Elkins will enter into a
Non-Competition Agreement with the Company. See "Management -- Employment and
Non-Competition Agreements."
DILUTION
As set forth more fully under "Dilution," the pro forma net tangible book
value per share of the assets of the Company after the Offering will be less
than the estimated initial public offering price per share of Common Stock in
the Offering. Accordingly, purchasers of shares of Common Stock offered hereby
will experience immediate dilution of $____ in the net tangible book value of
the shares of Common Stock from the estimated initial public offering price. See
"Dilution."
VALUATION
The valuation of the Company has not been determined by a valuation of its
assets, but instead has been determined based upon a capitalization of the
Company's pro forma Funds from Operations, estimated cash available for
distribution and potential for growth and the other factors discussed under
"Underwriting." In determining the estimated initial public offering price,
certain assumptions were made concerning the estimate of revenue to be derived
from the Initial Properties and other assets being acquired by the Company. This
methodology has been used because management believes that it is appropriate to
value the Company as an ongoing business, rather than with a view to values that
could be obtained from a liquidation of the Company or of individual assets
owned by the Company. There can be no assurance that the prices paid by the
Company for the Initial Properties and other assets being acquired by the
Company will not exceed their respective fair market values, and it is possible
that the market value of the Common Stock may exceed the stockholders'
proportionate share of the aggregate fair market value of such assets. See
"Distributions."
ABSENCE OF A PRIOR PUBLIC MARKET FOR THE COMMON STOCK
Prior to the completion of the Offering, there has been no public market
for the Common Stock and there can be no assurance that an active trading market
will develop or be sustained or that shares of the Common Stock will be resold
at or above the assumed initial public offering price. The offering price of the
Common Stock will be determined by agreement among the Company and the
Underwriters and may not be indicative of the market price for shares of the
Common Stock after the completion of the Offering. The market value of shares of
the Common Stock could be substantially affected by general market conditions,
including changes in interest rates. Moreover, numerous other factors, such as
governmental regulatory action and changes in tax laws, could have a significant
impact on the future market price of shares of the Common Stock.
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF COMMON STOCK, OR THE PERCEPTION THAT
SUCH SALES COULD OCCUR AND COULD ADVERSELY AFFECT PREVAILING MARKET PRICES OF
THE COMMON STOCK
The Company intends to reserve a total number of shares of Common Stock
equal to 5.0% of the Common Stock and Units outstanding from time to time for
issuance pursuant to the Company's 1998 Omnibus Securities and Incentive Plan,
and these shares of Common Stock will be available for sale from time to time
pursuant to exemptions from registration requirements or upon registration.
Options to purchase a total of 513,650 shares of Common Stock are expected to be
granted to the Company's executive officers, employees and directors on or prior
to the date of the Offering, subject to certain restrictions on transfer. No
prediction can be made about the effect that future sales of shares of Common
Stock will have on the market prices of the Common Stock. See "Management" and
"Shares Eligible for Future Sale."
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE COMMON STOCK PRICE
As with other publicly traded equity securities, the value of the shares of
Common Stock will depend upon various market conditions, which may change from
time to time. Among the market conditions that may affect the value of the
shares of Common Stock are the following: (i) the extent to
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which a secondary market develops for the Common Stock following the completion
of the Offering; (ii) the extent of institutional investor interest in the
Company; (iii) the general reputation of healthcare REITs and the attractiveness
of their equity securities in comparison to other equity securities (including
securities issued by other real estate-based companies); (iv) the Company's
financial performance; (v) the financial performance of Lyric, IHS and other
lessees and managers of the Company's healthcare facilities; and (vi) general
stock and bond market conditions. Although the offering price of the shares of
Common Stock will be determined by the Company in consultation with the
Underwriters, there can be no assurance that the Common Stock will not trade
below the offering price following the completion of the Offering.
EFFECT ON COMMON STOCK PRICE OF CHANGES IN EARNINGS AND CASH DISTRIBUTIONS
It is generally believed that the market value of the equity securities of
a REIT is based primarily upon the market's perception of the REIT's growth
potential and its current and potential future cash distributions, whether from
operations, sales or refinancings, and is secondarily based upon the value of
the underlying assets. For that reason, shares of Common Stock may trade at
prices that are higher or lower than the net asset value per share of Common
Stock. To the extent the Company retains operating cash flow for investment
purposes, working capital reserves or other purposes, these retained funds,
while increasing the value of the Company's underlying assets, may not
correspondingly increase the market price of the Common Stock. The failure of
the Company to meet the market's expectation with regard to future earnings and
cash distributions would likely adversely affect the market price of the Common
Stock.
EFFECT ON COMMON STOCK PRICE OF CHANGES IN MARKET INTEREST RATES
One of the factors that will influence the price of the Common Stock will
be the dividend yield on the Common Stock (as a percentage of the price of the
Common Stock) relative to market interest rates. Thus, an increase in market
interest rates may lead prospective purchasers of shares of Common Stock to
expect a higher dividend yield, which would adversely affect the market price of
the Common Stock.
DEPENDENCE ON EXTERNAL SOURCES OF CAPITAL COULD ADVERSELY AFFECT COMMON STOCK
PRICE
In order to qualify as a REIT under the Code, the Company generally is
required each year to distribute to its stockholders at least 95% of its net
taxable income (excluding any net capital gain). Because of these distribution
requirements, it is unlikely that the Company will be able to fund all future
capital needs, including capital needs in connection with financing of
additional acquisitions, from cash retained from operations. As a result, to
fund future capital needs, the Company likely will have to rely on third-party
sources of capital, which may or may not be available on favorable terms or at
all. The Company's access to third-party sources of capital will depend upon a
number of factors, including the market's perception of the Company's growth
potential and its current and potential future earnings and cash distributions
and the market price of the Common Stock. Moreover, additional equity offerings
may result in substantial dilution of stockholders' interests in the Company,
and additional debt financing may substantially increase the Company's leverage.
See "Federal Income Tax Considerations -- Requirements for Qualification as a
REIT -- Annual Distribution Requirements" and "Policies with Respect to Certain
Activities -- Financing Policies."
The sale of all of the Initial Properties to the Company is subject to the
closing of the Offering as well as normal and customary conditions to the
closing of real estate transactions, including the receipt of required consents,
waivers or regulatory approvals. There can be no assurance that all such
consents, waivers or regulatory approvals will be obtained prior to the closing
of the Offering. Failure to obtain such consents, waivers or regulatory
approvals could delay or prevent the acquisition of one or more of the Initial
Properties. In such event, the funds intended for the purchase of such Initial
Property or Initial Properties whose acquisition is delayed or prevented will be
invested as described under "Use of Proceeds." The yield on any such investments
may be lower than the expected return on the Initial Properties not acquired or
whose acquisition is delayed and could affect the Company's ability to make
anticipated distributions.
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ERISA RISKS
Depending upon the particular circumstances of an ERISA Plan (as
hereinafter defined), an investment by an ERISA Plan in shares of Common Stock
may not be appropriate under Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). In deciding whether to purchase shares of Common Stock on
behalf of an ERISA Plan, a fiduciary of an ERISA Plan, in consultation with its
advisors, should carefully consider its responsibilities under ERISA, the
prohibited transaction rules of ERISA and the Code and the effect of regulations
issued by the U.S. Department of Labor defining what constitutes assets of an
ERISA Plan. See "ERISA Considerations."
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THE COMPANY
Monarch was formed to capitalize on the growing demand from providers of
facility-based healthcare services for flexible and innovative real estate
financing structures. Monarch's strategy is to offer traditional and customized
sale and leaseback structures and other financing products that address the
differing needs of both established and emerging operators of skilled nursing,
specialty hospital, assisted living and other healthcare facilities. The Company
believes that the customized products it has developed offer operators
significant advantages over traditional sale and leaseback structures and will
generate sufficient customer demand to justify premium yields. The Company will
be self-administered and self-managed and expects to qualify as a REIT for
Federal income tax purposes.
Monarch will focus on meeting the needs of two primary customer segments:
(i) large, established operators of facility-based healthcare services, which
are typically publicly traded corporations; and (ii) emerging operators with
strong growth prospects run by experienced and entrepreneurial management teams
with proven track records. While Monarch will offer traditional REIT investment
products (such as sale and leaseback structures and, to a lesser extent,
mortgage financing), management expects that a substantial portion of its
revenues will be derived from innovative products which are customized for
individual operators. Monarch's products are generally structured to enhance the
financial flexibility of the operator while providing enhanced yields and
appropriate security to the Company. Monarch believes that its focus on
providing customized products will differentiate it from many of its REIT
competitors who are focused on more traditional investment products. Monarch
believes this strategy will enable it to grow its asset base through accretive
investments that will earn premium yields.
The Company's initial portfolio will consist of 47 healthcare facilities
located in 15 states, 44 of which will be purchased from IHS. The aggregate
purchase price of the Initial Properties is approximately $382.4 million, of
which approximately $371.0 million will be paid to IHS. The three other Initial
Properties will be purchased from an unaffiliated third party for an aggregate
purchase price of approximately $11.5 million. Of the 47 Initial Properties, 42
are skilled nursing facilities with a total of approximately 5,914 beds and five
are specialty hospitals with a total of approximately 181 beds. In addition, the
Company will have options to purchase up to 10 additional skilled nursing
facilities with a total of approximately 1,683 beds from IHS for an aggregate
purchase price of approximately $104.7 million, and will have a right of first
offer during the next four years to purchase or finance any healthcare
facilities IHS acquires or develops and elects to either sell and leaseback or
to finance in a transaction of the type normally engaged in by the Company.
Forty-two of the properties to be acquired from IHS, with an aggregate purchase
price of approximately $359.7 million, will be leased on a portfolio basis to
Lyric III pursuant to the Master Lease. The Company will acquire the Lyric
Properties from IHS for approximately $359.7 million. The Company will lease all
of the Lyric Properties to Lyric III pursuant to the Master Lease. Lyric III
will sublease the Lyric Properties to the Facility Subtenants pursuant to the
individual Facility Subleases.The remaining Initial Properties will be leased to
two independent healthcare facility operators.
The Lyric Properties will be leased on a triple net basis with initial
terms ranging from nine to thirteen years. The initial annual base portfolio
rent for the Lyric Properties equals the purchase price multiplied by the
greater of: (i) 10.0%; or (ii) the average yield on the 10-year U.S. Treasury
Note over the 20 trading days preceding the date of the Offering plus 450 basis
points. The base portfolio rent is subject to annual increases equal to the
lesser of two times the increase in the CPI or 3%, but shall in no event be
lower than the prior year's rent. The Master Lease and the Facility Subleases
require Lyric III and the facility subtenants, during each lease year during the
term of the Master Lease, to make minimum capital expenditures of $300 (as
increased annually by the CPI) per bed in each facility covered by the Master
Lease to maintain the property. The Company may declare an event of default in
the event that Lyric III or the Facility Subtenants fail to make the required
capital expenditures. The Master Lease may be renewed by the Company for up to
three renewal periods of 10 years each. Lyric III will enter into a management
agreement and a franchise agreement with IHS subject to the Master Lease. All
management and franchise fees payable to IHS will be subordinated to payments
under the Master Lease. Monarch will have the benefits of cross default
provisions and effective cross collateralization protection under the Master
Lease by virtue of the availability of the aggregate rent payments of all of
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the Facility Subtenants to satisfy the obligations of Lyric III under the Master
Lease. In addition, Lyric III will deposit with the Company as a security
deposit a letter of credit in an amount equal to six months of the estimated
rents payable with respect to the Master Lease. Rent payments and the
performance of Lyric III under the Master Lease and the Facility Subtenants
under the Facility Subleases will be guaranteed by Lyric.
IHS is a NYSE listed, leading national provider of post-acute healthcare
services, operating or managing approximately 312 geriatric care facilities
across the United States. IHS will not guarantee or have any other obligation to
Monarch with respect to the payment or performance obligations of Lyric III
under the Master Lease.
The other five Initial Properties will be leased to unaffiliated parties on
a triple net basis with initial terms ranging from 11 to 12 years. The initial
base portfolio rents for these five properties equal the purchase price
multiplied by the yield on the 10-year U.S. Treasury Note at the closing of the
Offering plus 375 to 400 basis points. Each of the base rents is subject to
annual increases equal to the lesser of the increase in the CPI or 5%, but
subject to a minimum annual increase of 2%.
The Company will be self-administered and self-managed. The Company will
initially employ five persons, including the Company's two executive officers,
and intends to hire additional employees as necessary to support its anticipated
growth. The Company will monitor its investments, develop investment and lending
opportunities, perform analysis, underwriting, negotiating and closing
activities with respect to future investment or financing transactions and
perform administrative functions.
As the sole stockholder of the General Partner and the Limited Partner, the
Company will initially own 100% of the ownership interests in the Operating
Partnership and the Operating Partnership will own the Initial Properties.
Following the Offering, the Operating Partnership may issue Units to third
parties who will contribute properties in exchange for Units. The ownership and
management structure of the Company is intended to enable the Company to acquire
assets in transactions that may defer some or all of a seller's tax
consequences.
The principal executive offices of the Company and the Operating
Partnership are located at 8889 Pelican Bay Boulevard, Suite 501, Naples,
Florida 34108 and its general telephone number is (941) 598-5601.
INDUSTRY OVERVIEW
Monarch will focus its investment efforts on the long-term care sector of
the healthcare industry. Long-term care encompasses a broad range of specialty
services for elderly and other patients with medically complex needs who do not
require acute care services but are unable to be cared for at home. Services
provided by long-term care facility operators range from meals and
transportation to assistance with activities of daily living such as eating,
dressing and medication reminders to intensive medical care. The real estate
asset types in this sector include assisted living, long-term care and subacute
care facilities and specialty hospitals. A significant portion of Monarch's
portfolio will be leased to healthcare operators who are focused on residents
needing a higher level of care.
Demand for assisted living and long term care services is partially driven
by growth in the elderly population. According to the U.S. Census Bureau, there
are currently 33.6 million elderly Americans, over the age of 65, comprising 13%
of the total population. The elderly population is expected to double by 2030 to
over 70 million, comprising 20% of the total population. Elderly adults are not
only growing in numbers, but are living longer. Medical technology has reduced
the mortality rate in the U.S. and increased longevity. The average life
expectancy of Americans has increased from 68 in 1959 to 82 years. Prolonged
life expectancy impacts the needs of the elderly and increases the probability
of chronic illness and disabilities, thus increasing the need for services and
care. The U.S. Census Bureau estimates that over 45% of the population over the
age of 85 requires assistance with everyday activities. The population over 85
is also the fastest growing segment of the elderly population, and this segment
is
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expected to grow from 3.6 million to nearly 9 million by 2030. According to the
General Accounting Office, the number of elderly Americans requiring long-term
care is expected to double over the next 25 years, rising from 7 million to 14
million by 2020.
The pending implementation of Medicare's prospective payment system and
private managed care plans have slowed growth in healthcare expenditures by
creating incentive for hospitals and physicians to lower the cost of healthcare
delivery by moving patients to low-cost-of-care settings. This has created
opportunities for long-term care providers which are generally lower-cost than
acute care hospitals. Cost containment pressures have also led to the
consolidation of the long-term care sector as providers seek to leverage costs
and services across a larger base of facilities. This has increased the demand
for flexible financing. Moreover, changes in healthcare delivery have shifted
the focus of providers' capital resources from real estate to investments in
information systems and the consolidation and integration of healthcare
networks. Healthcare facility REITs, such as Monarch, are positioned to fill the
gap created by this shift.
There is a significant market for the financing of healthcare facilities.
The U.S. Census Bureau estimates that healthcare construction expenditures are
approximately $14 billion per year. A study and conducted by Price Waterhouse
estimates that the gross capital size of the senior living and long-term care
market will grow from $86 billion in 1996 to $126 billion in 2005 and $490
billion in 2030. Despite the strong projected growth in demand for healthcare
facilities, the Company believes that Certificate of Need Statutes and other
licensure requirements in many markets will prevent overbuilding, thereby
preserving the value of its portfolio of properties. In addition, the Company
believes that consolidation in the industry has increased the demand for
flexible financing which the Company will offer.
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BUSINESS AND GROWTH STRATEGIES
CUSTOMER SEGMENTS
The Company will target two primary customer segments which it believes
currently have significant unmet needs for flexible and innovative financing:
ESTABLISHED PUBLIC OPERATORS. Monarch believes that large established
operators of healthcare facilities, such as IHS, will be a major source of
ongoing investment opportunities. Sale and leaseback structures allow these
operators to focus on optimizing the performance of the facilities they operate
without evaluating or being subject to real estate risks. Sale and leaseback
structures can have benefits, including reduced leverage and depreciation
charges. The Company believes there is significant demand in this market for
customized lease structures, such as the Intermediate Lessee Structure, that
will justify premium yields. These products offer the operator significantly
greater financial flexibility by eliminating the operator's obligations for
future lease payments and improving operating margins. The Company will also
offer traditional sale and leaseback structures.
EMERGING OPERATORS. The Company believes that there is a substantial
opportunity to provide financing for emerging operators run by strong management
teams with extensive experience operating healthcare facilities. These operators
often have limited access to attractive capital sources despite having extensive
experience and well-developed growth strategies. Monarch intends to identify and
target quality operators with the goal of providing financing to these select
customers throughout their growth cycles. The Company also believes that this
customer segment is presently underserved by existing public healthcare REITs,
whose primary focus is to provide facility-based financing to large operators on
a secured basis utilizing the corporate guarantees of the operators.
Monarch has developed several products tailored to target the capital needs
of emerging operators that may provide long-term cost savings to the operator as
compared with venture capital or other financing alternatives. The Company's
innovative lease or financing structures for such operators may not require a
personal guaranty from the owner and may include agreements to purchase
facilities upon completion of their construction at a predetermined purchase
price and to leaseback such facilities to the operator. The Company may also
enter into agreements to provide limited short-term working capital financing
and offer financing at higher loan to value ratios than may be available from
traditional mortgage lenders. In return for this flexibility, the Company
expects to obtain higher returns through premium yields, stock warrants or other
instruments which provide the Company with an opportunity to share in the growth
of the emerging operator's enterprise value, subject to compliance with
applicable REIT rules.
GROWTH STRATEGIES
The Company believes that it can achieve its principal growth objectives
through: (i) the acquisition of high quality healthcare properties operated by
experienced management teams; (ii) the generation of internal growth in rental
and other income; and (iii) the employment of a conservative and flexible
capital structure.
INVEST IN HIGH QUALITY HEALTHCARE PROPERTIES OPERATED BY EXPERIENCED
MANAGEMENT TEAMS. Monarch's strategy is to invest in or finance quality
healthcare properties operated or managed by experienced operators in order to
achieve attractive investment returns. The Company's initial portfolio will
consist primarily of skilled nursing facilities. In addition to skilled nursing
facilities, the Company also intends to invest in other healthcare delivery
facilities across the United States. Monarch intends to offer a mix of
traditional and innovative financing products to both large established
operators and to select emerging operators. Senior management believes its
experience operating and growing start-up healthcare ventures positions it to
target and underwrite quality emerging operators who will benefit from the
Company's product offerings. Senior management's and the Chairman's extensive
network of relationships with healthcare facility operators and the Company's
ability to provide flexible financing will be
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<PAGE>
instrumental in developing a series of important operator/lessee relationships.
Finally, the Company has developed specific investment evaluation criteria and a
disciplined underwriting process to analyze historical and projected performance
of potential investments as well as competitive positioning and market
demographics.
When evaluating potential healthcare assets for investment, the Company
performs substantial property level and market analysis and due diligence to
arrive at its valuation estimate, including: (i) analysis of historical property
financial performance and historical and implied cash flow coverages; (ii)
analysis of projected financial performance and implied cash flow coverages,
including the anticipated impact of the implementation of a prospective payment
system; (iii) trends analysis of key operating statistics such as reimbursement
received per patient per day, revenue mix, occupancy levels and payor quality
mix; (iv) review of regulatory surveys and resulting actions; (v) review of the
quality of the facility's construction and the commissioning of engineering
reports and environmental reviews; (vi) assessment of the competitive
positioning of the asset in its local market based on its historical financial
performance, services offered and recent comparable transactions in the market;
(vii) review of the regulatory and reimbursement environment in the state; and
(viii) a strategic assessment of the property's fit within the Company's overall
portfolio.
The Company also evaluates potential new lessee/operators utilizing several
qualitative and quantitative factors. Monarch interviews members of senior
management and frequently visits existing lessee/ operator facilities prior to
entering into a new relationship. The Company also analyzes the lessee/
operator's financial statements to assess their profitability and financial
resources. In addition to direct contact with the management and a review of
their financial status, the Company utilizes its network of relationships within
the industry to conduct multiple reference checks on each potential new lessee/
operator.
When evaluating relationships with emerging lessee/operators, the Company
considers additional factors in evaluating whether to provide financing,
including: (i) senior management's performance track record in their prior
operating positions; (ii) senior management's specific operating expertise in
the facility setting in which Monarch is considering investing or financing;
(iii) assessment of the business and geographic strategy of the lessee/operator;
(iv) financial condition of the lessee/operator; (v) the financial commitment
that the senior management has made to the lessee/operator including an
assessment of the percentage of net worth that each member has invested in the
company; (vi) the number of facilities to be initially financed by Monarch; and
(vii) the potential to provide additional financing in the future.
INTERNAL GROWTH. The Company's strategy is to achieve internal growth
through increased income from: (i) increases to base rent under leases with
annual fixed rate or CPI escalators; (ii) increased interest income from
participating mortgage loans or shared appreciation mortgage loans; and (iii)
subject to applicable REIT rules, gains from stock warrants, shared appreciation
mortgages or other instruments related to the operator's enterprise value or the
underlying asset value. In addition, the Company may receive increases in rental
income payable under any leases that it may enter into in the future having a
rent component based on a percentage of facility revenues.
EMPLOY CONSERVATIVE AND FLEXIBLE CAPITAL STRUCTURE. The Company's strategy
is to employ a conservative and flexible capital structure that will allow
Monarch to pursue investment opportunities aggressively. Upon completion of the
Offering, the Company's pro forma debt to total market capitalization ratio
(i.e., total debt of the Company as a percentage of its equity market value plus
total debt) will be __%. The Company intends to maintain a debt to total market
capitalization ratio after the Offering of less than 50%. In addition, the
Company will be structured as an UPREIT in order to permit the use of Units as
currency to make acquisitions of properties and to enable the Company to offer
certain tax advantages to the real estate sellers. These Units are redeemable
for cash equal to the fair market value of one share of Common Stock, or, at the
election of the Company, exchangeable for one share of Common Stock of the
Company. In this type of transaction the seller exchanges assets for Units and
any capital gains taxes are generally deferred until the seller redeems the
Units.
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FINANCIAL PRODUCTS
The Company intends to offer a variety of traditional and customized lease
and financing products to both established and emerging operators of skilled
nursing facilities, specialty hospitals and other healthcare delivery
facilities. The Company's planned product offerings include: (i) sale and
leaseback structures; (ii) customized sale and leaseback structures; (iii)
construction "take-out" financing structures; (iv) customized construction
"take-out" financing structures; (v) shared appreciation and increasing rate
mortgage financing; (vi) limited working capital financing; and (vii) fixed rate
mortgage financing. The Company seeks to enhance its effective yields and reduce
its credit risk by: (i) charging commitment fees equal to a percentage of its
investment or financing commitments, which may include up-front fees and fees
based upon the unfunded portion of the commitment; and (ii) obtaining security
deposits, minimum capital expenditure requirements on a per bed basis and rent
escalators. In addition, the seller or borrower will pay all legal and other
transaction costs such as appraisal, environmental reports and property
condition reports.
SALE AND LEASEBACK STRUCTURES. The Company anticipates that its primary
product offering will be sale and leaseback structures, including the customized
sale and leaseback structures described below. The Company intends to lease
healthcare facilities on a long-term basis with terms generally ranging from 8
to 15 years with renewal terms available at the lessee's option. The leases
originated by the Company generally will provide for minimum annual rentals
which are subject to annual formula increases (e.g., based upon such factors as
increases in the CPI or increases in the gross revenues of the underlying
properties, subject to applicable REIT rules), with certain fixed minimum and
maximum levels. In general, the Company intends to pursue fixed CPI increases on
mature, lower risk, fully occupied properties where cash flows are stable. The
Company intends to pursue additional rent escalators on facilities with
identified potential for revenue growth or a less mature cash flow history.
CUSTOMIZED SALE AND LEASEBACK STRUCTURES. The Company has developed sale
and leaseback structures which offer considerable flexibility relative to
traditional sale and leaseback structures. The Company believes that such
structures will command premium yields through higher lease or interest rates or
equity interests. The Company believes that it will develop market leadership in
this new segment of healthcare financing and expand its overall market share of
sale and leaseback financing. For example, the Company has developed the
Intermediate Lessee Structure for a sale and leaseback transaction with an
operator where the lessee would be a newly formed entity which is not majority
owned by the seller/ manager and where the seller/manager does not guarantee the
lease. The purchase of the Lyric Properties from IHS, the lease of the Lyric
Properties to Lyric III and the management of the Lyric Properties by IHS
utilize this structure. Such a transaction may allow operators to reduce
leverage by selling facilities while continuing to generate revenues through the
provision of fee-based management services.
CONSTRUCTION LOAN "TAKE-OUT" FINANCING STRUCTURES. The Company will
consider entering into agreements to purchase facilities upon completion of
their construction at a pre-determined purchase price and to leaseback such
facilities to the operator. These agreements will involve a qualified
construction lender as well as the developer. The Company's funding obligation
will be contingent upon the project being delivered in accordance with
pre-determined requirements such as cost, compliance with building codes,
approved plans and specifications and receipt of all applicable licenses.
CUSTOMIZED CONSTRUCTION LOAN "TAKE-OUT" FINANCING STRUCTURES. The Company
has developed customized construction loan take-out financing structures which
offer considerable flexibility relative to traditional construction loan
"take-out" financing. For example, the Company's construction "take-out"
structure will typically be used to "take-out" traditional bank construction
facilities for the period from certification of a new facility through
break-even occupancy of the facility. The Company believes that this product
will provide operators with enhanced financing flexibility during the "fill-up"
period of a new facility in exchange for premium yields compared to traditional
construction loan "take-out" financing.
SHARED APPRECIATION AND INCREASING RATE MORTGAGE FINANCING. The Company may
make shared appreciation mortgage loans which will be secured by first mortgage
liens on the underlying real estate and personal property of the mortgagor with
provisions that enable the Company to participate in the
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future appreciation of the collateral. Interest rates will usually be subject to
annual increases based upon increases in the CPI or increases in gross revenues
of the underlying facilities, with certain maximum limits. The mortgages will
contain prepayment fees to protect the Company's yield.
WORKING CAPITAL FINANCING. To the extent permitted under the REIT rules,
the Company intends to offer limited working capital financing primarily to
emerging facility lessees/operators. The Company believes that such financing
will allow the Company to compete favorably with respect to its target operators
for opportunities relating to newly developed facilities or those in which
change of ownership puts a temporary strain on cash resources. Due to the nature
of this product, the Company intends to assess an interest rate premium for
working capital financing. The working capital loans will be secured primarily
by excess real estate value and facility accounts receivable. Working capital
financing will be made available on a short-term basis and will generally
require a commitment for permanent working capital financing from another
source. The Company intends to limit its working capital financing product
offerings in accordance with applicable REIT rules and regulations.
FIXED RATE MORTGAGE FINANCING. The Company anticipates making fixed
interest rate mortgage loans on a selective basis secured by first mortgage
liens on the underlying real estate and personal property of the mortgagor. The
Company intends to limit the amount of fixed rate mortgage financing which it
provides to healthcare facility operators because of interest rate and inflation
risks associated with fixed rate loans.
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USE OF PROCEEDS
The net cash proceeds to the Company from the Offering, after deducting the
estimated underwriting discount and estimated Offering expenses of approximately
$___ million, are estimated to be approximately $____ million (approximately
$____ million if the Underwriters' overallotment option is exercised in full),
based upon the assumed initial public offering price.
The net cash proceeds of the Offering, together with approximately $___
million of borrowings under the Credit Facility and $___ million in up-front
commitment fees on the Initial Properties will be contributed by the Company to
the Operating Partnership in exchange for Units in the Operating Partnership.
Thereafter, through the Operating Partnership, the Company will utilize the
funds as follows: (i) approximately $___ million to acquire the Initial
Properties; and (ii) approximately $___ for costs associated with entering into
the Credit Facility, organizational expenses and for general corporate purposes.
If the Underwriters' overallotment option is exercised in full, the Company
expects to use the additional proceeds (which will be approximately $___
million) to reduce amounts outstanding under the Credit Facility, to fund
additional acquisitions and for general corporate purposes.
Pending the application of the net proceeds of the Offering, the Company
will invest such portion of the net proceeds in interest-bearing accounts and/or
short-term, interest-bearing securities, which are consistent with the Company's
intention to qualify as a REIT.
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DISTRIBUTIONS
Subsequent to the completion of the Offering, the Company intends to make
regular quarterly distributions to the holders of its Common Stock. The initial
distribution, covering a partial quarter commencing on the date of completion of
the Offering and ending on June 30, 1998, is expected to be $___ per share,
which represents a pro rata distribution based on a full quarterly distribution
of $___ per share and an annual distribution of $___ per share (or an annual
distribution rate of approximately __%). The Company does not intend to reduce
the expected distribution per share if the Underwriters' overallotment option is
exercised. The following discussion and the information set forth in the table
and footnotes below should be read in conjunction with the financial statements
and notes thereto, the pro forma financial information and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included elsewhere in this
Prospectus.
The Company intends initially to distribute annually approximately ___% of
estimated Cash Available for Distribution. The estimate of Cash Available for
Distribution for the 12 months following the closing of the Offering is based
upon pro forma Funds from Operations for the year ended December 31, 1997,
adjusted for: (i) certain known events and/or contractual commitments that
either have occurred or will occur subsequent to December 31, 1997 or during the
year ended December 31, 1997, but were not effective for the full year; and (ii)
for certain non-GAAP adjustments consisting of: (a) pro forma amortization of
financing costs; (b) non-real estate depreciation and amortization; and (c)
amortization of commitment fees. No effect was given to any changes in working
capital resulting from changes in current assets and current liabilities (which
changes are not anticipated to be material) or the amount of cash estimated to
be used for: (i) investing activities for acquisitions, development, tenant
improvement and leasing costs; and (ii) financing activities (other than
scheduled mortgage loan principal payments on existing mortgage indebtedness).
The estimate of Cash Available for Distribution is being made solely for the
purpose of setting the initial distribution and is not intended to be a
projection or forecast of the Company's results of operations or its liquidity,
nor is the methodology upon which such adjustments were made necessarily
intended to be a basis for determining future distributions. Future
distributions by the Company will be at the discretion of the Board of
Directors. There can be no assurance that any distributions will be made or that
the estimated level of distributions will be maintained by the Company.
The Company anticipates that its distributions will exceed earnings and
profits for Federal income tax reporting purposes due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company.
Therefore, it is expected that approximately ___% (or $____ per share) of the
distributions anticipated to be paid by the Company for the 12-month period
following the completion of the Offering will represent a return of capital for
Federal income tax purposes and in such event will not be subject to Federal
income tax under current law to the extent such distributions do not exceed a
stockholder's basis in his Common Stock. The nontaxable distributions will
reduce the stockholder's tax basis in the Common Stock and, therefore, the gain
(or loss) recognized on the sale of such Common Stock or upon liquidation of the
Company will be increased (or decreased) accordingly. The percentage of
stockholder distributions that represents a nontaxable return of capital may
vary substantially from year to year.
The Code generally requires that a REIT distribute annually at least 95% of
its net taxable income (excluding any net capital gain). The estimated Cash
Available for Distribution is anticipated to be in excess of the annual
distribution requirements applicable to REITs under the Code. Under certain
circumstances, the Company may be required to make distributions in excess of
Cash Available for Distribution in order to meet such distribution requirements.
For a discussion of the tax treatment of distributions to holders of Common
Stock. See "Federal Income Tax Considerations -- Requirements for Qualification
as a REIT -- Annual Distribution Requirements."
The Company believes that its estimate of Cash Available for Distribution
constitutes a reasonable basis for setting the initial distribution, and the
Company intends to maintain its initial distribution rate for the 12-month
period following the completion of the Offering unless actual results of
operations,
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economic conditions or other factors differ materially from the assumptions used
in its estimate. The Company's actual results of operations will be affected by
a number of factors, including the revenue received from its properties, the
operating expenses of the Company, interest expense, the ability of tenants of
the Company's properties to meet their financial obligations and unanticipated
capital expenditures. Variations in the net proceeds from the Offering as a
result of a change in the initial public offering price or the exercise of the
Underwriters' overallotment option may affect Cash Available for Distribution,
the payout ratio based on Cash Available for Distribution and available
reserves. No assurance can be given that the Company's estimate will prove
accurate. Actual results may vary substantially from the estimate.
The following table describes the calculation of pro forma Funds from
Operations for the 12 months ended December 31, 1997 and the adjustments to pro
forma Funds from Operations for the 12 months ended December 31, 1997 in
estimating initial Cash Available for Distribution for the 12 months following
the closing of the Offering:
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Pro forma net income for the year ended December 31, 1997, excluding non-
recurring non-cash compensation expense ...................................... $21,704
Plus: pro forma real estate related depreciation for the 12 months ended Decem-
ber 31, 1997 ................................................................. 10,849
-------
Pro forma Funds from Operations for the 12 months ended December 31, 1997(1) 32,553
Adjustments(2) ................................................................ --
-------
Estimated adjusted pro forma Funds from Operations for the 12 months follow-
ing the completion of the Offering ........................................... $32,553
Pro forma amortization of financing costs for the 12 months ended December 31,
1997(3) ...................................................................... 125
Non-real estate depreciation and amortization(4) .............................. 26
Amortization of commitment fees(5) ............................................ (182)
-------
Pro forma estimated Cash Available for Distribution for the 12 months following
the closing of the Offering .................................................. $32,522
=======
Total estimated annual cash distributions ..................................... $27,680
=======
Estimated annual distribution per share(6) .................................... $ 1.60
=======
Payout ratio based on estimated: ..............................................
Funds from Operations ........................................................ 85.0%
-------
Cash Available for Distribution .............................................. 85.1%
</TABLE>
- ----------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT, in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that Funds from Operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital
expenditures, and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT which
39
<PAGE>
may not be comparable to Funds from Operations reported by other REITs that
do not define the term in accordance with the current NAREIT definition or
that interpret the current definition differently than the Company. Funds
from Operations does not represent cash generated from operating activities
in accordance with GAAP and should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions.
(2) No adjustments are made as all of the Company's contractual arrangements
have been reflected in the pro forma results.
(3) Represents the amortization of the commitment fee related to the Credit
Facility. The commitment fee of $375,000 is amortized over the 3 year term
of the Credit Facility.
(4) Represents the following:
Organization costs ......... $ 25
Life (Years) ............... 5
====
$ 5
===
Corporate furniture and fix-
tures ...................... $128
Life (Years) ............... 6
====
21
---
Adjustment ................. $26
===
(5) Represents the revenue recognized from amortization of the lease commitment
fees related to the Initial Properties. The lease commitment fees are
amortized over the initial term of the related leases.
(6) Based on total shares outstanding of 17,300,000 to be outstanding after the
Offering assuming no exercise of the Underwriters' overallotment option.
(7) Calculated as total estimated annual cash distribution divided by pro forma
estimated Funds from Operations for the 12 months following the completion
of the Offering.
(8) Calculated as total estimated annual cash distribution divided by pro forma
estimated Cash Available for Distribution for the 12 months following the
closing of the Offering.
40
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of December 31, 1997, and on a pro forma basis, as adjusted to give effect to
the Formation Transactions, the Offering and use of the net proceeds from the
Offering as set forth under "Use of Proceeds." The information set forth in the
table should be read in conjunction with the financial statements and notes
thereto, the pro forma financial information and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
PRO FORMA
HISTORICAL AS ADJUSTED
($ IN THOUSANDS)
Credit Facility (1) .............................. $-- $
Stockholders' Equity:
Preferred Stock $.001 par value per share
20,000,000 shares authorized; none issued and
outstanding ..................................... -- --
Common Stock $.001 par value per share
100,000,000 shares authorized, 100 shares is-
sued and outstanding (historical), 17,300,000
shares issued and outstanding (pro forma) (2).... --
Additional paid-in capital ....................... --
---
Total stockholders' equity ....................... --
---
Total capitalization ............................. $-- $
=== ===
- ----------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
(2) Includes: (i) 100 shares of Common Stock issued at the time of the
Company's formation on February 20, 1998 and (ii) 800,000 shares of Common
Stock to be issued in the Concurrent Offering. Does not include 513,650
shares issuable upon exercise of stock options to be granted under the
Company's 1998 Omnibus Securities and Incentive Plan at an exercise price
of $.001 per share.
41
<PAGE>
DILUTION
As of December 31, 1997, the Company had 100 shares of Common Stock issued
and outstanding. After giving effect to the sale of the Common Stock offered
hereby (at an assumed initial public offering price of $___ per share of Common
Stock) and the receipt by the Company of approximately $___ million in net
proceeds from the Offering (after deducting the Underwriters' discounts and
commissions and other estimated expenses of the Offering), the pro forma net
tangible book value at December 31, 1997 would have been approximately $___
million, or $___ per share of Common Stock. This amount represents an immediate
increase in net tangible book value of $___ per share of Common Stock to the
holder of the Common Stock issued in connection with the Formation Transactions
and an immediate dilution in pro forma net tangible book value of $___ per share
of Common Stock to new investors. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share .......................... $
Net tangible book value per share prior to Offering .............. $
Increase in net tangible book value per share attributable to
the Offering (1) ................................................
-------
Pro forma net tangible book value after the Offering (2) .........
-------
Dilution in net tangible book value per share of Common
Stock to the purchasers in the Offering (3) ..................... $
=======
</TABLE>
- ----------
(1) Based upon the initial public offering price of $___ per share of Common
Stock and after deducting Underwriters' discounts and commissions and
estimated expenses of the Offering.
(2) Based on total pro forma tangible book value of $__ million divided by
total number of shares outstanding after the completion of the Offering and
the Concurrent Offering of shares of Common Stock and 513,650 shares of
Common Stock issuable to the Company's executive officers, employees and
directors upon exercise of stock options to be granted under the Company's
1998 Omnibus Securities and Incentive Plan.
(3) Dilution is determined by subtracting net tangible book value per share of
Common Stock after the Offering from the initial public offering price of
$____ per share of Common Stock.
The following table summarizes, on a pro forma basis giving effect to the
Offering and the Formation Transactions, the number of shares of Common Stock to
be sold by the Company in the Offering, the net tangible book value as of
December 31, 1997 of the assets contributed by the Chairman of the Board and the
net tangible book value of the average contribution per share based on total
contributions.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK ISSUED CASH CONTRIBUTED
-------------------- --------------------
AVERAGE
SHARES PERCENT AMOUNT PERCENT BOOK VALUE
<S> <C> <C> <C> <C> <C>
Purchasers in the Offering .......... % $ (1) % $
Common Stock purchased in the
Concurrent Offering ................
Common Stock issued in the
Formation Transactions (2) .........
-------- ------ ---- ------ -------
Total (2) .......................... % $ % $
======== ====== ==== ====== =======
</TABLE>
- ----------
(1) Before deducting Underwriters' discounts and commissions and other
estimated expenses of the Offering.
(2) Assumes the issuance of 513,650 shares of Common Stock to the Company's
executive officers, employees and directors upon exercise of stock options
to be granted under the Company's 1998 Omnibus Securities and Incentive
Plan.
42
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table sets forth financial information for the Company which
is derived from the Balance Sheet and the Pro Forma Balance Sheet and Statements
of Operations included elsewhere in this Prospectus. The adjustments for the
Offering assume an initial public offering price of $___ per share of Common
Stock and that the Underwriters' overallotment option is not exercised.
Pro forma operating data are presented for the year ended December 31,
1997, as if the Offering, the acquisitions of the Initial Properties and the
Formation Transactions had occurred, and as if the respective leases had been in
effect at January 1, 1997. The pro forma balance sheet data is presented as of
December 31, 1997, as if the Offering and the acquisitions of the Initial
Properties and related transactions had occurred, and as if the respective
leases had been in effect at that date. The unaudited pro forma financial
information set forth below is not necessarily indicative of the Company's
financial position or the results of operations that actually would have
occurred if the transactions had been consummated on the dates shown. In
addition, it is not intended to be a projection of results of operations that
may be obtained in the Company's future. The unaudited pro forma financial
information should be read in conjunction with the financial statements and
related notes thereto included elsewhere in the Prospectus. See "Balance Sheet"
and "Pro Forma Balance Sheet and Statement of Operations."
<TABLE>
<CAPTION>
PRO FORMA AT OR FOR
THE YEAR ENDED
HISTORICAL(1) DECEMBER 31, 1997
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
PRO FORMA OPERATING DATA:
Revenues ............................................. $ -- $ 38,820
Net income ........................................... -- 21,704
Earnings per share, diluted .......................... $ -- $ 1.22
PRO FORMA BALANCE SHEET DATA:
Properties ........................................... -- 382,439
Other assets ......................................... -- 528
Total assets ......................................... -- 382,967
Credit Facility ...................................... -- 63,041
Other liabilities .................................... -- 2,026
Total stockholders' equity ........................... -- 317,900
===========
OTHER DATA:
Funds from Operations (2) ............................ -- 32,553
Weighted average number of shares of Common Stock out-
standing, diluted (3) .............................. -- 17,813,650
</TABLE>
- ----------
(1) The Company was formed on February 20, 1998 and was capitalized with the
issuance of 100 shares of Common Stock for an aggregate purchase price of
$100.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT, in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and after adjustments for unconsolidated partnerships and
joint ventures. The White Paper also provides for other adjustments to net
income in deriving Funds from Operations, including adjustments for
extraordinary, unusual, or non-recurring items. For a more detailed
description of the definition of Funds from Operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Includes shares of Common Stock issuable upon exercise of stock options to
be granted contemporaneously with the Offering.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in Maryland on February 20, 1998, and intends
to make an election and qualify under the Code as a REIT commencing with its
taxable year ended December 31, 1998. Substantially all of the Company's
revenues are expected to be derived from: (i) rental revenue received under
triple net leases of healthcare related real property facilities; (ii)
amortization of fees received in connection with property acquisitions and
leasing transactions; (iii) interest earned from mortgages secured by healthcare
facilities; and (iv) interest earned from the temporary investment of funds in
short term investments.
The Company will incur operating and administrative expenses including
principally, compensation expense for its executive officers and other
employees, office rental and related occupancy costs and various expenses
incurred in the process of acquiring additional properties. The Company will not
engage a separate advisor or pay an advisory fee for administrative services.
The Company also expects to engage in some debt financing and incur the
related interest expense and other financing costs. The Company intends to
declare dividends to its stockholders in amounts generally exceeding taxable
income.
RESULTS OF OPERATIONS
The Company has had no operations from the date of its incorporation to the
date of this Prospectus.
PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Properties and the Formation Transactions, revenues
would have been $38.8 million and net income would have been $21.7 million or
$1.22 per share, diluted. Funds from Operations would have been $32.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the net proceeds of this Offering, together with
the Credit Facility will be sufficient to consummate the purchase of the Initial
Properties. Management believes the Company will have adequate remaining credit
under the Credit Facility to meet its liquidity needs for the twelve-month
period following the Offering.
The Company may, under certain circumstances, borrow additional amounts in
connection with the acquisition of additional properties, funding of additional
loans, or as necessary, to meet certain distribution requirements imposed on
REITs under the Code. The Company may raise additional capital by issuing, in
private and public transactions, equity or debt securities, but the availability
and terms of any such issuance will depend upon market and other conditions.
There can be no assurance that the Company will be able to obtain additional
capital or financing on acceptable terms or at all.
Under the terms of the leases for the Initial Properties, the lessees are
responsible for all operating expenses, taxes, property and casualty insurance,
other costs, and all capital expenditures. All of the leases have a minimum
capital expenditure requirement per year. The Company may declare an event of
default in the event that Lyric III or the Facility Subtenants fail to make the
required capital expenditures. As a result of these arrangements, the Company
does not believe it will be responsible for any major expenses in connection
with the Initial Properties during the terms of the respective leases. After the
expiration or termination of the respective leases, or in the event a lessee is
unable to meet its obligations, the Company anticipates that any expenditures it
might become responsible for in maintaining the Initial Properties will be
funded by cash from operations and, in the case of major expenditures, from
borrowings. Any unanticipated expenditures or significant borrowings may
adversely affect the Company's Cash Available for Distribution and liquidity.
44
<PAGE>
The Company has received a non-binding proposal and anticipates entering
into a three year unsecured credit facility, which would be used to pay a
portion of the purchase price of the Initial Properties, to facilitate future
acquisitions, for working capital needs, or for other general corporate
purposes. The Credit Facility will provide $150 million at a floating rate of
LIBOR plus a margin ranging from 100 to 150 basis points depending on the
overall debt to book capitalization of the Company ranging from less than 30% to
greater than 50%. The Credit Facility will also have an unused commitment fee
ranging from 20 to 37.5 basis points on the unused portion of the Credit
Facility. The Company will pay a $375,000 up front commitment fee for the Credit
Facility. The Credit Facility will have a term of three years with optional
renewal periods thereafter. In certain instances, the terms of the Credit
Facility may require the Company to enter into interest rate swaps, caps, or
other hedging arrangements in order to reduce the risk of rising interest rates.
The Credit Facility will have covenants on net worth, leverage, interest
coverage and fixed charge coverage. It will also include a negative pledge on
all property included in the borrowing base.
In addition to the Initial Properties, the Company has an option to
purchase 10 properties from IHS for an aggregate purchase price of approximately
$104.7 million. The option will be separately exercisable for each property at
the Company's election for a term of two years subject to three successive
one-year renewal options. The Company may acquire these properties by drawing on
the Credit Facility, issuing additional equity or debt, using the proceeds of
the Underwriters' overallotment option, or not at all.
NON-CASH COMPENSATION EXPENSE
Concurrent with the Offering, the Company intends to grant options to
purchase an aggregate of 513,650 shares of Common Stock to directors, executive
officers and employees of the Company. The options will have an exercise price
of $.001 per share and will become exercisable immediately. Accordingly, the
Company will recognize compensation expense equal to $10.3 million (the
difference between the Offering price and the exercise price of the options).
This expense will be recognized in the fiscal quarter in which the options are
granted. This expense relates to the formation of the Company and is a
non-recurring item. Accordingly, it has not been reflected in the pro forma
statement of operations.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT, in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
after adjustments for unconsolidated partnerships and joint ventures. The White
Paper also provides for other adjustments to net income in deriving Funds from
Operations, including adjustments for extraordinary, unusual, or non-recurring
items. Accordingly, the Company intends to adjust net income in computing Funds
from Operations by the amount of the non-cash compensation expense discussed
above. The Company believes that Funds from Operations is helpful to investors
as a measure of the performance of an equity REIT because, along with cash flow
from operating activities, financing activities and investing activities, it
provides investors with an indication of the ability of the Company to incur and
service debt, to make capital expenditures, and to fund other cash needs. The
Company computes Funds from Operations in accordance with standards established
by NAREIT which may not be comparable to Funds from Operations reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current definition differently than the
Company. Funds from Operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles ("GAAP")
and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
YEAR 2000 COMPLIANCE
The year 2000 compliance issue relates to whether computer systems will
properly recognize date sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. Systems that do not
properly recognize such information could generate erroneous data or fail.
45
<PAGE>
The Company believes its computer hardware and software systems will not be
materially and adversely affected by the calendar year 2000 conversion date.
However, this issue is expected to affect the systems of various entities with
which the Company interacts, including payors, suppliers and vendors. There can
be no assurance that the systems of other entities on which the Company's
systems rely will be timely converted, or that a failure by another entity's
systems to be year 2000 compliant would not have a material adverse effect on
the Company's business, financial condition and results of operations.
46
<PAGE>
BUSINESS OF THE COMPANY AND ITS PROPERTIES
The following discussion of the Initial Properties includes a description
of the lessees of the Initial Properties to be acquired by the Company. Unless
otherwise indicated, all information is given as of December 31, 1997. The
financial and operating data relating to the Lyric Properties is presented
herein only for the periods during which such properties were managed by IHS.
IHS is subject to the reporting requirements of the Securities and Exchange
Commission (the "SEC") and files annual reports containing audited financial
information and quarterly reports for the first three quarters of each fiscal
year containing unaudited financial information with the SEC. The information
provided with respect to IHS is derived, for the limited purposes of this
Prospectus, from filings made with the SEC or has been furnished to the Company
by IHS.
GENERAL
The Company has been formed to invest in a diversified portfolio of
healthcare properties. Initially, the Company will own fee interests in 47
properties in 15 states, primarily in the southern and south-eastern United
States. Upon completion of the Formation Transactions, the Company will own 42
skilled nursing facilities with a total of approximately 5,914 beds and five
specialty hospitals with a total of approximately 181 beds. The Company will
purchase 44 of the Initial Properties from IHS and the other three Initial
Properties will be purchased from an unaffiliated third party. The Company
intends to expand its geographic base by making investments in diverse
geographic markets that satisfy the Company's demographic and economic
underwriting criteria. In addition, the Company intends to diversify its
facility operator base by entering into relationships with a number of leading
or emerging healthcare providers throughout the United States.
The Lyric Properties, which are comprised of the 21 IHS Historical
Properties and the 21 HHC Properties, will each be leased to Lyric III on a
triple net basis, pursuant to the Master Lease and subleased to the Facility
Subtenants pursuant to the Facility Subleases. Lyric III will enter into a
management agreement and a franchise agreement with IHS subject to the Master
Lease. All management and franchise fees payable to IHS will be subordinated to
payments under the Master Lease. Monarch will have the benefits of cross default
provisions and effective cross collateralization protection under the Master
Lease by virtue of the availability of the aggregate rent payments of all of the
Facility Subtenants to satisfy the obligations of Lyric III under the Master
Lease. In addition, Lyric III will deposit with the Company as a security
deposit a Letter of Credit in an amount equal to six months of the estimated
rents payable with respect to the Master Lease. Rent payments and the
performance of Lyric III under the Master Lease and the Facility Subtenants
under the Facility Subleases will be guaranteed by Lyric. IHS will manage all of
the Lyric Properties under a management agreement with Lyric.
The Company will acquire the three Trans Health Properties from an
unaffiliated third party. The Trans Health Properties will each be leased,
pursuant to a long-term, triple net lease, to wholly owned subsidiaries of Trans
Health. Rent payments and performance of the Trans Health subsidiaries under the
leases will be unconditionally guaranteed by Trans Health. See "-- Trans Health
Transaction."
The Company will acquire the two Peak Medical Properties from IHS. The Peak
Medical Properties will each be leased, pursuant to a long-term, triple net
lease, to wholly owned subsidiaries of Peak Medical. Rent payments and
performance of the Peak Medical subsidiaries under the leases will be
unconditionally guaranteed by Peak Medical. See "-- Peak Medical Transaction".
SKILLED NURSING FACILITIES
Forty-two of the Initial Properties will be skilled nursing facilities
("SNFs") with a total of approximately 5,914 beds. Services provided in the
skilled nursing facilities include required nursing care, room and board,
special diets, and other services such as rehabilitative therapy, ventilator
therapy and pharmaceuticals which may be specified by a patient's physician who
directs the admission, treatment and discharge of the patient. In addition, the
skilled nursing facilities to be acquired from IHS provide subacute medical and
rehabilitative care services which have traditionally been delivered in the
acute care hospital setting.
47
<PAGE>
IHS SKILLED NURSING FACILITIES. Twenty of the skilled nursing facilities to
be purchased by Monarch from IHS, located in nine states with a total of
approximately 2,867 beds, were operated by IHS prior to December 31, 1997. For
the year ended December 31, 1997, these facilities generated aggregate revenues
of $174.7 million and had aggregate EBITDARM of $35.9 million, resulting in an
EBITDARM margin of 20.5%. For meaning of "EBITDARM" see the "Glossary." For
1997, the aggregate payor mix for these facilities was 38.5% Medicare, 30.0%
Medicaid and 31.5% private and other. The aggregate average revenue per patient
day for the same period was $184, ranging from $85 to $381 per facility, and the
aggregate occupancy was 91%, ranging from 73% to 97% per facility. For the three
months ended March 31, 1998, these facilities generated aggregate revenues of $
million and had aggregate EBITDARM of $ million, resulting in an EBITDARM margin
of __%. For the three months ended March 31, 1998, the aggregate payor mix for
these facilities was % Medicare, __% Medicaid and __% private and other. The
aggregate average revenue per patient day for the same period was $____ ,
ranging from $____ to $____ per facility, and the average occupancy was __%,
ranging from __% to __% per facility. Revenues per patient day and occupancy
varies by the services offered by the facility, the competitive and
reimbursement environment, the patient care level and the competitive position
of the facility.
HHC SKILLED NURSING FACILITIES. Seventeen of the skilled nursing facilities
to be purchased by Monarch from IHS, located in six states with a total of
approximately 2,520 beds, were acquired by IHS on December 31, 1997. For the
three months ended March 31, 1998, these facilities generated aggregate revenues
of $____ million and had aggregate EBITDARM of $____ million, resulting in an
EBITDARM margin of __%. For the three month period ended March 31, 1998, the
aggregate payor mix for these facilities was __% Medicare, __% Medicaid and __%
private and other. The aggregate average revenue per patient day for the same
period was $____ , ranging from $____ to $____ per facility, and the average
occupancy was __%, ranging from __% to __% per facility. On an annualized basis,
which would represent a full year of operations under the management of IHS,
these facilities would have generated aggregate revenues of $____ million.
However, annualized revenues may not necessarily reflect actual revenues.
OTHER SKILLED NURSING FACILITIES. The Company will purchase an additional
two skilled nursing facilities from IHS, located in Idaho with a total of
approximately 224 beds, which will be leased to a subsidiary of Peak Medical and
three skilled nursing facilities from a third party, located in Arkansas, with a
total of approximately 303 beds, which will be leased to a subsidiary of Trans
Health. See "-- Peak Medical Transaction" and "-- Trans Health Transaction."
SPECIALTY HOSPITALS
Five of the Initial Properties will be specialty hospitals with a total of
approximately 181 beds. Each of the specialty hospitals, with the exception of
IHS Hospital of Houston, are connected to or adjacent to a skilled nursing
facility included in the Initial Properties and are situated on a single parcel
of land. Specialty hospitals treat patients requiring a higher level of care
than skilled nursing facilities. These facilities receive a higher percentage of
net revenues from the Medicare program. They also tend to have higher revenues
per patient day. The facilities use state-of-the-art technology and a highly
trained staff of licensed and experienced professionals. Patients are medically
stable, but still need extended hospitalization, including 24-hour professional
nursing care, daily visits by a physician, critical care services, and
rehabilitation services. Specific services provided in the specialty hospitals
include complex care programs, ventilation weaning and management, wound
management programs, cardiac care programs, pre- and post-surgical
rehabilitation and patient/family teaching programs. These facilities fill a
higher level care model in the post-acute continuum of care.
IHS SPECIALTY HOSPITALS. The Company will purchase one specialty hospital
(IHS Hospital at Houston) with approximately 59 beds, which was operated by IHS
prior to December 31, 1997. This specialty hospital provides medically complex
care such as wound care, ventilation, cardiac care, post surgical rehabilitation
and spinal cord injuries. For the year ended December 31, 1997, this facility
generated revenues of $13.7 million and had EBITDARM of $2.7 million, resulting
in an EBITDARM margin of 19.9%. For 1997, the payor mix was 100% Medicare. The
average revenue per patient day for the same period was $828 and the average
occupancy was 77%. For the three months ended March 31, 1998, this facility
generated revenues of $____ million and had EBITDARM of $____ million, resulting
in an
48
<PAGE>
EBITDARM margin of __%. For the three months ended March 31, 1998, the payor mix
was __% Medicare, __% Medicaid and __% private and other. The aggregate average
revenue per patient day for the same period was $____ and the average occupancy
was __%.
HHC SPECIALTY HOSPITALS. Four of the specialty hospitals to be purchased by
Monarch from IHS, located in two states with a total of approximately 122 beds,
were acquired by IHS on December 31, 1997. For the three months ended March 31,
1998, these facilities generated aggregate revenues of $____ million and had
aggregate EBITDARM of $____ million, resulting in an EBITDARM margin of __%. For
the three month period ended March 31, 1998, the aggregate payor mix for these
facilities was __% Medicare, __% Medicaid and __% private and other. The
aggregate average revenue per patient day for the same period was $____ ,
ranging from $____ to $____ per facility, and the average occupancy was __%,
ranging from __% to __% per facility. On an annualized basis, which would
represent a full year of operations under the management of IHS, these
facilities would have generated aggregate revenues of $____ million. However,
annualized revenues may not necessarily reflect actual revenues.
LYRIC TRANSACTION
The Company will acquire the 21 IHS Historical Properties and the 21 HHC
Properties which comprise the Lyric Properties from IHS for a purchase price of
approximately $359.7 million. The Lyric Properties will be leased to Lyric III
pursuant to the Master Lease and subleased to the Facility Subtenants pursuant
to the Facility Subleases. Lyric III is a recently formed Delaware corporation
whose sole assets will be the stock of the Facility Subtenants. The Facility
Subtenants are all former IHS subsidiaries whose stock will be transferred to
Lyric III contemporaneously with the date of the transfer of the Initial
Properties by IHS to the Company.
Lyric is the sole stockholder of Lyric III. Pursuant to the Lyric Guaranty,
Lyric will unconditionally guarantee the performance and payment obligations of
Lyric III and the Facility Subtenants for the term of the Master Lease and the
Facility Subleases. Lyric is owned 50% by IHS and 50% by TFN which is 100%
beneficially owned by Timothy F. Nicholson, a director of IHS. Consolidated
subsidiaries of Lyric currently lease ten healthcare facilities from an
unaffiliated publicly traded healthcare REIT. Lyric unconditionally guarantees
the payment and performance obligations of the Lyric subsidiaries under the
leases. The consolidated financial statements and notes thereto of Lyric for the
three years ended December 31, 1997 are included elsewhere in this Prospectus.
All of the Initial Properties leased to Lyric III under the Master Lease
and subleased to the Facility Subtenants under the Facility Subleases will be
managed by IHS Facility Management, Inc., a wholly owned subsidiary of IHS. IHS,
headquartered in Owings Mills, Maryland, is one of the nation's leading
providers of post-acute healthcare services. IHS was founded in 1986. IHS'
post-acute care services include subacute care, skilled nursing facility care,
home respiratory care, home health nursing care, other home care services and
contract rehabilitation, hospice, lithotripsy and diagnostic services. The
various geriatric care facilities currently owned, leased or managed by IHS
offer extended care to elderly and other patients not able to live
independently. Since 1993, IHS has focused on the development of a post-acute
care network to provide a continuation of care to patients following discharge
from an acute care hospital. IHS' post-acute care network currently consists of
approximately 2,000 service locations in 48 states and the District of Columbia,
including 312 geriatric care facilities in 35 states (excluding 38 facilities
currently being held for sale).
TRANS HEALTH TRANSACTION
The Company has entered into a commitment letter with Trans Health to
finance the acquisition of three skilled nursing facilities located in Arkansas
with a total of approximately 303 beds, comprising the Trans Health Properties
and lease the facilities back to wholly owned subsidiaries of Trans Health (the
"Trans Health Tenants"). The total purchase price of the Trans Health Properties
is approximately $11.5 million. Trans Health was recently formed by several
former executives of HHC and intends to offer post-acute services focusing on
specialty hospitals and developing a continuum of care. Trans
49
<PAGE>
Health also intends to operate outpatient clinics in its market area. Trans
Health's chairman, president and CEO is Anthony Misitano. Prior to forming Trans
Health, Mr. Misitano was president and chief executive officer of Continental
Medical Systems, Inc., a subsidiary of HHC, and senior vice president of HHC.
The Trans Health Tenants will lease the Trans Health Properties from the
Company for an initial term of 11 years with two successive options to renew for
additional periods of five years each, pursuant to a lease substantially similar
to the Master Lease (the "Trans Health Lease"). The Trans Health Lease will
provide for a minimum base rent equal to the purchase price multiplied by 400
basis points over the current yield on U.S. Treasury debt securities of the same
maturity as the term of the Trans Health Lease (subject to a minimum base rent
equal to 9.6% of the purchase price) with annual base rent increases equal to
the change in the CPI, with a minimum base rent increase of 2% and a maximum
base rent increase of 5% (subject to certain conditions set forth in the lease).
Trans Health will guarantee the payment and performance obligations of the Trans
Health Tenants under the Trans Health Lease. The Trans Health Lease will be a
triple net lease that requires the Trans Health Tenants to pay all operating
expenses, taxes, insurance and other costs associated with the Trans Health
Properties, including annual required capital expenditures equal to at least
$250 per bed, the amount to be increased annually by the change in the CPI. The
Trans Health Tenants will be required to maintain a security deposit with the
Company ranging in amount from three months of base rent to up to nine months of
base rent, the size of the security deposit depending on the Trans Health
Properties' attaining certain financial covenants. The Trans Health Lease will
provide the Company with broad indemnification protection for past or present
liabilities at the Trans Health Properties.
PEAK MEDICAL TRANSACTION
The Company will also acquire from IHS two skilled nursing facilities
located in Idaho with a total of approximately 224 beds comprising the Peak
Medical Properties and lease the facilities back to the Peak Medical Tenant. The
total purchase price for the Peak Medical Properties will be approximately $11.3
million. The Peak Medical Properties will be acquired subject to an existing
master lease with the Peak Medical Tenant. Peak Medical was formed by former
executive officers of HHC. Peak Medical will acquire and utilize skilled nursing
facilities to develop community and regionally concentrated post-acute
healthcare networks. At the time the Company acquires the Peak Medical
Properties, Peak will be operating 10 skilled nursing facilities with a total of
1,176 beds and one assisted living facility with a total of 250 beds. The
founding stockholders have over 65 years of healthcare experience with strength
in the long-term care and assisted living segments. Peak Medical's president and
chief executive officer is Charles H. Gonzales who last served as a director and
senior vice president of subsidiary operations for HHC.
The Peak Medical Tenant will lease the Peak Medical Properties for an
initial term of 12 years, with two successive options to renew for additional
periods of 10 years each. This lease is substantially similar to the Master
Lease (the "Peak Medical Lease"). The Peak Medical Lease provides for a minimum
base rent equal to the purchase price multiplied by 375 basis points over the
current yield on U.S. Treasury debt securities of the same maturity as the term
of the Peak Medical Lease (subject to a minimum base rent equal to 9.4% of the
purchase price), with annual base rent increases equal to the change in the CPI,
with a minimum base rent increase of 2% and a maximum base rent increase of 5%
(subject to certain conditions set forth in the lease). Peak Medical guarantees
the payment and performance obligations of the Peak Medical Tenant under the
Peak Medical Lease. The Peak Medical Lease is a triple net lease that requires
the Peak Medical Tenant to pay all operating expenses, taxes, insurance and
other costs associated with the Peak Medical Properties, including annual
required capital expenditures equal to at least $300 per bed, the amount to be
increased annually by the change in the CPI. The Peak Medical Tenant will be
required to maintain a security deposit with the Company equal to a maximum of
nine months of base rent, with the amount to be determined every six months
based upon a cash flow coverage ratio. The Peak Medical Lease provides the
Company with broad indemnification protection for past or present liabilities at
the Peak Medical Properties.
50
<PAGE>
THE INITIAL PROPERTIES
The table below sets forth certain information regarding the Initial
Properties. The Initial Properties are comprised of 42 skilled nursing
facilities with 5,914 beds and five specialty hospitals with 181 beds. The
aggregate purchase price of the Initial Properties is approximately $382.4
million. The Company has a purchase option to acquire 10 additional skilled
nursing facilities from IHS for an aggregate purchase price of approximately
$104.7 million. See "Business of the Company and its Properties" for a
description of the Initial Properties and "Selected Historical and Pro Forma
Financial Information" for a quantification of the base rents for the Initial
Properties.
<TABLE>
<CAPTION>
YEAR NUMBER
BUILT/ OF 1997
PROPERTY (LOCATION) RENOVATED BEDS(1) OCCUPANCY(2)
<S> <C> <C> <C>
SKILLED NURSING FACILITIES (FORTY-TWO):
IHS HISTORICAL PROPERTIES (4)
IHS of Colorado Springs (Colorado Springs, CO). 1986 155 73%
IHS at Brandon (Brandon, FL) ......................... 1990 120 91
IHS at Central Park Village (Orlando, FL) ............ 1984 120 89
IHS at Vero Beach (Vero Beach, FL) ................... 1981 110 91
IHS of Florida at Auburndale (Auburndale, FL)......... 1972 120 90
IHS of Florida at Clearwater (Clearwater, FL) ........ 1982 150 96
IHS of Florida at Fort Pierce (Fort Pierce, FL) ...... 1981 107 95
IHS at Briarcliff Haven (Atlanta, GA) ................ 1973 128 93
IHS of Lakeland at Oakbridge (Lakeland, FL) .......... 1991 120 94
IHS of Sarasota at Beneva (Sarasota, FL) ............. 1982 120 93
IHS of Iowa at Des Moines (Des Moines, IA) ........... 1967 93 81
IHS at Brentwood (Burbank, IL) ....................... 1965 165 81
IHS of St. Louis at Big Bend Woods
(Valley Park, MO) ................................... 1940 176 94
IHS of New Hampshire at Manchester
(Manchester, NH) .................................... 1982 68 89
IHS at Whitemarsh (Whitemarsh, PA) ................... 1967 247 97
IHS of Pennsylvania at Broomall (Broomall, PA). 1959 306 95
IHS of Amarillo (Amarillo, TX) (5) ................... 1985 153 90
IHS of Texoma at Sherman (Sherman, TX) ............... 1981 179 86
IHS of West Palm Beach (West Palm Beach, FL). 1993 120 97
Vintage Health Care Center (Denton, TX) .............. 1985 110 96
----- --
SUBTOTAL/WEIGHTED AVERAGE .......................... 2,867 91
----- --
HHC PROPERTIES (6)
Horizon Healthcare & Specialty Center
(Daytona Beach, FL) ................................. 1964 113 90
Meadowview Care Center (Seville, OH) ................. 1981 100 83
Washington Square (Warren, OH) ....................... 1975 96 96
Midwest City Nursing (Midwest City, OK) .............. 1989 174 60
Lynwood Manor (Adrian, MI) ........................... 1969 99 93
Ruidoso Care Center (Ruidoso, NM) .................... 1975 85 97
Doctors Healthcare Center (Dallas, TX) ............... 1964 325 75
Harbor View Care Center (Corpus Christi, TX) ......... 1968 116 90
Heritage Estates (Ft. Worth, TX) ..................... 1975 149 95
Heritage Gardens (Carrollton, TX) .................... 1972 152 94
Heritage Manor Longview (Longview, TX) ............... 1977 150 84
Heritage Manor Plano (Plano, TX) ..................... 1976 188 88
Heritage Place of Grand Prairie (Grand Prairie, TX) 1984 164 92
Horizon Healthcare-El Paso (El Paso, TX) ............. 1970 182 92
Longmeadow Care Center (Justin, TX) .................. 1988 120 88
Parkwood Place (Lubkin, TX) .......................... 1919/1980 157 74
Silver Springs Nursing and Rehabilitation
Center (Houston, TX) ................................ 1974 150 80
----- --
SUBTOTAL/WEIGHTED AVERAGE .......................... 2,520 85
----- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INITIAL
PURCHASE PERCENTAGE LEASE
PRICE OF INITIAL TERM
PROPERTY (LOCATION) ($ IN THOUSANDS) PROPERTIES (YEARS)(3)
<S> <C> <C> <C>
SKILLED NURSING FACILITIES (FORTY-TWO):
IHS HISTORICAL PROPERTIES (4)
IHS of Colorado Springs (Colorado Springs, CO). $ 9,129 2.4% 9
IHS at Brandon (Brandon, FL) ......................... 9,563 2.5 10
IHS at Central Park Village (Orlando, FL) ............ 7,297 1.9 10
IHS at Vero Beach (Vero Beach, FL) ................... 7,821 2.0 10
IHS of Florida at Auburndale (Auburndale, FL)......... 8,535 2.2 11
IHS of Florida at Clearwater (Clearwater, FL) ........ 11,482 3.0 10
IHS of Florida at Fort Pierce (Fort Pierce, FL) ...... 5,922 1.5 9
IHS at Briarcliff Haven (Atlanta, GA) ................ 9,944 2.6 13
IHS of Lakeland at Oakbridge (Lakeland, FL) .......... 9,843 2.6 11
IHS of Sarasota at Beneva (Sarasota, FL) ............. 8,939 2.3 13
IHS of Iowa at Des Moines (Des Moines, IA) ........... 3,787 1.0 11
IHS at Brentwood (Burbank, IL) ....................... 43,692 11.4 11
IHS of St. Louis at Big Bend Woods
(Valley Park, MO) ................................... 6,713 1.9 10
IHS of New Hampshire at Manchester
(Manchester, NH) .................................... 6,569 1.7 9
IHS at Whitemarsh (Whitemarsh, PA) ................... 21,192 5.5 12
IHS of Pennsylvania at Broomall (Broomall, PA). 35,923 9.4 11
IHS of Amarillo (Amarillo, TX) (5) ................... 9,720 2.5 13
IHS of Texoma at Sherman (Sherman, TX) ............... 8,358 2.2 13
IHS of West Palm Beach (West Palm Beach, FL). 13,200 3.5 13
Vintage Health Care Center (Denton, TX) .............. 4,839 1.3 12
-------- ---- ----
SUBTOTAL/WEIGHTED AVERAGE .......................... 242,468 63.4 11.2
-------- ---- ----
HHC PROPERTIES (6)
Horizon Healthcare & Specialty Center
(Daytona Beach, FL) ................................. 4,385 1.1 9
Meadowview Care Center (Seville, OH) ................. 2,923 0.8 9
Washington Square (Warren, OH) ....................... 4,038 1.1 10
Midwest City Nursing (Midwest City, OK) .............. 3,921 1.0 11
Lynwood Manor (Adrian, MI) ........................... 6,008 1.6 12
Ruidoso Care Center (Ruidoso, NM) .................... 2,657 0.7 10
Doctors Healthcare Center (Dallas, TX) ............... 7,537 2.0 11
Harbor View Care Center (Corpus Christi, TX) ......... 3,963 1.0 13
Heritage Estates (Ft. Worth, TX) ..................... 6,889 1.8 13
Heritage Gardens (Carrollton, TX) .................... 6,856 1.8 12
Heritage Manor Longview (Longview, TX) ............... 8,315 2.2 10
Heritage Manor Plano (Plano, TX) ..................... 12,676 3.3 9
Heritage Place of Grand Prairie (Grand Prairie, TX) 5,107 1.3 12
Horizon Healthcare-El Paso (El Paso, TX) ............. 3,055 0.8 12
Longmeadow Care Center (Justin, TX) .................. 2,677 0.7 13
Parkwood Place (Lubkin, TX) .......................... 3,519 0.9 12
Silver Springs Nursing and Rehabilitation
Center (Houston, TX) ................................ 7,451 1.9 13
-------- ---- ----
SUBTOTAL/WEIGHTED AVERAGE .......................... 91,977 24.0 11.1
-------- ---- ----
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
YEAR NUMBER
BUILT/ OF 1997
PROPERTY (LOCATION) RENOVATED BEDS(1) OCCUPANCY(2)
<S> <C> <C> <C>
PEAK MEDICAL PROPERTIES (7)
Idaho Falls Care Center (Idaho Falls, ID) ........... 1990 108 93%
Twin Falls Care Center (Twin Falls, ID) ............. 1989 116 77
SUBTOTAL/WEIGHTED AVERAGE ......................... 224 85
--- --
TRANS HEALTH PROPERTIES (8)
Fulton County Nursing and Rehab Center
(Salon, AR) ........................................ 1962/1991 125 93
Lakeland Lodge Nursing Center
(Heber Springs, AR) ................................ 1962 102 93
Pioneer Nursing and Rehab Center
(Melbourne, AR) .................................... 1996 76 93
SUBTOTAL/WEIGHTED AVERAGE ......................... 303 93
--- --
TOTAL/WEIGHTED AVERAGE SKILLED NURSING
FACILITIES ....................................... 5,914 88
----- --
SPECIALITY HOSPITALS (FIVE):
IHS HISTORICAL PROPERTIES (4)
IHS Hospital at Houston (Houston, TX) ............... 1963 59 77
HHC PROPERTIES (6)
HSH-Midwest City (Midwest City, OK) ................. 1989 30 47
HSH-El Paso (El Paso, TX) ........................... 1970 31 81
HSH-Plano (Plano Specialty Hospital) (Plano, TX) 1976 30 40
HSH-Corpus Christi (Corpus Christi, TX) ............. 1968 31 57
SUBTOTAL/WEIGHTED AVERAGE ......................... 122 57
----- --
TOTAL/WEIGHTED AVERAGE SPECIALTY
HOSPITALS ....................................... 181 63.2
----- ----
TOTAL INITIAL PROPERTIES ......................... 6,095 87.5%
===== ====
<CAPTION>
INITIAL
PURCHASE PERCENTAGE LEASE
PRICE OF INITIAL TERM
PROPERTY (LOCATION) ($ IN THOUSANDS) PROPERTIES (YEARS)(3)
<S> <C> <C> <C>
PEAK MEDICAL PROPERTIES (7)
Idaho Falls Care Center (Idaho Falls, ID) ........... $ 6,500 1.7% 12
Twin Falls Care Center (Twin Falls, ID) ............. 4,800 1.3 12
-------- ---- --
SUBTOTAL/WEIGHTED AVERAGE ......................... 11,300 3.0 12
-------- ---- --
TRANS HEALTH PROPERTIES (8)
Fulton County Nursing and Rehab Center
(Salon, AR) ........................................ 3,343 0.9 11
Lakeland Lodge Nursing Center
(Heber Springs, AR) ................................ 2,957 0.8 11
Pioneer Nursing and Rehab Center
(Melbourne, AR) .................................... 5,175 1.3 11
-------- ---- --
SUBTOTAL/WEIGHTED AVERAGE ......................... 11,475 3.0 11
-------- ---- --
TOTAL/WEIGHTED AVERAGE SKILLED NURSING
FACILITIES ....................................... 357,220 93.4 11.2
-------- ---- ----
SPECIALITY HOSPITALS (FIVE):
IHS HISTORICAL PROPERTIES (4)
IHS Hospital at Houston (Houston, TX) ............... 19,679 5.1 9
-------- ---- ----
HHC PROPERTIES (6)
HSH-Midwest City (Midwest City, OK) ................. 354 0.1% 11
HSH-El Paso (El Paso, TX) ........................... 1,227 0.3 12
HSH-Plano (Plano Specialty Hospital) (Plano, TX) 2,255 0.6 9
HSH-Corpus Christi (Corpus Christi, TX) ............. 1,704 0.5 13
-------- ---- ----
SUBTOTAL/WEIGHTED AVERAGE ......................... 5,540 1.5 11.0
-------- ---- ----
TOTAL/WEIGHTED AVERAGE SPECIALTY
HOSPITALS ....................................... 25,218 6.6 9.4
-------- ---- ----
TOTAL INITIAL PROPERTIES ......................... $382,439 100% 11.1
======== ==== ====
</TABLE>
- ----------
(1) Based on the number of private and semi-private beds currently available.
(2) Based on weighted average occupancy for the 12 months ended December 31,
1997.
(3) Represents the initial lease term under each of the leases for these
facilities, which leases will be entered into as of the closing of the
Offering and excludes all renewal options.
(4) "IHS Historical Properties" means the Initial Properties which have been
owned and managed by IHS for more than one year. All of the IHS Historical
Properties will be leased to Lyric III, pursuant to the Master Lease, and
subleased to wholly owned subsidiaries of Lyric III.
(5) Facility also includes a specialty hospital consisting of 33 beds.
(6) "HHC Properties" means the Initial Properties which were owned and managed
by Horizon/CMS Healthcare Corporation, ("HHC") prior to December 31, 1997
and were acquired by IHS effective December 31, 1997, and will be leased to
Lyric III, pursuant to the Master Lease and subleased to wholly owned
subsidiaries of Lyric III.
(7) "Peak Medical Properties" means the Initial Properties which were owned and
managed by HHC prior to December 31, 1997, and were acquired by IHS
effective December 31, 1997, and will be leased to and managed by Peak
Medical of Idaho, Inc., ("Peak Medical Tenant") a wholly owned subsidiary
of Peak Medical Corporation ("Peak Medical").
(8) "Trans Health Properties" means the Initial Properties to be acquired from
an unaffiliated third party. The Trans Health Properties will be leased to
a subsidiary of Trans Healthcare, Inc. ("Trans Health").
52
<PAGE>
OPTION PROPERTIES
The Company will have options to acquire up to 10 additional skilled
nursing facilities with 1,683 beds from IHS with an aggregate purchase price of
approximately $104.7 million. One of the skilled nursing facilities contains a
subacute care unit, with an aggregate 183 beds, designated for treating patients
needing a higher level of care. For the three months ended March 31, 1998, the
10 skilled nursing facilities had a weighted average occupancy of __%, while
individual facilities ranged from __% to __%. Weighted aggregate revenue per
patient day was $____ , while individual facilities ranged from $____ to $____ .
The aggregate payor mix was __% Medicare, __% Medicaid and __% private and
other.
The Purchase Option Agreement will have an initial term of two years, with
the Company granted three successive renewal options of one year each. For the
first six months of the term of the Purchase Option Agreement, each facility
will have a fixed purchase price described in the Purchase Option Agreement,
which purchase price was based on current appraisals. For the remaining term of
the Purchase Option Agreement, including renewals, the purchase price will be
the greater of the fixed price or a multiple of the facility's EBITDARM for the
prior 12 months. The Company will pay non-refundable purchase option deposits to
IHS in the amount of 0.5% of an applicable facility's purchase price for each
facility as to which a renewal option is exercised, with the amount of such
deposits to be credited against the purchase price for any facility for which
the Company subsequently exercises its option. All facilities acquired by the
Company under the Purchase Option Agreement will be leased to Lyric III and its
consolidated subsidiaries and managed by IHS. Each exercise of the Purchase
Option Agreement will be approved by a majority of the Company's disinterested
directors.
The following table sets forth certain information regarding the properties
included in the Purchase Option Agreement between the Company and IHS. It is
expected that should the Company acquire any of the properties under the
Purchase Option Agreement, they will be leased to Lyric III pursuant to the
Master Lease, subleased to each of the current IHS subsidiary owners pursuant to
subleases substantially similar to the Facility Subleases and managed by IHS.
The Operating Partnership will hold a fee interest in any properties acquired in
the future under the Purchase Option Agreement.
<TABLE>
<CAPTION>
YEAR BUILT/ NUMBER OF PURCHASE PRICE
PROPERTY LOCATION RENOVATED BEDS (1) OCCUPANCY(2) ($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SKILLED NURSING FACILITIES:
Henderson SNF #1 Henderson, NV 1985/1991 140 $ 6,198
Henderson SNF #2 Henderson, NV 1985/1991 124 5,490
Heritage Forest Lane Dallas, TX 1975 120 4,357
Heritage Manor Canton Canton, TX 1974 110 7,644
Heritage Oaks Arlington, TX 1968 204 13,868
Heritage Place Mesquite, TX 1972 149 9,635
Heritage Village Richardson, TX 1978 280 12,559
IHS at Greenbriar Miami, FL 1968 203 23,342
Mountain View Place El Paso, TX 1969 193 8,708
Winterhaven Nursing Home Houston, TX 1969 160 12,925
--------- --- --- --------
TOTAL/WEIGHTED AVERAGE 1,683 $104,726
===== === ========
</TABLE>
- ----------
(1) Based on the number of private and semi-private beds available as of
December 31, 1997.
(2) Based on total weighted average occupancy for the three months ended March
31, 1998.
53
<PAGE>
ADDITIONAL INFORMATION REGARDING DESCRIPTION OF SIGNIFICANT INITIAL PROPERTIES
Set forth below is a description of the four largest Initial Properties
(based on the facility purchase price).
INTEGRATED HEALTH SERVICES AT BRENTWOOD ("BRENTWOOD"). Brentwood is a
two-story, 44,356 square foot skilled nursing facility comprised of two
buildings located on 1.86 acres of land in Burbank, Illinois. This facility was
built in 1965 and has 165 beds, including a 101-bed sub-acute unit. Special
medical equipment such as built-in oxygen and suction is provided for the
sub-acute beds. The facility has five patient dining rooms and a gymnasium for
rehabilitation services. For the year ended December 31, 1997, the payor mix for
Brentwood was approximately 35% Medicare, 0% Medicaid and 65% private pay and
other. The Company will acquire Brentwood from IHS for approximately $43.7
million in cash. Average occupancy and average revenue per patient day of
Brentwood for each of the last five years is set forth in the table below:
AVERAGE AVERAGE REVENUE
YEAR OCCUPANCY PER PATIENT DAY
1997 ......... 81% $381
1996 ......... 76 360
1995 ......... 76 401
1994 ......... 72 447
1993 ......... 70 386
The principal referral sources for Brentwood include six area hospitals and
various managed care companies. The Brentwood facility competes for patients
with several other skilled nursing and sub-acute care facilities in its market
area.
Brentwood provides long-term care services for a mix of residents,
including those who are alert and need minimal assistance, those whose mental
state is considered lower than alert and those with early Alzheimer's. The
subacute beds are for oncology, cardiac or other critically ill patients, for
whom the facility can provide a variety of treatments, including chemotherapy,
tracheotomy/ventilation weaning, peritoneal dialysis, wound care, cardiac
monitoring, infectious disease management, diabetic monitoring and teaching and
neurological disorder services.
The Company will lease Brentwood to Lyric III pursuant to the Master Lease
and Lyric III will sublease Brentwood to a wholly owned subsidiary. The
undepreciated tax basis of Brentwood for Federal income tax purposes will be
$43.7 million as of the date of purchase. Depreciation and amortization will be
computed on the straight-line method over 27.5 years. The current real estate
tax rate for Brentwood is $19.81 per $100 of assessed value. The total annual
tax for Brentwood at this rate for the 1997-1998 tax year is $258,241 (at a
taxable assessed value of $1,303,400). For a description of the terms of the
Master Lease see "Key Agreements -- Master Lease."
INTEGRATED HEALTH SERVICES OF PENNSYLVANIA AT BROOMALL ("BROOMALL").
Broomall is a three-story, 76,772 square foot skilled nursing facility comprised
of two buildings located on 5 acres of land in Broomall, Pennsylvania. This
facility was built in 1959 and has 306 beds, including a 28-bed subacute unit.
Special medical equipment such as built-in oxygen and suction is provided for
the subacute beds. For the year ended December 31, 1997, the payor mix for
Broomall was approximately 24% Medicare, 57% Medicaid and 19% private pay and
other. The Company will acquire Broomall from IHS for approximately $35.9
million in cash. Average occupancy and average revenue per patient day of
Broomall for each of the last five years is set forth in the table below:
AVERAGE AVERAGE REVENUE
YEAR OCCUPANCY PER PATIENT DAY
1997 ......... 95% $167
1996 ......... 91 159
1995 ......... 98 136
1994 ......... 94 124
1993 ......... 87 112
54
<PAGE>
Referral sources for Broomall include 14 area hospitals, various home care
agencies, adult day care centers, churches and community organizations. Broomall
competes for patients with several other skilled nursing facilities in its
market area.
Broomall provides long-term care services for a mix of residents, including
those who are alert and need minimal assistance, those whose mental state is
considered lower than alert and those with early Alzheimer's. The subacute beds
are for oncology or critically ill patients, for whom the facility can provide a
variety of treatments, including chemotherapy, blood transfusions, IV antibiotic
therapy, wound care, subacute rehabilitation services, respiratory therapy, pain
management and psychiatric services.
The Company will lease Broomall to Lyric III pursuant to the Master Lease
and Lyric III will sublease Broomall to a wholly owned subsidiary. The
undepreciated tax basis of Broomall for Federal income tax purposes will be
$35,923,236 as of the date of purchase. Depreciation and amortization will be
computed on the straight-line method over 27.5 years. The current real estate
tax rate for Broomall is $591.54 per $1,000 of assessed value. The total annual
tax for Broomall at this rate for the 1997-1998 tax year is $202,898 (at a
taxable assessed value of $343,000). For a description of the terms of the
Master Lease see "Key Agreements -- Master Lease."
INTEGRATED HEALTH SERVICES AT WHITEMARSH ("WHITEMARSH"). Whitemarsh is a
2-story, 77,758 square foot skilled nursing facility comprised of two buildings
located on 5 acres of land in Whitemarsh, Pennsylvania. This facility was built
in 1967 and has 247 beds, including an Alzheimer's wing with 44 beds. For the
year ended December 31, 1997, the payor mix for Whitemarsh was approximately 11%
Medicare, 69% Medicaid and 20% private pay and other. The Company will acquire
Whitemarsh from IHS for approximately $21.2 million in cash. Average occupancy
and average revenue per patient day of Whitemarsh for each of the last five
years is set forth in the table below:
AVERAGE AVERAGE REVENUE
YEAR OCCUPANCY PER PATIENT DAY
1997 ......... 97% $140
1996 ......... 96 125
1995 ......... 93 137
1994 ......... 95 122
1993 ......... 93 109
Referral sources for Whitemarsh include six area hospitals, various
assisted living and personal care facilities and the Alzheimer's unit of three
psychiatric hospitals. The Whitemarsh facility competes for patients with
several other skilled nursing and assisted living facilities in its market area
including three other facilities operated by IHS and not owned by the Company.
Whitemarsh provides long term care services for a mix of residents,
including those who are alert and need minimal assistance, those whose mental
state is considered lower than alert and those with early Alzheimer's. These
services include physical therapy, occupational therapy, speech therapies,
respiratory therapies and restorative nursing programs.
The Company will lease Whitemarsh to Lyric III pursuant to the Master Lease
and Lyric III will sublease Whitemarsh to a wholly owned subsidiary. The
undepreciated tax basis of Whitemarsh for Federal income tax purposes will be
$21.2 million as of the date of purchase. Depreciation and amortization will be
computed on the straight-line method over 27.5 years. The current real estate
tax rate for Whitemarsh is $364.21 per $1,000 of assessed value. The total
annual tax for Whitemarsh at this rate for the 1997-1998 tax year is $123,358
(at a taxable assessed value of $338,700). For a description of the terms of the
Master Lease see "Key Agreements -- Master Lease."
INTEGRATED HEALTH SERVICES HOSPITAL OF HOUSTON ("HOUSTON HOSPITAL").
Houston Hospital is a single story, 38,000 square foot specialty hospital
located on 10 acres of land in Houston, Texas. This facility was built in 1963
and has 59 beds. For the year ended December 31, 1997, the payor mix for Houston
Hospital was approximately 81% Medicare, 1% Medicaid and 18% private pay and
other. The
55
<PAGE>
Company will acquire Houston Hospital from IHS for approximately $19.7 million
in cash. Average occupancy and average revenue per patient day of Houston
Hospital for each of the last five years is set forth in the table below:
AVERAGE AVERAGE REVENUE
YEAR OCCUPANCY PER PATIENT DAY
1997 ......... 77% $828
1996 ......... 74 866
1995 ......... 73 583
1994 ......... 24 595
1993 ......... -- --
The principal referral sources for Houston Hospital are five area
hospitals. Houston Hospital competes for patients with several other specialty
hospitals in its market area.
Houston Hospital provides specialized medically complex care services for
patients, including ventilation weaning and management, wound care, airway
management, cardiopulmonary rehabilitation, cardiac care, pre- and post-surgical
rehabilitation, care for head and spinal cord injuries and HIV/AIDS management.
The Company will lease Houston Hospital to Lyric III pursuant to the Master
Lease and Lyric III will sublease Houston Hospital to a wholly owned subsidiary.
The undepreciated tax basis of Houston Hospital for Federal income tax purposes
will be $19.7 million as of the date of purchase. Depreciation and amortization
will be computed on the straight-line method over 27.5 years. The current real
estate tax rate for Houston Hospital is $2.76 per $100 of assessed value. The
total annual tax for Houston Hospital at this rate for the 1997-1998 tax year is
$101,294 (at a taxable assessed value of $3,666,120). For a description of the
terms of the Master Lease see "Key Agreements -- Master Lease."
RIGHT OF FIRST OFFER AGREEMENT
The Company and IHS will enter into the Right of First Offer Agreement for
a period of four years from the closing of the Offering (subject to automatic
annual renewals thereafter unless terminated by either party), pursuant to which
IHS must offer the Company the opportunity to purchase or finance each IHS
facility to be sold and leased back or financed in a transaction of the type
normally engaged in by the Company. The Company will be offered the opportunity
to acquire or finance the IHS facility on terms and conditions that, should the
Company decline to pursue the proposed transaction, must be offered to any other
third party by IHS. If IHS is only able to sell and leaseback or finance the IHS
facility on better terms than previously offered to the Company, then the
Company must again be offered those new terms and conditions for consideration
prior to IHS finalizing a transaction with the third party. It is currently
anticipated that some of the IHS facilities that may be acquired by the Company
under the Right of First Offer Agreement may involve Lyric and its consolidated
subsidiaries as lessee and IHS as manager. IHS will also agree not to construct
any competing healthcare facilities within 10 miles of any healthcare facility
owned by the Company. The Company believes that the Right of First Offer
Agreement will provide it with opportunities to acquire and finance healthcare
facilities that complement its existing portfolio of facilities.
OTHER ACQUISITIONS
The Company intends to continue to acquire and lease additional long-term
care facilities in addition to the Initial Properties and the Option Properties,
including skilled nursing facilities, assisted living facilities and other
healthcare related properties. The Company is currently engaged in discussions
or negotiations with various operators with respect to possible investment or
financing transactions. There can be no assurance that any of these possible
investment or financing transactions will be consummated.
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GOVERNMENT REGULATION
GOVERNMENT REGULATION OF HEALTHCARE INDUSTRY. The long-term care segment of
the healthcare industry is highly regulated. Operators of healthcare facilities
of the kind to be acquired as the Initial Properties and expected to be acquired
by the Company in the future are subject to federal, state and local laws
relating to the delivery and adequacy of medical and nursing care, nutrition,
condition of the physical facility, residents' rights, distribution of
pharmaceuticals, equipment, personnel, operating policies, fire prevention,
rate-setting, compliance with building and safety codes and environmental,
health and safety issues. Operators of healthcare facilities are also subject to
periodic inspection by governmental and other authorities to assure continued
compliance with various standards, the continued licensing of the facility under
state law, certification under the Medicare and Medicaid programs and the
ability to participate in other third party payment programs. Many states have
adopted Certificate of Need or similar laws which generally require that the
appropriate state agency approve certain acquisitions of healthcare facilities
and determine that a need exists for new facilities, certain bed additions, new
services and capital expenditures or other changes prior to new facilities being
established, beds and/or new services being added or capital expenditures being
undertaken. The failure to obtain or maintain any required regulatory approvals
or licenses could prevent a healthcare facility operator from offering services
or adversely affect its ability to receive reimbursement for services and could
result in fines, the denial of reimbursement, suspension of admission of new
patients, suspension or decertification from the Medicaid or Medicare programs,
restrictions on the ability to acquire new facilities or expand existing
facilities and, in extreme cases, revocation of the facility's license or
closure of a facility. Separate civil law claims brought by the states against
healthcare facilities for alleged threats to healthcare facility resident health
and safety, alleged abuse or neglect, or consumer-type actions for alleged
violations of regulatory standards interpreted to be deceptive trade practices
could also result in fines or damage awards against any lessee. Healthcare
facilities that are certified under the Medicare and/or Medicaid programs must
satisfy conditions of participation to qualify for certification,
recertification, and reimbursement under such programs. Any suspension or
revocation of a required license or failure to continue to satisfy the
conditions of participation could result in suspension or termination of
certification under the Medicare and Medicaid programs. There can be no
assurance that lessees of healthcare facilities owned by the Company, or the
provision of services and supplies by such lessees or managers retained by such
lessees, will meet or continue to meet the requirements for participation in the
Medicaid or Medicare programs (if applicable) or the requirements of state
licensing authorities or that regulatory authorities will not adopt changes or
new interpretations of existing regulations that would adversely affect the
ability of lessees or borrowers to make rental or loan payments to the Company.
Healthcare facility operators also are subject to federal and state
anti-remuneration laws and regulations, such as the Medicare/Medicaid
Anti-Kickback Law, which govern certain financial arrangements among healthcare
providers and others who may be in a position to refer or recommend patients to
such providers. Under the Medicare and Medicaid programs, the federal and state
governments enforce the federal Anti-Kickback Law which prohibits the offer,
payment, solicitation or receipt of any remuneration, directly or indirectly,
overtly or covertly, in cash or in kind to induce or in exchange for: (i) the
referral of patients covered by the programs; or (ii) the leasing, purchasing,
ordering or arranging for or recommending the lease, purchase or order of any
item, good, facility or service covered by the programs. Pursuant to the
Anti-Kickback Law, the federal government has announced a policy of increased
scrutiny of joint ventures and other transactions among healthcare providers in
an effort to reduce potential fraud and abuse relating to Medicare costs. The
applicability of these provisions to many business transactions in the
healthcare industry has not yet been subject to judicial and regulatory
interpretation. Penalties for violation of the Anti-Kickback Law include civil
and criminal sanctions and exclusion from the Medicare and Medicaid programs.
Significant prohibitions against physician referrals have been enacted by
Congress. These prohibitions are commonly known as the "Stark Law." As
originally enacted, the Stark Law restricted physician investments in, and
referrals to, clinical laboratory services provided after January 1, 1992 to
Medicare patients. Effective January 1, 1995, the Stark Law was expanded to
include, among other restricted services: (i) physical/occupational therapy;
(ii) radiology services and supplies, including magnetic resonance imaging,
computerized axial tomography scans, radiation therapy and ultrasound scans;
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(iii) durable medical equipment and supplies; (iv) prosthetics, orthotics, and
prosthetic devices and supplies; (v) home health services and supplies; and (vi)
outpatient prescription drugs. Unless excepted, a physician may not make a
referral of a Medicaid or Medicare patient to any entity with whom he or she has
a financial relationship (either investment and/or compensation) for the above
enumerated services, and any entity which accepts such a prohibited referral may
not bill for the service provided pursuant to the referral. Sanctions for
violation of the Stark Law include civil monetary penalties and exclusion from
the Medicare and Medicaid programs.
In an effort to combat healthcare fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996. HIPAA, among other things, amends existing crimes and criminal
penalties for Medicare fraud and enacts new federal healthcare fraud crimes.
HIPAA also expands the Anti-Kickback Law to apply to all federal healthcare
programs, defined to include any plan or program that provides health benefits
through insurance that is funded by the federal government. Under HIPAA, the
Secretary of Health and Human Services ("the Secretary") may exclude from the
Medicare program any individual who has a direct or indirect ownership or
control interest in a healthcare entity that has been convicted of a healthcare
fraud crime or that has been excluded from the Medicare program, if the
individual knew or should have known of the action constituting the basis for
the conviction or exclusion of the entity.
HIPAA prohibits any person or entity from knowingly and willfully
committing a federal healthcare offense relating to a healthcare benefit
program. Under HIPAA, any person or entity that knowingly and willfully defrauds
or attempts to defraud a healthcare benefit program or obtains by means of false
or fraudulent pretenses, representations, or promises, any of the money or
property of any healthcare benefit program in connection with the delivery of
healthcare services is subject to a fine and/or imprisonment.
The False Claims Act is an additional means of policing false bills or
requests for payment in the healthcare delivery system. In part, the FCA imposes
a civil penalty on any person who: (i) knowingly presents, or causes to be
presented, to the federal government a false or fraudulent claim for payment or
approval; (ii) knowingly makes, uses, or causes to be made or used, a false
record or statement to get a false or fraudulent claim paid or approved by the
federal government; (iii) conspires to defraud the federal government by getting
a false or fraudulent claim allowed or paid; or (iv) knowingly makes, uses or
causes to be made or used, a false record or statement to conceal, avoid or
decrease an obligation to pay or transmit money or property to the federal
government. The penalty for a violation of the FCA ranges from $5,000 to $10,000
for each fraudulent claim plus three times the amount of damages caused by each
such claim.
The FCA has been used widely by the federal government to prosecute
Medicare fraud in areas such as coding errors, billing for services not
rendered, submitting false cost reports, billing services at a higher
reimbursement rate than is appropriate, billing services under a comprehensive
code as well as under one or more component codes, and billing for care which is
not medically necessary. The Federal government, private insurers and various
state enforcement agencies have increased their scrutiny of providers, business
practices and claims in an effort to identify and prosecute fraudulent and
abusive practices. In addition, the Federal government has issued fraud alerts
concerning nursing services, double billing, home health services and the
provision of medical supplies to healthcare facilities; accordingly, these areas
may come under closer scrutiny by the government. Many states have laws that
prohibit payment in cash, in kind, or in exchange for the referral of patients,
certain physician referrals, and false claims. Some of these laws apply only to
services reimbursable under state Medicaid programs. However, a number of these
laws apply to all healthcare services in the state, regardless of the source of
payment for such services. These state laws regarding referrals, kickbacks, and
false claims have been subjected to limited judicial and regulatory
interpretation. Furthermore, some states restrict certain business corporations
from providing, or holding themselves out as a provider of, medical care.
Possible sanctions for violation of any of these restrictions or prohibitions
include loss of licensure or eligibility to participate in reimbursement
programs and civil and criminal penalties. State laws vary from state to state,
are often vague and have seldom been interpreted by the courts or regulatory
agencies. There can be no assurance that these Federal and state laws will
ultimately be interpreted in a manner consistent with the practices of the
Company's lessees or borrowers. Noncompliance with such state and Federal
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laws could have a material adverse effect on the ability of lessees or borrowers
to make rental or loan payments to the Company.
Medicare and the Pennsylvania, Michigan and Iowa Medicaid programs (which
constituted __%, __%, __% and __% of the revenues for the three months ended
March 31, 1998, respectively, of the 47 healthcare facilities included in the
Initial Properties) each impose certain limitations on the amount of
reimbursement available for capital-related costs, such as depreciation,
interest and rental expenses, following a change of ownership, including a sale
and leaseback transaction. Under currently applicable Medicare reimbursement
policies, the amount of Medicare reimbursement available to a skilled nursing
facility for rental expenses following a sale and leaseback transaction may not
exceed the amount that would have been reimbursed as capital costs had the
provider retained legal title to the facility. The Pennsylvania, Michigan and
Iowa Medicaid programs each impose similar limitations. Pennsylvania bases
reimbursement for capital-related costs for new owners (including rent paid by
lessees) on the appraised fair rental value of the facility to the prior owner
as determined by the Pennsylvania Department of Public Welfare. Michigan limits
reimbursement for capital-related costs for new owners (including lease
agreements) to an allowance for a return on ownership and interest established
by the previous owner or to the new owner's actual rate of interest expense, but
in each case, reimbursement is limited to the amount that would be allowed under
Medicare's principles of reimbursement. Iowa limits reimbursement for
capital-related costs for new owners (including lease agreements) to the
schedule of depreciation and interest established by the previous owner or to
the new owner's actual rate of interest expense but, in each case, reimbursement
is limited to the amount that would be allowed under Medicare's principles of
reimbursement. Thus, in each case, if rental expenses are greater than the
allowable capital cost reimbursement a skilled nursing facility would have
received had the sale and leaseback transaction not occurred and the provider
retained legal title, the amount of Medicare reimbursement received by the
provider will be limited. Similarly, in Missouri, where Medicaid reimbursement
for skilled nursing care is prospective and based on rates established on the
basis of reported facility costs, increased capital costs resulting from changes
in ownership or leasehold interest are recognized for purposes of reimbursement.
Medicare will begin a four-year phase out of separate capital cost reimbursement
for skilled nursing facilities beginning January 1, 1999 under provisions of the
Balanced Budget Act of 1997, which establish a prospective payment system for
skilled nursing facilities that will factor capital-related costs into the
facility's per diem rates for resident care. There can be no assurance that
reimbursement of the costs of skilled nursing facilities included in the Initial
Properties under current or future reimbursement methodologies will be adequate
to cover the rental payments owed to the Company.
RELIANCE ON GOVERNMENT AND OTHER THIRD PARTY REIMBURSEMENT. A significant
portion of the revenue derived from the healthcare facilities included in the
Initial Properties is attributable to government reimbursement programs such as
Medicare and Medicaid. Future budget reductions or other changes in
government-financed programs could significantly reduce reimbursement payments,
and there can be no assurance that future payment rates will be sufficient to
cover the costs of providing services to residents of such facilities. The
Medicare program is highly regulated and subject to frequent and substantial
changes. In recent years, changes in the Medicare program have resulted in
reduced levels of payment for a substantial portion of healthcare services. HCFA
is expected to release in the near future regulations establishing a prospective
payment system for inpatient services provided by skilled nursing facilities, as
required by the Balanced Budget Act of 1997. The new reimbursement system will
be phased in over three years, beginning on July 1, 1998, replacing the present
cost-based reimbursement system. There can be no assurance that reimbursement
levels will not be further reduced in future periods. The Medicaid program is a
federally-mandated, state-run program providing benefits to low income and other
eligible persons and is funded through a combination of state and Federal
funding. The method of reimbursement for nursing care under Medicaid varies from
state to state, but is typically based on rates set by the state. Under Medicare
and many state Medicaid programs, rates for skilled nursing facilities are based
on the facility's costs as reported to the applicable Federal or state agency.
The facility's costs for services purchased from an organization related by
ownership or control are limited to the costs (not charges) of the related
organization. Any failure to comply with these requirements could have a variety
of adverse consequences on the operator of the healthcare facility, including
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recoupment of amounts overpaid and other sanctions under false claim laws.
Although lease and loan payments to the Company are not directly linked to the
level of government reimbursement, to the extent that changes in these programs
have a material adverse effect on the revenues from such healthcare facilities,
such changes could have a material adverse impact on the ability of the lessees
of the healthcare facilities included in the Initial Properties to make lease
and loan payments. Healthcare facilities also have experienced increasing
pressures from private payors attempting to control healthcare costs that, in
some instances, have reduced reimbursement to levels approaching that of
government payors. There can be no assurance that future actions by private
third party payors, including cost control measures adopted by managed care
organizations, will not result in further reductions in reimbursement levels, or
that future reimbursements from any payor will be sufficient to cover the costs
of the facilities' healthcare operations.
POTENTIAL DELAYS IN SUBSTITUTING LESSEES OR OPERATORS. A loss of license or
Medicare/Medicaid certification by a lessee of the Company or a default by
lessees or borrowers under loans made by the Company, could result in the
Company having to obtain another lessee or substitute operator for the affected
facility or facilities. Because the facility licenses for the Initial Properties
will be held by lessees and not the Company and because under the REIT tax rules
the Company would have to find a new "unrelated" lessee to operate the
properties, the Company may encounter delays in exercising its remedies under
leases and loans made by the Company or substituting a new lessee or operator in
the event of any loss of licensure or Medicare/Medicaid certification by a prior
lessee or operator. No assurances can be given that the Company could contract
with a new lessee or successor operator on a timely basis or on acceptable terms
and a failure of the Company to do so could have a material adverse effect on
the Company's financial condition and results of operations.
LIMITATION ON TRANSFERS AND ALTERNATIVE USES OF HEALTHCARE FACILITIES.
Transfers of operations of certain healthcare facilities are subject to
regulatory approvals not required for transfers of other types of commercial
operations and other types of real estate. In addition, substantially all of the
Initial Properties are special purpose facilities that may not be easily
adaptable to non-healthcare related uses.
COMPETITION
The Company will compete against other REITs for new investments. There are
currently a number of other public healthcare REITs and one undergoing the
initial public offering process. The combined investment portfolios of these
REITs totals approximately $12 billion out of the total estimated healthcare
real estate market of $1 trillion representing approximately a 1.2% market
share. In addition to the other healthcare REITs, the Company will compete with
other more traditional sources of real estate financing such as healthcare
providers, private real estate partnerships, insurance companies and banks. The
vast majority of healthcare real estate investments are held by these more
traditional capital sources. These financing sources compete for new investments
based on a number of factors including pricing, duration of financing, risk
profile, healthcare industry segment and transaction structure. Nearly all of
the healthcare real estate financing activity by both REITs and traditional
financing sources occurs in the lower risk market segment.
Lyric III and IHS (and other lessees and managers of the Company's
properties) will compete on a local and regional basis with operators of other
facilities that provide comparable services. Operators compete for residents
based on quality of care, reputation, physical appearance of facilities,
services offered, family preferences, physicians, staff and price. The Company's
purchase of the Initial Properties represents only approximately 14% of the
total number of healthcare facilities owned, leased or managed by IHS. The
Company also will enter into the Purchase Option Agreement and the Right of
First Offer Agreement with IHS. See "Risk Factors -- Conflicts of Interest."
LEGAL PROCEEDINGS
Neither the Company nor any of the Initial Properties is presently subject
to any material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company, or any of the Initial Properties, other than
routine actions for negligence arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the
liquidity, results of operations, or business or financial condition of the
Company.
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OFFICE LEASE
The Company has entered into a sublease with IHS with respect to certain
office space occupied by the Company as its headquarters in Naples, Florida.
This sublease has an initial term of three years and provides for a total annual
lease payment in the amount of $42,543, plus sales tax of $2,547, payable in
advance, in installments of $3,750 per month, with annual rent adjustments tied
to the CPI. The sublease provides that IHS, the Company's landlord, is
responsible for all taxes, utilities and other charges associated with the
leased property, and the sublease contains certain other provisions which are
standard for subleases of its type.
EMPLOYEES
The Company will initially employ five persons, including the Company's two
executive officers, and intends to hire additional employees as necessary to
support its anticipated growth. The Company's employees will monitor its
investments, develop investment and lending opportunities, perform analysis,
underwriting, negotiating and closing activities with respect to future
investment or financing transactions and perform administrative functions.
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KEY AGREEMENTS
FACILITIES PURCHASE AGREEMENT
The Company, through the Operating Partnership, will acquire 44 of the
Initial Properties from IHS (the "44 IHS Properties") and the Facility
Subtenants pursuant to a Facilities Purchase Agreement among the Operating
Partnership, IHS and each of the Facility Subtenants, as the current owners of
each Initial Property (the "Facilities Purchase Agreement"). The total purchase
price for the 44 IHS Properties to be acquired by the Company from IHS is
approximately $371.0 million. The agreement contains terms and conditions
representative of similar acquisition transactions by large institutions and
other real estate investment trusts. For example, the Facilities Purchase
Agreement contains representations, warranties and indemnities from IHS and each
of the Facility Subtenants as the transferors of the 44 IHS Properties regarding
matters such as title to the 44 IHS Properties, the absence of liens and
encumbrances thereon, accuracy of historical financial statements for the 44 IHS
Properties, title to personal property utilized at the 44 IHS Properties,
existing leases or other occupancy or third party agreements and the rents
payable thereunder, environmental matters and other representations, warranties
and indemnities from the Facility Subtenants and IHS customarily found in
similar documents. The Facilities Purchase Agreement will also provide the
Company with broad indemnification protection regarding past liabilities
involving the 44 IHS Properties, including, but not limited to, environmental
matters. These representations, warranties and indemnities will survive the
closing of the acquisition of the 44 IHS Properties. IHS will also be
responsible for all fees and expenses associated with the acquisition of the 44
IHS Properties, including, but not limited to, title costs, appraisal fees,
environmental report fees, transfer taxes and the reasonable legal fees and
expenses of counsel to the Company. Copies of the form of the Facilities
Purchase Agreement to be entered into with the various parties has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
When IHS contributes the shares of Lyric III and the Facility Subtenants to
Lyric after the Company acquires the Initial Properties, Lyric will join IHS as
a party responsible for IHS' and the Facility Subtenants' representations,
warranties and indemnities under the Facilities Purchase Agreement.
The transfer of the ownership of the Initial Properties is subject to the
completion of the Offering, as well as the normal and customary conditions to
the closing of real estate transactions, including the receipt of any required
consents, waivers or regulatory approvals.
MASTER LEASE
TERM. The initial lease terms of the Lyric Properties divided into
Subleases under the Master Lease with Lyric III will be staggered over 9, 10,
11, 12 and 13 years for the Lyric Properties, with three successive options to
extend these terms for additional periods of 10 years each, provided that Lyric
III must exercise its options to extend with respect to all, but not less than
all, of the facilities which are then subject to renewal under the Master Lease.
No assurance can be given that the options to extend the lease terms will be
exercised by Lyric III. The staggered lease terms for groups of Lyric Properties
will limit the effect of any non-renewal and afford the Company an opportunity
to locate a new lessee, if necessary.
USE OF THE FACILITIES. The Master Lease permits Lyric III to operate the
facilities as a licensed health care facility unless otherwise consented to by
the Company. Lyric III has the responsibility to procure, maintain and comply
with all licenses, certificates of need, provider agreements and other
authorizations required for the use of the Facilities.
RENT. The Master Lease with Lyric III will provide for the payment of rent
during the first lease year equal to the greater of: (i) 10.0% of the purchase
price or (ii) the purchase price multipled by the average yield on the 10-year
U.S. Treasury Note over the 20 trading days preceding the date of the Offering
plus 450 basis points at the time of the Offering. Rent will thereafter be
annually adjusted upward based on the lesser of: (i) two times the CPI (but in
no case less than zero) or (ii) a fixed percentage of 3% over the rent for the
previous year.
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TRIPLE NET. The Master Lease will be a "triple net" lease that requires
Lyric III or the Facility Subtenants to pay base rent without offset, deduction,
abatement or counterclaim and all additional charges, including, all taxes,
assessments, levies, fees, water and sewer rents and charges, all governmental
charges with respect to the applicable property and all utility and other
charges incurred in the operation of the applicable property including , but not
limited to, every fine, penalty, interest and cost which may be added for
non-payment or late payment thereof.
INSURANCE. The Master Lease provides that Lyric III will maintain insurance
on all the Lyric Properties for the following coverages: (i) fire, vandalism,
earthquake (if available at commercially reasonable rates), extended coverage
perils and all physical loss perils; (ii) loss by explosion of steam boilers and
pressure vessels; (iii) loss of rental value or business interruption; (iv)
comprehensive general public liability (including personal injury and property
damage); (v) professional malpractice; (vi) flood, if required; (vii) workers'
compensation; and (viii) automobile liability. The Company is expected to be
named on such policies as an additional insured or loss payee as the case may
be. Under the Lease, the Company will have the right to periodically review
Lyric III's or the Facility Subtenants' property insurance coverage and require
increases in coverage.
DAMAGE OR CONDEMNATION. In the event of any damage or destruction to any
Lyric Property, Lyric III or the Facility Subtenants have the obligation to
fully repair or restore the same at Lyric III's or the Facility Subtenants'
expense, with no abatement of rent during such restoration. If any facility is
damaged to such an extent that Lyric III or the Facility Subtenants cannot
obtain all necessary government approvals, permits and certificates of need
required for use, Lyric III or the Facility Subtenants shall purchase such
facility. In the event of a partial taking of any Lyric Property which does not
render it unsuitable for Lyric III's or the Facility Subtenants' use and
occupancy, Lyric III or the Facility Subtenants' are obligated to repair the
portion not taken. In the event the partial taking does render such property
unsuitable for Lyric III's or the Facility Subtenants' use and occupancy, Lyric
III or the Facility Subtenant shall have the obligation to purchase the
facility. In the event of a total taking, the Master Lease shall terminate with
respect to the taken property.
INDEMNIFICATION. The Master Lease requires Lyric III and the Facility
Subtenants to indemnify the Company against certain liabilities in connection
with the applicable Lyric Property.
MAINTENANCE; ADDITIONAL COVENANTS. Lyric III or the Facility Subtenants are
required, at their expense, to maintain each property in good order and repair,
in accordance with standards promulgated in the Master Lease and all applicable
legal and insurance requirements. In addition, during each lease year of the
term (as extended, if applicable), Lyric III or the Facility Subtenants are
required to expend a minimum of $300 (as increased annually by the CPI) per bed
in each facility covered by the Master Lease as capital expenditures to maintain
the applicable property. The Master Lease contains additional financial
covenants covering permitted debt and minimum cash flow from facilities. The
Company is not required to repair, rebuild or maintain any Lyric Property or to
pay for any addition, modification or improvement.
GUARANTY; SECURITY DEPOSIT. The payment and performance obligations of
Lyric III under the Master Lease and the Facility Subtenants under the Facility
Subleases are unconditionally guaranteed by Lyric under the Lyric Guaranty. Any
assignment of the Master Lease would require the consent of the Company. The
Lyric Guaranty is unsecured and may be structurally subordinated to the secured
indebtedness of Lyric. The Lyric Guaranty does not limit Lyric's ability to
incur additional secured indebtedness. In addition, Lyric III will deposit with
the Company as a security deposit a letter of credit in an amount equal to six
months of the estimated base rent payable with respect to the Master Lease.
EVENTS OF DEFAULT. An event of default will be deemed to have occurred
under the Master Lease and any Facility Sublease if Lyric III or the Facility
Subtenants fail to pay base rent or restore the Security Deposit within five
days after notice, or to pay any additional charges within 10 days after notice;
if any bankruptcy proceedings are instituted by or against Lyric III or the
Facility Subtenants and, if against Lyric III or the Facility Subtenants, such
bankruptcy proceedings are not dismissed within 90 days; if Lyric III or the
Facility Subtenants is liquidated or dissolved; if any material property of
Lyric III or the Facility Subtenants is levied upon or attached in any
proceeding and not discharged within 60
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days; if Lyric III or the Facility Subtenants ceases operation for a period in
excess of five business days; if the license to operate any Facility is revoked,
allowed to lapse, suspended or transferred and Lyric III or the Facility
Subtenants do not take reasonable steps to cure and cause such license to be
reinstated within 60 days; if Lyric III or the Facility Subtenants defaults in
any payment of any obligations for borrowed money having a principal balance in
excess of one million dollars; if Lyric III or the Facility Subtenants fail to
perform any covenant and does not diligently undertake to cure the same within
30 days after notice from the Company; if any representation or warranty of the
Facility Subtenants in the Facilities Purchase Agreement proves to be untrue and
the Facility Subtenants do not diligently undertake to cure the same within 20
days after notice from the Company; or if there is a default under any guaranty
of the Lease, the Master Management Agreement, Facility Management Agreement,
Master Franchise Agreement, Facility Franchise Agreement, any Facility Sublease,
the Escrow Agreement, Letter of Credit or the Security Agreement which is not
cured within any applicable grace or cure period.
In the event of any event of default referable to a specific Lyric
Property, the Company may evict Lyric III or the Facility Subtenants from such
Lyric Properties, terminate the Lease and/or re-let the Lyric Property. In all
events, Lyric III or the Facility Subtenants shall remain responsible for the
rental value of such Lyric Property for the remainder of the period of the term
in excess of rents received by the Company from any successor occupant.
Alternatively, at the Company's option, the Company will be entitled to recover
all unpaid rent then due plus the present value of the rent for the unexpired
term at the time of the award, subject to a credit for any net rentals or
proceeds actually received from the lease, sale or other disposition of the
Lyric Property thereafter. In addition, the Company may exercise any other
rights that it may have under law. In the event the Company evicts Lyric III or
the Facility Subtenants from a Lyric Property, the Master Lease will remain in
full force and effect for all other Lyric Properties. With respect to Lyric
III's or the Facility Subtenants' failure to timely pay rent and with respect to
certain nonmonetary events of default under the Master Lease, the Company shall
have all of the foregoing rights, remedies and obligations with respect to all
of the Lyric Properties.
The leases will be governed by and construed in accordance with New York
law except for certain procedural laws which must be governed by the laws of the
location of each Lyric Property. Because the facilities are located in various
states, the Leases may be subject to restrictions imposed by applicable local
law. Neither the Master Lease nor any of the other agreements entered into by
Lyric III in connection with the Formation Transactions prohibits or otherwise
restricts the Company's ability to lease properties to parties (domestic or
foreign) other than Lyric III or the Facility Subtenants.
Copies of the form of the Master Lease with Lyric III, the Facility
Subleases with the Facility Subtenants and the Lyric Guaranty have been filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
The foregoing is a summary of certain provisions of such agreements, does not
purport to be complete and is qualified in its entirety by reference to such
agreements.
LYRIC GUARANTY
Pursuant to a guaranty (the "Lyric Guaranty") by Lyric in favor of the
Operating Partnership, Lyric will unconditionally guarantee the payment and
performance of all rent and other obligations of Lyric III and the Facility
Subtenants under the Master Lease and the Facility Subleases. The obligations of
Lyric under the Lyric Guaranty are not subordinated to any indebtedness of
Lyric, but the Lyric Guaranty is unsecured and may be structurally subordinated
to secured indebtedness of Lyric to the extent of the assets securing such
indebtedness. In addition, the Lyric Guaranty does not limit Lyric's ability to
incur additional secured indebtedness. The Lyric Guaranty provides for certain
financial covenants by Lyric, including a provision which will limit the amount
of dividends which Lyric may pay when Lyric's tangible net worth is below $2.5
million. After an Event of Default under the Master Lease, the Operating
Partnership may proceed directly against Lyric prior to or in lieu of proceeding
against Lyric III or the Facility Subtenants.
MASTER MANAGEMENT AGREEMENT AND FACILITY MANAGEMENT AGREEMENTS
Pursuant to a Master Management Agreement (the "Master Management
Agreement") between Lyric and IHS Facility Management, Inc. ("IHS Management")
and the Facility Management Agreements between IHS Management and each of the
Facility Subtenants, IHS Management will manage all
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of the IHS Properties (the Master Management Agreement and the Facility
Management Agreements, collectively, the "Management Agreements"). Under the
Management Agreements, IHS Management will be granted the sole and exclusive
right to manage the IHS Properties and IHS Management will agree to provide the
IHS Properties with all management services and techniques customarily provided
by IHS Management. Annual operating and capital budgets for each of the IHS
Properties will be submitted by IHS Management to the Subtenants for their
review and approval. All licenses and permits will be arranged for by IHS
Management on behalf of, and held in the name of, the Facility Subtenants. All
facility employees will be hired and discharged by IHS Management and will be
employees of the applicable Facility Subtenant (with the exception of the
administrator and director of nursing for each facility who will be employed by
IHS Management, but whose salaries will be a facility expense).
IHS Management will receive: (i) a base management fee equal to (a) 3% of
the gross revenues of each facility; or (b) 4% of the gross revenues of each
facility if gross revenues for all facilities owned by Lyric and managed by IHS
Management exceeds $350 million; and (ii) an annual incentive fee equal to 70%
of the annual net cash flow of each facility. IHS Management may, but is not
obligated to, advance funds for working capital (including payment of management
fees) and capital investment purposes. Any such funds advanced and not
reimbursed by the applicable Facility Subtenant within 30 days shall accrue
interest at Citibank N.A.'s prime rate plus 2%.
The term of the Management Agreements will be coterminous with that of the
applicable Facility Sublease, including any applicable renewal period; provided,
however, that IHS Management may elect not to extend a Facility Management
Agreement for any particular Facility Sublease renewal term by giving six months
prior notice. The Facility Subtenants may terminate their respective Facility
Management Agreements in the event of, among other things: (i) certain
insolvency related actions taken by or against IHS Management; (ii) a material
default by IHS Management under the Management Agreements continuing for 60 days
after written notice; or (iii) fraud or self-dealing by IHS Management not cured
within 60 days after written notice. IHS Management may terminate any Facility
Management Agreement in the event of, among other things: (i) certain insolvency
related actions taken by or against the applicable Facility Subtenant; (ii) a
default by the Facility Subtenant (including a payment default) under its
Facility Management Agreement which continues for 60 days after written notice;
(iii) certain casualty events; (iv) certain loss of license or Facility Sublease
termination events; or (v) the insufficiency of cash flow to pay base management
fees for two consecutive fiscal quarters. The Master Management Agreement may be
terminated by either Lyric or IHS Management in the event of: (i) certain
insolvency related actions taken by or against the other party or (ii)
termination of all of the Facility Management Agreements.
MASTER FRANCHISE AGREEMENT AND FACILITY FRANCHISE AGREEMENTS
Integrated Health Services Franchising Co., Inc. ("IHS Franchising") will
grant to Lyric and each of the Facility Subtenants the right to use certain
proprietary materials developed and used by IHS in its operation of healthcare
facilities by entering into a Master Franchise Agreement with Lyric (the "Master
Franchise Agreement") and Facility Franchise Agreements with each of the
Facility Subtenants. Pursuant to the Master Franchise Agreement and the Facility
Franchise Agreements, IHS Franchising will agree not to compete with Lyric or
any of the Facility Subtenants within a 15 mile radius of any facility they are
operating. IHS Franchising will receive an annual franchise fee equal to 1% of
the gross revenues for all facilities covered by the Master Franchise Agreement.
In the event any portion of the franchise fee goes unpaid for 120 days after
notice, IHS Franchising may require reconsideration and revision of Lyric's then
current annual and capital budgets and require Lyric to comply with certain
negative covenants with regard to capital and debt transactions which otherwise
would be applicable only in the event of a sale of IHS' membership interest in
Lyric. Past due franchise fees will, in certain circumstances, accrue interest
at Citibank N.A.'s prime rate plus 2%.
The initial term of the Master Franchise Agreement will be coterminous with
that of the Master Lease. The term of the Master Franchise Agreement will be
automatically extended for two consecutive 13 year renewal terms; provided,
however, that IHS Franchising may elect not to extend for either of the renewal
terms by giving six months prior notice. IHS Franchising may terminate the
Master Franchise Agreement and the Facility Franchise Agreements in the event
of, among other things: (i) certain prohibited transfers by
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Lyric or the Facility Subtenants; (ii) certain insolvency related actions taken
by or against Lyric; (iii) violation by Lyric or the Facility Subtenants of
certain confidentiality and non-disclosure covenants; (iv) a default by Lyric
(including the payment of fees) under the Master Franchise Agreement which
continues for 60 days after written notice; or (v) commencement of legal
proceedings by the lessor or mortgagee of any Facility Subtenant. The Master
Franchise Agreement may be not be terminated by Lyric under any circumstances
without the prior written consent of IHS Franchising.
PLEDGE AGREEMENTS
Pursuant to Pledge Agreements (the "Pledge Agreements") between the
Operating Partnership and Lyric and the Operating Partnership and Lyric III,
Lyric will pledge 100% of the stock of Lyric III and Lyric III will pledge 100%
of the stock of each of the Facility Subtenants to the Operating Partnership to
secure the rental obligations of Lyric III under the Master Lease and the
Facility Subtenants under the Facility Subleases. During the term of the Pledge
Agreement, Lyric and Lyric III may not sell, convey or dispose of the pledged
stock without prior written approval of the Operating Partnership. An event of
default under the Master Lease and the Facility Subleases will be an event of
default under the Pledge Agreement entitling the Operating Partnership to
realize upon the pledged stock in accordance with applicable state law.
SECURITY AGREEMENT
Pursuant to a Security Agreement (the "Security Agreement") between the
Operating Partnership and the Facility Subtenants, each of the Facility
Subtenants will grant first priority security interests, in favor of the
Operating Partnership, in certain personal property of the Facility Subtenants
located at the properties to secure the rental obligations and any other amounts
due from the Facility Subtenants under the Facility Subleases. The personal
property subject to security interests will include all present and
after-acquired inventory, equipment, licenses and permits, certificates of need,
proceeds arising out of the operation of the facilities, insurance rights and
all other tangible property of the Facility Subtenants. An event of default
under the Facility Sublease will be an event of default under the Security
Agreement entitling the Operating Partnership to realize upon the collateral in
accordance with applicable state law.
ESCROW AGREEMENT
Pursuant to an Escrow Agreement (the "Escrow Agreement") among the
Operating Partnership, Lyric III, the Facility Subtenants and Fidelity National
Title Insurance Company of New York, as escrow agent, Lyric III and each of the
Facility Subtenants agree to complete within one year certain capital repairs
and improvements identified by the Operating Partnership as required in
connection with the purchase of the Initial Properties. All escrowed funds will
be held in a separate bank account and, subject to the Operating Partnership's
approval, will be disbursed from time to time to cover the costs of such repairs
and improvements. In the event all of the work is not completed within one year,
the Operating Partnership may complete the work at Lyric III's expense or
declare an event of default under the Master Lease and the Facility Subleases.
Upon satisfactory completion of all of the work described in the Escrow
Agreement, any remaining escrowed funds will be disbursed to the Facility
Subtenants.
CONSENT AND SUBORDINATION AGREEMENT
Pursuant to a Consent and Subordination Agreement (the "Subordination
Agreement") among the Operating Partnership, IHS Management, IHS Franchising,
Lyric III and each of the Facility Subtenants, the rights of IHS Management
under the Master Management Agreement (including IHS Management's rights to all
management and incentive fees) and the rights of IHS Franchising under the
Master Franchise Agreement (including IHS Franchising's rights to all franchise
fees) will be subordinated to the rights of the Operating Partnership under the
Master Lease. If an event of default occurs under the Master Lease, the Facility
Subleases, the Lyric Guaranty or the Subordination Agreement, no management fees
or incentive fees may be paid to IHS Management and no franchise fees may be
paid to IHS Franchising unless, in each
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case, the Operating Partnership shall have first consented to such payments. In
the event that the Operating Partnership terminates the Master Lease or recovers
possession of any facility, the Operating Partnership will have the right to
terminate the respective Facility Management Agreements and the Facility
Franchising Agreements.
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MANAGEMENT
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
Pursuant to amendments to the Charter and Bylaws to be adopted immediately
prior to the completion of the Offering, the Board of Directors of the Company
will be modified effective immediately following the completion of the Offering
to increase the size of the Board to six directors and include the director
nominees named below, each of whom has been nominated for election and has
consented to serve. Upon election of the director nominees, a majority of
directors will not be employees or affiliates of the Company, Lyric or IHS. In
connection with the expansion of the Board of Directors, and upon completion of
the Offering, the Board of Directors will be divided into three classes of
directors. The initial terms of the first, second, and third classes will expire
in 1999, 2000 and 2001, respectively. Beginning in 1999, directors of each class
will be chosen for three-year terms upon the expiration of their current terms
and each year one class of directors will be elected by the stockholders. The
Company believes that classification of the Board of Directors will help to
enhance the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors. Holders of Common Stock will
have no right to cumulative voting in the election of directors. Consequently,
at each annual meeting of stockholders, the holders of a majority of the shares
of Common Stock will be able to elect all of the successors of the class of
directors whose term expires at that meeting.
Information concerning the current directors, director nominees and
executive officers of the Company is set forth below.
NAME AGE POSITION TERM
Robert N. Elkins, M.D. 54 Chairman of the Board of Directors 2001
John B. Poole 46 President, Chief Executive Officer 2000
and Director
Donald Tomlin 50 Director Nominee 2000
Lisa K. Merritt 38 Director Nominee 1999
William McBride, III 38 Director Nominee 1999
Brian E. Cobb 53 Director Nominee 2001
Douglas Listman 27 Chief Financial Officer
ROBERT N. ELKINS, M.D. is the Chairman of the Board of Directors of the
Company. Dr. Elkins is a co-founder and has served as Chairman of the Board, and
Chief Executive Officer of IHS, a NYSE-traded, national provider of post-acute
care, since 1986 and President since March 1998 and also served as President
from March 1986 to July 1994. Dr. Elkins and IHS were among the first to
introduce subacute care to the industry in 1989. Dr. Elkins has thus established
himself as a leader in the new generation of healthcare providers. IHS was
listed in America's New Blue Chips: An Investment Guide to the Hottest Growth
Stocks and in Quantum Companies. Prior to founding IHS, Dr. Elkins was a founder
and Vice President of Continental Care Centers, Inc., an owner and operator of
long-term healthcare facilities, from 1980 to 1986. From 1976 through 1980, Dr.
Elkins was a practicing physician. Dr. Elkins, a graduate of the University of
Pennsylvania, received his M.D. degree from the Upstate Medical Center, State
University of New York, and completed his residency at Harvard University
Medical Center. Dr. Elkins was named a recipient of the 1991 Maryland
Entrepreneur of the Year Award and is National Co-Chairman of the American
Entrepreneurs for Economic Growth, an organization representing over 4,500
venture-financed emerging growth companies. From May 8, 1995 through October 16,
1996, Dr. Elkins served as Co-Chairman of the Governors Council on Management
and Productivity.
JOHN B. POOLE is the President and Chief Executive Officer and a member of
the Board of Directors of the Company. Mr. Poole has over 19 years experience in
the healthcare industry. From July 1997 until joining the Company he was an
Executive Vice President and Special Assistant to the CEO of IHS. While at IHS,
Mr. Poole was responsible for various acquisition, divestiture, and financial
projects. He served as Chief Financial Officer of Integrated Living Communities,
Inc. ("ILC"), a publicly traded senior housing, assisted living and Alzheimer's
care company from March 1996 until its sale in July 1997
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that was spun off from IHS in an IPO. From November 1995 until March 1996 he was
an independent consultant to the long-term care industry. From July 1994 through
October 1995 he served as Chief Financial Officer of American Care Communities,
Inc., an owner and operator of assisted living residences. From March 1993
through June 1994 he served as Chief Financial Officer of Medifit of America,
Inc., an owner and operator of outpatient physical therapy centers and corporate
fitness centers. From October 1990 to February 1993 he served as Chief Financial
Officer of Frankwood Holdings, Ltd., an owner and operator of a third-party
administrator of health claims. From 1979 to August 1990 he served in various
positions at Beverly Enterprises, Inc., an owner and operator of long-term
healthcare facilities, retirement living facilities and pharmacies, including
Senior Vice President and Chief Accounting Officer, where he had responsibility
for all accounting and data processing for the entire company.
DONALD R. TOMLIN, JR. has been the Chairman, President and Chief Executive
Officer of Tomlin & Company, Inc. since its formation in 1986. Tomlin & Company,
Inc. is an integrated investment advisory, financial services and capital
investment firm. In his position with Tomlin & Company, Inc., Mr. Tomlin has
initiated, structured or advised on over $3 billion of merger, acquisition and
financing transactions for middle-market companies during the last five years.
Mr. Tomlin's experience includes structuring and arranging financing for the
acquisition of a $711 million diversified media company with radio stations,
television stations and newspapers, involvement in developing over 6,000
multi-family housing units and involvement in the issuance of some of the first
investment grade mortgage-backed securities.
LISA K. MERRITT has served as the Vice President and Managing Officer of
the Naples office of The Chase Manhattan Private Bank since May 1996. Prior to
joining The Chase Manhattan Private Bank, from 1991 to 1996 Ms. Merritt was Vice
President and District Manager of Chase Manhattan Personal Financial Services
with responsibility for Southwest, Central and Northern Florida. Ms. Merritt has
also held officer positions with Chase Manhattan Bank of Florida and Chase
Manhattan Mortgage Corporation serving in various capacities including
commercial real estate, residential real estate and consumer lending. Ms.
Merritt served as a Director of ILC until its sale in July 1997. Ms. Merritt is
a State of Florida registered residential contractor and has held real estate
licenses in Florida and Michigan.
WILLIAM MCBRIDE III is Chairman of the Board, Chief Executive Officer and
one of the founders of Assisted Living Concepts, Inc., an AMEX listed
owner/operator of assisted living facilities based in Portland, Oregon. He has
served as Chairman of the Board since August 1994 and CEO since October 1997. He
is a member of the Board of Directors for Malan Realty Investors, a NYSE listed
REIT based in Birmingham, Michigan and Newcare Health Corporation, a nursing
home operating company listed on NASDAQ out of Atlanta, Georgia. Mr. McBride
co-founded LTC Properties, Inc., a real estate investment trust (REIT), where he
was President, Chief Operating Officer and Board member from August 1992 to
October 1997. Prior to co-founding LTC Properties, Mr. McBride was employed by
Beverly Enterprises, Inc., from April 1988 to July 1992, where he served as Vice
President, Controller and Chief Accounting Officer.
BRIAN E. COBB is the Managing Director and founder of Media Venture
Partners, a mergers and acquisitions firm formed in 1987 which specializes in
media transactions. During the last ten years, in his position with Media
Venture Partners, Mr. Cobb has arranged numerous transactions relating to
television licenses, real estate and other related assets. He also serves as
president of Media Venture Management, Inc. and Biltmore Broadcasting, LLC,
entities that own television stations in Florida and California. Prior to
founding Media Venture Partners, Mr. Cobb was Vice-President of Television with
Chapman from 1981 to 1987. From 1967 to 1981, Mr. Cobb held various management
positions with General Electric Broadcasting Company including Vice President
and General Manager of their broadcasting properties in Denver, Colorado and
Nashville, Tennessee.
DOUGLAS LISTMAN is the Chief Financial Officer of the Company. From July
1997 to March 1998, Mr. Listman served as Chief Financial Officer of Senior
Lifestyle Corporation, a nationwide developer, owner and operator of senior
housing and assisted living facilities. Senior Lifestyle operated over 50
facilities totaling over 7,000 units. As Chief Financial Officer, his duties
included arranging significant acquisition capital, overseeing the accounting
function and structuring and evaluating potential acquisitions. Mr. Listman
served as Controller of ILC from May 1996 until its sale in July 1997. Mr.
Listman
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was instrumental in ILC's successful IPO and its subsequent acquisitions. From
June 1995 to May 1996, he served as Assistant Corporate Controller of IHS. From
September 1992 to June 1995, he served in various positions for KPMG Peat
Marwick LLP, a public accounting firm, including Supervising Senior Accountant.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee will make recommendations concerning
the engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review the
independence of the independent public accountants, consider the range of audit
and non-audit fees and review the adequacy of the Company's internal accounting
controls. The membership of the Audit Committee will consist of only Independent
Directors as long as they continue in office. An individual is deemed an
"Independent Director" if such individual is not an affiliate of the Company and
is not an employee of the Company. Upon completion of the Offering, and election
of the director nominees, the members of the Audit Committee will be Messrs.
Cobb and McBride.
EXECUTIVE COMMITTEE. The Executive Committee will have the authority within
certain parameters to acquire, dispose of and finance investments for the
Company (including the issuance by the Operating Partnership of additional Units
or other equity interests) and approve the execution of contracts and
agreements, including those related to the borrowing of money by the Company,
and generally exercise all other powers of the Board of Directors except as
prohibited by law. Upon completion of the Offering, and election of the director
nominees, the members of the Executive Committee will be Dr. Elkins, Mr. Poole
and Ms. Merritt.
COMPENSATION COMMITTEE. The Compensation Committee will determine
compensation for the Company's executive officers. The Compensation Committee
will review and make recommendations concerning proposals by management with
respect to compensation, bonus, employment agreements and other benefits and
policies respecting such matters for the executive officers of the Company. Upon
completion of the Offering and election of the director nominees, the members of
the Compensation Committee will be Dr. Elkins, Mr. Cobb and Ms. Merritt.
INCENTIVE PLAN COMMITTEE. The Incentive Plan Committee will administer the
1998 Omnibus Securities and Incentive Plan, including the grant of options and
bonus shares thereunder. Upon completion of the Offering, and election of the
director nominees, the members of the Incentive Plan Committee will be Dr.
Elkins, Mr. Cobb and Ms. Merritt.
The Board of Directors will not have a nominating committee and the entire
Board of Directors will perform the function of such a committee.
COMPENSATION OF THE BOARD OF DIRECTORS
The Company will compensate non-employee directors at the rate of $1,000
per meeting and will reimburse the directors for travel expenses incurred in
connection with attending meetings of the Board of Directors and committee
meetings. Each of the non-employee directors of the Company (other than the
Chairman of the Board) will be granted share stock options for 21,402 shares of
Common Stock at a per share option exercise price equal to $.001, effective upon
joining the Board. These options will become exercisable on the date of grant.
The Chairman of the Board will be granted a ten-year stock option for 315,681
shares of Common Stock at a per share option exercise price equal to $.001, on
or prior to the date of the Offering. The options granted to the Company's
Chairman will become exercisable upon the completion of the Offering, but any
shares of Common Stock received upon exercise will be subject to transfer
restrictions pursuant to a three-year lock-up agreement. Dr. Elkins will enter
into a Non-Competition Agreement with the Company. See "-- Employment and
Non-Competition Agreements."
EXECUTIVE COMPENSATION
The following table sets forth the annual base salary levels and other
compensation expected to be paid in 1998 to the Company's President and Chief
Executive Officer and to the Company's other executive officers (the "Named
Executive Officers").
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME PRINCIPAL POSITION(S) SALARY($)
<S> <C> <C>
John B. Poole ........... President, Chief Executive Officer $220,000
and Director
Douglas Listman ......... Chief Financial Officer 120,000
</TABLE>
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF SHARE PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION PERIOD
--------------------------------------------------------------------- ---------------------------
SHARES OF PERCENT OF TOTAL
COMMON STOCK STOCK OPTIONS TO BE EXERCISE OR
UNDERLYING OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME TO BE GRANTED(1) IN FISCAL YEAR (PER SHARE) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
John B. Poole ........... 80,258 71% $ 0.001 (2) $2,614,636 $4,163,372
Douglas Listman ......... 10,701 10 0.001 (2) 348,616 555,113
</TABLE>
- ----------
(1) The options granted will become exercisable on the date of the Offering.
(2) The expiration date of the options is the tenth year anniversary of the
closing date of the Offering.
1998 OMNIBUS SECURITIES AND INCENTIVE PLAN
Prior to the completion of the Offering, the Company will adopt the 1998
Omnibus Securities and Incentive Plan (the "Plan") to provide incentives to
attract and retain executive officers, directors, employees and other key
personnel. The Plan will be administered by the Incentive Plan Committee of the
Board of Directors (the "Committee"). The maximum number of shares of Common
Stock available for issuance under the Plan will be 5.0% of the total number of
shares of Common Stock and Units outstanding from time to time. The Company
initially intends to grant stock options for an aggregate of approximately
513,650 shares.
STOCK OPTIONS. The Plan permits the granting of: (i) options to purchase
shares of Common Stock intended to qualify as incentive stock options
("Incentive Options") under Section 422 of the Code; and (ii) options that do
not so qualify ("Non-Qualified Options"). The option exercise price of each
option will be determined by the Committee but may not be less than 100% of the
fair market value of the Common Stock on the date of grant in the case of
Incentive Options.
The term of each option will be fixed by the Committee and may not exceed
ten years from the date of grant in the case of an Incentive Option. The
Committee will determine at what time or times each option may be exercised and,
subject to the provisions of the Plan, the period of time, if any, after
retirement, death, disability or termination of employment or director status
during which options may be exercised. Options may be made exercisable in
installments, and the exercisability of options may be accelerated by the
Committee.
Upon exercise of options, the option exercise price must be paid in full
either in cash or by certified or bank check or other instrument acceptable to
the Committee or, if the Committee so permits, by delivery of shares of Common
Stock already owned by the optionee or delivery of a promissory note. The
exercise price may also be delivered to the Company by a broker pursuant to
irrevocable instructions to the broker from the optionee.
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To qualify as Incentive Options, options must meet additional federal tax
requirements, including limits on the value of shares subject to Incentive
Options which first become exercisable in any one calendar year, and a shorter
term and higher minimum exercise price in the case of certain large
stockholders.
RESTRICTED SHARES. The Committee may also award shares of Common Stock to
participants, subject to such conditions and restrictions as the Committee may
determine. These conditions and restrictions will include the achievement of
certain performance goals and/or continued employment with or membership on the
Board of Directors of the Company through a specified period. No dividends will
be paid on unvested shares. If the performance goals and any other restrictions
are not attained, the participant would forfeit his restricted Common Stock.
DEFERRED COMMON STOCK. The Committee may also award bookkeeping units which
are ultimately payable in the form of unrestricted shares of Common Stock upon
the satisfaction of such conditions and restrictions as the Committee may
determine. These conditions and restrictions may include the achievement of
certain performance goals and/or continued employment with the Company through a
specified restriction period. If the performance goals and other restrictions
are not attained, the participant would forfeit his right to the deferred Common
Stock units. During the period of employment or membership on the Board of
Directors performance measurement period, subject to terms and conditions
imposed by the Committee, the deferred Common Stock units may be credited with
distribution equivalent rights.
UNRESTRICTED COMMON STOCK. The Committee may also grant shares of Common
Stock (at no cost or for a purchase price determined by the Committee) which are
free from any restrictions under the Plan. Unrestricted Common Stock may be
issued to participants in recognition of past services or for other valid
consideration.
PERFORMANCE SHARE AWARDS. The Committee may also grant performance shares
awards to participants entitling the participants to receive shares of Common
Stock upon the achievement of individual or Company performance goals and such
other conditions as the Committee shall determine.
DISTRIBUTION EQUIVALENT RIGHTS. The Committee may grant distribution
equivalent rights, which entitle the recipient to receive credits for
distributions that would be paid if the recipient had held a specified number of
shares of Common Stock. Distribution equivalent rights may be granted as a
component of another award or as a freestanding award. Distribution equivalent
rights credited under the Plan may be paid currently or be deemed to be
reinvested in additional shares of Common Stock, and may thereafter accrue
additional distribution equivalent rights at fair market value at the time of
deemed reinvestment. Distribution equivalent rights may be settled in cash,
shares or a combination thereof, in a single installment or installments, as
specified in the award. Awards payable in cash on a deferred basis may provide
for crediting and payment of interest equivalents.
ADJUSTMENTS FOR SHARE DIVIDENDS, MERGERS AND SIMILAR EVENTS. The Committee
will make appropriate adjustments in outstanding awards to reflect Common Stock
dividends, splits and similar events. In the event of a merger, liquidation,
sale of the Company or similar event, the Committee, in its discretion, may
provide for substitution or adjustment of outstanding awards, or may terminate
all awards with payment of cash or in-kind consideration.
CHANGE OF CONTROL. Except as the Committee may otherwise provide in an
award agreement, the award becomes fully vested and non-forfeitable, all
employment or membership on the Board of Directors requirements are deemed to
have been satisfied and all performance goals and objectives are deemed to have
been fully met upon the occurrence of a "Change of Control of the Company" (as
defined in the Plan or as otherwise defined in the award agreement).
AMENDMENTS AND TERMINATION. The Board of Directors may at any time amend or
discontinue the Plan and the Committee may at any time amend or cancel
outstanding awards; however, no such action may be taken which adversely affects
any rights under an outstanding award without the holder's consent. Further,
Plan amendments may be subject to approval by the Company's stockholders if and
to the extent required by the Code to preserve the qualified status of Incentive
Options or to preserve the tax deductibility of compensation earned under the
Plan.
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EMPLOYMENT AND NON-COMPETITION AGREEMENTS
The Company has entered into an Employment Agreement with John B. Poole, as
its President and Chief Executive Officer, that will continue in effect until
the third anniversary of the effective date of the agreement and will be
automatically renewed each January 1 for one additional year, unless otherwise
terminated. Mr. Poole's annual base salary will be $220,000, subject to increase
by the Board of Directors. Mr. Poole's Employment Agreement entitles him to
receive additional bonus compensation as may be determined by the Company's
Board of Directors in its sole discretion, based upon the Company's budgeted
Funds from Operations per share. In addition, Mr. Poole will receive options to
purchase 80,258 shares of Common Stock. Mr. Poole's Employment Agreement may be
terminated by the Company at any time for Cause (as defined in his Employment
Agreement). Mr. Poole may terminate his Employment Agreement upon the occurrence
of certain events described in the Employment Agreement, including any
diminution in his job responsibilities, reduction in salary or benefits of more
than 5% or a change in control. In the event that the Company terminates Mr.
Poole's Employment Agreement without Cause, or Mr. Poole terminates his
Employment Agreement as described in the preceding sentence, Mr. Poole is
entitled to severance compensation equal to three times his then current annual
base salary and bonus. All existing stock options also will vest. If Mr. Poole
becomes disabled, he will continue to receive all of his compensation and
benefits for six months, less any amounts received under any disability
insurance provided by the Company. If the disability continues for six months,
the Company may terminate Mr. Poole's employment, with a thirty-six month payout
of salary and bonus, less any amounts received under any disability insurance
provided by the Company. Mr. Poole's Employment Agreement also contains
provisions which are intended to limit him from competing with the Company
throughout the term of the agreement and for a period of 18 months thereafter.
In particular, Mr. Poole may not establish, engage in, own, manage, operate,
join or control or participate in the establishment, ownership (other than as
the owner of less than 10% of the stock of a corporation whose shares are
publicly traded), management, operation or control of, or be a director,
officer, employee, salesman, agent or representative of, or be a consultant to,
any person or entity in any healthcare REIT in competition with the Company.
The Company has entered into an Employment Agreement with Douglas Listman,
as its Chief Financial Officer, that will continue until the third anniversary
of the effective date of the agreement and will be automatically renewed each
January 1 for one additional year, unless otherwise terminated. Mr. Listman's
annual base salary will be $120,000, subject to discretionary annual
adjustments. Mr. Listman's Employment Agreement also entitles him to receive a
discretionary cash bonus within 90 days of the end of the calendar year. In
addition, Mr. Listman will receive options to purchase 10,701 shares of Common
Stock. Mr. Listman's Employment Agreement may be terminated by the Company at
any time for Cause (as defined in the Employment Agreement). Mr. Listman may
terminate his Employment Agreement upon the occurrence of certain events
described in the Employment Agreement, including any material diminution in his
job responsibilities or a change in control. In the event the Company terminates
Mr. Listman's Employment Agreement without Cause, or Mr. Listman terminates his
Employment Agreement as described in the preceding sentence, Mr. Listman is
entitled to severance equal to one year of salary. Mr. Listman's Employment
Agreement also contains provisions which are intended to limit him from
competing with the Company throughout the term of the agreement and for a period
of up to 12 months thereafter. As is the case with Mr. Poole's Employment
Agreement, Mr. Listman may not compete with the Company and join or invest in
any healthcare REIT in competition with the Company.
Dr. Elkins will enter into a Non-Competition Agreement with the Company
restricting activities by Dr. Elkins in his individual capacity at any location
within 10 miles of any office or facility owned, leased or operated by the
Company during the period that Dr. Elkins serves as Chairman or as a director of
the Company, provided that any activity engaged in by Dr. Elkins as an officer,
director or employee of, or any interest of Dr. Elkins as a stockholder in, IHS
will not in any way be limited by such provisions. Dr. Elkin's Non-Competition
Agreement also will provide that he may retain his current board positions and
that he may develop office and similar development projects not related to the
healthcare business.
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INCENTIVE COMPENSATION
The Company intends to establish an incentive compensation plan for
executive officers of the Company. This plan will provide for payment of cash
bonuses to participating executive officers after evaluating the employee's
performance and the overall performance of the Company. The President and Chief
Executive Officer will make recommendations to the Compensation Committee of the
Board of Directors, which will make the final determination of the award of
bonuses. The Compensation Committee will determine such bonuses, if any, for the
President and Chief Executive Officer.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from: (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by the MGCL. This provision has no effect on the availability of equitable
remedies, such as injunctive relief and rescissionary relief. The Charter also
provides that no amendment thereto may limit or eliminate this limitation of
liability with respect to events occurring prior to the effective date of such
amendment.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to: (i) any present or
former director or officer or (ii) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
officer of the Company. The Bylaws obligate the Company, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to: (i) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (ii) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that: (i) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
(a) was committed in bad faith or (b) was the result of active and deliberate
dishonesty; (ii) the director or officer actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corpora-
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tion's receipt of: (i) a written affirmation by the director or officer of his
good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (ii) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
The Operating Partnership Agreement also provides for indemnification of
the Company and its officers and directors to the same extent that
indemnification is provided under the Charter and Bylaws.
INDEMNIFICATION AGREEMENTS
The Company intends to enter into Indemnification Agreements with each of
its directors and officers prior to completion of the Offering. The
indemnification agreements will require, among other things, that the Company
indemnify its directors and officers to the fullest extent permitted by law and
advance to its directors and executive officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted.
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STRUCTURE AND FORMATION OF THE COMPANY
THE OPERATING ENTITIES OF THE COMPANY. The Formation Transactions were
designed to: (i) enable the Company to raise the necessary capital to acquire
the Initial Properties; (ii) provide a vehicle for future acquisitions; and
(iii) enable the Company to comply with certain requirements under the Code (and
the regulations promulgated by the IRS thereunder (the "Treasury Regulations")
relating to REITs.
The Company will be structured as an UPREIT, which means that following the
completion of the Offering and the Formation Transactions, substantially all of
the Company's assets will be held by, and its operations conducted through, the
Operating Partnership. Through MP Operating, Inc. (the "General Partner"), which
will be the sole general partner of the Operating Partnership, the Company will
control the Operating Partnership. The board of directors of the General
Partner, the members of which will be the same as the members of the Board of
Directors of the Company, will manage the affairs of the Operating Partnership
by directing the affairs of the General Partner. The Operating Partnership will
continue in full force and effect until December 31, 2098, or until sooner
dissolved pursuant to the terms of the Operating Partnership Agreement. Pursuant
to the Operating Partnership Agreement, the General Partner has full, exclusive
and complete responsibility and discretion in the management, operation and
control of the Operating Partnership, including the ability to cause the
Operating Partnership to enter into certain major transactions, including
acquisitions, developments, and dispositions of properties and refinancings of
existing indebtedness. No limited partner may take part in the operation,
management or control of the Operating Partnership by virtue of being a holder
of Units. The Company will contribute the net proceeds of the Offering to the
Operating Partnership in exchange for a number of Units equal to the amount of
Common Stock sold in the Offering. Initially, MP LP will be the sole limited
partner of the Operating Partnership.
FORMATION TRANSACTIONS. The Formation Transactions include the following
transactions which have occurred or will have occurred prior to or concurrent
with the consummation of the Offering:
o The Company was incorporated in Maryland in February 1998 at which
time the Company issued 100 shares of Common Stock to Dr. Robert N.
Elkins, which was all of the outstanding shares of Common Stock. The
Operating Partnership was formed as a Delaware limited partnership in
April 1998 as a wholly owned subsidiary of the Company, with MP
Operating as the general partner and MP LP as the limited partner.
Lyric was previously formed in May 1997 as a Delaware limited
liability company.
o The Company has received a non-binding proposal for and anticipates
entering into the Credit Facility. The Credit Facility will be used
to: (i) finance a portion of the purchase price and acquisition costs
of the Initial Properties; (ii) facilitate future acquisitions or
financings; and (iii) for working capital and other general corporate
purposes. No assurance can be given that the Company will enter into
the Credit Facility.
o The Company will acquire the Lyric Properties from IHS for
approximately $359.7 million. The Company will lease all of the Lyric
Properties to Lyric III pursuant to the Master Lease. Lyric III will
sublease the Lyric Properties to the Facility Subtenants pursuant to
individual Facility Subleases. Rent payments and the performance of
Lyric III under the Master Lease and the Facility Subtenants under the
Facility Subleases will be guaranteed by Lyric. IHS will manage all of
the Lyric Properties under a management agreement with Lyric. The
Master Lease will provide for a minimum base rent, plus annual base
rent increases equal to the lesser of: (i) two times the increase in
the CPI; or (ii) a 3%, over the rent in the base lease year, provided
that in no event shall the base rent decrease from the prior year. As
a "triple net lease," the Master Lease requires that Lyric III or the
Facility Subtenants pay all operating expenses, taxes, insurance and
other costs. The Lyric Properties were divided in to five groups whose
initial lease terms under the Facility Subleases will be staggered
over 9, 10, 11, 12 and 13 years, with three successive options to
extend these terms for additional periods of 10 years each provided
that Lyric III must exercise its options to extend with respect to
all, but not less than all, of the Facility Subleases which are then
subject to renewal under the Master Lease. See "Risk Factors --
Dependence on
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Lyric III, Lyric and IHS for the Company's Revenues and Ability to
Make Distributions," "-- Risks Associated With Owning Healthcare
Facilities in the Highly Regulated Healthcare Industry" and "Business
of the Company and its Properties."
o The Company will acquire the Peak Medical Properties from IHS for
approximately $11.3 million, subject to existing leases at each
facility with the Peak Medical Tenant. The leases are substantially
similar to the Master Lease and are cross defaulted. Peak Medical will
guarantee the payment and performance of Peak Medical Tenant under the
leases.
o The Company will acquire the Trans Health Properties from an
unaffiliated third party for approximately $11.5 million and lease the
Trans Health Properties to wholly owned subsidiaries of Trans Health
under a master lease substantially similar to the Master Lease. Trans
Health will guarantee the payment and performance of all obligations
under the master lease for the Trans Health Properties.
o As the sole stockholder of the General Partner and the Limited
Partner, the Company will initially indirectly own 100% of the
ownership interests in the Operating Partnership and the Operating
Partnership will own the Initial Properties. Following the Offering,
the Operating Partnership may issue Units to third parties who
contribute properties in exchange for Units.
o The Company and IHS will enter into the Purchase Option Agreement
pursuant to which the Company will be granted options to purchase the
Option Properties for a total purchase price of approximately $104.7
million. The Purchase Option Agreement will have an initial term of
two years, with the Company granted three successive renewal options
of one year each. It is currently anticipated that all facilities
acquired by the Company under the Purchase Option Agreement will be
leased to Lyric III and its consolidated subsidiaries and managed by a
subsidiary of IHS. See "Business of the Company and its Properties"
and "Risk Factors -- Conflicts of Interest"
o In addition to the Purchase Option Agreement, the Company and IHS will
enter into the Right of First Offer Agreement for a period of four
years from the closing of the Offering (subject to annual renewals
thereafter), pursuant to which IHS must offer the Company the
opportunity to purchase or finance any healthcare facility IHS
acquires or develops and elects to sell and leaseback or finance in a
transaction of the type normally engaged in by the Company. The
Company will be offered the opportunity to acquire or finance the IHS
facility on terms and conditions that, should the Company decline to
pursue the proposed transaction, must be offered to any other third
parties by IHS. If IHS is only able to sell and leaseback or finance
the IHS facility on better terms with a third party than previously
offered to the Company, then the Company must again be offered those
new terms and conditions for consideration prior to IHS finalizing a
transaction with the third party. It is currently anticipated that
some of the IHS facilities that may be acquired by the Company under
the Right of First Offer Agreement may involve Lyric and its
consolidated subsidiaries as lessee and a subsidiary of IHS as
manager. The Company believes that the Right of First Offer Agreement
will provide it with opportunities to acquire and finance healthcare
facilities that complement its existing portfolio of facilities. See
"Risk Factors -- Conflicts of Interest" and "Business of the Company
and its Properties -- Right of First Offer Agreement."
o Following the completion of the Offering and the purchase of the
Initial Properties, the Company will have approximately $____ million
available under the Credit Facility for general corporate purposes,
including acquisitions of additional properties.
o Upon completion of the Offering, the purchasers of the shares of
Common Stock sold in the Offering will own ____% of the issued and
outstanding shares of Common Stock (excluding shares purchased in the
Concurrent Offering), or ____% assuming the exercise of all
outstanding stock options granted pursuant to the 1998 Omnibus
Securities and Incentive Plan.
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TRANSACTIONS WITH AND BENEFITS TO RELATED PARTIES
In connection with the Formation Transactions and the Offering, the Company
will enter into transactions with Dr. Elkins, IHS and Lyric, which transactions
may benefit Dr. Elkins, IHS and Lyric or result in conflicts of interest between
the Company and Dr. Elkins, IHS or Lyric, including the following:
o All of the Lyric Properties will be purchased from IHS and leased to
Lyric III pursuant to the Master Lease. The Company will obtain third
party appraisals of the values of the Lyric Properties. However, the
purchase price for the Lyric Properties and the terms and conditions
of the Master Lease, the Purchase Option Agreement and the Right of
First Offer Agreement will be negotiated between the Company, IHS and
Lyric and, as a result of the lack of an arm's length relationship
between the Company, IHS and Lyric, may not reflect market prices or
market terms. Additionally, future conflicts of interest may arise as
a result of any failure by the Company to enforce the Master Lease,
the Purchase Option Agreement, the Right of First Offer Agreement and
other agreements to be entered into by and among the Company, IHS and
Lyric. See "Structure and Formation of the Company."
o Following the Offering, the Company may acquire additional properties
from IHS pursuant to the Purchase Option Agreement or the Right of
First Offer Agreement. As a result of the lack of an arm's length
relationship between the Company, IHS and Lyric, the prices to be paid
for such properties may not reflect market prices or market terms.
Following the Offering, the Company will be prohibited by the terms of
its Bylaws from acquiring additional properties from, or providing
financing on properties involving, IHS or the Company's directors and
officers or affiliates thereof without the approval of a majority of
the disinterested directors including any properties to be acquired
pursuant to the Right of First Offer Agreement and any properties to
be acquired pursuant to the Purchase Option Agreement.
o Dr. Elkins will simultaneously serve as Chairman of the Board of
Directors of the Company and Chairman of the Board of Directors, Chief
Executive Officer and President of IHS. See "Management."
o IHS and TFN Healthcare each will beneficially own 50% of Lyric.
Timothy F. Nicholson, a director of IHS, beneficially owns 100% of TFN
Healthcare.
o The Company will: (i) grant to Dr. Elkins options to purchase 315,681
shares of Common Stock; (ii) grant to its executive officers and
certain other employees options to purchase an aggregate of 112,361
shares of Common Stock; and (iii) grant to each of the four
non-employee director nominees at the time they become directors
options to purchase 21,402 shares of Common Stock, all under the
Company's 1998 Omnibus Securities and Incentive Plan. All such options
will have an exercise price of $.001 per share and will become
exercisable on the date of the Offering, subject to certain
restrictions on transfer. See "Management -- 1998 Omnibus Securities
and Incentive Plan."
o Dr. Elkins, the executive officers and certain employees of the
Company and certain officers of IHS will purchase Common Stock in the
Concurrent Offering representing up to ____% of the outstanding Common
Stock.
o The Company will pay to IHS approximately $371.0 million as the
purchase price for the Lyric Properties and the Peak Medical
Properties plus approximately $____ million as repayment of a loan
made by IHS to the Company in connection with the Formation
Transactions and the Company's operations prior to the Offering.
o The Company will sublease its headquarters office space from IHS.
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VALUATION OF INITIAL PROPERTIES
The valuation of the Initial Properties has been made based on a number of
factors, including: (i) independent appraisals of each of the Initial
Properties; (ii) analysis of historical operating results and corresponding
industry cash flow coverage ratios of the Initial Properties; (iii) analysis of
projected operating results and corresponding industry cash flow coverage ratios
of the Initial Properties for the twelve months ending December 31, 1998; (iv)
comparable sale and leaseback transactions in this sector; (v) qualitative
assessments of the competitive position and business strategy of the operator;
and (vi) inquiries of management concerning historical and projected operating
results and the physical condition of assets.
The M.A.I. appraisals were obtained by Monarch and paid for by IHS, with
the exception of the appraisals on the Peak Medical Properties and the Trans
Health Properties, which were paid for by the respective lessees. The appraisals
were prepared by Valuation Counselors Group, Inc. ("Valuation Counselors") a
large, full service independent valuation firm, founded in 1970, and
headquartered in Chicago with offices in several other cities in the United
States. Valuation Counselors is not affiliated with either Monarch, IHS or any
of the lessees. The appraisals indicated that the Initial Properties on an
aggregate portfolio basis have a fair market value of $____. The appraised
values were developed based on a correlation of income, sales comparison and
cost approaches. The income approach recognizes that the underlying value of
operating assets can be represented by a discounted stream of earnings. The
sales comparison approach assumes that when a facility is replaceable in the
market its value tends to be set at the cost of acquiring a comparable
substitute facility. The cost approach indicates the value of tangible assets as
established by the cost of replacement less depreciation plus land value. The
appraisers based their valuations primarily on the income approach, which, in
their opinion is the most reliable method of valuation. Because the appraisals
represent only an estimate of value, and are subject to numerous assumptions,
the appraisals do not purport to represent precise measures of realizable value
and should not be relied upon for purposes of determining such value at any
particular time. In addition, the estimate does not reflect any benefits to the
Company of owning the facilities on a portfolio basis.
The purchase price of the Initial Properties was determined through
negotiations between the Company and the respective sellers based on the factors
discussed above and after taking into account the proposed lease terms.
Furthermore, the properties to be acquired from IHS were valued based on a
portfolio basis rather than on an individual property-by-property basis. As a
result, the purchase price for an individual property may be at a higher or
lower multiple and coverage or may be at a value higher or lower than its M.A.I.
appraised value.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the anticipated policies with respect to
investments, financing and certain other activities of the Operating Partnership
and the Company. Upon consummation of the Offering, these policies will be
determined by the Board of Directors of the Company and may be amended or
revised from time to time at the discretion of the Board of Directors without
notice to or a vote of the stockholders of the Company, or the partners of the
Operating Partnership, except that changes in certain policies with respect to
conflicts of interest must be consistent with legal requirements.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE AND INVESTMENTS IN
MORTGAGES. The Company currently plans to conduct all of its investment
activities through the Operating Partnership and subsidiary entities. The
Company's principal business objectives are to maximize total stockholder
returns through a combination of growth in Funds from Operations per share and
enhancement of the value of its investment portfolio. The Company believes that
it can achieve its principal growth objectives through: (i) the acquisition of
high quality healthcare properties operated by experienced management teams;
(ii) the generation of internal growth in rental and other income; and (iii) the
employment of a conservative and flexible capital structure. There can be no
assurance, however, that the Company's strategies will be implemented
successfully or that its business objectives will be realized. See "Business and
Growth Strategies" and "Policies with Respect to Certain Activities."
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The Company intends to acquire a diversified portfolio of income-producing
healthcare facilities or mortgages thereon, with an initial focus on facilities
located primarily in the southeastern and southwestern United States. When
evaluating potential healthcare assets for investments, the Company performs
substantial property level and market analysis and due diligence to arrive at
its valuation estimate, including: (i) analysis of historical property financial
performance and historical and implied cash flow coverages; (ii) analysis of
projected financial performance and implied cash flow coverages, including the
anticipated impact of the implementation of a prospective payment system; (iii)
trends analysis of key operating statistics such as reimbursement received per
patient per day, revenue mix, occupancy levels and payor quality mix; (iv)
review of regulatory surveys and resulting actions; (v) review of the quality of
the facility's construction and the commissioning of engineering reports and
environmental reviews; (vi) assessment of the competitive positioning of the
asset in its local market based on its historical financial performance,
services offered and recent comparable transactions in the market; (vii) review
of regulatory and reimbursement environment in the state; and (viii) a strategic
assessment of the property's fit within the Company's overall portfolio.
The Company also evaluates potential new lessee/operators utilizing several
qualitative and quantitative factors. Monarch interviews members of senior
management and frequently visits existing lessee/operator facilities prior to
entering into a new relationship. The Company also analyzes the
lessee/operator's financial statements to assess their profitability and
financial resources. In addition to direct contact with the management and a
review of their financial status, the Company utilizes its network of
relationships within the industry to conduct multiple reference checks on each
potential new lessee/operator. Although the Company initially will emphasize
investments in skilled nursing facilities, specialty hospitals, assisted living
and geriatric care facilities, and, to a lesser extent, medical and other office
buildings, it may seek to diversify into other types of healthcare facilities,
such as retirement facilities, congregate care facilities and continuing care
retirement communities. The Company also may seek to diversify its investments
in terms of geographic location, operators and, subject to the foregoing,
facility types. Nonetheless, substantially all of the Initial Properties will be
leased to subsidiaries of Lyric and managed by a subsidiary of IHS, and it is
anticipated that a significant portion of new investments also will involve
subsidiaries of Lyric as tenant and a subsidiary of IHS as manager.
There are no limitations on the amount or percentage of the Company's total
assets that may be invested in any one property. Additionally, no limits have
been set on the concentration of investments in any one location, operator or
facility type.
The Company may participate with other entities in property ownership
through joint ventures or other types of co-ownership in accordance with the
Company's investment policies. Subject to the percentage of ownership
limitations and gross income tests necessary for REIT qualification, there are
no limitations on the amount or percentage of the Company's total assets that
may be invested in such security or interest.
Equity investments may be subject to existing mortgage financing and other
indebtedness or such financing or indebtedness may be incurred in connection
with acquiring investments. Any such financing or indebtedness will have
priority over the Company's equity interest in such property.
The Company does not intend to invest in the securities of others for the
purpose of exercising control. Where appropriate, and subject to REIT
qualification rules, the Operating Partnership may sell certain of its
properties.
To the extent that the Company's Board of Directors determines to obtain
additional capital, the Company may raise such capital through additional equity
offerings, debt financing or retention of cash flow (subject to provisions of
the Code concerning the taxability of undistributed income of "real estate
investment trusts") or a combinations of these methods. See "--Financing
Policies" for further information concerning the Company's policies regarding
debt financing.
FINANCING POLICIES
The Company currently intends to maintain a debt to total market
capitalization ratio (i.e., total debt of the Company as a percentage of equity
market value plus total debt) of less than 50%. The Board of Directors of the
Company may, however, from time to time reevaluate this policy and decrease
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or increase this ratio accordingly. The Company will determine its financing
policies in light of then current economic conditions, relative costs of debt
and equity capital, market values of properties, growth and acquisition
opportunities and other factors. See "Risk Factors -- Risks Associated With Debt
Financing and Interest Rates" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
LENDING POLICIES
The Company may consider offering purchase money financing in connection
with the sale of properties where the provision of such financing will increase
the value received by the Company for the property sold.
CONFLICT OF INTEREST POLICIES
Dr. Elkins, the Chairman of the Board of Directors, also serves as Chairman
of the Board of Directors and President and Chief Executive Officer of IHS. At
March 1, 1998, Dr. Elkins beneficially owned approximately 7.6% of the
outstanding common stock of IHS. Because he serves as Chairman of both IHS and
the Company, Dr. Elkins may be subject to certain conflicts of interest in
fulfilling his responsibilities to the Company and its stockholders. Under
Maryland law, any contract or other transaction between a corporation and any of
its directors or any other corporation, firm or other entity in which any of its
directors is a director or has a material financial interest may be void or
voidable. However, the MGCL provides that any such contract or transaction will
not be void or voidable solely because of the common directorship or interest
if: (i) the contract or transaction is authorized, approved or ratified, after
disclosure of, or with knowledge of, the common directorship or interest, by the
affirmative vote of a majority of disinterested directors (even if the
disinterested directors constitute less than a quorum) or by the affirmative
vote of a majority of the votes cast by disinterested stockholders; or (ii) it
is fair and reasonable to the corporation. The Company believes that a
requirement of disinterested director approval of such transactions, including
transactions with IHS, will help to eliminate or minimize certain potential
conflicts of interest. Therefore, pursuant to the Charter and Bylaws, without
the approval of a majority of the disinterested directors, the Company and its
subsidiaries may not engage in any transaction in which any director or officer,
or any firm of which any director or officer may be a member, or any corporation
or association of which any director or officer may be a director or officer or
in which any director or officer may be interested as the holder of any amount
of its capital stock or otherwise may be a party to or may be pecuniarily or
otherwise interested. See"Risk Factors -- Conflicts of Interest."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company may, but does not presently intend to, make investments other
than as previously described. The Company will make investments only through the
Operating Partnership or a subsidiary of the Operating Partnership. The Company
will have authority to offer shares of its Common Stock or other equity or debt
securities of the Operating Partnership in exchange for property and to
repurchase or otherwise reacquire its Common Stock or any other securities and
may engage in such activities in the future. Similarly, the Operating
Partnership may offer additional Units or other equity interests in the
Operating Partnership that are exchangeable into shares of Common Stock, in
exchange for property. The Operating Partnership also may make loans to joint
ventures in which it may participate in the future. At all times, the Company
intends to cause the Operating Partnership to make investments in such a manner
as to be consistent with the requirements of the Code to qualify as a REIT
unless, because of circumstances or changes in the Code (or the regulations
promulgated thereunder), the Board of Directors determines that it is no longer
in the best interests of the Company to continue to qualify as a REIT. The
Company's policies with respect to such activities may be reviewed and modified
from time to time by the Company's directors without notice to or the vote of
its stockholders.
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OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement describes the
material provisions of such agreement. This summary is qualified in its entirety
by reference to the Operating Partnership Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership was organized as a Delaware limited partnership
on April 17, 1998. The Operating Partnership will be the entity through which
the Company conducts its business and owns all of its assets (either directly or
through subsidiaries). The Company through MP Operating and MP LP initially will
hold all of the Operating Partnership Units. Through MP Operating (the "General
Partner"), which will be the sole general partner of the Operating Partnership,
the Company will control the Operating Partnership. The board of directors of
the General Partner, the members of which will be the same as the members of the
Board of Directors of the Company, will manage the affairs of the Operating
Partnership by directing the affairs of the General Partner. The Company's
indirect limited and general partner interests in the Operating Partnership will
entitle it to share in cash distributions from, and in the profits and losses
of, the Operating Partnership in proportion to the percentage interests of the
General Partner and MP LP therein and will entitle the Company (through MP LP)
to vote on all matters requiring a vote of the limited partners.
Pursuant to the Operating Partnership Agreement, the General Partner has
full, exclusive and complete responsibility and discretion in the management,
operation and control of the Operating Partnership, including the ability to
cause the Operating Partnership to enter into certain major transactions,
including acquisitions, developments and dispositions of properties and
refinancings of existing indebtedness. No limited partner may take part in the
operation, management or control of the business of the Operating Partnership by
virtue of being a holder of Units. Certain restrictions apply to the Company's
ability to engage in a Business Combination, as described more fully under "--
Extraordinary Transactions" below.
The Operating Partnership Agreement provides that all business activities
of the Company, including all activities pertaining to the acquisition and
operating of properties, will be conducted through the Operating Partnership,
and that the Operating Partnership must be operated in a manner that will enable
the Company to satisfy the requirements for being classified as a REIT.
REMOVAL OF THE GENERAL PARTNER; TRANSFER OF THE GENERAL PARTNER'S INTEREST
The Operating Partnership provides that neither MP LP nor the General
Partner may transfer its interests in the Operating Partnership or withdraw as a
partner, and the Company may not transfer any of its interests in MP LP or the
General Partner except: (i) in connection with a merger or sale of all or
substantially all of its assets pursuant to a transaction for which it has
obtained the requisite approval in accordance with the terms of the Operating
Partnership Agreement; (ii) if the limited partners holding at least
three-fourths of the Units (excluding Units owned by the Company or its
affiliates) consent to such transfer; (iii) to certain affiliates of the
Company; and (iv) the Company may liquidate MP LP and the General Partner.
AMENDMENTS OF THE OPERATING PARTNERSHIP AGREEMENT
Amendments to the Operating Partnership Agreement may be proposed by the
Company or by limited partners owning at least 20% of the Units.
Generally, the Operating Partnership Agreement may be amended with the
approval of the General Partner and limited partners (including the Company)
holding a majority of the Units. Certain amendments that would, among other
things, convert a limited partner's interest into a general partner's interest,
modify the limited liability of a limited partner, alter the interest of a
partner in profits or losses or the right to receive any distribution, alter or
modify the redemption right described below, or cause the termination of the
Operating Partnership at a time or on terms inconsistent with those set forth in
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the Operating Partnership Agreement must be approved by the General Partner and
each limited partner that would be adversely affected by such amendment.
Notwithstanding the foregoing, the General Partner will have the power, without
the consent of the limited partners, to amend the Operating Partnership
Agreement as may be required to: (i) add to the obligations of the General
Partner or surrender any right or power granted to the General Partner; (ii)
reflect the admission, substitution, termination or withdrawal of partners in
accordance with the terms of the Operating Partnership Agreement; (iii)
establish the rights, powers, and duties of any additional partnership interests
issued in accordance with the terms of the Operating Partnership Agreement; (iv)
reflect a change of an inconsequential nature that does not materially adversely
affect the limited partners, or cure any ambiguity, correct or supplement any
provisions of the Operating Partnership Agreement, or make other changes
concerning matters under the Operating Partnership Agreement that are not
otherwise inconsistent with the Operating Partnership Agreement or law; or (v)
satisfy any requirements of federal or state law. Certain provisions affecting
the rights and duties of the General Partner (e.g., restrictions on the General
Partner's power to conduct businesses other than owning Units; restrictions
relating to the issuance of additional Units of the Company and related capital
contributions to the Operating Partnership; restrictions relating to certain
extraordinary transactions involving the Company; restrictions relating to
transactions with affiliates of the Operating Partnership; and rules relating to
meetings of the partners) may not be amended without the approval of a majority
or, in certain instances, a super majority of the Units not held by the Company.
TRANSFER OF UNITS; SUBSTITUTE LIMITED PARTNERS
The Operating Partnership Agreement provides that limited partners
generally may transfer their Units without the consent of any other person, but
may substitute a transferee as a limited partner only with the prior written
consent of the General Partner of the Operating Partnership. In addition,
limited partners may not transfer Units in any event in violation of certain
regulatory and other restrictions set forth in the Operating Partnership
Agreement.
REDEMPTION OF UNITS
The Operating Partnership will be obligated to redeem each Unit at the
request of the holder thereof for cash equal to the fair market value of one
share of Common Stock at the time of such redemption, provided that the Company
may elect to acquire any such Unit presented for redemption for one share of
Common Stock or an amount of cash of the same value. The Company presently
anticipates that it will elect to issue Common Stock in connection with each
such redemption, rather than having the Operating Partnership pay cash. With
each such redemption, the Company's wholly owned subsidiaries percentage
ownership interest in the Operating Partnership will increase. If Units are
redeemed for cash, such redemption will be recorded at the fair market value of
the Units.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP INTERESTS
The General Partner is authorized, without the consent of the limited
partners, to cause the Operating Partnership to issue additional Units to the
Company, to the limited partners or to other persons for such consideration and
on such terms and conditions as the General Partner deems appropriate. If
additional Units are issued to the Company, unless such Units are issued upon
the conversion, redemption or exchange of indebtedness, Units or other
securities, then the Company must: (i) issue additional shares of Common Stock
or other securities or interests of the Company and must contribute to the
Operating Partnership the entire proceeds received by the Company from such
issuances or (ii) issue additional Units to all partners in proportion to their
respective interests in the Operating Partnership. Consideration for additional
partnership interests may be cash or other property or assets. No limited
partner has preemptive, preferential or similar rights with respect to
additional capital contributions to the Operating Partnership or the issuance or
sale of any partnership interests therein.
EXTRAORDINARY TRANSACTIONS
The Operating Partnership Agreement provides that the Company may not
generally engage in any merger, consolidation or other combination with or into
another person or sale of all or substantially all of its assets or any
reclassification, or any recapitalization or change of outstanding shares of
Common
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Stock (a "Business Combination"), unless the holders of Units will receive, or
have the opportunity to receive, the same consideration per Unit as holders of
shares of Common Stock receive per share of Common Stock in the transaction if
holders of Units will not be treated in such manner in connection with a
proposed Business Combination, the Company may not engage in such transaction
unless limited partners (other than the Company) holding at least 75% of the
Units held by limited partners vote to approve the Business Combination. In
addition, the General Partner has agreed in the Operating Partnership Agreement
with the limited partners that the Company will not consummate a Business
Combination in which the Company conducted a vote of the stockholders unless the
matter would have been approved had holders of Units been able to vote together
with the stockholders on the transaction. The foregoing provision of the
Operating Partnership Agreement would under no circumstances enable or require
the Company to engage in a Business Combination which required the approval of
the Company's stockholders if the Company's stockholders did not in fact give
the requisite approval. Rather, if the Company's stockholders did approve a
Business Combination, the Company would not consummate the transaction unless:
(i) the General Partner first conducts a vote of holders of Units (including the
Company) on the matter; (ii) the Company votes the Units held by it in the same
proportion as the stockholders of the Company voted on the matter at the
stockholder vote; and (iii) the result of such vote of the Unit holders
(including the proportionate vote of the Company's Units) is that had such vote
been a vote of stockholders, the Business Combination would have been approved
by the stockholders. As a result of these provisions of the Operating
Partnership, a third party may be inhibited from making an acquisition proposal
that it would otherwise make, or the Company, despite having the requisite
authority under its Charter, may not be authorized to engage in a proposed
Business Combination.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Operating Partnership Agreement generally provides that the General
Partner will incur no liability to the Operating Partnership or any limited
partner for losses sustained or liabilities incurred as a result of errors in
judgment, or mistakes of fact or law, or of any act or omission if the General
Partner carried out its duties in good faith. In addition, the General Partner
is not responsible for any misconduct or negligence on the part of its agents,
provided the General Partner appointed such agents in good faith. The General
Partner may consult with legal counsel, accountants, appraisers, management
consultants, investment bankers and other consultants and advisors, and any
action it takes or omits to take in reliance upon the opinion of such persons,
as to matters that the General Partner reasonably believes to be within their
professional or expert competence, shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion.
The Operating Partnership Agreement also provides for indemnification of
the General Partner, the directors and officers of the General Partner, and such
other persons as the General Partner may from time to time designate against any
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by such person in connection with the preceding unless it is
established that: (i) the act or omission of the indemnified person was material
to the matter giving rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the indemnified person
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the indemnified person had
reasonable cause to believe that the act or omission was unlawful.
TAX MATTERS
The General Partner will be the tax matters partner of the Operating
Partnership and, as such, will have the authority to make tax elections under
the Code on behalf of the Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2098 or until sooner dissolved pursuant to the terms of the
Operating Partnership Agreement.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock by: (i) each director (and director nominee) of the Company;
(ii) each executive officer of the Company; (iii) all directors, director
nominees and executive officers of the Company as a group; and (iv) each person
or entity which is expected to be the owner of 5% or more of the outstanding
shares of Common Stock immediately following completion of the Offering. Except
as indicated below, all of such shares of Common Stock are owned directly, and
the indicated person or entity has sole voting and investment power.
<TABLE>
<CAPTION>
PERCENT OF ALL
NUMBER OF SHARES COMMON STOCK
BENEFICIALLY OUTSTANDING
NAME OF STOCKHOLDER(1) OWNED FOLLOWING THE OFFERING FOLLOWING THE OFFERING
<S> <C> <C>
Robert N. Elkins, M.D. ....................... (2)(3) %
John B. Poole ................................ (2)(3) *
Donald Tomlin ................................ (2)(3) *
Lisa K. Merritt .............................. (2)(3) *
William McBride III .......................... (2)(3) *
Brian E. Cobb ................................ (2)(3) *
Douglas Listman .............................. (2)(3) *
All directors, director nominees and executive
officers as a group (7 persons) ............. (2)(3) %
</TABLE>
- ---------------
* Less than 1%.
(1) Address: c/o Monarch Properties, Inc., 8889 Pelican Bay Boulevard, Naples,
Florida 34108.
(2) Includes , , , , , , and shares of Common Stock,
respectively, that Dr. Elkins, Mr. Poole, Mr. Tomlin, Ms. Merritt, Mr.
McBride, Mr. Cobb, and Mr. Listman have indicated they expect to purchase
in the Concurrent Offering.
(3) Includes 315,681, 80,258, 21,402, 21,402, 21,402, 21,402, and 10,701 shares
issuable pursuant to stock options to be granted at the time of the
Offering to Dr. Elkins, Mr. Poole, Mr. Tomlin, Ms. Merritt, Mr. McBride,
Mr. Cobb, and Mr. Listman, respectively, which options become exercisable
on the date of the Offering subject to certain transfer restrictions.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The following summary of the terms of the Company's stock does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Charter and Bylaws, copies of which are exhibits to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
GENERAL
Under the Charter, the Company has authority to issue up to 180 million
shares of stock, consisting of 100 million shares of Common Stock, par value
$.001 per share, 60 million shares of excess stock, par value $.001 per share
("Excess Stock") (as described below), and 20 million shares of Preferred Stock,
par value $.001 per share. Under Maryland law, stockholders generally are not
responsible for the corporation's debts or obligations. Upon completion of the
Offering and the Formation Transactions, there will be 17,300,000 shares of
Common Stock issued and outstanding (______ shares if the Underwriters'
overallotment option is exercised in full), excluding shares that may be issued
upon the redemption of outstanding Units, and no Preferred Stock will be issued
or outstanding.
The Charter authorizes the Board of Directors to classify or reclassify any
unissued shares of stock by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to distributions,
qualifications or terms or conditions of redemption of such stock.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other shares
or series of shares and to the provisions of the Charter regarding Excess Stock,
holders of shares of Common Stock will be entitled to receive dividends on
Common Stock if, as and when authorized and declared by the Board of Directors
of the Company out of assets legally available therefor and to share ratably in
the assets of the Company legally available for distribution to its stockholders
in the event of its liquidation, dissolution or winding-up after payment of or
adequate provision for all known debts and liabilities of the Company. The
Company intends to pay quarterly dividends beginning with a dividend for the
period ending June 30, 1998. See "Distributions."
Subject to the provisions of the Charter regarding Excess Stock, each
outstanding share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors, and,
except as provided with respect to any other class or series of shares, the
holders of Common Stock will possess exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of Common Stock can elect all of the
directors then standing for election, and the holders of the remaining shares of
Common Stock will not be able to elect any director.
Holders of shares of Common Stock have no conversion, sinking fund or
redemption rights, or any preemptive rights to subscribe for any securities of
the Company.
Subject to the provisions of the Charter regarding Excess Stock, all Common
Stock will have equal dividend, distribution, liquidation and other rights, and
will have no preference, appraisal or exchange rights.
Under the MGCL, a corporation generally cannot dissolve, amend its charter,
merge, sell all or substantially all of its assets, engage in a share exchange
or engage in simultaneous transactions outside the ordinary course of business
unless approved by the affirmative vote of stockholders holding at least
two-thirds of the shares entitled to vote on the matter, unless a lesser
percentage (but not less than a majority of all of the votes to be cast on the
matter) is set forth in the corporation's charter. The Charter does not provide
for a lesser percentage in such situations. In addition, the Operating
Partnership Agreement provides, with certain exceptions, that the Operating
Partnership may not dissolve and wind up its affairs without the consent of the
holders of 85% of all outstanding Units. See "Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws."
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PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more classes or
series, as authorized by the Board of Directors. Prior to issuance of shares of
each series, the Board of Directors is required by the MGCL and the Charter to
fix for each class or series, subject to the provisions of the Charter regarding
Excess Stock, the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, as are permitted by Maryland law. Such
rights, powers, restrictions and limitations could include the right to receive
specified dividend payments and payments on liquidation prior to any such
payments being made to the holders of the Common Stock. The Board of Directors
could authorize the issuance of Preferred Stock with terms and conditions that
could have the effect of delaying, deferring or preventing a change in control
or other transaction that holders of Common Stock might believe to be in their
best interests or in which holders of some, or a majority, of the Common Stock
might receive a premium for their shares over the then-current market price of
such shares. As of the date hereof, no shares of Preferred Stock are
outstanding, and the Company has no present plans to issue any Preferred Stock.
See "Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws."
RESTRICTIONS ON TRANSFERS
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year (other than the
first year) (the "Five or Fewer Requirement"), and such shares of capital stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months (other than the first year) or during a proportionate
part of a shortable taxable year. The Charter subject to certain exceptions
provides that no holder who is an individual may own, or be deemed to own by
virtue of the attribution provisions of the Code, 10% or more of the aggregate
value of the Common Stock. Pursuant to the Code, Common Stock held by certain
types of entities, such as pension trusts qualifying under Section 401(a) of the
Code, United States investment companies registered under the Investment Company
Act of 1940, partnerships, trusts and corporations will be attributed to the
beneficial owners of such entities for purposes of the Five or Fewer Requirement
(i.e., the beneficial owners of such entities will be counted as holders). The
Charter provides that no such entity may own 10% or more of the aggregate value
of the Company's shares of stock (the "Look-Through Ownership Limit"). Any
transfer of shares of stock or any security convertible into shares of stock
that would create a direct or indirect ownership of shares of stock in excess of
the Ownership Limit or the Look-Through Ownership Limit or that would result in
the disqualification of the Company as a REIT, including any transfer that
results in the shares of stock being owned by fewer than 100 persons or results
in the Company being "closely held" within the meaning of Section 856(h) of the
Code, shall be null and void, and the intended transferee will acquire no rights
to the shares of stock. The foregoing restrictions on transferability and
ownership will 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 Board of Directors may, in its sole
discretion, waive the Ownership Limit and the Look-Through Ownership Limit if
evidence satisfactory to the Board of Directors and the Company's tax counsel is
presented that the changes in ownership will not then or in the future
jeopardize the Company's REIT status and the Board of Directors otherwise
decides that such action is in the best interest of the Company. See "Federal
Income Tax Considerations."
Shares of stock owned, or deemed to be owned, or transferred to a
stockholder in excess of the Ownership Limit or the Look-Through Ownership Limit
will automatically be converted into shares of Excess Stock that will be
transferred, by operation of law, to the Company as trustee of a trust for the
exclusive benefit of the transferees to whom such shares of stock may be
ultimately transferred without violating the Ownership Limit or the Look-Through
Ownership Limit. Common Stock that is converted shall be Excess Common Stock and
Preferred Stock that is converted shall be Excess Preferred Stock. While the
Excess Stock is held in trust, it will not be entitled to vote, it will not be
considered for purposes of any stockholder vote or the determination of a quorum
for such vote, and, except upon liquidation, it will not be entitled to
participate in dividends or other distributions. Any distribution paid to a
proposed transferee of Excess Stock prior to the discovery by the Company that
capital stock has
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been transferred in violation of the provisions of the Charter shall be repaid
to the Company upon demand. The Excess Common Stock and Excess Preferred Stock
is not treasury stock, but rather constitutes separate classes of issued and
outstanding stock of the Company. The original transferee-stockholder may, at
any time the Excess Stock is held by the Company in trust, transfer the interest
in the trust representing the Excess Stock to any person whose ownership of the
shares of capital stock exchanged for such Excess Stock would be permitted under
the Ownership Limit or the Look-Through Ownership Limit, at a price not in
excess of: (i) the price paid by the original transferee-stockholder for the
shares of stock that were exchanged into Excess Stock; or (ii) if the original
transferee-stockholder did not give value for such shares (e.g., the Excess
Stock was received through a gift, devise or other transaction), the average
closing price for the class of shares from which such shares of Excess Stock
were converted for the ten days immediately preceding such sale or gift.
Immediately upon the transfer to the permitted transferee, the Excess Stock will
automatically be converted back into shares of stock of the class from which it
was converted. 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 shares of Excess Stock may be deemed, at the
option of the Company, to have acted as an agent on behalf of the Company in
acquiring the Excess Stock and to hold the Excess Stock on behalf of the
Company.
In addition, the Company will have the right, for a period of 90 days
during the time any shares of Excess Stock are held by the Company in trust, to
purchase all or any portion of the Excess Stock from the original
transferee-stockholder at the lesser of: (i) the price initially paid for such
shares by the original transferee-stockholder, or if the original
transferee-stockholder did not give value for such shares (e.g., the shares were
received through a gift, devise or other transaction), the average closing price
for the class of Stock from which such shares of Excess Stock were converted for
the ten days immediately preceding such sale or gift; and (ii) the average
closing price for the class of shares from which such shares of Excess Stock
were converted for the ten trading days immediately preceding the date the
Company elects to purchase such shares. The 90-day period begins on the date
notice is received of the violative transfer if the original
transferee-stockholder gives notice to the Company of the transfer or, if no
such notice is given, the date the Board of Directors determines that a
violative transfer has been made.
These restrictions will not preclude settlement of transactions through the
New York Stock Exchange.
Each stockholder shall upon demand be required to disclose to the Company
in writing any information with respect to the direct, indirect and constructive
ownership of capital stock as the Board of Directors deems necessary to comply
with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
The Ownership Limit may have the effect of precluding acquisition of
control of the Company unless the Board of Directors determines that maintenance
of REIT status is no longer in the best interests of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws does not purport to be complete and is subject to and
qualified in its entirety by reference to Maryland law and to the Charter and
Bylaws, copies of which are exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
BUSINESS COMBINATIONS
Under the MGCL certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then-outstanding voting stock of
the corporation or an affiliate or associate thereof are prohibited for five
years after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of the corporation and approved by the
affirmative vote of at least: (i) 80% of the votes entitled to be cast by
holders of outstanding voting shares of the corporation; and (ii) two-thirds of
the votes entitled to be cast by holders of outstanding voting shares of the
corporation other than shares held by the Interested Stockholder with whom (or
with whose affiliate) the business combination is to be effected, unless, among
other conditions, the corporation's common stockholders receive a minimum price
(as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares.
These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. The Charter exempts from the Maryland statute any
business combination with Dr. Elkins, or current or future affiliates,
associates or other persons acting in concert as a group with Dr. Elkins.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control Shares" are voting shares of stock
that, if aggregated with all other shares of stock previously acquired by that
person or in respect of which the acquiror is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third; (ii) one-third or more but less than a majority; or (iii) a majority
of all voting power. Control Shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of Control Shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the Control Shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights, as of the date of the last control share acquisition by the
acquiror or of any meeting of stockholders at
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which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply: (i) to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction; or (ii) to acquisitions approved or exempted by the
charter or bylaws of the corporation.
The Bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of the Company's shares of stock.
There can be no assurance that such provision will not be amended or eliminated
at any time in the future.
AMENDMENT OF CHARTER AND BYLAWS
The Charter may be amended only by the affirmative vote of the holders of
not less than two-thirds of all of the votes entitled to be cast on the matter.
The Board of Directors has the exclusive right to amend the Bylaws without a
vote of the stockholders.
DISSOLUTION OF THE COMPANY
The MGCL permits the dissolution of the Company by: (i) the affirmative
vote of a majority of the entire Board of Directors declaring such dissolution
to be advisable and directing that the proposed dissolution be submitted for
consideration at an annual or special meeting of stockholders and (ii) upon
proper notice, stockholder approval by the affirmative vote of at least
two-thirds of the votes entitled to be cast on the matter.
MEETINGS OF STOCKHOLDERS
The Bylaws provide for annual meetings of stockholders to be held on the
second Wednesday of May of each year or on any other day in the month of May as
may be established from time to time by the Board of Directors. Special meetings
of stockholders may be called by: (i) the Chairman of the Board or the President
or (ii) a majority of the Board of Directors and must be called by the Secretary
of the Company on written request by holders of shares entitled to cast a
majority of all votes entitled to be cast at the meeting.
The Bylaws provide that any stockholder of record wishing to nominate a
director or have a stockholder proposal considered at an annual meeting (except
for stockholder proposals included in the Company proxy materials pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended) must provide
written notice and certain supporting documentation to the Company relating to
the nomination or proposal not less than 75 days nor more than 180 days prior to
the anniversary date of the prior year's annual meeting or special meeting in
lieu thereof the ("Anniversary Date"). In the event that the annual meeting is
called for a date more than seven calendar days before the Anniversary Date,
stockholders generally must provide written notice within 20 calendar days after
the date on which notice of the meeting is mailed to stockholders.
The purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Board of Directors a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business and, to the extent deemed necessary
or desirable by the Board of Directors, to inform stockholders and make
recommendations about the qualifications or business, as well as to provide a
more orderly procedure for conducting meetings of stockholders. Although the
Company's Bylaws do not give the Board of Directors any power to disapprove
stockholder nominations for the election of directors or proposals for action,
they may have the effect of precluding a contest for the election of directors
or the consideration of stockholder proposals if the proper procedures are not
followed, and of discouraging or deterring a third
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party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of the nominees or proposals might be harmful or beneficial to the
Company and its stockholders.
THE BOARD OF DIRECTORS
The Charter provides that the number of Directors of the Company may be
established by the Board of Directors but may not be fewer than the minimum
number required by Maryland law nor more than twelve. Any vacancy will be filled
by the vote of a majority of the remaining Directors, except that a vacancy
resulting from an increase in the number of Directors must be filled by the vote
of a majority of the entire Board of Directors. Pursuant to the terms of the
Bylaws, the Directors are divided into three classes. One class will hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 1999, the second class will hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2000, and the third class will hold
office initially for a term expiring at the annual meeting of stockholders to be
held in 2001. As the term of each class expires, Directors in that class will be
elected for a term of three years and until their successors are duly elected
and qualified. The use of a staggered board may render more difficult a change
in control of the Company or removal of incumbent management.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of directors and officers to the corporation
and its stockholders for money damages except for the liability resulting from:
(i) actual receipt of an improper benefit or profit in money, property or
services; or (ii) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The Charter contains such a
provision which eliminates such liability to the maximum extent permitted by the
MGCL. This provision has no effect on the availability of equitable remedies,
such as injunctive relief and rescissionary relief. The Charter also provides
that no amendment thereto may limit or eliminate this limitation of liability
with respect to events occurring prior to the effective date of such amendment.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
officer of the Company. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others,
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against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty; (b) the
director or officer actually received an improper personal benefit in money,
property or services; or (c) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or omission was
unlawful. However, under the MGCL, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (i) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (ii) a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with each of its
executive officers and directors. The indemnification agreements will require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under these
agreements, the Company must also indemnify and advance all expenses incurred by
executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors under
the Company's directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by law, it provides greater assurance to directors and executive
officers that indemnification will be available because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or the
stockholders to eliminate the rights it provides.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Trading of the shares of Common Stock on the New York Stock Exchange is
expected to commence immediately following completion of the Offering. No
prediction can be made as to the effect, if any, that future sales or shares of
the availability of shares for future sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of Common Stock
(including Common Stock issued upon the exercise of options), or the perception
that such sales could occur, could adversely affect prevailing market prices of
the shares of Common Stock.
Upon the completion of the Offering, the Company will have outstanding
_________ shares of Common Stock ( shares if the Underwriters' overallotment
option is exercised in full). The shares of Common Stock issued in the Offering
will be freely tradable by persons other than "affiliates" of the Company
without restriction under the Securities Act, subject to the limitations on
ownership set forth in this Prospectus. See "Description of Capital Stock of the
Company."
Shares acquired by "affiliates" in the Concurrent Offering, pursuant to the
exercise of stock options or otherwise, may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including exemptions contained in Rule 144. As of ____ , 1998, there
were _______ shares of Common Stock which are deemed "restricted securities"
under Rule 144. In general, under Rule 144 as currently in effect, if one year
has elapsed since the later of the date of acquisition of "restricted
securities" from the Company or any "affiliate" of the Company, as that term is
defined under the Securities Act, the acquiror or subsequent holder thereof is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding Common Stock (approximately
_________ shares after the completion of the Offering) or the average weekly
trading volume of the shares of Common Stock during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
SEC. Sales under Rule 144 also are subject to certain manner of sales
provisions, notice requirements and the availability of current public
information about the Company. If two years have elapsed since the date of
acquisition of "restricted securities" from the Company or from any "affiliate"
of the Company, and the acquiror or subsequent holder thereof is deemed not to
have been an "affiliate" of the Company at any time during the 90 days
immediately preceding a sale, such person is entitled to sell such shares in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
Each of the Company, its executive officers and directors and certain
stockholders of the Company has agreed, subject to certain exceptions, not to:
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock; or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) for a period of 180 days
after the date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders of the Company has agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock without DLJ's prior written consent.
The Company has established the 1998 Omnibus Securities and Incentive Plan
for the purpose of attracting and retaining executive officers, directors,
employees and other key personnel. See "Management -- Compensation of the Board
of Directors" and "--1998 Omnibus Securities and Incentive Plan." The Company
intends to issue options to purchase approximately 513,650 shares of Common
Stock to executive officers, directors and employees prior to the completion of
the Offering and has reserved ____ additional shares for future issuance under
the Plan for a total equal to 5% of the issued
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and outstanding Common Stock and Units. On or prior to the expiration of the
initial 12-month period following the completion of the Offering, the Company
expects to file a registration statement with the Commission with respect to the
shares of Common Stock issuable under the Plan, which shares may be resold
without restriction, unless held by affiliates. In addition, each director and
executive officer of the Company who is to receive options to purchase shares of
Common Stock at an exercise price of $.001 per share has agreed, solely with
respect to shares of Common Stock issuable upon exercise of such options, not to
enter into any of the transactions described in clauses (i) or (ii) of the
preceding paragraph for a period of three years after the date of the Prospectus
without the prior written consent of DLJ. Such restrictions shall lapse under
certain circumstances, including death or disability of the option holder.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the applicable Federal income tax
considerations anticipated to be material to a prospective stockholder in the
Company in connection with the ownership of Common Stock. LeBoeuf, Lamb, Greene
& MacRae, L.L.P., counsel to the Company, has reviewed the following discussion
and is of the opinion that it fairly summarizes the Federal income tax
considerations that are likely to be material to a holder of Common Stock. The
following discussion is for general information only, is not exhaustive of all
possible tax considerations, and is not intended to be (and should not be
construed as) tax advice. For example, this summary does not give a detailed
discussion of any state, local or foreign tax considerations. In addition, the
discussion is intended to address only those Federal income tax considerations
that are generally applicable to all stockholders in the Company. It does not
discuss all aspects of Federal income taxation that might be relevant to a
specific stockholder in light of its particular investment or tax circumstances.
The description does not purport to deal with all aspects of taxation that may
be relevant to stockholders subject to special treatment under the Federal
income tax laws, including, without limitation, insurance companies, financial
institutions or broker-dealers, tax-exempt organizations (except to the extent
discussed under the heading "-- Taxation of Tax-Exempt Stockholders of the
Company") or foreign corporations and persons who are not citizens or residents
of the United States (except to the extent discussed under the heading "--
Taxation of Non-U.S. Stockholders of the Company").
The information in this section is based on the Code, final, temporary and
proposed Treasury regulations thereunder, the legislative history of the Code,
current administrative interpretations and practices of the IRS (including its
practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to a taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury regulations, administrative
interpretations and practices and court decisions will not significantly change
the current law or adversely affect existing interpretations of current law. Any
such change could apply retroactively to transactions preceding the date of the
change. The Company has not requested, and does not plan to request, any rulings
from the IRS concerning the tax treatment of the Company or the Operating
Partnership. Thus, no assurance can be provided that the statements set forth
herein (which do not bind the IRS or the courts) will not be challenged by the
IRS or will be sustained by a court if so challenged.
As used in this section, the term "Company" refers solely to Monarch
Properties, Inc.
EACH PROSPECTIVE PURCHASER OF SHARES OF COMMON STOCK IS URGED TO CONSULT
WITH ITS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE
OWNERSHIP AND DISPOSITION OF SHARES OF COMMON STOCK OF AN ENTITY ELECTING TO BE
TAXED AS A REIT IN LIGHT OF ITS SPECIFIC TAX AND INVESTMENT CIRCUMSTANCES AND
THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS APPLICABLE TO IT.
TAXATION OF THE COMPANY
GENERAL. The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ending
December 31, 1998. The Company believes that, commencing with its taxable year
ending December 31, 1998, it will be organized and will operate in such a manner
as to qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner, but no assurance can be given that it will
qualify or remain qualified.
These sections of the Code and the corresponding Treasury regulations are
highly technical and complex. This summary is qualified in its entirety by the
applicable Code provisions, Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
LeBoeuf, Lamb, Greene & MacRae, L.L.P. has acted as tax counsel to the
Company in connection with the Company's planned election to be taxed as a REIT.
In the opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., commencing with the
Company's taxable year ending December 31, 1998, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed
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method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. It must be emphasized that this opinion
is conditioned upon certain representations made by the Company as to factual
matters relating to the organization and operation of the Company and the
Operating Partnership. In addition, this opinion is based upon the factual
representations of the Company concerning its business and properties as set
forth in this Prospectus and will assume that the actions described in this
Prospectus are completed in a timely manner as described herein. LeBoeuf, Lamb,
Greene & MacRae, L.L.P. is not aware of any facts or circumstances that are
inconsistent with these assumptions and representations. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet
on an ongoing basis (through actual annual operating results, distribution
levels and diversity of share ownership) the various qualification tests imposed
under the Code discussed below, the results of which will not be reviewed by
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Accordingly, no assurance can be given
that the actual results of the Company's operations for any particular taxable
year will satisfy such requirements. Further, the anticipated income tax
treatment described in this Prospectus may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time. See "-- Failure of
the Company to Qualify as a REIT."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to Federal income tax on its net income that is currently distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that generally results from investment in
a regular corporation. However, the Company will be subject to Federal income
tax as follows. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax." Third, if the Company has: (i) net income from the
sale or other disposition of "foreclosure property" (i.e., generally, property
acquired by the Company by foreclosure or otherwise upon default of a loan
secured by the property) which is held primarily for sale to customers in the
ordinary course of business; or (ii) other non-qualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property, other
than foreclosure property, held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but has nonetheless maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount by which the Company fails the 75% or 95% test multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, if the Company
should fail to distribute during each calendar year at least the sum of: (i) 85%
of its REIT ordinary income for such year; (ii) 95% of its REIT capital gain net
income for such year; and (iii) any undistributed taxable income from prior
years, the Company would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed.
Seventh, with respect to any asset (a "Built-In Gain Asset") acquired by the
Company from a corporation which is or has been a C corporation (i.e., generally
a corporation subject to full corporate-level tax) in a transaction in which the
basis of the Built-In Gain Asset in the hands of the Company is determined by
reference to the basis of the Built-In Gain Asset in the hands of the C
corporation and such basis is less than the fair market value of such asset at
the time of such acquisition (with the excess of such fair market value over
such basis amount being referred to as the "Built-In Gain"), if the Company
recognizes any Built-In Gain on the disposition of such Built-In Gain Asset
during the ten-year period (the "Recognition Period") beginning on the date on
which such asset was acquired by the Company, then, such Built-In Gain will be
subject to tax at the highest regular corporate rate applicable pursuant to
Treasury regulations that have not yet been promulgated. The results described
above with respect to the recognition of Built-In Gain assume that the Company
will make an election pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION AS A REIT
ORGANIZATIONAL REQUIREMENTS. The Code defines a REIT as a corporation,
trust or association: (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) that would be taxable
as
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a domestic corporation, but for Sections 856 through 859 of the Code; (iv) that
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (v) the beneficial ownership of which is held by 100 or
more persons; (vi) during the last half of each taxable year not more than 50%
in value of the outstanding shares of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); (vii) that makes an election to be a REIT (or has made such
an election for a previous taxable year which has not been terminated or
revoked) and satisfies all relevant filing and other administrative requirements
established by the IRS that must be met in order to elect and maintain REIT
status; (viii) that uses a calendar year for Federal income tax purposes and
complies with the record keeping requirements of the Code and Treasury
regulations promulgated thereunder; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of twelve months, or during a proportionate part of a taxable year
of less than twelve months. Conditions (v) and (vi) will not apply until after
the first taxable year for which an election is made to be taxed as a REIT. For
purposes of conditions (v) and (vi), pension funds and certain other tax-exempt
entities are treated as individuals, subject to a "look-through" exception in
the case of condition (vi).
Under the "look-through" exception, any REIT shares held by a trust
described in Section 401(a) of the Code and exempt from tax under Section 501(a)
of the Code (a "qualified trust") will be treated as held directly by its
beneficiaries (and not treated as held by the qualified trust) in proportion to
their actuarial interest in such qualified trust. In the event that condition
(vi) cannot be satisfied because an investor or a group of five or fewer
investors will own more than 50% in value of the Common Stock of the Company,
such investor or group of investors may be required to purchase Units of the
Operating Partnership. Such Units will be convertible into Common Stock of the
Company at such time when condition (vi) may be satisfied if such investor or
group of investors were to own Common Stock of the Company. An investor
converting Units into Common Stock of the Company may realize gain on the
conversion subject to Federal income tax.
The Company believes that it will have issued sufficient Common Stock with
sufficient diversity of ownership in the Offering to allow it to satisfy
conditions (v) and (vi) above. In addition, the Company's Charter provide for
restrictions regarding the transfer and ownership of Common Stock, which
restrictions are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (v) and (vi) above. Such ownership and
transfer restrictions are described in "Description of Capital Stock of the
Company -- Restrictions on Transfers." No assurance can be given that these
stockholder conditions can or will be satisfied. If the Company fails to satisfy
such share ownership requirements, the Company's status as a REIT will
terminate. See "-- Failure of the Company to Qualify as a REIT." Treasury
regulations require that the Company each year demand from certain record owners
of its shares certain information in order to assist the Company in ascertaining
that the share ownership requirements described above are satisfied. If the
Company were to fail to comply with these Treasury regulation requirements for
any year, it would be subject to a $25,000 penalty. If the Company's failure to
comply were due to intentional disregard of the requirements, the penalty would
be increased to $50,000. However, if the Company's failure to comply were due to
reasonable cause and not willful neglect, no penalty would be imposed. If the
Company complies with the regulatory rules on ascertaining its actual owners but
does not know, or would not have known by exercising reasonable diligence,
whether it failed to meet the requirement that it not be closely held, the
Company will be treated as having met the requirement.
The Company will use a calendar year for Federal income tax purposes and
intends to comply with the record keeping requirements of the Code and Treasury
regulations.
OWNERSHIP OF OPERATING PARTNERSHIP UNITS. It is intended that the Company
will own and operate properties through the Operating Partnership. During the
period that MP LP and MP Operating are the sole members of the Operating
Partnership, the Operating Partnership will be disregarded as an entity separate
from the Company and treated as a branch or division of the Company for Federal
income tax purposes. It is expected that the Operating Partnership will have
other members in the future, at which time the Operating Partnership will be
treated as a partnership for Federal income tax purposes. In the
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case of a REIT which is a partner in a partnership, Treasury regulations provide
that the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share of assets. In addition, the character of the assets
and gross income of the partnership shall retain the same character in the hands
of the REIT for purposes of Section 856 of the Code, including satisfying the
gross income tests and the asset tests. Thus, the Company's proportionate share
of the assets and items of income of the Operating Partnership (including the
Operating Partnership's share of such items of any subsidiaries that are
partnerships or limited liability companies ("LLCs")) will be treated as assets
and items of income of the Company for purposes of applying the requirements
described herein. A summary of the rules governing the Federal income taxation
of partnerships and their partners is provided below in "-- Tax Risks Associated
with Partnerships." The Company will have direct control of the Operating
Partnership and intends to operate the Operating Partnership in a manner
consistent with the requirements for qualification as a REIT.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy two gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing).
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 such
rent is derived from leases which qualify as true leases for Federal income tax
purposes. Such rents also must satisfy several conditions required by the Code.
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, rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or an actual or constructive
owner of 10% or more of the REIT, actually or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property" (the "15% Personal Property Test"). Finally, for rents received to
qualify as "rents from real property," a 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 (except to the extent that the Impermissible Tenant Service
Income would not exceed the 1% threshold described below). A REIT may, however,
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. Additionally, due to
changes in this requirement enacted as part of the 1997 Act for taxable years
beginning on or after January 1, 1998, a REIT may provide de minimis services
directly to the tenants of a property; provided, however, that if: (i) the REIT
operates or manages a property or furnishes or renders services to the tenants
at the property other than through an independent contractor from whom the REIT
derives no revenue (not including services "usually or customarily rendered" in
connection with the rental of real property and not otherwise considered
"rendered to the occupant"); and (ii) the amount received for so doing (the
"Impermissible Tenant Service Income") exceeds 1% of the total amount of rent
received by the REIT with respect to the property, then no amount of rent
received by the REIT with respect to the property will qualify as "rents from
real property." If the Impermissible Tenant Service Income is one percent or
less of the total amount of rent received by the REIT with respect to the
property, then only the Impermissible Tenant Service Income will not qualify as
"rents from real property." The amount treated as received by the REIT for such
impermissible services may not be less than 150% of the REIT's direct cost in
generating such income. To the extent that services (other than those
customarily furnished or rendered in connection with the rental of real
property) are rendered to the tenants of the property by the independent
contractor, the cost of the services must be borne by the independent
contractor.
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In order for rent to constitute "rents from real property," the leases must
be respected as true leases for Federal income tax purposes and not treated as
some other type of arrangement. The determination of whether the leases are true
leases depends on an analysis of all the surrounding facts and circumstances. In
making such a determination, courts have considered a variety of factors,
including the following: (i) the intent of the parties; (ii) the form of the
agreement; (iii) the length of the lease term; (iv) the degree of control over
the property that is retained by the property owner (e.g., whether the lessee
has substantial control over the operation of the property or whether the lessee
was required simply to use its best efforts to perform its obligations under the
agreement); and (v) the extent to which the property owner retains the risk of
loss with respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property) or the
potential for economic gain (e.g., appreciation) with respect to the property.
The Company believes that all of its leases have been structured so as to
qualify as true leases for Federal income tax purposes.
The Company will not: (i) charge rent for any property that is based in
whole or in part on the income or profits of any person; (ii) rent any property
to a Related Party Tenant; (iii) derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease), or; (iv) provide any services with respect to the Properties
other than certain administrative services and other than through an independent
contractor from whom the Company derives no revenue (except to the extent that
the Impermissible Tenant Service Income would not exceed the 1% threshold
described above). Notwithstanding the foregoing, the Company may take one or
more of the actions described in the preceding sentence if, based on the advice
of counsel, the Company determines that such action or actions will not have an
adverse effect on the Company's status as a REIT.
The Company may lease certain items of personal property in connection with
the lease of an assisted living facility, a skilled nursing facility or an
independent living facility property. The 15% Personal Property Test provides
that if a lease provides for the rental of both real and personal property and
the portion of the rent attributable to personal property is 15% or less of the
total rent due under the lease, then all rent paid pursuant to such lease
qualifies as "rent from real property." If, however, a lease provides for the
rental of both real and personal property, and the portion of the rent
attributable to personal property exceeds 15% of the total rent due under the
lease, then the portion of the rent that is attributable to personal property
does not qualify as "rent from real property." The amount of rent attributable
to personal property is that amount which bears the same ratio to total rent for
the taxable year as the average of the adjusted tax bases of the personal
property at the beginning and end of the year bears to the average of the
aggregate adjusted tax bases of both the real and personal property at the
beginning and end of such year. The Company has represented that with respect to
each lease that includes a lease of items of personal property, the amount of
rent attributable to personal property with respect to such lease, determined as
set forth above, will not exceed 15% of the total rent due under the lease.
If any of the Company's properties were to be operated directly by the
Operating Partnership or its subsidiary partnership or LLC as a result of a
default by the lessee under the applicable lease, such property would constitute
foreclosure property for three years following its acquisition (or for up to an
additional three years if an extension is granted by the IRS), provided that:
(i) the Operating Partnership or its subsidiary partnership or LLC conducts
operations through an independent contractor within 90 days after the date the
property is acquired; (ii) the Operating Partnership or its subsidiary
partnership or LLC does not undertake any construction on the foreclosed
property other than completion of improvements that were more than 10% complete
before default became imminent; and (iii) foreclosure was not regarded as
foreseeable at the time the Company entered into such leases. For as long as any
of these properties constitute foreclosure property, the income from the
properties would be subject to tax at the maximum corporate rates, but it would
qualify under the 75% and 95% gross income tests. However, if any of these
properties does not constitute foreclosure property at any time in the future,
income earned from the disposition or operation of such property will not
qualify under the 75% and 95% gross income 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
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of the Code. These relief provisions generally will be available if: (i) the
Company's failure to meet such tests was due to reasonable cause and not due to
willful neglect; and (ii) the Company attaches a schedule of the sources of its
income to its Federal income tax return and any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances the Company would be entitled to
the benefit of these relief provisions. For example, if the Company fails to
satisfy the gross income tests because non-qualifying income that the Company
intentionally incurs exceeds the limits on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable cause.
If these relief provisions are inapplicable to a particular set of circumstances
involving the Company, the Company will not qualify as a REIT. As discussed
above under "-- Taxation of the Company," even if these relief provisions apply,
a tax would be imposed with respect to the excess net income.
Any gain realized by the Company on the sale of any property (other than
foreclosure property) held as inventory or other property held primarily for
sale to customers in the ordinary course of business (including the Company's
share of any such gain realized by any partnership in which the Company is a
partner) will be treated as income from a prohibited transaction that is subject
to a 100% tax. Such prohibited transaction income may also have an adverse
effect upon the Company's ability to satisfy the income tests for qualification
as a REIT. Under existing law, whether property is held as inventory or
primarily for sale to customers in the ordinary course of a trade or business is
a question of fact that depends on all the facts and circumstances with respect
to the particular transaction. It is intended that the properties the Operating
Partnership will own or acquire will be held for investment with a view to
long-term appreciation, and that the Operating Partnership will engage in the
business of acquiring, developing, owning, and operating such properties (and
other properties) and will make such occasional sales of such properties as are
consistent with the Company's investment objectives.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including assets held by
the Company's qualified REIT subsidiaries and the Company's allocable share of
the assets held by partnerships in which the Company owns an interest) must be
represented by real estate assets, cash, cash items (including receivables) and
government securities. Second, not more than 25% of the Company's total assets
(including assets held by the Company's qualified REIT subsidiaries and the
Company's allocable share of the assets held by partnerships in which the
Company owns an interest) may be represented by securities other than those in
the 75% asset class. Third, of the investments included in the 25% asset class,
the value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets (including assets held by the
Company's qualified REIT subsidiaries and the Company's allocable share of the
assets held by partnerships in which the Company owns an interest) and the
Company may not own more than 10% of any one issuers outstanding voting
securities (excluding securities of a qualified REIT subsidiary or another
REIT). The President's Budget Proposal for Fiscal Year 1999 (the "Budget
Proposal") includes a provision to expand the ownership limitation from no more
than 10% of the voting securities of an issuer to no more than 10% of the vote
or value of all classes of the issuer's stock. The Company, therefore, could not
own stock (either directly or indirectly through the Operating Partnership)
possessing more than 10% of the vote or value of all classes of any issuer's
stock. Such provision, if enacted, would place further limits on the value of
warrants or other equity instruments which the Company would be able to own in
connection with its customized financing products.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including, for example, as a
result of the Company increasing its interest in the Operating Partnership as a
result of the exercise of a Unit redemption right or an additional capital
contribution of proceeds of an offering of Common Stock by the Company), the
failure can be cured by disposition of sufficient non-qualifying assets within
30 days after the close of that quarter. The Company intends to maintain
adequate records of the value of its assets to ensure compliance with the asset
tests and to take such other actions within 30 days after the close of any
quarter as may be required to
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cure any noncompliance. If the Company fails to cure noncompliance with the
asset tests within such time period, the Company would cease to qualify as a
REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to make distributions (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. In addition, if the Company disposes of any Built-In
Gain Asset during its Recognition Period, the Company will be required, pursuant
to Treasury regulations which have not yet been promulgated, to distribute at
least 95% of the Built-In Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate. Dividends paid in the subsequent year, however, will be
treated as if paid in the prior year for purposes of such prior year's 95%
distribution requirement if one of the following two sets of criteria are
satisfied: (i) the dividends were declared in October, November, or December of
any year and are payable to stockholders of record on a specified date in such a
month, and the dividends were actually paid before January 31 of the following
calendar year or (ii) the dividends were declared before the Company timely
files its Federal income tax return for such year, the dividends were
distributed in the twelve month period following the close of the prior year and
not later than the first regular dividend payment after such declaration, and
the Company elected on its Federal income tax return for the prior year to have
a specified amount of the subsequent dividend treated as if paid in the prior
year.
To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax on the undistributed amount at
regular ordinary and capital gain corporate tax rates. The Company, however, may
designate some or all of its retained net capital gain, so that, although the
designated amount will not be treated as distributed for purposes of this tax, a
stockholder would include its proportionate share of such amount in income, as
long-term capital gain, and would be treated as having paid its proportionate
share of the tax paid by the Company with respect to such amount. The
stockholder's basis in its shares would be increased by the amount the
stockholder included in income and decreased by the amount of the tax the
stockholder is treated as having paid. The Company would make an appropriate
adjustment to its earnings and profits. For a more detailed description of the
tax consequences to a stockholder of such a designation. See "-- Taxation of
Taxable U.S. Stockholders of the Company Generally."
The Company intends to make timely distributions sufficient to satisfy
these annual distribution requirements. In this regard, the Operating
Partnership Agreement authorizes the Company to take such steps as may be
necessary to cause the Operating Partnership to distribute to its partners an
amount sufficient to permit the Company to meet these distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance for depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it
generally will have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between: (i)
the actual receipt of income and actual payment of deductible expenses; and (ii)
the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company. If such timing differences occur, in order to
meet the distribution requirements, 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 share dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
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Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of: (i) 85% of its REIT ordinary income for such year;
(ii) 95% of its REIT capital gain income for such year; and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable year,
and if the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure to qualify as a REIT
would significantly reduce the cash available for distribution by the Company to
its stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income to the extent
of the Company's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS OF THE COMPANY GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of Common Stock
who (for United States Federal income tax purposes): (i) is a citizen or
resident of the United States; (ii) is a corporation, partnership or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof; (iii) is an estate, the income of which is
subject to United States Federal income taxation regardless of its source; or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who would
have the authority to control all substantial decisions of the trust.
DISTRIBUTIONS GENERALLY. As long as the Company qualifies as a REIT,
distributions made by the Company out of its current or accumulated earnings and
profits (and not designated as capital gain dividends) will constitute dividends
taxable to its taxable U.S. Stockholders as ordinary income. These distributions
are not eligible for the dividends received deduction for corporations. U.S.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against future income (subject
to certain limitations). The Company will notify U.S. Stockholders after the
close of the Company's taxable year as to the portions of distributions
attributable to that year that constitute ordinary income, return of capital and
capital gain.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted basis which such U.S.
Stockholder has in its Common Stock for Federal income tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a U.S. Stockholder's adjusted basis in its Common Stock taxable as capital
gains (provided that the Common Stock have been held as a capital asset).
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to taxable U.S. Stockholders
that are individuals, estates or trusts as gain from the sale or exchange of a
capital asset held for more than one year (to the extent such capital gain
dividends do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which such U.S. Stockholder has held the
Common Stock with respect to which any such distribution is made.
On November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that the Company may classify portions of its designated capital gain
dividend as: (i) a 20% rate gain distribution (which would be taxed as long-term
capital gain in the 20% group); (ii) an unrecaptured Section 1250
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gain distribution (which would be taxed as long-term capital gain in the 25%
group); or (iii) a 28% rate gain distribution (which would be taxed as long-term
capital gain in the 28% group). (If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate gain
distribution. For a discussion of the 20%, 25% and 28% tax rates applicable to
individuals, estates and trusts. See "-- 1997 Act Changes to Capital Gain
Taxation" below.) IRS Notice 97-64 also provides that the Company must determine
the maximum amounts that it may designate as 20% and 25% rate capital gain
dividends by performing the computation required by the Code as if the Company
were an individual whose ordinary income were subject to a marginal tax rate of
at least 28%. The Notice further provides that designations made by the Company
only will be effective to the extent that they comply with Revenue Ruling 89-81,
which requires that distributions made with respect to different classes of
shares be composed proportionately of dividends of a particular type.
Distributions that are properly designated by the Company as capital gain
dividends will be taxable to taxable corporate U.S. Stockholders as long-term
capital gain (to the extent that such capital gain dividends do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which such corporate U.S. Stockholder has held the Common Stock with
respect to which any such distribution is made. The tax rate designations
described in the preceding paragraph do not apply to corporate stockholders.
Such corporate U.S. Stockholders may, however, be required to treat up to 20% of
certain capital gain dividends as ordinary income.
The Company may designate by written notice to its U.S. Stockholders its
net capital gain so that, with respect to any retained net capital gains, a U.S.
Stockholder would include its proportionate share of such retained net capital
gains in income as long-term capital gain and would be treated as having paid
its proportionate share of the tax paid by the Company with respect to such
retained net capital gains. The U.S. Stockholder's basis in its shares would be
increased by its share of such retained net capital gains and decreased by its
share of such tax. With respect to such long-term capital gain of a U.S.
Stockholder that is an individual or an estate or trust, the IRS, as described
above in this section, has authority to issue regulations that should apply to
such long-term capital gain the special tax rate applicable generally to the
portion of the long-term capital gains of an individual or an estate or trust
attributable to deductions for depreciation taken with respect to depreciable
real property.
PASSIVE ACTIVITY LOSS AND INVESTMENT LIMITATIONS. Distributions made by the
Company and gain arising from the sale or exchange by a U.S. Stockholder of
Common Stock will not be treated as passive activity income, and, as a result,
U.S. Stockholders generally will not be able to apply any "passive losses"
against such income or gain. Dividends from the Company (to the extent they do
not constitute a return of capital) generally will be treated as investment
income for purposes of the investment income limitation. Net capital gain from
the disposition of Common Stock and capital gain dividends generally will be
excluded from investment income unless the U.S. Stockholder makes an election to
the contrary.
CERTAIN DISPOSITIONS OF STOCK. In general, upon any sale or other
disposition of Common Stock, a U.S. Stockholder will recognize gain or loss for
Federal income tax purposes in an amount equal to the difference between: (i)
the amount of cash and the fair market value of any property received on such
sale or other disposition; and (ii) the holder's adjusted basis in such Common
Stock for Federal income tax purposes. Such gain or loss will be capital gain or
loss if the Common Stock have been held by the U.S. Stockholder as a capital
asset, and such gain or loss will be long-term capital gain or loss if such
Common Stock have been held for more than one year. In general, any loss
recognized by a U.S. Stockholder upon the sale or other disposition of Common
Stock that have been held for six months or less (after applying certain holding
period rules) will be treated as long-term capital loss to the extent of
distributions received by such U.S. Stockholder from the Company which were
required to be treated as long-term capital gains. For a U.S. Stockholder that
is an individual, trust or estate, the long-term capital loss will be
apportioned among the applicable long-term capital gain groups to the extent
that distributions received by such U.S. Stockholder were previously so treated.
1997 ACT CHANGES TO CAPITAL GAIN TAXATION. The 1997 Act alters the taxation
of capital gain income. Under the 1997 Act, individuals, trusts and estates that
hold certain investments for more than 18 months may be taxed at a maximum
long-term capital gain rate of 20% on the sale or exchange of
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those investments. Individuals, trusts and estates that hold certain assets for
more than one year but no more than 18 months may be taxed at a maximum
long-term capital gain rate of 28% on the sale or exchange of those investments.
The 1997 Act also provides for a maximum rate of 25% for "unrecaptured section
1250 gain" for individuals, trusts and estates, special rules for "qualified
5-year gain" and certain other changes to prior law. The 1997 Act allows the IRS
to prescribe regulations on how the 1997 Act's new capital gain rates will apply
to sales of capital assets by "pass-through entities." To date such regulations
have not been prescribed. For a discussion of new rules under the 1997 Act that
apply to the taxation of distributions by the Company to its U.S. Stockholders
that are designated by the Company as "capital gain dividends." See "--
Distributions Generally" above. U.S. Stockholders are urged to consult with
their own tax advisors with respect to the new rules contained in the 1997 Act.
BACKUP WITHHOLDING FOR COMPANY DISTRIBUTIONS
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such
holder: (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact; or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Stockholder that does not provide the Company with its
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
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any stockholders who fail to
certify their non-foreign status to the Company. See "-- Taxation of Non-U.S.
Stockholders of the Company."
TAXATION OF TAX-EXEMPT STOCKHOLDERS OF THE COMPANY
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by
certain tax-exempt entities. Based on that ruling, provided that a tax-exempt
stockholder (except certain tax-exempt stockholders described below) has not
held its shares of Common Stock of the Company as "debt financed property"
within the meaning of the Code (generally shares of Common Stock of the Company,
the acquisition of which was financed through a borrowing by the tax-exempt
stockholder) and such shares are not otherwise used in a trade or business, the
dividend income from the Company and gain on the sales of shares of Common Stock
of the Company will not be UBTI to such tax-exempt stockholder.
For tax-exempt stockholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from Federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
If the Company must rely on the "look-through" exception with respect to
qualified trusts in order to satisfy the "not closely held" requirement, then
all or a portion of the Company's distributions could be UBTI. Section
856(h)(3)(C) of the Code provides that a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any qualified trust holding
more than 10% (by value) of the interests in the REIT. The Company will be a
"pension held REIT" if: (i) at least one qualified trust holds more than 25% (by
value) of the interests in the REIT; or (ii) one or more qualified trusts, each
of which owns more than 10% (by value) of the interests in the REIT, hold in the
aggregate more than 50% (by value) of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of (i) the gross UBTI
earned by the REIT (treating the REIT as if it were a qualified trust and
therefore subject to tax on UBTI) to (ii) the total gross income of the REIT. A
de minimis exception applies if the percentage determined according to the
preceding sentence is less than 5% for any year.
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If the Company must rely on the "look through" exception to qualify as a
REIT and it is a "pension held REIT," a qualified trust could be required to
treat a portion of its dividends from the Company as unrelated debt-financed
income subject to tax as UBTI under Section 514 of the Code if any of the real
property held by the Company is "debt-financed property." Section 514 of the
Code requires a tax-exempt organization (i.e., a qualified trust) to take into
account a portion of its income and deductions from any debt financed property
in determining UBTI. Notwithstanding the above, if the property is held through
an entity treated as a partnership for Federal income tax purposes and such
entity meets certain requirements of Section 514(c)(9) of the Code, then a
qualified trust will not be required to treat a portion of its dividends from
the Company as unrelated debt-financed income subject to tax as UBTI. The
exception under Section 514(c)(9) of the Code is for indebtedness incurred in
acquiring or improving any real property. However, this exception for real
estate will not apply if such real property is held through an entity treated as
a partnership for Federal income tax purposes, unless, among other things: (i)
the qualified trust's highest percentage of partnership income over the entire
life of the partnership does not exceed its partnership losses over the entire
life of the partnership (the "fractions rule"); and (ii) every allocation under
the partnership agreement has substantial economic effect within the meaning of
Treasury regulations Section 1.704-1(b)(2). Accordingly, if the fractions rule
is satisfied, a qualified trust will not be required to treat a portion of its
dividends from the Company as unrelated debt-financed income subject to tax as
UBTI even if the Company must rely on the "look through" exception to qualify as
a REIT.
Under the fractions rule, the allocation of partnership items to a
tax-exempt entity cannot result in that tax-exempt entity having a percentage
share of overall partnership income for any partnership taxable year greater
than that tax-exempt entity's share of overall partnership loss for the
partnership taxable year for which that tax-exempt entity's percentage share of
overall partnership loss will be the smallest. The fractions rule must be
satisfied both on a prospective and actual basis for each taxable year of the
partnership, commencing with the first taxable year in which the partnership
holds debt financed real property and has a tax-exempt entity as a partner.
Generally, a partnership will not qualify for the UBTI exception for real
property for any taxable year of its existence unless it satisfies the fractions
rule for every year the fractions rule applies. Reasonable preferred returns are
disregarded in computing overall partnership income or loss for purposes of the
fraction rule provided the income allocation generally does not precede the
making of the related cash payment. A preferred return is considered reasonable
to the extent it is computed based on unreturned capital at a rate that is
commercially reasonable. A rate is considered commercially reasonable if it is
no greater than either: (i) four percentage points more than or (ii) 150% of,
the highest long-term applicable Federal rate within the meaning of Section
1274(d) of the Code, for the month the partner's right to a preferred return is
first established or for any month in the partnership taxable year for which the
return on capital is computed. The fractions rule can create significant complex
restrictions in the establishment and operation of an entity treated as a
partnership for Federal income tax purposes and the admission of new investors.
Failure to satisfy the fractions rule for any year for which the "look through"
exception must be relied upon could cause all qualified trusts to be required to
treat a portion of their dividends from the Company as unrelated debt-financed
income subject to tax as UBTI. Nevertheless, it is intended that the Company
will use its best efforts to cause the Operating Partnership or its subsidiary
partnership or LLC to satisfy the fractions rule in all events, however, no
assurance can be given that it will be able to do so.
TAXATION OF NON-U.S. STOCKHOLDERS OF THE COMPANY
The rules governing United States Federal income taxation of the ownership
and disposition of Common Stock by persons that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Stockholders") are complex, and no attempt is made herein to provide more than a
brief summary of such rules. Accordingly, the discussion does not address all
aspects of United States Federal income taxation that may be applicable to
Non-U.S. Stockholders and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Stockholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Stockholders should consult with their
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own tax advisers to determine the impact of Federal, state, local and foreign
income tax laws with regard to an investment in Common Stock, including any
reporting requirements.
DISTRIBUTIONS BY THE COMPANY. Distributions by the Company to a Non-U.S.
Stockholder that are neither attributable to gain from sales or exchanges by the
Company of United States real property interests nor designated by the Company
as capital gains 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 ordinarily will be subject to withholding of
United States Federal income tax on a gross basis (that is, without allowance
for deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States trade
or business. Dividends that are effectively connected with such a trade or
business will be subject to tax on a net basis (that is, after allowance for
deductions) at graduated rates, in the same manner as domestic stockholders are
taxed with respect to such dividends, and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
The Company expects to withhold United States income tax at the rate of 30% on
the gross amount of any such distributions made to a Non-U.S. Stockholder
unless: (i) a lower treaty rate applies and any required form or certification
evidencing eligibility for that reduced rate is filed with the Company; or (ii)
the Non-U.S. Stockholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's Common Stock, but
rather will reduce the adjusted basis of such Common Stock. To the extent that
such distributions exceed the adjusted basis of a Non-U.S. Stockholder's Common
Stock, they will give rise to gain from the sale or exchange of its Common
Stock, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution (or a lower applicable treaty rate), to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate) will
nevertheless be subject to withholding at a rate of 10%. However, the Non-U.S.
Stockholder may seek a refund of such amounts from the IRS if it subsequently
determined that such distribution was, in fact, in excess of current or
accumulated earnings and profits of the Company and that the amount withheld
exceeded the Non-U.S. Stockholder's United States tax liability, if any, with
respect to the distribution.
Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States Federal income taxation, unless: (i) investment
in the Common Stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business, in which case the Non-U.S. Stockholder will be
subject to the same treatment as domestic stockholders with respect to such gain
(except that a stockholder that is a foreign corporation may also be subject to
the 30% branch profits tax, as discussed above); or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA")
distributions to a Non-U.S. Stockholder that are attributable to gain from sales
or exchanges by the Company of United States real property interests will cause
the Non-U.S. Stockholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders (subject to a special alternative minimum tax in the case
of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Stockholder that is a corporation,
as discussed above. The
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Company is required to withhold 35% of any such distribution. That amount is
creditable against the Non-U.S. Stockholder's United States Federal income tax
liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains in respect of a Non-U.S. Stockholder's Common Stock (see "--
Requirements for Qualification as a REIT -- Annual Distribution Requirements"
above) would be treated with respect to Non-U.S. Stockholders in the manner
outlined in the preceding two paragraphs for actual distributions by the Company
of capital gain dividends. Under that approach, Non-U.S. Stockholders would be
able to offset as a credit against their United States Federal income tax
liability resulting therefrom their proportionate share of the tax paid by the
Company on such undistributed capital gains (and to receive from the IRS a
refund to the extent their proportionate share of such tax paid by the Company
exceeds their actual United States Federal income tax liability).
SALE OF COMMON STOCK. Gain recognized by a Non-U.S. Stockholder upon the
sale or exchange of Common Stock generally will not be subject to United States
taxation unless such shares constitute a "United States real property interest"
within the meaning of FIRPTA. The Common Stock will not constitute a "United
States real property interest" as long as the Company is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its shares is
held directly or indirectly by Non-U.S. Stockholders. The Company believes that
at the closing of the Offering it will be a "domestically controlled REIT," and
therefore that the sale of Common Stock will not be subject to taxation under
FIRPTA. However, because the Common Stock are expected to become publicly
traded, no assurance can be given that the Company will continue to be a
"domestically controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of Common Stock not otherwise subject to FIRPTA will be taxable
to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States. In such case, the
nonresident alien individual will be subject to a 30% United States withholding
tax on the amount of such individual's gain.
Even if the Company does not qualify as or ceases to be a
"domestically-controlled REIT," gain arising from the sale or exchange by a
Non-U.S. Stockholder of Common Stock would not be subject to United States
taxation under FIRPTA as a sale of a "United States real property interest" if
(i) the Common Stock are "regularly traded" (as defined by applicable Treasury
regulations) on an established securities market (e.g., the New York Stock
Exchange) and (ii) such Non-U.S. Stockholder owned 5% or less of the value of
the Common Stock throughout the five-year period ending on the date of the sale
or exchange. If gain on the sale or exchange of Common Stock were subject to
taxation under FIRPTA, the Non-U.S. Stockholder would be subject to regular
United States Federal income tax with respect to such gain in the same manner as
a U.S. Stockholder (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of the Common Stock could be required to withhold and remit to
the IRS 10% of the purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting generally
will not apply to distributions paid to Non-U.S. Stockholders outside the United
States that are treated as: (i) dividends subject to the 30% (or lower treaty
rate) withholding tax discussed above; (ii) capital gains dividends; or (iii)
distributions attributable to gain from the sale or exchange by the Company of
United States real property interests. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of Common Stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of Common Stock by a foreign office of a broker that: (i) is
a United States person; (ii) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States; or (iii)
is a "controlled foreign corporation" (generally, a foreign corporation
controlled by United States stockholders) for United States tax purposes, unless
the broker has documentary evidence in its records that the holder is a Non-U.S.
Stockholder and certain other conditions are met, or the stockholder otherwise
establishes an exemption. Payment to or through a
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United States office of a broker of the proceeds of a sale of Common Stock is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalty of perjury that the stockholder is a
Non-U.S. Stockholder, or otherwise establishes an exemption. A Non-U.S.
Stockholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS.
FINAL TREASURY REGULATIONS. The United States Treasury has recently issued
final Treasury regulations (the "Final Regulations") regarding the withholding
and information reporting rules discussed above. In general, these Final
Regulations do not alter the substantive withholding and information reporting
requirements but unify certification procedures and forms and clarify and modify
reliance standards. These regulations generally are effective for payments made
after December 31, 1998, subject to certain transition rules. Valid withholding
certificates that are held on December 31, 1998, will remain valid until the
earlier of December 31, 1999 or the date of expiration of the certificate under
rules currently in effect (unless otherwise invalidated due to changes in the
circumstances of the person whose name is on such certificate). A Non-U.S.
Stockholder should consult its own advisor regarding the effect of the Final
Regulations.
TAX RISKS ASSOCIATED WITH PARTNERSHIPS
The Company, through MP Operating and MP LP, will own an interest in the
Operating Partnership following the Offering, and may own interests in
additional partnerships in the future. The ownership of an interest in a
partnership involves special tax risks, including the possible challenge by the
IRS of: (i) allocations of income and expense items, which could affect the
computation of taxable income of the Company; and (ii) the status of a
partnership as a partnership (as opposed to an association taxable as a
corporation) for Federal income tax purposes. If a partnership were deemed to be
an association taxable as a corporation for Federal income tax purposes, it
would be treated as a taxable entity. In such a situation, if the Company owned
more than 10% of the outstanding voting securities of such partnership, or if
the value of such securities exceeded 5% of the value of the Company's assets,
the Company would fail to satisfy the asset tests described above, and would
therefore fail to qualify as a REIT. Further, distributions from such
partnership to the Company would be treated as dividends that are not taken into
account in satisfying the 75% gross income test described above, which would
make it more difficult for the Company to satisfy that test. Moreover, the
interest in any such partnership held by the Company would not qualify as a
"real estate asset," which would make it more difficult for the Company to meet
the 75% asset test described above. In addition, the Company would not be able
to deduct its share of any losses generated by such a partnership in computing
its taxable income, which might adversely affect the Company's ability to comply
with the REIT distribution requirements. See "--Failure of the Company to
Qualify as a REIT" for a discussion of the effect of the Company's failure to
meet any one or more of these tests for a taxable year.
OTHER TAX CONSEQUENCES FOR THE COMPANY AND ITS STOCKHOLDERS
The Company and its stockholders and the Operating Partnership may be
subject to state or local taxation in various state or local jurisdictions,
including those in which it or they transact business or reside. The state and
local tax treatment of the Company and its stockholders may not conform to the
Federal income tax consequences discussed above. Accordingly, the state and
local income taxes of the Company and its stockholders and the Operating
Partnership could reduce the amount of cash distributable by the Company to its
stockholders. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
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ERISA CONSIDERATIONS
EMPLOYMENT BENEFIT PLANS, TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS
PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to ERISA (an "ERISA
Plan") should carefully consider whether an investment in the shares of Common
Stock is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require an
ERISA Plan's investment, inter alia, to be: (i) for the exclusive purpose of
providing benefits to the ERISA Plan's participants and their beneficiaries and
defraying reasonable expenses of administering the ERISA Plans; (ii) prudent and
solely in the interests of the participants and beneficiaries of the ERISA
Plans; (iii) diversified in order to minimize the risk of large losses, unless
it is clearly prudent not to do so; and (iv) authorized under the terms of the
governing documents of the ERISA Plan. In addition, a fiduciary of an ERISA Plan
should not cause or permit such ERISA Plan to enter into transactions prohibited
under Section 406 of ERISA or Section 4975 of the Code. In determining whether
an investment in the shares of Common Stock is prudent for purposes of ERISA,
the appropriate fiduciary of an ERISA Plan should consider whether such
investment is reasonably designed, as part of an ERISA Plan's investment
portfolio for which the fiduciary has responsibility, to further the purposes of
the ERISA Plan, taking into consideration the risk of loss and opportunity for
gain (or other return) associated with the investment, the diversification, cash
flow and funding requirements of the ERISA Plan and the liquidity and current
return of the ERISA Plan's investment portfolio. A fiduciary should also take
into account the nature of the Company's business, the length of the Company's
operating history, the terms of the management agreements, the fact that certain
investment properties may not have been identified yet, other matters described
under "Risk Factors" and the possibility of UBTI.
The fiduciary of an ERISA Plan, or of an IRA or a qualified pension, profit
sharing or stock bonus plan, or medical savings account which is not subject to
ERISA but is subject to Section 4975 of the Code ("Other Plans"), should ensure
that the purchase of Common Stock will not constitute a prohibited transaction
under ERISA or the Code.
To the extent that a fiduciary of an ERISA Plan or other Plan is not
familiar with the foregoing requirements they should consult with legal counsel.
STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the entity's equity interests is an ERISA Plan or Other Plan.
The fiduciary of an ERISA Plan should also consider the relevance of these
principles to ERISA's prohibition on improper delegation of control over or
responsibility for Plan assets and ERISA's imposition of co-fiduciary liability
on a fiduciary who participates in, permits (by action or inaction) the
occurrence of or fails to remedy a known breach by another fiduciary.
If the underlying assets of the Company are deemed to be assets of an ERISA
Plan ("Plan Assets"): (i) the prudence standards and other provisions of Part 4
of Title I of ERISA and the prohibited transaction provisions of ERISA and the
Code would be applicable to any transactions involving the Company's assets; and
(ii) persons who exercise any authority or control over the Company's assets, or
who provide investment advice for a fee or other compensation to the Company,
would be (for purposes of ERISA and the Code) fiduciaries of ERISA Plans and
Other Plans that acquire Common Stock. The United States Department of Labor
(the "DOL"), which has administrative responsibility over ERISA Plans and
certain Other Plans, has issued a regulation defining plan assets for certain
purposes (the "DOL Regulation"). The DOL Regulation generally provides that when
an ERISA Plan acquires a security that is an equity interest in an entity and
that security is neither a "publicly-offered security" nor a security issued by
an investment company registered under the 1940 Act, the assets of the ERISA
Plan include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an "operating company" (as defined in the DOL Regulation) or that equity
participation in the entity by "benefit plan investors" is not significant.
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The Company believes that, under the DOL Regulation, the shares of Common
Stock should be considered "publicly-offered securities" and, therefore, that
the underlying assets of the Company should not be deemed to be plan assets of
any ERISA Plan or Other Plan that invests in the shares of Common Stock.
In addition, the Charter provides that if, in the future, the Board of
Directors authorizes the creation of any class of equity interests other than
Common Stock, and such class of equity interests will not be "publicly-offered
securities," the Board of Directors will limit the equity participation in such
class by "benefit plan investors" so that their participation will not become
"significant." For these purposes, the DOL Regulation provides that equity
participation becomes "significant" once 25 percent or more of the value of the
class is held by "benefit plan investors," and the term "benefit plan investors"
means any employee benefit plan (as defined in ERISA section 3(3)) or any plan
described in section 4975(e) of the Code, or any entity whose underlying assets
include benefit plan investments.
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UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), the Underwriters named below, who
are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"),
Smith Barney Inc., BT Alex. Brown Incorporated, Legg Mason Wood Walker,
Incorporated and Morgan Stanley & Co. Incorporated (the "Representatives"), have
severally agreed to purchase from the Company the respective number of shares of
Common Stock set forth opposite their names below.
UNDERWRITERS NUMBER OF SHARES
- ------------------------------------------------------------- -----------------
Donaldson, Lufkin & Jenrette Securities Corporation .........
Smith Barney Inc. ...........................................
BT Alex. Brown Incorporated .................................
Legg Mason Wood Walker, Incorporated ........................
Morgan Stanley & Co. Incorporated ...........................
-----------------
Total .......................................................
=================
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the overallotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $____ . The
Underwriters may allow, and such dealers may re-allow, to certain other dealers
a concession not in excess of $____ per share. After the initial offering of the
Common Stock, the public offering price and other selling terms may be changed
by the Representatives at any time without notice. The Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
At the request of the Company, approximately __% of the shares offered
hereby have been reserved for sale at the public offering price to certain
employees of the Company and other persons designated by the Company. The
maximum investment of any such person may be limited by the Company in its sole
discretion. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby. This
program will be administered by DLJ. In addition to the shares of Common Stock
to be sold to the Underwriters in the Public Offering, the Company is offering a
portion of the shares of Common Stock offered hereby directly to Robert N.
Elkins, M.D., certain executive officers and employees of the Company and
certain officers of IHS.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of ____ additional shares of Common Stock
at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the Offering. To the extent that
the Underwriters exercise such option, each Underwriter will become obligated,
subject to certain conditions, to purchase its pro rata portion of such
additional shares based on such Underwriter's percentage underwriting commitment
as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
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Each of the Company, its executive officers and directors and certain
stockholders of the Company has agreed, subject to certain exceptions, not to
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) for a period of 180 days
after the date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders of the Company has agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock without DLJ's prior written consent. In addition,
each director and executive officer of the Company who is to receive options to
purchase shares of Common Stock at an exercise price of $.001 per share has
agreed, solely with respect to shares of Common Stock issuable upon exercise of
such options, not to enter into any of the transactions described in the
foregoing clauses (i) or (ii) for a period of three years after the date of the
Prospectus without the prior written consent of DLJ. Such restrictions shall
lapse under certain circumstances, including death or disability of the option
holder.
Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which the Company competes, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the recent market prices of securities of generally
comparable companies and the general condition of the securities markets at the
time of the Offering.
Application will be made to list the Common Stock on the New York Stock
Exchange (the "NYSE"). In order to meet the requirements for listing the Common
Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more
shares to a minimum of 2,000 beneficial owners.
Other than in the United States, no action has been taken by the Company,
or the Underwriters that would permit a public offering of the shares of Common
Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering and the distribution of this Prospectus. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of Common Stock offered hereby in any jurisdiction in which such
an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
The Company will pay an advisory fee equal to 0.75% of the gross proceeds
of the Offering (including any exercise of the Underwriters' overallotment
option) plus $750,000 to DLJ for advisory services in connection with the
evaluation, analysis and structuring of the Company as a REIT.
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EXPERTS
The balance sheet of Monarch Properties, Inc. as of March 31, 1998 and the
financial statements of Lyric Health Care, LLC as of December 31, 1996 and 1997
and for each of the years in the three-year period ended December 31, 1997, have
been included herein and in the registration statement in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP covering the financial statements of Lyric
Health Care, LLC refers to a change in accounting method, in 1996, from
deferring and amortizing pre-opening costs of medical specialty units to
recording them as expenses when incurred.
LEGAL MATTERS
Certain matters with respect to the shares of Common Stock offered hereby
will be passed upon for the Company by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a
limited liability partnership including professional corporations, New York, New
York and Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, Maryland
counsel to the Company. In addition, the description of Federal income tax
considerations under the heading "Federal Income Tax Considerations" is based
upon the opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. Certain legal matters
will be passed upon for the Underwriters by Alston & Bird LLP, Raleigh, North
Carolina. In addition to providing services to the Company, LeBoeuf, Lamb,
Greene & MacRae, L.L.P. also provides legal services to IHS, including in
connection with certain of the Formation Transactions.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-11
under the Securities Act with respect to the shares of Common Stock offered
hereby (the "Registration Statement"). This Prospectus, which is part of the
Registration Statement, does not contain all information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the SEC. Statements contained in this Prospectus
as to the content of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement is qualified in all respects by such reference and the exhibits and
schedules hereto. For further information regarding the Company, and the shares
of Common Stock offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules, which may be obtained from the SEC at
its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the fees prescribed by the SEC. The SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the SEC. In addition, the Company intends to apply for
listing of the shares of Common Stock on the NYSE and, upon official notice of
issuance, similar information concerning the Company, when filed, can be
inspected and copied at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and a report thereon by independent
certified public auditors.
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GLOSSARY
The following are definitions of certain terms used in this Prospectus.
Unless the context otherwise requires, the following terms shall have the
meanings set forth below for purposes of this Prospectus.
"15% Personal Property Test" means the test under the Code to determine
whether 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.
"44 IHS Properties" means the Lyric Properties and the Peak Medical
Properties.
"ACM" means asbestos-containing building materials.
"Anti-Kickback Law" means the federal Medical/Medicaid law codified in 42
U.S.C. 1320a-7b(b).
"Brentwood" means Integrated Health Services at Brentwood, a skilled
nursing facility located in Burbank, Illinois included in the IHS Historical
Properties.
"Broomall" means Integrated Health Services of Pennsylvania at Broomall, a
skilled nursing facility located in Broomall, Pennsylvania included in the IHS
Historical Properties.
"Budget Proposal" means the President's Budget Proposal for Fiscal Year
1999.
"Built-In Gain" means the excess of the fair market value of an asset as of
the beginning applicable Recognition Period over the Company's adjusted basis in
such assets as of the beginning of such Recognition Period.
"Built-In Gain Asset" means any asset acquired by the Company from a
corporation which is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax).
"Business Combination" means any merger, consolidation or other combination
with or into another person or sale of all or substantially all of its assets or
any reclassification, or any recapitalization or change of outstanding shares of
Common Stock.
"Bylaws" means the Bylaws of the Company, as amended from time to time.
"Change of Control of the Company," for purposes of the Plan, means such
term as defined in the Plan or as otherwise defined in the applicable award
agreement. As defined in the Plan, a "Change of Control of the Company" means
the occurrence of any one of the following events: (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;
(ii) during any two (2) year period, individuals who at the beginning of such
period constitute the Board of Directors, including for this purpose any new
director whose election resulted from a vacancy on the Board of Directors caused
by the mandatory retirement, death, or disability of a director and was approved
by a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period, cease for any reason to constitute a
majority thereof; (iii) notwithstanding clauses (i) or (v), the Company
consummates a merger or consolidation of the Company with or into another
corporation, the result of which is that the stockholders of the Company at the
time of the execution of the agreement to merge or consolidate own less than
eighty percent (80%) of the total equity of the entity surviving or resulting
from the merger or consolidation or of a entity owning, directly or indirectly,
one hundred percent (100%) of the total equity of such surviving or resulting
entity; (iv) the sale in one or a series of transactions of all or substantially
all of the assets of the Company; (v) any person, has commenced a tender or
exchange offer, or entered into an agreement or received an option to acquire
beneficial ownership of fifty percent (50%) or more of the total number of
voting shares of the Company unless the Board of Directors has made a
determination that such action does not constitute and will not constitute a
change in the persons in control of the Company; or (vi) there is a change of
control in the Company of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act other than in circumstances specifically covered by clauses (i)-(v)
above.
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<PAGE>
"Charter" means the charter of the Company, as amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Stock Option Committee of the Company's Board of
Directors.
"Common Stock" means the common stock, $.001 par value per share, of the
Company.
"Company" means Monarch Properties, Inc., a Maryland corporation, and one
or more of its subsidiaries (including MP Operating, MP LP, the Operating
Partnership and the Operating Partnership's subsidiaries), or, as the context
may require, Monarch Properties, Inc. only or each of the Operating Partnership,
MP Operating and MP LP only.
"Concurrent Offering" means shares of Common Stock offered by the Company
that will be purchased by Robert N. Elkins, M.D., certain executive officers and
employees of the Company and certain officers of IHS directly from the Company
at a price equal to the price to the public less the underwriting discount.
"Control Shares" means voting shares of stock that, if aggregated with all
other shares of stock previously acquired by that person or in respect of which
the acquiror is able to exercise or direct the exercise voting power (except
solely by virtue of a revocable proxy), would entitle the acquiror to exercise
voting power in electing directors within a certain range of voting power.
"CPI" means the Consumer Price Index.
"Credit Facility" means the Company's proposed credit facility in the
amount of up to $150 million.
"DLJ" means Donaldson, Lufkin & Jenrette Securities Corporation.
"DOL" means the United States Department of Labor.
"DOL Regulation" means a regulation, issued by the DOL, defining plan
assets for certain purposes under ERISA.
"EBITDARM" means the sum of: (i) net income exclusive of extraordinary
gains and extraordinary losses; (ii) interest expense, net of income, determined
in conformity with GAAP; (iii) all charges for taxes counted in determining the
consolidated net income of such facility for such period; (iv) depreciation; (v)
amortization; (vi) lease payments, payable during such period by the facilities
under all leases and rental agreements, other than capital leases and healthcare
facility leases; (vii) any management fee and franchise fee used to calculate
the facility's net income for the period; and (viii) other non-cash charges
deducted in determining net income. EBITDARM is not a measurement calculated in
accordance with GAAP and should not be considered as an alternative to operating
or net income as an indicator of operating performance, cash flows as a measure
of liquidity or any other GAAP determined measurement. Certain items excluded
from EBITDARM, such as depreciation, amortization, rent and management and
franchise fees are significant components in understanding and assessing
financial performance. Other companies may define EBITDARM differently, and as a
result, such measures may not be comparable to the definition of EBITDARM used
by the Company. The Company has included information regarding EBITDARM because
management believes they are indicative measures of liquidity and financial
performance, and are generally used by investors to evaluate the operating
results of healthcare facilities.
"Environmental Laws" means the federal, state and local laws and
regulations relating to protection of the environment and workplace health and
safety.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means an employee benefit plan subject to ERISA.
"Escrow Agreement" means the agreement between Operating Partnership, Lyric
III, the Facility Subtenants and Fidelity National Title Insurance Company of
New York, as escrow agent, pursuant to which Lyric III and each of the Facility
Subtenants agrees to complete within one year certain capital repairs and
improvements identified by the Operating Partnership as required in connection
with the purchase of the Initial Properties.
"Excess Stock" means the separate class of shares of stock of the Company
into which shares of stock of the Company owned, or deemed to be owned, or
transferred to a stockholder in excess of the Ownership Limit or the
Look-Through Ownership Limit will automatically be converted.
"Facilities Purchase Agreement" means the agreement by and between the
Operating Partnership and IHS pursuant to which the Operating Partnership will
purchase 44 of the Initial Properties from IHS.
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<PAGE>
"Facility Subleases" means the leases pursuant to which Lyric III will
sublease each of the Lyric Properties to the Lyric Subtenants.
"Facility Subtenants" means the separate wholly owned subsidiaries of Lyric
III which will directly own the Lyric Properties.
"False Claim Act" means the False Claims Act.
"Final Regulations" means the final Treasury regulations regarding
withholding and information reporting rules, recently issued by the United
States Treasury.
"FIRPTA" means the Foreign Investment in Real Property Tax Act.
"Five or Fewer Requirement" means the requirement under the Code that not
more than 50% in value of the Company's outstanding shares of Stock may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code) during the last half of a taxable year (other than the first year).
"Formation Transactions" means all of the transactions described under
"Structure and Formation of the Company -- Formation Transactions."
"Fractions Rule" means the qualified trust's highest percentage of
partnership income over the entire life of the partnership can not exceed its
partnership losses over the entire life of the partnership.
"Funds from Operations" means net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. The Company
believes that Funds from Operations is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides investors
with an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company computes
Funds from Operations in accordance with standards established by NAREIT which
may not be comparable to Funds from Operations reported by other REITs that do
not define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. Funds from
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make cash distributions.
"GAAP" means Generally Accepted Accounting Principles.
"General Partner" means MP Operating, Inc.
"HHC Properties" means the Initial Properties which were owned and managed
by Horizon/CMS Healthcare, Corporation. prior to December 31, 1997 and were
acquired by IHS effective December 31, 1997; and will be leased to Lyric III,
pursuant to the Master Lease and subleased to wholly owned subsidiaries of Lyric
III.
"HIPAA" means the Federal Health Insurance Portability Act and
Accountability Act of 1996.
"Houston Hospital" means Integrated Health Services Hospital of Houston, a
specialty hospital located in Houston, Texas included in the IHS Historical
Properties.
"IHS" means Integrated Health Services, Inc.
"IHS Agreements" means the Facilities Purchase Agreement, the Purchase
Option Agreement and the Right of First Offer Agreement, collectively.
"IHS Franchising" means Integrated Health Services Franchising Co., Inc.
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<PAGE>
"IHS Historical Properties" means the Initial Properties which have been
owned and managed by IHS for more than one year and will be leased to Lyric III
pursuant to the Master Lease.
"IHS Management" means IHS Facility Management, Inc.
"Impermissible Tenant Service Income" means the amounts received by a REIT
for operating or managing a property or furnishing or rendering services to a
tenant at a property other than through an independent contractor from whom the
REIT derives no revenue (not including services "usually or customarily
rendered" in connection with the rental of real property and not otherwise
considered "rendered to the occupant").
"Incentive Options" means options to purchase shares of Common Stock which
are granted under the Plan and which are intended to qualify as incentive
options under Section 422 of the Code.
"Initial Properties" means the Company's initial portfolio consisting of 47
healthcare facilities located in 15 states, 44 of which will be purchased from
IHS.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of the Company's then outstanding shares or an affiliate of
the Company who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting shares of stock of the Company.
"Intermediate Lessee Structure" means the structure utilized in connection
with the purchase and sale and leaseback of the Lyric Properties.
"IRS" means the Internal Revenue Service.
"LIBOR" means the London Interbank Offered Rate.
"Limited Partner" means MP LP
"LLC" means limited liability companies.
"Look Through Ownership Limit" means the ownership limit applicable to
entities which are looked through for purposes of Five or Fewer Requirement
restricting such entities to holding no more than 9.9% of the aggregate value of
the Company's outstanding shares of Common Stock.
"Lyric" means Lyric Health Care LLC, a Delaware limited liability company,
which is 50% owned by IHS and 50% owned by TFN.
"Lyric III" means Lyric Health Care Holdings III, Inc., a Delaware
corporation and a wholly owned subsidiary of Lyric.
"Lyric Guaranty" means the agreement pursuant to which Lyric will
unconditionally guarantee payment and performance of all rent and other
obligations of Lyric III and the Facility Subtenants under the Master Lease and
the Facility Subleases.
"Lyric Properties" means 42 of the Initial Properties to be acquired from
IHS which are to be leased to Lyric Health Care Holdings III, Inc.
"Management Agreements" means the Master Management Agreement and the
Facility Management Agreements, collectively.
"Master Franchise Agreement" means the agreement between Lyric and IHS
Franchising pursuant to which IHS Franchising will grant to Lyric and its
subtenants the right to use certain proprietary materials developed and used by
IHS in its operation of healthcare facilities.
"Master Lease" means the lease pursuant to which the Lyric Properties will
be leased to Lyric III.
"Master Management Agreement" means the agreement between Lyric III and IHS
pursuant to which IHS, through its subsidiaries, will manage the Lyric
Properties.
"MSUs" means medical specialty units.
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"MGCL" means the Maryland General Corporation Law.
"Monarch" means Monarch Properties, Inc., a Maryland corporation, and one
or more of its subsidiaries (including MP Operating, MP LP, the Operating
Partnership and the Operating Partnership's subsidiaries), or, as the context
may require, Monarch Properties, Inc. only or each of the Operating Partnership,
MP Operating and MP LP only.
"MP Operating" means MP Operating, Inc., a Delaware corporation, which will
be the general partner of the Operating Partnership.
"MP LP" means MP Properties LP, Inc., a Delaware corporation, which will be
the limited partner of the Operating Partnership.
"Named Executive Officers" means the Company's President and Chief
Executive Officer and the Company's other executive officers.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"1997 Act" means the Taxpayer Relief Act of 1997.
"Non-Qualified Options" means options to purchase shares of Common Stock
which are granted under the Plan and which are not intended to qualify as
incentive options under Section 422 of the Code.
"Non-U.S. Stockholders" means holders of Common Stock that are, for United
States Federal income taxation purposes, nonresident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts.
"Notice" means IRS Notice 97-64 issued November 10, 1997.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of shares of Common Stock of the Company
pursuant to and as described in this Prospectus.
"Operating Partnership" means Monarch Properties, LP, a Delaware limited
partnership.
"Operating Partnership Agreement" means the Operating Partnership Agreement
of the Operating Partnership, as amended from time to time.
"Option Properties" means the ten properties owned by IHS on which the
Company will have an option to purchase.
"Other Plans" means an IRA or a qualified pension, profit sharing or stock
bonus plan, or medical savings account which is not subject to ERISA but is
subject to Section 4975 of the Code.
"Ownership Limit" means the restrictions in the Charter which generally
will prohibit ownership, directly or by virtue of the attribution provisions of
the Code, by any single stockholder of 9.9% or more of the issued and
outstanding shares of Common Stock and generally will prohibit ownership,
directly or by virtue of the attribution provisions of the Code, by any single
stockholder of 9.9% or more of the issued and outstanding shares of any class or
series of the Company's Preferred Stock.
"Peak Medical" means Peak Medical Corporation.
"Peak Medical Leases" means the leases pursuant to which the Peak Medical
Properties will be leased to the Peak Medical Tenant.
"Peak Medical Properties" means the two Initial Properties which will be
purchased from IHS and leased to the Peak Medical Tenant.
"Peak Medical Tenant" means Peak Medical of Idaho, Inc., a wholly owned
subsidiary of Peak Medical Corporation.
"Plan" means the 1998 Omnibus Securities and Incentive Plan.
"Plan Assets" means assets of an ERISA Plan.
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"Pledge Agreements" means the agreements between the Operating Partnership
and Lyric and the Operating Partnership and Lyric III, whereby Lyric will pledge
100% of the stock of Lyric III and Lyric III will pledge 100% of the stock of
the Facility Subtenants to the Operating Partnership to secure the obligations
of Lyric III under the Master Lease and the obligations of the Facility
Subtenants under the Facility Subleases.
"Preferred Stock" means the preferred stock, $.001 par value per share, of
the Company.
"Prospectus" means this prospectus, as the same may be amended.
"Purchase Option Agreement" means the agreement between the Company and IHS
pursuant to which the Company is granted options to acquire up to 10 healthcare
facilities from IHS.
"Recognition Period" means the ten-year period beginning on the date on
which the Company acquires a Built-In Gain Asset.
"Registration Statement" means the Company's Registration Statement on Form
S-11, Registration Number 333- .
"REIT" means a real estate investment trust as defined under Sections 856
through 860 of the Code and applicable Treasury regulations.
"Related Party Tenant" means a tenant of the Company which also is an
actual or constructive owner of 10% or more of the Company, or of which the
Company actually or constructively owns 10% or more.
"Representatives" means Donaldson, Lufkin & Jenrette Securities
Corporation; Smith Barney Inc.; BT Alex. Brown Incorporated; Legg Mason Wood
Walker, Incorporated and Morgan Stanley & Co. Incorporated.
"Restricted Common Stock" means shares of Common Stock which are
"restricted" securities under the meaning of Rule 144 or any shares of Common
Stock acquired in redemption of Units.
"Right of First Offer Agreement" means the agreement between the Company
and IHS pursuant to which IHS must, for a period of four years, offer the
Company the opportunity to purchase or finance each IHS facility to be sold and
leased back or financed in a transaction of the type normally engaged in by the
Company.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreement" means the agreement between the Operating Partnership
and the Facility Subtenants pursuant to which each of the Facility Subtenants
will grant first priority security interests, in favor of the Operating
Partnership, in certain personal property of the Facility Subtenants located at
the properties to secure the obligations of the Facility Subtenants under the
Facility Subleases.
"SNFs" means skilled nursing facilities.
"Stabilized Occupancy" means average monthly occupancy for a facility of at
least 90% for three consecutive months.
"Stark Law" means the federal statute codified in 42 U.S.C. 1395nn, as
amended, and the regulations promulgated thereunder.
"Subordination Agreement" means the Consent and Subordination Agreement
among the Operating Partnership, IHS Management, IHS Franchising, Lyric III and
each of the Facility Subtenants pursuant to which the rights of IHS Management
and IHS Franchising under the Master Management Agreement and the Master
Franchise Agreement are subordinated to the rights of the Operating Partnership
under the Master Lease.
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"TFN" means TFN Healthcare Investors, LLC, a Delaware limited liability
company, which is 100% beneficially owned by Timothy F. Nicholson.
"Trans Health" means Trans Healthcare, Inc.
"Trans Health Lease" means the lease pursuant to which the Trans Health
Properties will be leased to Trans Health.
"Trans Health Properties" means the three Initial Properties to be acquired
from an unrelated third party and will be leased to and managed by a subsidiary
of Trans Healthcare, Inc.
"Trans Health Tenants" means the wholly owned subsidiaries of Trans
Healthcare, Inc. which will lease the Trans Health Properties from the Operating
Partnership.
"Treasury Regulations" means the applicable regulations of the U.S.
Department of Treasury that have been promulgated under the Code.
"UBTI" means unrelated business taxable income.
"Underwriters" means the underwriters in this Prospectus for whom the
Representatives are acting as representatives.
"Underwriting Agreement" means the underwriting agreement among the Company
and the Underwriters.
"Unit(s)" means a unit(s) of partnership interest in the Operating
Partnership.
"UPREIT" means a REIT conducting business through a partnership.
"U.S. or United States" means the United States of America (including the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction.
"U.S. Stockholder" means a holder of Common Stock who (for United States
Federal income tax purposes): (i) is a citizen or resident of the United States;
(ii) is a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof; or
(iii) is an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
"USTs" means underground storage tanks.
"Whitemarsh" means Integrated Health Services at Whitemarsh, a skilled
nursing facility located in Whitemarsh, Pennsylvania included in the IHS
Historical Properties.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MONARCH PROPERTIES, INC.
Independent Auditors' Report .................................................... F-2
Balance Sheet as of February 20, 1998 ........................................... F-3
Notes to Balance Sheet .......................................................... F-4
Pro Forma Balance Sheet and Statement of Operations ............................. F-6
Pro Forma Balance Sheet as of December 31, 1997 ................................. F-7
Pro Forma Statement of Operations for the Year Ended December 31, 1997 .......... F-8
Notes to Pro Forma Balance Sheet and Statement of Operations .................... F-9
LYRIC HEALTH CARE LLC
Independent Auditors' Report .................................................... F-12
Balance Sheets as of December 31, 1996 and 1997 ................................. F-13
Statements of Earnings for the Years Ended December 31, 1995, 1996 and 1997 ..... F-14
Statements of Changes in Net Equity of Parent Company for the Years Ended Decem-
ber 31, 1995, 1996 and 1997 ................................................... F-15
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 ... F-16
Notes to Financial Statements ................................................... F-17
Pro Forma Statement of Operations ............................................... F-27
Pro Forma Statement of Operations for the Year Ended December 31, 1997 .......... F-28
Notes to Pro Forma Statement of Operations ...................................... F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Monarch Properties, Inc.:
We have audited the accompanying balance sheet of Monarch Properties, Inc.
(the Company) as of February 20, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Company as of February 20,
1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
April 23, 1998
F-2
<PAGE>
MONARCH PROPERTIES, INC.
BALANCE SHEET
FEBRUARY 20, 1998
<TABLE>
<S> <C>
ASSETS:
Cash ........................................................................ $100
====
STOCKHOLDER'S EQUITY:
Preferred stock, $.001 par value; 20,000,000 shares authorized; none issued
or outstanding ........................................................... $ --
Common stock, $.001 par value; 100,000,000 shares authorized; 100 shares
issued and outstanding ................................................... --
Additional paid-in capital ................................................ 100
----
Total stockholder's equity ............................................... $100
====
</TABLE>
----------
See accompanying notes to balance sheet.
F-3
<PAGE>
MONARCH PROPERTIES, INC.
NOTES TO BALANCE SHEET
FEBRUARY 20, 1998
(1) ORGANIZATION
Monarch Properties, Inc. (Monarch or the Company) was formed in the State
of Maryland on February 20, 1998 and issued 100 shares of common stock to Dr.
Robert N. Elkins, the Chairman of the Board, for a total consideration of $100.
The Company is in the process of an initial public offering pursuant to which it
plans to issue approximately 17.3 million additional shares of common stock (the
Offering). The Company intends to file a registration statement on Form S-11
with the Securities and Exchange Commission in connection with the proposed
Offering.
The Company has had no operations. Upon consummation of the Offering, the
Company intends to begin operations by purchasing 47 healthcare facilities
located in 15 states (the Initial Properties). The Initial Properties will
consist of: (i) a portfolio of 37 skilled nursing facilities and five specialty
hospitals (the Lyric Properties) to be purchased from Integrated Health
Services, Inc. (IHS) for an aggregate purchase price of approximately $359.7
million and leased to Lyric Health Care Holdings III, Inc., (Lyric III), a
subsidiary of Lyric Health Care LLC (Lyric); (ii) a portfolio of two skilled
nursing facilities to be purchased from IHS (the Peak Medical Properties) for an
aggregate purchase price of approximately $11.3 million and leased to Peak
Medical of Idaho, Inc.; and (iii) a portfolio of three skilled nursing
facilities (the Trans Health Properties) to be purchased from an unaffiliated
third party for a purchase price of approximately $11.5 million and leased to
Trans Healthcare, Inc.
(2) FEDERAL INCOME TAXES
The Company intends to qualify as a real estate investment trust (a REIT)
under the Internal Revenue Code of 1986, as amended. Accordingly, assuming such
qualification, it will not be subject to federal income taxes on amounts
distributed to stockholders provided it distributes at least 95% of its REIT
taxable income and meets certain other conditions. The Company may, however, be
subject to state or local taxation in various jurisdictions.
(3) PLANNED TRANSACTIONS
The Company intends to contribute the proceeds of the Offering to Monarch
Properties, LP (the Operating Partnership) in exchange for the sole general and
the initial limited partner interests in the form of units (Units). The
Company's percentage ownership in the Operating Partnership may vary if the
Operating Partnership admits new limited partners in connection with future
property acquisitions. The Operating Partnership will use the contributions from
the Company and borrowings under a proposed credit facility to purchase the
Initial Properties.
The Operating Partnership has agreements to purchase the properties subject
to certain terms and conditions, including, among other things, successful
completion of the Offering and obtaining a credit facility. The Company has
received a nonbinding proposal for and anticipates entering into an unsecured
credit facility in the amount of $150 million. This facility would be used to
fund a portion of the purchase price and acquisition costs of the Initial
Properties, to facilitate future acquisitions and for working capital and other
general corporate purposes. Management believes that the Company will be able to
obtain additional credit on acceptable terms, if necessary.
The Company has agreed to reimburse actual costs incurred on its behalf by
IHS upon consummation of the Offering. These costs relate to organizing the
Company and other work performed in contemplation of the Offering.
The Company and IHS will enter into a purchase option agreement pursuant to
which the Company will be granted purchase options to acquire up to 10
healthcare facilities currently operated by IHS for a total purchase price of
$104.7 million. The purchase option agreement will have an initial term of two
years with three one-year renewals. If the Company exercises the purchase
options on these facilities, the facilities will be leased to Lyric.
F-4
<PAGE>
MONARCH PROPERTIES, INC.
NOTES TO BALANCE SHEET- (CONTINUED )
In addition to the purchase option agreement, the Company and IHS will
enter into a right of first offer agreement during the next four years pursuant
to which IHS must offer the Company the opportunity to purchase and leaseback or
finance any healthcare facilities IHS acquires or develops and elects to either
sell and leaseback or to finance in a transaction of the type normally engaged
in by the Company. The Company will be offered the opportunity to acquire or
finance the IHS facility on terms and conditions that, should the Company
decline to pursue the proposed transaction, must be offered to any other third
parties by IHS. If IHS is only able to sell or finance the facility on better
terms with a third party than previously offered to the Company, then the
Company must again be offered those new terms and conditions for consideration
prior to IHS finalizing a transaction with the third party.
(4) EMPLOYEE RELATED MATTERS
Prior to the completion of the Offering, the Company's Board of Directors
intends to adopt a 1998 Omnibus Securities and Incentive Plan (the Plan). On or
prior to the date of the Offering the Company initially intends to grant to
directors and executive officers options to purchase 513,650 shares of common
stock at an exercise price of $.001 per share. These options will be exercisable
upon completion of the Offering. The Company intends to adopt the intrinsic
value method to account for share-based compensation to employees and
accordingly, will recognize compensation expense equal to the excess of the
market value of the stock over the exercise price during the fiscal quarter in
which the Offering is consummated. The maximum number of shares of common stock
available for issuance under the Plan will be 5.0% of the total number of shares
of common stock and Units outstanding from time to time.
The Company will enter into an employment agreement with its President and
Chief Executive Officer upon consummation of the Offering. The agreement will
have an initial term of three years. The agreement will contain provisions,
which are intended to limit the President from competing with the Company
throughout the term of the agreement.
The Company will also enter into a non-competition agreement with the
Chairman of the Board. The agreement will be in effect during the term he serves
as Chairman.
(5) MASTER LEASE
Immediately subsequent to the completion of the Offering, the Company will
enter into a master lease with Lyric III (a wholly owned subsidiary of Lyric)
with respect to the Lyric Properties. Lyric III will sublease the individual
properties to certain subsidiaries (Facility Subtenants). Rent payments and the
performance of Lyric III under the master lease and the Facility Subtenants
under the subleases will be guaranteed by Lyric. The master lease will provide
for a minimum base rent, plus annual base rent increases equal to the lesser of:
(i) two times the increase in the consumer price index; or (ii) 3% over the rent
in the preceding lease year, provided that in no event shall the rent decrease
from the prior year. The master lease will be a triple net lease and require
Lyric III or the Facility Subtenants to pay all operating expenses, capital
expenditures, taxes, insurance and other costs. The Lyric Properties will have
staggered initial terms of 9, 10, 11, 12, and 13 years with each subject to
three successive 10 year renewal periods.
The following table summarizes the unaudited results of the Lyric
Properties for the year ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1996 1997
------------- ----------- -----------
<S> <C> <C> <C>
Total revenues .................................. $ 223,343 $267,513 $306,784
Operating expenses .............................. 180,130 218,535 251,807
Management fee .................................. 13,378 14,600 15,424
Depreciation .................................... 9,614 9,444 12,039
Rent ............................................ 3,065 3,667 4,505
Interest ........................................ 13,924 13,365 13,367
Loss on impairment of long-lived assets ......... 20,301 -- --
--------- -------- --------
Income (loss) before income taxes ............... $ (17,069) $ 7,902 $ 9,642
========= ======== ========
</TABLE>
F-5
<PAGE>
MONARCH PROPERTIES, INC.
PRO FORMA BALANCE SHEET AND STATEMENT OF OPERATIONS
(UNAUDITED)
The unaudited pro forma balance sheet is based on the balance sheet
included elsewhere in the Prospectus and has been prepared as if the Company
were formed on December 31, 1997 and gives effect to the Offering, investment in
the Operating Partnership and the acquisition of the Initial Properties as if
they had occurred on December 31, 1997. The unaudited pro forma statement of
operations for the year ended December 31, 1997 gives effect to the Offering,
the investment in the Operating Partnership and the acquisition of the Initial
Properties as if they had occurred on January 1, 1997. The pro forma adjustments
are based upon available information and certain estimates and assumptions that
management of the Company believes are reasonable. The unaudited pro forma
financial information set forth below is not necessarily indicative of the
Company's financial position or the results of operations that actually would
have occurred if the transactions had been consummated on the dates indicated.
In addition, it is not intended to be a projection of results of operations that
may be obtained by the Company in the future.
The unaudited pro forma balance sheet and statement of operations should be
read in conjunction with the balance sheet of the Company and the related notes
thereto, and other financial information pertaining to the Company, including
such information contained under the sections captioned "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in the Prospectus. Capitalized terms used herein
and not defined herein have the respective meanings given to them in the
Prospectus.
F-6
<PAGE>
MONARCH PROPERTIES, INC.
PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ----------------- ----------
<S> <C> <C> <C>
ASSETS:
Initial properties ...................................... $ -- $ 382,439(1) $382,439
Other assets ............................................ -- 528(2) 528
----- ------------ --------
Total assets ........................................... $ -- $ 382,967 $382,967
===== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Credit facility ......................................... $ -- $ 63,041(3) $ 63,041
Deferred income ......................................... -- 2,026(4) 2,026
Preferred stock $.001 par value; 20,000,000 shares autho-
rized; none issued or outstanding ...................... -- -- --
Common stock $.001 par value; 100,000,000 shares autho-
rized, 100 shares outstanding (historical), 17,300,000
shares outstanding (pro forma) ......................... -- 17(5) 17
Additional paid-in capital .............................. -- 317,883(5) 317,883
----- ------------ --------
Total liabilities and stockholders' equity ............. $ -- $ 382,967 $382,967
===== ============ ========
</TABLE>
- ----------
See accompanying notes to unaudited pro forma balance sheet and statement of
operations.
F-7
<PAGE>
MONARCH PROPERTIES, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ---------------- --------------
<S> <C> <C> <C>
Revenues:
Rental revenues ............................. $-- $ 38,638(6) $ 38,638
Other income ................................ -- 182(7) 182
--- ----------- -----------
Total revenues ............................... -- 38,820 38,820
--- ----------- -----------
Expenses (note 11):
Administrative expenses ..................... -- 1,750(8) 1,750
Interest .................................... -- 4,491(9) 4,491
Depreciation and amortization ............... -- 10,875(10) 10,875
--- ------------ -----------
Total expenses ............................... -- 17,116 17,116
--- ------------ -----------
Net income ................................... $-- $ 21,704 $ 21,704
=== ============ ===========
Earnings per share of common stock (note 12):
Basic ....................................... $ 1.25
===========
Diluted ..................................... $ 1.22
===========
Weighted average shares outstanding (note 12):
Basic ....................................... 17,300,000
===========
Diluted ..................................... 17,813,650
===========
</TABLE>
- ----------
See accompanying notes to unaudited pro forma balance sheet and statement of
operations.
F-8
<PAGE>
MONARCH PROPERTIES, INC.
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENT OF OPERATIONS
(UNAUDITED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(A) BACKGROUND AND BASIS OF PRESENTATION
Monarch Properties, Inc. (the Company) has been formed to invest in a
diversified portfolio of healthcare related real estate and mortgages. The
Company will be self-administered and self-managed and expects to qualify as a
real estate investment trust (REIT) for federal income tax purposes. Upon
completion of the Offering, the Company intends to purchase 47 healthcare
facilities located in 15 states (the Initial Properties). The Initial Properties
will consist of: (i) a portfolio of 37 skilled nursing facilities and five
specialty hospitals (the Lyric Properties) to be purchased from Integrated
Health Services, Inc. (IHS) for an aggregate purchase price of approximately
$359.7 million and leased to Lyric Health Care Holdings III, Inc. (Lyric III), a
subsidiary of Lyric Health Care LLC (Lyric); (ii) a portfolio of two skilled
nursing facilities to be purchased from IHS (the Peak Medical Properties) for an
aggregate purchase price of $11.3 and leased to Peak Medical of Idaho, Inc.; and
(iii) a portfolio of three skilled nursing facilities (the Trans Health
Properties) to be purchased from an unaffiliated third party for a purchase
price of $11.5 million and leased to Trans Healthcare, Inc.
The leases for the Initial Properties will be long-term operating leases.
The initial rental amount will be a fixed amount based on the purchase price of
the facilities multiplied by the greater of (i) 10.0% or (ii) a margin over the
10 year U.S. Treasury Note yield. The rental amounts will increase each year by
the lesser of a fixed amount or an amount based on the CPI, but shall in no
event be lower than the prior year's rent. The rental amounts will have no
additional rent clauses that are based on a percentage of the facilities'
operating revenues. All of the leases will be triple net leases that will
require the lessees to pay all operating expenses, capital expenditures, taxes,
insurance and other costs.
The accompanying unaudited pro forma balance sheet is provided to
illustrate the effects of the Offering, the acquisition of the Initial
Properties and the related transactions on the Company. It reflects how the
balance sheet might have appeared if the Company had been formed and the Initial
Properties had been purchased on December 31, 1997. The accompanying pro forma
statement of operations for the year ended December 31, 1997 gives effect to the
Offering, the acquisition of the Initial Properties, and the related
transactions as if they had been in effect on January 1, 1997.
The unaudited pro forma financial statements are not necessarily indicative
of the Company's financial position or the results of operations that actually
would have occurred if the transactions had been consummated on the dates shown.
In addition, they are not intended to be a projection of results of operations
that may be obtained in the future.
(B) PRO FORMA ADJUSTMENTS
(1) To record the acquisition of the Initial Properties, as follows:
Purchase price of Lyric Properties ................ $359,663
Purchase price of Peak Properties ................. 11,300
Purchase price of Trans Health Properties ......... 11,476
--------
$382,439
========
(2) To record other assets, as follows:
Credit Facility commitment fee ................... $375
Office furniture and equipment ................... 128
Other organization costs ............... ......... 25
----
$528
====
F-9
<PAGE>
MONARCH PROPERTIES, INC.
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENT OF OPERATIONS- (CONTINUED )
(3) To record the initial draw on the Credit Facility.
(4) To record unearned commitment fees received, as follows:
Lyric Properties ......................... $1,798
Peak Properties .......................... 113
Trans Health Properties .................. 115
------
$2,026
======
(5) To record the issuance of shares of Common Stock in the Offering, as
follows:
Gross proceeds from the Offering ......... $ 345,000
Underwriter's discount ................... (20,625)
Structuring fee .......................... (3,225)
Other offering costs ..................... (3,250)
---------
$ 317,900
=========
(6) To record rental revenue, assuming the average yield on the 10-year
U.S. Treasury Note over the 20 trading days preceding the Offering was
5.64%, as follows:
Purchase price of Lyric Properties ......... $ 359,663
Rental rate ................................ 10.14%
=========
$36,470
Purchase price of Peak Properties .......... $ 11,300
Rental rate ................................ 9.40%
=========
1,062
Purchase price of Trans Health Properties .. $ 11,476
Rental rate ................................ 9.64%
=========
1,106
-------
$38,638
=======
(7) To record amortization of commitment fees received, as follows:
Lyric Properties ................... 1,798
Average lease life (years) ......... 11
======
$163
Peak Properties .................... $ 113
Lease life (years) ................. 12
======
9
Trans Health Properties ............ $ 115
Lease life (years) ................. 11
======
10
----
$182
====
F-10
<PAGE>
MONARCH PROPERTIES, INC.
NOTES TO PRO FORMA BALANCE SHEET AND STATEMENT OF OPERATIONS- (CONTINUED )
(8) To record estimated administrative expenses consisting of salaries,
benefits, travel, insurance, rent and other administrative costs.
(9) To record interest expense (including the unused commitment fee and
amortization of deferred financing costs) related to the Credit
Facility, as follows:
Credit Facility balance ................... $ 63,041
Applicable rate ........................... 6.65%
========
$4,192
Unused portion of Credit Facility ......... $ 86,959
Applicable rate ........................... 0.20%
========
174
Credit Facility commitment fee ............ $ 375
Amortization period (years) ............... 3
========
125
------
$4,491
======
Borrowings on the Credit Facility are assumed to bear interest at a
variable rate based on a specified margin (100 basis points) over
LIBOR and is based on LIBOR as of April 24, 1998. A 1/8% fluctuation
in the assumed interest rate would change interest expense by $79.
(10) To record depreciation and amortization, as follows:
<TABLE>
<CAPTION>
ASSET AMOUNT LIFE (YEARS) EXPENSE
- -------------------------------------------------------- -------- -------------- ----------
<S> <C> <C> <C>
Organization costs .................................... $ 25 5 $ 5
Office furniture and equipment ........................ 128 6 21
-------
Total non-real estate depreciation and amortization ... 26
Depreciation of properties ............................ 10,849
-------
$10,875
=======
</TABLE>
Depreciation of properties is computed using the straight-line method
over estimated useful lives of 40 years for buildings and 25 years for
land improvements.
(11) Upon completion of the Offering, the Company initially intends to
grant to directors and executive officers options to purchase a total
of 513,650 shares of Common Stock at a price per share of $.001. These
options will be exercisable upon completion of the Offering. The
Company will recognize compensation expense equal to the excess of the
market value of the shares of common stock over the exercise price
during the fiscal quarter in which the Offering is consummated. This
estimated expense of approximately $10.3 million is nonrecurring and,
accordingly, has not been included in the pro forma statement of
operations.
(12) Weighted average shares of common stock outstanding includes the
shares of common stock issued in the Offering for both the basic and
diluted earnings per share calculations. For the diluted earnings per
share calculation, weighted average shares of common stock outstanding
also includes the effect of dilutive potential common stock (i.e., the
options granted to directors and executive officers) calculated using
the "treasury stock" method and assuming an average price during the
period equal to the offering price.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Member
Lyric Health Care LLC:
We have audited the accompanying balance sheets of Lyric Health Care LLC
(the Company) as of December 31, 1996 and 1997 and the related statements of
earnings, changes in net equity of parent company and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1996 and 1997 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 9 to the financial statements, in connection
with the adoption of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, effective January 1, 1996
the Company changed its accounting method from deferring and amortizing
pre-opening costs of medical specialty units to recording them as expenses when
incurred.
KPMG Peat Marwick LLP
Baltimore, Maryland
April 22, 1998
F-12
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 418 $ 229
Patient accounts and third-party payor settlements
receivable (note 3) ................................... 5,051 4,420
Supplies, prepaid expenses and other current assets..... 182 319
------- -------
Total current assets ..................................... 5,651 4,968
Property, plant and equipment, net (note 4) .............. 44,621 41,764
Other assets ............................................. 34 40
------- -------
$50,306 $46,772
======= =======
LIABILITIES AND NET EQUITY OF PARENT COMPANY
Current liabilities:
Current maturities of long-term debt (note 6) .......... $ 189 $ 180
Accounts payable and accrued expenses (note 5) ......... 3,153 3,931
------- -------
Total current liabilities ................................ 3,342 4,111
Long-term debt less current maturities (note 6) .......... 1,114 947
Deferred income taxes (note 7) ........................... 6,492 6,047
Net equity of parent company ............................. 39,358 35,667
------- -------
$50,306 $46,772
======= =======
</TABLE>
- ----------
See accompanying notes to financial statements.
F-13
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues:
Basic medical services ........................ $15,028 $20,913 $19,493
Specialty medical services .................... 10,088 13,430 17,782
Other ......................................... 300 303 358
------- ------- -------
Total revenues .................................. 25,416 34,646 37,633
------- ------- -------
Costs and expenses:
Facility operating expenses:
Salaries, wages and benefits ................. 12,569 16,601 17,482
Other operating expenses ..................... 8,125 12,945 12,411
Corporate administrative and general expenses
(note 8) ..................................... 1,542 2,081 2,186
Rent .......................................... 332 545 621
Interest, net ................................. 170 143 106
Depreciation and amortization ................. 1,440 1,289 1,527
Non-recurring charges, net (note 9) ........... 1,041 -- 2,500
------- ------- -------
Total costs and expenses ........................ 25,219 33,604 36,833
------- ------- -------
Earnings before income taxes .................... 197 1,042 800
Federal and state income taxes (note 7) ......... 76 401 312
------- ------- -------
Net earnings .................................... $ 121 $ 641 $ 488
======= ======= =======
</TABLE>
- ----------
See accompanying notes to financial statements.
F-14
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
STATEMENTS OF CHANGES IN NET EQUITY OF PARENT COMPANY
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Balance at December 31, 1994 .............................. $ 31,711
Net earnings ............................................. 121
Net activity with parent -- capital contribution ......... 12,041
--------
Balance at December 31, 1995 .............................. 43,873
Net earnings ............................................. 641
Net activity with parent -- capital distribution ......... (5,156)
--------
Balance at December 31, 1996 .............................. 39,358
Net earnings ............................................. 488
Net activity with parent -- capital distribution ......... (4,179)
--------
Balance at December 31, 1997 .............................. $ 35,667
========
- ----------
See accompanying notes to financial statements.
F-15
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings ......................................................... $ 121 $ 641 $ 488
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Non-recurring charges, net ......................................... 1,041 -- 2,500
Depreciation and amortization ...................................... 1,440 1,289 1,527
Deferred income taxes .............................................. (67) 557 (445)
Decrease (increase) in patient accounts and third-party payor
settlements receivable, net ....................................... (1,491) 2,248 631
Decrease (increase) in other current assets ........................ (83) 52 (137)
Increase in accounts payable and accrued expenses .................. 556 774 778
-------- -------- --------
Net cash provided by operating activities ............................. 1,517 5,561 5,342
-------- -------- --------
Cash flows from financing activities:
Payment of debt ...................................................... (31) (157) (176)
Capital contribution from parent company (distribution), net ......... 2,006 (5,156) (4,179)
-------- -------- --------
Net cash provided (used) by financing activities ...................... 1,975 (5,313) (4,355)
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment ........................... (1,806) (876) (1,149)
Deferred pre-opening costs ........................................... (706) -- --
Increase in other assets ............................................. (1) (33) (27)
---------- -------- --------
Net cash used by investing activities ................................. (2,513) (909) (1,176)
--------- -------- --------
Increase (decrease) in cash and cash equivalents ...................... 979 (661) (189)
Cash and cash equivalents, beginning of year .......................... 100 1,079 418
--------- -------- --------
Cash and cash equivalents, end of year ................................ $ 1,079 $ 418 $ 229
========= ======== ========
Cash payments for interest ............................................ $ 161 $ 143 $ 106
========= ======== ========
</TABLE>
- ----------
See accompanying notes to financial statements.
F-16
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Lyric Health Care LLC (Lyric or the Company) is a limited liability company
organized pursuant to the Delaware Limited Liability Company Act and a wholly
owned subsidiary of Integrated Health Services, Inc. (IHS or the Parent
Company). IHS became Lyric's sole member when Lyric was formed in May 1997. In
January 1998, the stock of certain IHS wholly owned operating subsidiaries was
transferred to a subsidiary of Lyric. This has been accounted for as a
reorganization of entities under common control. Intercompany balances with IHS
are treated as net equity of the Parent Company.
The financial statements of Lyric represent the combined financial
statements of the aforementioned subsidiaries as if the reorganization had been
effected during the three-year period. Accordingly, the subsidiaries of IHS
operate the following skilled nursing facilities: -
<TABLE>
<CAPTION>
OWNER AND IHS
FACILITY AND LOCATION DATE OF ACQUISITION BY IHS OPERATING ENTITY
- ----------------------------------- ---------------------------- ---------------------------------
<S> <C> <C>
Governors Park, a 150-bed facility Integrated Management-Governor's
Barrington, IL ................... November 1, 1995 Park, Inc.
Chestnut Hill, a 200-bed facility Rest Haven Nursing Center
Philadelphia, PA ................. December 1, 1993 (Chestnut Hill), Inc.
Gainesville, a 120-bed facility Gainesville HealthCare
Gainesville, FL .................. December 1, 1993 Center, Inc.
Claremont, a 68-bed facility Claremont Integrated
Claremont, NH .................... March 5, 1993 Health, Inc.
William and Mary, a 92-bed facility
St. Petersburg, FL ............... September 1, 1987 Rikad Properties, Inc.
</TABLE>
The financial statements reflect the historical accounts of the skilled
nursing facilities, including allocations of general and administrative expenses
from the IHS corporate office to the individual facilities. Such corporate
office allocations, calculated as a percentage of revenue, are based on
determinations that management believes to be reasonable. However, IHS has
operated certain other businesses and has provided certain services to the
Company, including financial, legal, accounting, human resources and information
systems services. Accordingly, expense allocations to the Company may not be
representative of costs of such services to be incurred in the future (see note
8).
MEDICAL SERVICE REVENUES
Medical service revenues are recorded at established rates and adjusted for
differences between such rates and estimated amounts reimbursable by third-party
payors. Estimated settlements under third-party payor retrospective rate setting
programs (primarily Medicare and Medicaid) are accrued in the period the related
services are rendered. Settlements receivable and related revenues under such
programs are based on annual cost reports prepared in accordance with Federal
and state regulations, which reports are subject to audit and retroactive
adjustment in future periods. In the opinion of management, adequate provision
has been made for such adjustments and final settlements will not have a
F-17
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
material effect on financial position or results of operations. Basic medical
service revenues represent routine service (room and board) charges of geriatric
facilities, exclusive of medical specialty units (MSUs). Specialty medical
service revenues represent ancillary service charges of geriatric facilities and
revenues generated by MSUs.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid instruments with an
original maturity of three months or less. Under a cash management facility
provided by the Parent Company, the Company's operating cash balances of the
facilities are generally transferred to a centralized account and applied to
reduce the IHS intercompany account which is treated as net equity of the Parent
Company. The Company's cash needs for operating and other purposes are similarly
provided through an increase to net equity of the Parent Company.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
estimated useful lives of the assets as follows:
Building and improvements ......... 40 years
Land improvements ................. 25 years
Equipment ......................... 10 years
DEFERRED PRE-OPENING COSTS
Through December 31, 1995 direct costs incurred to initiate and implement
new MSUs at nursing facilities (e.g., respiratory therapy, rehabilitation and
Alzheimer units) were deferred during the pre-opening period and amortized on a
straight-line basis over five years, which generally corresponds to the period
over which the Company receives reimbursement from Medicare. Effective January
1, 1996, the Company changed its policy to expense such costs when incurred (see
note 9).
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). The
Company was not a separate taxable entity during the three years ended December
31, 1997; however, under SFAS 109 the current and deferred tax expense has been
allocated among the members of the IHS controlled corporate group, including the
operating subsidiaries which comprise Lyric.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are recorded for deferred tax
assets when it is more likely than not that such deferred tax assets will not be
realized.
BUSINESS AND CREDIT CONCENTRATIONS
The Company's medical service revenues are provided through five owned
facilities located in four states. The Company generally does not require
collateral or other security in extending credit to patients; however, the
Company routinely obtains assignments of (or is otherwise entitled to receive)
benefits receivable under the health insurance programs, plans or policies of
patients (e.g., Medicare, Medicaid, commercial insurance and managed care
organizations) (see note 3).
F-18
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates (see note
10).
IMPAIRMENT OF LONG-LIVED ASSETS AND CHANGES IN ACCOUNTING
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. In December 1995, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(SFAS No. 121). In accordance with the provisions of SFAS No. 121, if there is
an indication that the carrying value of an asset is not recoverable, the
Company estimates the projected undiscounted cash flows, excluding interest, of
the related individual facilities (the lowest level for which there are
identifiable cash flows independent of the other groups of assets) to determine
if an impairment loss should be recognized. The amount of impairment loss is
determined by comparing the historical carrying value of the asset to its
estimated fair value. Estimated fair value is determined through an evaluation
of recent financial performance and projected discounted cash flows of its
facilities using standard industry valuation techniques, including the use of
independent appraisals when considered necessary.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives.
Adoption of SFAS No. 121 had no effect on the Company's financial
statements; however, see note 9 for the effect of the change in accounting
estimate in 1995 related to the write-off of deferred pre-opening costs and the
change in accounting method in 1996 to expense pre-opening costs as incurred.
RECLASSIFICATIONS
Certain amounts presented in 1995 and 1996 have been reclassified to
conform with the presentation for 1997.
(2) BUSINESS ACQUISITIONS
In November 1995, IHS acquired the Governor's Park facility. The
acquisition was accounted for by the purchase method; accordingly, the total
cost of the acquisition has been allocated to the assets and liabilities of the
acquired facility based on their estimated fair values. The results of
operations of the acquired facility have been included in the financial
statements from the date of acquisition.
F-19
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
The total cost of the Governor's Park acquisition has been allocated as
follows:
Current assets, less current liabilities ................. $ 832
Property, plant and equipment ............................ 9,203
-------
Total, representing capital contributed by the Parent Com-
pany ................................................... $10,035
=======
(3) PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS RECEIVABLE
Patient accounts and third-party payor settlements receivable at December
31 consist of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Patient accounts ....................................... $4,153 $4,640
Allowance for doubtful accounts ........................ 427 535
------ ------
3,726 4,105
Third party payor settlements, less allowance for
contractual adjustments of $1,007 and $1,585.......... 1,325 315
------ ------
$5,051 $4,420
====== ======
</TABLE>
The Company's provision for bad debts was $84, $323 and $361 for the years
ended December 31, 1995, 1996 and 1997, respectively.
At December 31, 1996 and 1997 amounts receivable from the Federal
government (Medicare) and various states (Medicaid), primarily the Commonwealth
of Pennsylvania, are summarized as follows:
1996 1997
-------- ---------
Patient accounts:
Medicare ................... $ 198 $ 542
Medicaid ................... 1,471 1,569
------ ------
1,669 2,111
Third-party payor settlements:
Medicare ................... 1,292 1,280
Medicaid ................... 1,040 620
------ ------
$2,332 $1,900
====== ======
Certain Medicare and Medicaid cost reports for prior years were settled
during 1995, 1996 and 1997, the impact of which was not material. At December
31, 1997, the Company had open cost reports for the 1994, 1995, 1996 and 1997
years which, after related allowances, are recorded at estimated net realizable
value.
F-20
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
1996 1997
--------- ---------
Land and improvements ......................... $ 4,925 $ 4,925
Building and improvements ..................... 40,171 37,934
Equipment ..................................... 2,906 3,250
Construction in progress ...................... 798 1,339
------- -------
48,800 47,448
Less accumulated depreciation and amortization. 4,179 5,684
------- -------
Net property, plant and equipment ............. $44,621 $41,764
======= =======
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are summarized as follows:
1996 1997
--------- ---------
Accounts payable .................... $1,163 $1,908
Accrued salaries and wages .......... 958 901
Other accrued expenses .............. 1,032 1,122
------ ------
$3,153 $3,931
====== ======
(6) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 is summarized as follows:
1996 1997
-------- --------
10.5% mortgage note payable due in monthly in-
stallments of $8, including interest, with final
payment due May 1999. ............................. $ 491 $ 414
8.0% mortgage note payable due in monthly in-
stallments of $15, including interest, with final
payment due December 2001. ........................ 812 713
------ ------
1,303 1,127
Less current portion ............................... 189 180
------ ------
Total long-term debt, less current portion ......... $1,114 $ 947
====== ======
F-21
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
(7) INCOME TAXES
The Company is included in IHS' consolidated Federal income tax return. The
allocated provision for income taxes is summarized as follows:
1995 1996 1997
-------- ---------- ---------
Federal ........... $ 64 $ 337 $ 263
State ............. 12 64 49
----- ------ ------
$ 76 $ 401 $ 312
===== ====== ======
Current ........... $ 143 $ (156) $ 757
Deferred .......... (67) 557 (445)
----- ------ ------
$ 76 $ 401 $ 312
===== ====== ======
The amount computed by applying the Federal corporate tax rate of 35% in
1995, 1996 and 1997 to earnings before income taxes is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- -------
<S> <C> <C> <C>
Income tax computed at statutory rates .................. $69 $365 $280
State income taxes, net of Federal tax benefit .......... 8 42 32
Other ................................................... (1) (6) --
------ ------ ----
$76 $401 $312
===== ===== ====
</TABLE>
Deferred income tax (assets) liabilities at December 31 are summarized as
follows:
1996 1997
--------- ---------
Excess of book over tax basis of assets ......... $7,030 $6,842
Allowance for doubtful accounts ................. (538) (795)
------ ------
$6,492 $6,047
====== ======
The provision for Federal and state income taxes is recorded using the
overall effective tax rate of the consolidated group applied to the Company's
taxable income computed on a stand-alone basis. Provisions for current income
taxes have been applied to the IHS intercompany account which is treated as net
equity of the Parent Company. Deferred income tax (assets) liabilities are
recorded for the Company's temporary differences using the same effective tax
rate. The provision for income taxes, deferred income taxes, and income taxes
currently payable may have been different had Lyric operated as an unaffiliated
entity.
(8) OTHER RELATED PARTY TRANSACTIONS
Corporate administrative and general expenses represent management fees for
certain services, including financial, legal, accounting, human resources and
information systems services provided by IHS pursuant to a management services
agreement. Management fees have been charged by IHS at approximately 6% of total
revenues of each facility.
Management fees charged by IHS have been determined based on an allocation
of IHS' corporate general and administrative expenses, which apply to all IHS
divisions, including Lyric. Such allocation has been made because specific
identification of expenses is not practicable. Management believes that this
allocation method is reasonable. However, management believes that the Company's
corporate administrative and general expenses on a stand alone basis may have
been different had Lyric operated as an unaffiliated entity.
F-22
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
(9) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
In 1995, the Company, as well as industry analysts, believed that Medicare
and Medicaid reform was imminent. Both the House and Senate balanced budget
proposals proposed a reduction in future growth in Medicare and Medicaid
spending from 10% a year to approximately 4-6% a year. While Medicare and
Medicaid reform had been previously discussed, the Company came to believe that
a future reduction in the growth of Medicare and Medicaid spending was now
virtually a certainty. Such reforms include, in the near term, a continued
freeze in the Medicare routine cost limit (RCL), followed by reduced increases
in later years, more stringent documentation requirements for Medicare RCL
exception requests, reduction in the growth in Medicaid reimbursement in most
states, as well as salary equivalency in rehabilitative services and, in the
longer term (2-3 years), a switch to a prospective payment system for nursing
homes. The Company estimated the effect of the aforementioned reforms on each
nursing and subacute facility, by reducing (or in some cases increasing) the
future revenues and expense growth rates for the impact of each of the
aforementioned factors. Accordingly, these events and circumstances triggered
the early adoption of Statement of Financial Accounting Standards No. 121 in the
fourth quarter of 1995. In accordance with SFAS No. 121, the Company estimated
the future cash flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets (i.e., by
individual facilities). The results of comparing future undiscounted cash flows
to historical carrying value were that none of the Lyric nursing facilities were
identified for an impairment charge since only those facilities where the
carrying value exceeded the undiscounted cash flows are considered impaired.
Prior to adoption of SFAS No. 121, the Company evaluated impairment on the
entity level, and such evaluation had yielded no impairment in prior years.
In connection with the adoption of SFAS No. 121 described above, the
Company adopted a change in accounting estimate to write-off in 1995 all
deferred pre-opening costs of MSUs. This change was made in recognition of the
circumstances, discussed above, which raised doubt about and thereby triggered
the assessment of recoverability of long-lived assets in 1995. These
circumstances also raised doubt as to the estimated future benefit and
recoverability of deferred pre-opening costs, resulting in the Company's
decision to write-off $1,678 of deferred pre-opening costs and $637 of related
deferred revenue. Such deferred revenue resulted from the timing differences in
accounting for deferred pre-opening costs for third party payor reimbursement
and financial reporting purposes. In connection with the change in accounting
estimate regarding the future benefits and recoverability of deferred
pre-opening costs, the Company has changed its accounting method beginning in
1996 from deferring and amortizing pre-opening costs to recording them as an
expense when incurred. The effect of this change in 1996 was to decrease
amortization expense by approximately $363 and to increase operating expenses by
approximately $525.
In 1997, the Company recorded a loss of $2,500 in anticipation of the loss
incurred on the sale-leaseback transaction discussed in note 12.
(10) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The following information is provided in accordance with the AICPA
Statement of Position No. 94-6, Disclosure of Certain Significant Risks and
Uncertainties.
F-23
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
The Company and others in the healthcare business are subject to certain
inherent risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs;
o Ability to obtain per diem rate approvals for costs which exceed the
Federal Medicare established per diem rates (routine cost limits);
o Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
The Company receives payment for a significant portion of services rendered
to patients from the Federal government under Medicare and from the states in
which its facilities are located under Medicaid. Revenue derived from Medicare
and various state Medicaid reimbursement programs represented 34% and 38%,
respectively, of the Company's total revenue for the year ended December 31,
1997. The Company's operations are subject to a variety of other Federal, state
and local regulatory requirements, and failure to maintain required regulatory
approvals and licenses and/or changes in such regulatory requirements could have
a significant adverse effect on the Company. Changes in Federal and state
reimbursement funding mechanisms, related government budgetary constraints and
differences between final settlements and estimated settlements receivable under
Medicare and Medicaid retrospective reimbursement programs, which are subject to
audit and retroactive adjustment, could have a significant adverse effect on the
Company. In addition, the Company's cost of care for its MSU patients generally
exceeds regional reimbursement limits established under Medicare. The success of
the Company's MSU strategy will depend in part on its ability to obtain per diem
rate approvals for costs which exceed the Medicare established per diem rate
limits.
The Company is from time to time subject to malpractice and related claims
and lawsuits, which arise in the normal course of business and which could have
a significant effect on the Company. The Parent Company maintains occurrence
basis professional and general liability insurance with coverage and deductibles
which management believes to be appropriate with respect to such claims.
The Company believes that adequate provision for the aforementioned items
has been made in the accompanying financial statements and that their ultimate
resolution will not have a material effect on the financial statements.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 130
was issued to address concerns over the practice of reporting elements of
comprehensive income directly in equity. SFAS No. 130 is effective for annual
periods beginning in 1998. Comparative financial statements provided for earlier
periods are required to be reclassified to reflect the provisions of this
Statement.
(12) SUBSEQUENT EVENTS
On January 13, 1998 the real estate assets of the operating subsidiaries of
Lyric were sold to an unaffiliated, publicly traded healthcare REIT for $44.5
million and leased back to subsidiaries of Lyric at an annual rent of $4.5
million subject to certain increases as defined by the lease agreement. The
F-24
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
Company incurred a loss of $2,500 in connection with the sale of these
facilities which was recorded in 1997. The net proceeds from the sale of
approximately $42.8 million were used to repay the balance of the mortgages
payable described in note 6 and the remaining balance was distributed to the
Parent Company. The lease has an initial term of 13 years, provides for two
renewal option periods of 13 years each, and requires a $1,100 security deposit.
In addition, the lease requires that the lessee subsidiaries of Lyric maintain a
minimum cash flow to debt service ratio as well as other prescribed financial
covenants.
Also on January 13, 1998, the Company entered into management and franchise
agreements with subsidiaries of IHS. The management and franchise agreements'
initial terms are 13 years with two renewal option periods of 13 years each. The
base management fee is 3% of gross revenues, subject to increase to 4% if gross
revenues exceed $350 million. In addition, the management agreement provides for
an incentive management fee equal to 70% of the annual net cash flow as defined
by the management agreement. The duties of the manager under the management
agreement include the following functions: accounting, legal, human resources,
operations, materials and facilities management and regulatory compliance. The
annual franchise fee is 1% of gross revenues and which grants Lyric and the
lessee subsidiaries of Lyric the authority to use IHS' trade names and
proprietary materials.
On January 21, 1998 the Company's subsidiaries obtained a $10.0 million
revolving credit facility from Copelco/American Healthfund, Inc. The initial
term of the credit facility expires on January 21, 2001 and the interest rate is
equal to the LIBOR rate plus 2.75%. The aggregate principal amount outstanding
under the credit facility shall not exceed certain base borrowing amounts as
defined by the agreement. In addition, the agreement requires maintenance of a
debt service coverage ratio of at least 1.0. The amounts outstanding under the
revolving credit facility are secured by a first priority security interest in
the accounts receivable of the subsidiaries.
In a related transaction, TFN Healthcare Investors, LLC (TFN) invested
$1,000 for a 50% interest in the Company. Accordingly, IHS' interest in the
Company was reduced to 50%. The amended operating agreement provides that the
Company will dissolve on December 31, 2047 unless extended for an additional 12
months. On February 1, 1998, the Company also entered into a five-year
employment agreement with Timothy F. Nicholson, the principal member of TFN and
a director of the Parent Company. Pursuant to the amended operating agreement,
Mr. Nicholson will serve as the Managing Director of the Company, will have the
day-to-day authority for the management and operation of the Company and will
initiate policy proposals for business plans, acquisitions, employment policy,
approval of budgets, adoption of insurance programs, additional service
offerings, financing strategy, ancillary service usage, change in material terms
of any lease and adoption/amendment of employee health, benefit and compensation
plans.
The pro forma balance sheet of the Company after giving effect to the
sale-leaseback transaction, the related distributions to IHS and the equity
contribution of TFN is summarized as follows:
Current assets .............. $ 4,768
Current liabilities ......... (3,931)
--------
Working capital ............. 837
Other assets ................ 1,163
--------
Members' equity ............. $ 2,000
========
On March 31, 1998, the real estate assets (the New Facilities) of five
additional wholly owned subsidiaries of IHS were sold to an unaffiliated,
publicly traded healthcare REIT for $50.5 million and leased back to a
subsidiary of the Company at an annual rent of $4.9 million, subject to certain
increases as defined by the lease agreement. Concurrent with the transaction,
IHS contributed the shares of the
F-25
<PAGE>
LYRIC HEALTH CARE LLC
(WHOLLY OWNED BY INTEGRATED HEALTH SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS- (CONTINUED )
subsidiaries to Lyric. The lease has an initial term of 13 years, provides for
two additional option periods of 13 years each and requires a $1,237 security
deposit. In addition, the lease requires that the lessee subsidiaries of Lyric
maintain a minimum cash flow to debt service ratio as well as other prescribed
covenants. In addition, Lyric amended its existing management and franchise
agreements with IHS, as discussed more fully above, to include the New
Facilities. As a result of this additional transaction, TFN contributed an
additional $50 to Lyric which amount equaled the value of shares of stock in the
lessee subsidiaries contributed by IHS to Lyric.
F-26
<PAGE>
LYRIC HEALTH CARE LLC
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
The unaudited pro forma statement of operations for the year ended December
31, 1997 was prepared as if Lyric had entered into: (i) the January 1998 lease
with an unaffiliated, publicly traded healthcare real estate investment trust
(REIT); (ii) the April 1998 lease with the aforementioned REIT; and (iii) the
lease, with Monarch Properties LP (Monarch) effective January 1, 1997. The
necessary adjustments have been reflected to eliminate depreciation and
interest, as Lyric obtained only an operating leasehold interest in the
facilities, and to reflect rent expense per the related lease agreements. In
addition, the management fees, franchise fees and incentive fees have been
adjusted to reflect the management and franchise agreements with IHS as if those
agreements were effective January 1, 1997. The unaudited pro forma financial
information set forth below is not necessarily indicative of the results of
operations that actually would have occurred if the transactions had been
consummated on the dates shown. In addition, it is not intended to be a
projection of results of operations that may be obtained by Lyric in the future.
The unaudited pro forma statements of operations should be read in
conjunction with the financial statements of the Lyric and the related notes
thereto contained elsewhere in this prospectus. Capitalized terms used herein
but not defined herein have the respective meanings given to them in the
Prospectus.
F-27
<PAGE>
LYRIC HEALTH CARE LLC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ORIGINAL LYRIC PROPERTIES LYRIC II PROPERTIES
---------------------------- ----------------------------
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS ACTUAL ADJUSTMENTS
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Revenue ................................ $37,633 $ -- $46,391 $ --
Costs and expenses:
Facility operating expense ............ 29,893 -- 38,067 --
Base Management and Franchise Fee...... 2,186 (304)(1) 2,692 (372)(7)
Incentive Management Fee .............. -- 523 (2) -- 235 (8)
Depreciation and amortization ......... 1,527 (1,527)(3) 1,482 (1,482)(3)
Facility rent ......................... -- 4,490 (4) -- 4,949 (4)
Equipment rent ........................ 621 -- 719 --
Interest .............................. 106 (106)(5) 2,239 (2,239)(5)
------- ---------- ------- ----------
Non-recurring charges ................. 2,500 -- -- --
------- ---------- ------- ----------
Total costs and expenses .............. 36,833 3,076 45,199 1,091
------- ---------- ------- ----------
Earnings (loss) before income taxes ... 800 (3,076) 1,192 (1,091)
------- ---------- ------- ----------
Federal and state income taxes ........ 312 (312) 464 (464)
------- ---------- ------- ----------
Net income (loss) ..................... $ 488 $ (2,764) $ 728 $ (627)
======= ========== ======= ==========
<CAPTION>
LYRIC III PROPERTIES
------------------------------
PRO FORMA LYRIC
ACTUAL ADJUSTMENTS PRO FORMA
----------- ------------------ ------------
<S> <C> <C> <C>
Revenue ................................ $306,784 $ -- $390,808
Costs and expenses:
Facility operating expense ............ 251,807 -- 319,767
Base Management and Franchise Fee...... 15,424 (85)(9) 19,541
Incentive Management Fee .............. -- 2,218 (10) 2,976
Depreciation and amortization ......... 12,039 (12,039)(3) --
Facility rent ......................... -- 36,470 (4) 45,909
Equipment rent ........................ 4,505 (4,505)(4) 1,340
Interest .............................. 13,367 (13,367)(5) --
-------- ----------- --------
Non-recurring charges ................. -- -- 2,500
-------- ----------- --------
Total costs and expenses .............. 297,142 8,692 392,033
-------- ----------- --------
Earnings (loss) before income taxes ... 9,642 (8,692) (1,225)
-------- ----------- --------
Federal and state income taxes ........ 3,760 (3,760)(6) --
-------- ----------- --------
Net income (loss) ..................... $ 5,882 $ (4,932) $ (1,225)
======== =========== ========
</TABLE>
- ----------
See accompanying notes to unaudited pro forma statement of operations.
F-28
<PAGE>
LYRIC HEALTH CARE LLC
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(A) BACKGROUND AND BASIS OF PRESENTATION
Lyric was formed in May 1997. In January 1998, the stock of certain IHS
wholly owned operating subsidiaries was transferred to a subsidiary of Lyric.
This has been accounted for as a reorganization of entities under common
control. The five subsidiaries included in Lyric at the time of formation
included the following operating facilities (the Original Lyric Properties):
<TABLE>
<CAPTION>
DATE OF ACQUISITION OWNER AND IHS
FACILITY AND LOCATION BY IHS OPERATING ENTITY
- ----------------------------------- --------------------- ---------------------------------
<S> <C> <C>
Governors Park, a 150-bed facility Integrated Management-Governor's
Barrington, IL ................... November 1, 1995 Park, Inc.
Chestnut Hill, a 200-bed facility Rest Haven Nursing Center
Philadelphia, PA ................. December 1, 1993 (Chestnut Hill), Inc.
Gainesville, a 120-bed facility Gainesville HealthCare
Gainesville, FL .................. December 1, 1993 Center, Inc.
Claremont, a 68-bed facility Claremont Integrated
Claremont, NH .................... March 5, 1993 Health, Inc.
William and Mary, a 92-bed facility
St. Petersburg, FL ............... September 1, 1987 Rikad Properties, Inc.
</TABLE>
In January 1998, Lyric sold these facilities to an unaffiliated, publicly
traded healthcare REIT for $44.5 million and leased back the facilities for an
annual rental of $4.5 million, subject to certain increases, as defined by the
lease agreement. The lease is a triple net lease with a wholly owned subsidiary
of Lyric, Lyric Health Care Holdings, Inc. At that time, Lyric entered into a
management agreement with IHS that provided for a base management fee of 3%
which increases to 4% if and when Lyric attains consolidated total revenues in
excess of $350.0 million. In addition, IHS entered into a franchise agreement
with Lyric that grants Lyric the authority to use IHS trade names and
proprietary materials for a fee of 1% of revenue.
In February 1998, TFN Healthcare Investors acquired a 50% interest in Lyric
from IHS.
In April 1998, a wholly owned subsidiary of Lyric, Lyric Health Care
Holdings II, Inc., entered into a lease with an unaffiliated, publicly traded
healthcare REIT for five facilities for an annual rental of $4.9 million,
subject to certain increases, as defined by the lease agreement (the Lyric II
Properties). This lease is a triple net lease separate from the aforementioned
January 1998 lease. The two leases have no cross- collateralization or
cross-default provisions. The following are the five facilities that were leased
in this transaction:
FACILITY NAME BEDS LOCATION
--------------------------- ------ -------------------
1) Sarasota Nursing Pavilion 180 Sarasota, FL
2) Pinellas Park 120 Pinellas Park, FL
3) Tarpon Springs 120 Tarpon Springs, FL
4) Waterford Commons 101 Toledo, OH
5) Hershey at Woodlands 213 Hershey, PA
Immediately subsequent to Monarch's initial public offering, Lyric Health
Care Holdings III, Inc. (a wholly owned subsidiary of Lyric) will enter into a
lease agreement with Monarch with respect to the 37 skilled nursing facilities
and five speciality hospitals (the Lyric III Properties). The lease will provide
for
F-29
<PAGE>
LYRIC HEALTH CARE LLC
NOTES TO PRO FORMA STATEMENT OF OPERATIONS- (CONTINUED)
a minimum base rent, plus annual base rent step-ups equal to the lesser of: (i)
two times the increase in the consumer price index (but in no case less than
zero); or (ii) a fixed percentage of three percent.
The accompanying unaudited pro forma financial statements have been
prepared based on the audited consolidated financial statements of Lyric Health
Care LLC for the year ended December 31, 1997. The following statements were
also used:
1) The unaudited combined financial statements of the Lyric III
Properties for the year ended December 31, 1997.
2) The unaudited combined financial statements of the Lyric II Properties
for the year ended December 31, 1997.
The pro forma statement of operations for the year ended December 31, 1997
was prepared as if Lyric had entered into: (i) the aforementioned January 1998
lease; (ii) the aforementioned April 1998 lease; and (iii) the lease with
Monarch effective January 1, 1997. The necessary adjustments have been reflected
to eliminate depreciation and interest, as Lyric obtained only an operating
leasehold interest in the facilities, and to reflect rent expense per the
related lease agreements. In addition, the management fees, franchise fees, and
incentive fees have been adjusted to reflect the management and franchise
agreements with IHS as if those agreements were effective January 1, 1997.
No pro forma balance sheet is presented as the offering and related
transactions with Monarch will have no effect on the balance sheet of Lyric. See
the Lyric financial statements and the notes thereto presented elsewhere in the
Prospectus.
The unaudited pro forma statement of operations is not necessarily
indicative of the results of operations that actually would have occurred if the
transactions had been consummated on the dates shown. In addition, it is not
intended to be a projection of results of operations that may be obtained in the
future.
(B) PRO FORMA ADJUSTMENTS
(1) To adjust the base management fee to the terms of the management and
franchise agreements between IHS and Lyric, as follows:
Pro forma revenues .................................. $ 37,633
Management and franchise fee percentage ............. 5.00%
--------
Pro forma base management and franchise fee ......... 1,882
Actual fee .......................................... (2,186)
--------
Adjustment .......................................... $ (304)
========
(2) To record the incentive management fee as per the terms of the
management agreement between IHS and Lyric, as follows:
Pro forma revenues .................................. $ 37,633
Pro forma operating expense ......................... (29,893)
Pro forma base management and franchise fee ......... (1,882)
Pro forma rent ...................................... (5,111)
---------
Subtotal ............................................ 747
Incentive fee percentage ............................ 70.00%
---------
Adjustment .......................................... $ 523
=========
F-30
<PAGE>
LYRIC HEALTH CARE LLC
NOTES TO PRO FORMA STATEMENT OF OPERATIONS- (CONTINUED)
(3) To eliminate depreciation as Lyric holds only a leasehold interest in
the facilities.
(4) To reflect rent expense per the applicable lease agreement.
(5) To eliminate interest on debt not assumed by Lyric.
(6) To eliminate historical income tax expense as Lyric is a limited
liability company, and no longer included in IHS' Federal income tax
return.
(7) To adjust the base management fee to the terms of the management and
franchise agreements between IHS and Lyric, as follows:
Pro forma revenues .................................. $ 46,391
Management and franchise fee percentage ............. 5.00%
---------
Pro forma base management and franchise fee ......... 2,320
Actual fee .......................................... (2,692)
---------
Adjustment .......................................... $ (372)
=========
(8) To record the incentive management fee as per the terms of the
management agreement between IHS and Lyric, as follows:
Pro forma revenues .................................. $ 46,391
Pro forma operating expense ......................... (38,067)
Pro forma base management and franchise fee ......... (2,320)
Pro forma rent ...................................... (5,668)
---------
Subtotal ............................................ 336
Incentive fee percentage ............................ 70.00%
---------
Adjustment .......................................... $ 235
=========
(9) To adjust the base management fee to the terms of the management and
franchise agreements between IHS and Lyric, as follows:
Pro forma revenues .................................. $ 306,784
Management and franchise fee percentage ............. 5.00%
----------
Pro forma base management and franchise fee ......... 15,339
Actual fee .......................................... (15,424)
----------
Adjustment .......................................... $ (85)
==========
(10) To record the incentive management fee as per the terms of the
management agreement between IHS and Lyric, as follows:
Pro forma revenues .................................. $ 306,784
Pro forma operating expense ......................... (251,807)
Pro forma base management and franchise fee ......... (15,339)
Pro forma rent ...................................... (36,470)
----------
Subtotal ............................................ 3,168
Incentive fee percentage ............................ 70.00%
----------
Adjustment .......................................... $ 2,218
==========
F-31
<PAGE>
====================================== ======================================
NO DEALER, SALESPERSON OR OTHER
INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN [ ] SHARES
AUTHORIZED BY THE COMPANY OR ANY OF
THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MONARCH PROPERTIES, INC.
MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON STOCK
OFFERED HEREBY. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION COMMON STOCK
THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
-----------------------------------
TABLE OF CONTENTS -----------------------------------
PAGE PROSPECTUS
Prospectus Summary .............. 1
Risk Factors .................... 16 -----------------------------------
The Company ..................... 30
Business and Growth Strategies .. 33
Use of Proceeds ................. 37
Distributions ................... 38
Capitalization .................. 41
Dilution ........................ 42 DONALDSON, LUFKIN & JENRETTE
Selected Historical and Pro SECURITIES CORPORATION
Forma Financial Information ... 43
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 44
Business of the Company and Its
Properties .................... 47 SALOMON SMITH BARNEY
Key Agreements .................. 62
Management ...................... 68
Structure and Formation of the
Company ....................... 76
Transactions with and Benefits to
Related Parties................ 78
Valuation of Initial Properties . 79 BT ALEX. BROWN
Policies With Respect to Certain
Activities .................... 79
Operating Partnership Agreement . 82
Principal Stockholders .......... 85
Description of Capital Stock of
the Company ................... 86 LEGG MASON WOOD WALKER
Certain Provisions of Maryland INCORPORATED
Law and of the Company's
Charter and Bylaws ............ 89
Shares Eligible for Future Sale . 93
Federal Income Tax Considerations 95
ERISA Considerations ............ 109
Underwriting .................... 111
Experts ......................... 113 MORGAN STANLEY DEAN WITTER
Legal Matters ................... 113
Additional Information .......... 113
Glossary ........................ 114
Index to Financial Statements ... F-1
-----------------------------------
UNTIL ______________, 1998 (25
DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING [ ], 1998
TRANSACTIONS IN THE SHARES OF COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
====================================== ======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the Offering. All amounts are estimated except for the
Registration Fee and the NASD Fee.
Registration Fee ...................................... $ 117,041.25
NASD Fee .............................................. *
New York Stock Exchange Listing Fee ................... *
Printing and Engraving Expenses ....................... *
Legal Fees and Expenses ............................... *
Accounting Fees and Expenses .......................... *
Blue Sky Fees and Expenses ............................ *
Environmental and Engineering Expenses ................ *
Credit Facility Fee ................................... *
Land Title Insurance .................................. *
Indemnification Insurance Costs (see Item 34) ......... *
Miscellaneous ......................................... *
------------
TOTAL ................................................. *
============
- ----------
* To be completed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On February 20, 1998, the Company issued 100 shares of Common Stock to
Robert N. Elkins, M.D. at a purchase price of $1.00 per share. Such shares were
issued in a transaction exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 as they were issued in a transaction not involving any
public offering.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
officer of the Company. The Bylaws obligate the Company, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by
II-1
<PAGE>
reason of his service in that capacity. The Charter and Bylaws also permit the
Company to indemnify and advance expenses to any person who served a predecessor
of the Company in any of the capacities described above and to any employee or
agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty; (b) the director or officer actually received an improper personal
benefit in money, property or services; or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
The Company will enter into indemnification agreements with each of its
executive officers and directors. The indemnification agreements will require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under these
agreements, the Company must also indemnify and advance all expenses incurred by
executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors under
the Company's directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by law, it provides greater assurance to directors and executive
officers that indemnification will be available because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or the
stockholders to eliminate the rights it provides.
ITEM 35. TREATMENT OF PROCEEDS FROM COMMON STOCK BEING REGISTERED
The consideration to be received by the Company for the shares registered
will be credited to the appropriate capital account.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
See Index to Financial Statements and Index to Exhibits.
(ii) Exhibits
EXHIBIT
NO.
- -------
1.1** Form of Underwriting Agreement
3.1** Charter of Monarch Properties, Inc.
3.2** Bylaws of Monarch Properties, Inc.
4.1** Form of Stock Certificate
5.1** Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to Validity
of Shares Registered
II-2
<PAGE>
EXHIBIT
NO.
- -------
8.1** Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. as to certain
Tax Matters
10.1** Agreement of Limited Partnership of Monarch Properties, LP
10.2** Form of Indemnification Agreement between the Registrant and
each of its Officers
10.3** Form of Indemnification Agreement between the Registrant and
each of its Directors
10.4** Form of 1998 Omnibus Securities and Incentive Plan
10.5** Form of Non-Competition Agreement between the Registrant and
Robert N. Elkins
10.6** Form of Facilities Purchase Agreement between Monarch
Properties, LP, Integrated Health Services, Inc. and the
entities listed therein
10.7** Form of Master Lease between Monarch Properties, LP and Lyric
Health Care Holdings III, Inc.
10.8** Form of Facility Sublease between Lyric Health Care Holdings
III, Inc. and each of the Facility Subtenants
10.9** Form of Consent and Subordination Agreement between IHS Facility
Management, Inc., IHS Franchising Co., Inc., all Facility
Subtenants, Lyric Health Care Holdings III, Inc. and Monarch
Properties, LP
10.10** Form of Indemnity Agreement between the Registrant and
Integrated Health Services, Inc.
10.11** Form of Right of First Offer Agreement among the Registrant,
Integrated Health Services, Inc. and Monarch Properties, LP
10.12** Form of Purchase Option Agreement between Monarch Properties,
LP, and Integrated Health Services, Inc.
10.13** Form of Guaranty by Lyric Health Care LLC in favor of Monarch
Properties, LP
10.14** Form of Security Agreement between Monarch Properties, LP, all
Facility Subtenants, and Lyric Health Care Holdings III, Inc.
10.15** Form of Escrow Agreement among Monarch Properties, LP, Lyric
Health Care Holdings III, Inc. and the entities listed therein
10.16** Form of Letter of Credit Agreement between Monarch Properties,
LP, Lyric Healthcare Holdings III, Inc. and all subsidiaries of
Lyric Healthcare Holdings III, Inc.
10.17** Form of Letter of Credit
10.18** Form of Pledge Agreement between Monarch Properties, LP and
Lyric Health Care Holdings III, Inc.
10.19** Form of Pledge Agreement between Lyric Health Care LLC and the
Registrant
10.20** Form of Revolving Credit Agreement between South Trust Bank,
National Association, Monarch Properties, LP and the other
lenders listed therein
10.21** Form of Revolving Promissory Note
21.1** List of Subsidiaries
23.1* Consent of KPMG Peat Marwick LLP
23.2* Consent of KPMG Peat Marwick LLP
23.3** Consent of Ballard Spahr Andrews & Ingersoll, LLP (included as
part of Exhibit 5.1)
23.4** Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23.5* Consent of Donald Tomlin
23.6* Consent of Lisa K. Merritt
23.7* Consent of William McBride, III
II-3
<PAGE>
EXHIBIT
NO.
- --------
23.8* Consent of Brian E. Cobb
23.9** Consent of Valuation Counselors Group, Inc.
24.1* Power of Attorney (Included in Signatures Section of this
Registration Statement)
27.1* Financial Data Schedule
- ----------
* Filed herewith
** To be filed by amendment.
ITEM 37. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The Registrant hereby undertakes:
(a) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To the underwriter at the closing specified in the underwriting
agreements certificates in such denominations and registered in such names
as required by the underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Naples, State of Florida on this 27th day of April,
1998.
MONARCH PROPERTIES, INC.
By: /s/ John B. Poole
---------------------------------
John B. Poole
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Monarch Properties, Inc.
hereby severally constitute and appoint John B. Poole and Douglas Listman, and
each of them singly, our true and lawful attorneys with full power to them, and
each of them singly, to sign for us and in our names in the capacities indicated
below, the Registration Statement on Form S-11 filed herewith and any and all
pre-effective and post-effective amendments to said Registration Statement, and
any subsequent Registration Statement for the same offering which may be filed
under Rule 462(b), and generally to do all such things in our names and on our
behalf in our capacities as officers and directors to enable Monarch Properties,
Inc. to comply with the provisions of the Securities Act of 1933, as amended,
and all requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys, or
any of them, to said Registration Statement and any and all amendments thereto
or to any subsequent Registration Statement for the same offering which may be
filed under Rule 462(b).
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------- ----------------------------------- ---------------
/s/ John B. Poole President, Chief Executive Officer April 27, 1998
- ------------------------- and Director (Principal Executive
John B. Poole Officer)
/s/ Douglas Listman Chief Financial Officer April 27, 1998
- ------------------------- (Principal Financial and
Douglas Listman Accounting Officer)
/s/ Robert N. Elkins Chairman of the Board of Directors April 27, 1998
- ------------------------- and Director
Robert N. Elkins
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1.1** Form of Underwriting Agreement
3.1** Charter of Monarch Properties, Inc.
3.2** Bylaws of Monarch Properties, Inc.
4.1** Form of Stock Certificate
5.1** Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to Validity
of Shares Registered
8.1** Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. as to certain
Tax Matters
10.1** Agreement of Limited Partnership of Monarch Properties, LP
10.2** Form of Indemnification Agreement between the Registrant and
each of its Officers
10.3** Form of Indemnification Agreement between the Registrant and
each of its Directors
10.4** Form of 1998 Omnibus Securities and Incentive Plan
10.5** Form of Non-Competition Agreement between the Registrant and
Robert N. Elkins
10.6** Form of Facilities Purchase Agreement between Monarch
Properties, LP, Integrated Health Services, Inc. and the
entities listed therein
10.7** Form of Master Lease between Monarch Properties, LP and Lyric
Health Care Holdings III, Inc.
10.8** Form of Facility Sublease between Lyric Health Care Holdings
III, Inc. and each of the Facility Subtenants
10.9** Form of Consent and Subordination Agreement between IHS Facility
Management, Inc., IHS Franchising Co., Inc., all Facility
Subtenants, Lyric Health Care Holdings III, Inc. and Monarch
Properties, LP
10.10** Form of Indemnity Agreement between the Registrant and
Integrated Health Services, Inc.
10.11** Form of Right of First Offer Agreement among the Registrant,
Integrated Health Services, Inc. and Monarch Properties, LP
10.12** Form of Purchase Option Agreement between Monarch Properties,
LP, and Integrated Health Services, Inc.
10.13** Form of Guaranty by Lyric Health Care LLC in favor of Monarch
Properties, LP
10.14** Form of Security Agreement between Monarch Properties, LP, all
Facility Subtenants, and Lyric Health Care Holdings III, Inc.
10.15** Form of Escrow Agreement among Monarch Properties, LP, Lyric
Health Care Holdings III, Inc. and the entities listed therein
10.16** Form of Letter of Credit Agreement between Monarch Properties,
LP, Lyric Healthcare Holdings III, Inc. and all subsidiaries of
Lyric Healthcare Holdings III, Inc.
10.17** Form of Letter of Credit
10.18** Form of Pledge Agreement between Monarch Properties, LP and
Lyric Health Care Holdings III, Inc.
10.19** Form of Pledge Agreement between Lyric Health Care LLC and the
Registrant
10.20** Form of Revolving Credit Agreement between South Trust Bank,
National Association, Monarch Properties, LP and the other
lenders listed therein
10.21** Form of Revolving Promissory Note
21.1** List of Subsidiaries
23.1* Consent of KPMG Peat Marwick LLP
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
23.2* Consent of KPMG Peat Marwick LLP
23.3** Consent of Ballard Spahr Andrews & Ingersoll, LLP (included as
part of Exhibit 5.1)
23.4** Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23.5* Consent of Donald Tomlin
23.6* Consent of Lisa K. Merritt
23.7* Consent of William McBride, III
23.8* Consent of Brian E. Cobb
23.9** Consent of Valuation Counselors Group, Inc.
24.1* Power of Attorney (Included in Signatures Section of this
Registration Statement)
27.1* Financial Data Schedule
- ----------
* Filed herewith
** To be filed by amendment.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Monarch Properties, Inc.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Baltimore, Maryland
April 27, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Member
Lyric Health Care, LLC
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
Our report dated April 22, 1998 refers to a change in accounting method, in
1996, from deferring and amortizing pre-opening costs of medical specialty units
to recording them as expenses when incurred.
KPMG Peat Marwick LLP
Baltimore, Maryland
April 27, 1998
EXHIBIT 23.5
CONSENT OF DIRECTOR NOMINEE
To Monarch Properties, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, I
hereby consent to the references in the Registration Statement of Monarch
Properties, Inc. (the "Company") on Form S-11, and amendments thereto, which
indicate that I have accepted a nomination to become a director of the Company
subsequent to the closing of the Company's initial public offering.
Dated: April 21, 1998 Signature: /s/ Donald R. Tomlin, Jr.
-----------------------------
Print Name: Donald R. Tomlin, Jr.
-----------------------------
EXHIBIT 23.6
CONSENT OF DIRECTOR NOMINEE
To Monarch Properties, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, I
hereby consent to the references in the Registration Statement of Monarch
Properties, Inc. (the "Company") on Form S-11, and amendments thereto, which
indicate that I have accepted a nomination to become a director of the Company
subsequent to the closing of the Company's initial public offering.
Dated: April 21, 1998 Signature: /s/ Lisa Merritt
-----------------------------
Print Name: Lisa Merritt
-----------------------------
EXHIBIT 23.7
CONSENT OF DIRECTOR NOMINEE
To Monarch Properties, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, I
hereby consent to the references in the Registration Statement of Monarch
Properties, Inc. (the "Company") on Form S-11, and amendments thereto, which
indicate that I have accepted a nomination to become a director of the Company
subsequent to the closing of the Company's initial public offering.
Dated: April 21, 1998 Signature: /s/ William McBride, III
-----------------------------
Print Name: William McBride, III
-----------------------------
EXHIBIT 23.8
CONSENT OF DIRECTOR NOMINEE
To Monarch Properties, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, I
hereby consent to the references in the Registration Statement of Monarch
Properties, Inc. (the "Company") on Form S-11, and amendments thereto, which
indicate that I have accepted a nomination to become a director of the Company
subsequent to the closing of the Company's initial public offering.
Dated: April 21, 1998 Signature: /s/ Brian E. Cobb
-----------------------------
Print Name: Brian E. Cobb
-----------------------------
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