<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number 1-8895
HEALTH CARE PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0091377
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
4675 MacArthur Court, Suite 900
Newport Beach, California 92660
(Address of principal executive offices)
Registrant's telephone number: (714) 221-0600
------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock* New York Stock Exchange
7-7/8% Series A Cumulative
Redeemable Preferred Stock New York Stock Exchange
*The Common Stock has stock purchase rights attached which are registered
pursuant to Section 12(b) of the Act and listed on the New York Stock Exchange.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 19, 1998 there were 30,246,169 shares of Common Stock
outstanding. The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, based on the closing price of these shares on
March 19, 1998 on the New York Stock Exchange, was approximately $1,073,107,000.
Portions of the definitive Proxy Statement for the registrant's 1998 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Report.
<PAGE>
PART I
Item 1. BUSINESS
Health Care Property Investors, Inc. (the "Company"), a Maryland
corporation, was organized in March 1985 to qualify as a real estate investment
trust ("REIT"). The Company invests in health care related real estate located
throughout the United States, including long-term care facilities, congregate
care and assisted living facilities, acute care and rehabilitation hospitals,
medical office buildings, physician group practice clinics and psychiatric
facilities. Having commenced business nearly 13 years ago, the Company today is
the second oldest REIT specializing in health care real estate. At December 31,
1997, the Company owned an interest in 220 properties located in 39 states, of
which 213 are leased or subleased pursuant to long-term leases (the "Leases") to
53 health care providers (the "Lessees"), including affiliates of Beverly
Enterprises, Inc. ("Beverly"), Columbia/HCA Healthcare Corp. ("Columbia"),
Emeritus Corporation ("Emeritus"), HealthSouth Corporation ("HealthSouth"),
Tenet Healthcare Corporation ("Tenet") and Vencor, Inc. ("Vencor"). The
remaining seven properties are medical office buildings with multiple tenant
leases. Of the Lessees, only Vencor accounts for more than 10% of the Company's
revenue for the year ended December 31, 1997. The Company also holds mortgage
loans on 24 properties that are owned and operated by 12 health care providers
(the "Mortgagors") including Beverly, Columbia and Tenet.
At December 31, 1997, the gross acquisition price of the Company's 244
leased or mortgaged properties (the "Properties"), including partnership
acquisitions and mortgage loan acquisitions, was approximately $1.1 billion.
The average age of the Properties is 18 years. As of December 31, 1997,
approximately 70% of the Company's revenue is derived from Properties operated
by publicly traded health care providers.
Since receiving its initial senior debt rating of Baa1/BBB by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group
("Standard & Poor's") in 1986, the Company has historically maintained or
improved its ratings. Currently, its senior debt is rated Baa1/BBB+/A- by
Moody's, Standard & Poor's and Duff & Phelps Credit Rating Co. ("Duff &
Phelps"), respectively. The Company believes that it has had an excellent track
record in attracting and retaining key employees. The Company's five executive
officers have worked with the Company on average for 12 years. The Company's
annualized return to its stockholders, assuming reinvestment of dividends and
before stockholders' income taxes is approximately 20% over the period from its
initial public offering in May 1985 through December 31, 1997.
References herein to the Company include Health Care Property Investors,
Inc. and its wholly-owned subsidiaries and affiliated partnerships, unless the
context otherwise requires.
THE PROPERTIES
Of the 244 health care facilities in which the Company has an investment as
of December 31, 1997, the Company directly owns 180 facilities including 98 long
- - -term care facilities, two rehabilitation hospitals, 63 congregate care and
assisted living centers, three acute care hospitals, 11 medical office buildings
and three physician group practice clinics.
<PAGE>
The Company has provided mortgage loans on 24 properties, including 15 long
- - -term care facilities, three congregate care and assisted living centers, three
acute care hospitals and three medical office buildings.
At December 31, 1997, the Company also had varying percentage interests in
several joint ventures and partnerships that together own 40 facilities, as
further discussed below:
1. A 77% interest in a joint venture which owns two acute care hospitals, one
psychiatric facility and 21 long-term care facilities.
2. Interests of between 90% and 97% in four joint ventures, each of which was
formed to own a comprehensive rehabilitation hospital.
3. A 90% interest in a company formed to own five medical office buildings.
4. An 80% interest in a company formed to own a long-term care facility.
5. A 50% interest in five partnerships, each of which owns a congregate care
facility.
6. A 45% interest in a company formed to own a congregate care facility.
The following summary of the Company's Properties details certain pertinent
information grouped by type of facility and equity interest as of December 31,
1997:
<TABLE>
<CAPTION>
Equity Number Number Total
Interest of of Beds/ Investments Annual
Facility Type Percentage Facilities Units (1) (2) Rents/Interest
- - --------------------------- ---------- ---------- ---------- ----------- --------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Long-Term Care Facilities 100% 113 13,658 $ 365,475 $ 53,989
Long-Term Care Facilities 77-80 22 2,625 50,975 10,663
-------------------------------------------------------
135 16,283 416,450 64,652
-------------------------------------------------------
Acute Care Hospitals 100 6 656 53,690 6,047
Acute Care Hospitals 77 2 356 32,961 7,708
-------------------------------------------------------
8 1,012 86,651 13,755
-------------------------------------------------------
Rehabilitation Hospitals 100 2 168 27,385 4,167
Rehabilitation Hospitals 90-97 4 307 45,011 8,175
-------------------------------------------------------
6 475 72,396 12,342
-------------------------------------------------------
Congregate Care & Assisted Living Centers 100 66 5,507 292,776 26,732
Congregate Care & Assisted Living Centers 45-50 6 709 6,902(5) 4,919
-------------------------------------------------------
72 6,216 299,678 31,651
-------------------------------------------------------
Medical Office Buildings (3) 100 14 --- 85,236 9,308
Medical Office Buildings (3) 90 5 --- 42,300 4,700
Physician Group Practice Clinics (4) 100 3 --- 48,908 5,010
Psychiatric Facility 77 1 108 3,018 561
-------------------------------------------------------
Totals 244 24,094 $1,054,637 $ 141,979
=======================================================
(1) Congregate Care and Assisted Living Centers are stated in units; all other
facilities are stated in beds, except the Medical Office Buildings and the
Physician Group Practice Clinics.
(2) Includes partnership investments, and incorporates all partners' assets and
construction commitments.
<PAGE>
(3) The Medical Office Buildings encompass approximately 955,000 square feet.
(4) The Physician Group Practice Clinics encompass approximately 437,000 square
feet.
(5) Represents HCPI's net investment.
LONG-TERM CARE FACILITIES. The Company owns or holds mortgage loan
interests in 135 long-term care facilities. These facilities are leased to
various health care providers. Such long-term care facilities offer
restorative, rehabilitative and custodial nursing care for people not requiring
the more extensive and sophisticated treatment available at acute care
hospitals. Many long-term care facilities have experienced significant growth
in ancillary revenues and subacute care services over the past several years.
Ancillary revenues and subacute care services are derived from providing
services to residents beyond room and board care and include occupational,
physical, speech, respiratory and IV therapy, wound care, oncology treatment,
brain injury care and orthopedic therapy as well as sales of pharmaceutical
products and other services. In certain long-term care facilities some of the
foregoing services are provided on an out-patient basis. Such revenues
currently relate primarily to Medicare and private pay residents. These
facilities are designed to supplement hospital care and many have transfer
agreements with one or more acute care hospitals. These facilities depend to
some degree upon referrals from practicing physicians and hospitals. Such
services are paid for either by the patient or the patient's family, or through
the federal Medicare and state Medicaid programs.
Patients in long-term care facilities are generally provided with
accommodations, all meals, medical and nursing care, and rehabilitation services
including speech, physical and occupational therapy. As a part of the Omnibus
Budget Reconciliation Act ("OBRA") of 1981, Congress established a waiver
program under Medicaid to offer an alternative to institutional long-term care
services. The provisions of OBRA and the subsequent OBRA Acts of 1987 and 1990
allowed states, with federal approval, greater flexibility in program design as
a means of developing cost-effective alternatives to delivering services
traditionally provided in the long-term care setting. Recently this has led to
an increase in the number of assisted living facilities. This may adversely
affect some long-term care facilities for a period as individuals are shifted to
the lower cost delivery system provided in the assisted living setting.
Eligibility for assisted living services to be included as a Medicaid reimbursed
service does not necessarily mean that more Government spending will be
available for the delivery of health care services to the frail elderly.
CONGREGATE CARE AND ASSISTED LIVING CENTERS. The Company has investments
in 72 congregate care and assisted living centers. Congregate care centers
typically contain studio, one bedroom and two bedroom apartments which are
rented on a month-to-month basis by individuals, primarily those over 75 years
of age. Residents, who must be ambulatory, are provided meals and eat in a
central dining area; they may also be assisted with some daily living
activities. These centers offer programs and services that allow residents
certain conveniences and make it possible for them to live independently; staff
is also available when residents need assistance and for group activities.
Assisted living centers serve elderly persons who require more assistance
with daily living activities than congregate care residents, but who do not
require the constant supervision nursing homes provide. Services include
personal supervision and assistance with eating, bathing, grooming and
administering medication. Assisted living centers typically contain larger
common areas for dining, group activities and relaxation to encourage social
interaction. Residents typically rent studio and one bedroom units on a
month-to-month basis.
Charges for room and board and other services in both congregate care and
assisted living centers are generally paid from private sources.
<PAGE>
ACUTE CARE HOSPITALS. The Company has an interest in six general acute
care hospitals and two long-term acute care hospitals. Acute care hospitals
generally offer a wide range of services such as general and specialty surgery,
intensive care units, clinical laboratories, physical and respiratory therapy,
nuclear medicine, magnetic resonance imaging, neonatal and pediatric care units,
outpatient units and emergency departments, among others. Such services are
paid for by the patient or the patient's family, third party payors (e.g.
insurance, HMOs), or through the federal Medicare and state Medicaid programs.
Long-term acute care hospitals are defined as those facilities in which a
patient's stay is at least 25 days. These hospitals receive reimbursement on a
cost-based reimbursement system, subject to certain limitations, for Medicare
patients. Traditional general acute care hospitals are provided reimbursement
incentives by Medicare to minimize inpatient length of stay.
REHABILITATION HOSPITALS. The Company has an investment in six
rehabilitation hospitals. These hospitals provide inpatient and outpatient care
for patients who have sustained traumatic injuries or illnesses, such as spinal
cord injuries, strokes, head injuries, orthopedic problems, work related
disabilities and neurological diseases, as well as treatment for amputees and
patients with severe arthritis. Rehabilitation programs encompass physical,
occupational, speech and inhalation therapies, rehabilitative nursing and other
specialties. Such services are paid for by the patient or the patient's family,
third party payors (e.g. insurance, HMOs), or through the federal Medicare
program.
MEDICAL OFFICE BUILDINGS. The Company has investments in 19 medical office
buildings. These buildings are generally located adjacent to, or a short
distance from, acute care hospitals. Medical office buildings contain
physicians' offices and examination rooms, and may also include pharmacies,
hospital ancillary service space and day-surgery operating rooms. Medical office
buildings require more extensive plumbing, electrical, heating and cooling
capabilities than commercial office buildings for sinks, brighter lights and
special equipment physicians typically use. Except as noted below, the
Company's owned medical office buildings are generally master leased to a Lessee
which then subleases office space to physicians or other medical practitioners.
During 1997, the Company purchased seven medical office buildings which are
leased to multiple tenants under triple net or gross leases. These facilities
are operated by property management companies on behalf of the Company.
PHYSICIAN GROUP PRACTICE CLINICS. The Company has investments in three
physician group practice clinics. Physician group practice clinics generally
provide a broad range of medical services through organized physician groups
representing various medical specialties.
PSYCHIATRIC FACILITY. The Company has an investment in one psychiatric
facility which offers comprehensive, multidisciplinary adult and adolescent
care. A substance abuse program is offered in a separate unit of the facility.
COMPETITION. The Company competes for property acquisitions with health
care providers, other health care related real estate investment trusts, real
estate partnerships and other investors.
The Company's Properties are subject to competition from the properties of
other health care providers. Certain of these other operators have capital
resources substantially in excess of some of the operators of the Company's
facilities. In addition, the extent to which the Properties are utilized
depends upon several factors, including the number of physicians using the
health care facilities or referring patients there, competitive systems of
health care delivery and the area population, size and composition. Private,
federal and state payment programs and the effect of other laws and regulations
may also have a significant effect on the utilization of the Properties.
Virtually all of the Properties operate in a competitive environment and
patients and referral sources, including physicians, may change their
preferences for a health care facility from time to time.
<PAGE>
The following table shows, with respect to each Property, the location by
state, the number of beds/units, recent occupancy levels, patient revenue mix,
annual rents and interest and information regarding remaining lease terms, by
property type.
</TABLE>
<TABLE>
<CAPTION>
Average
Number Private
Number of Beds/ Average Patient Annual Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (5) (2),(5) Interest Term
- - --------------------------- ---------- -------- ---------- -------- --------- ----------
(Thousands) (Years)
<S> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities
Alabama 1 174 95% 31% $ 903 --
Arkansas 9 866 77 48 2,203 8
California 21 2,083 88 50 7,828 10
Colorado 3 420 93 59 1,824 2
Connecticut 1 121 97 37 622 2
Florida 11 1,267 92 55 6,734 6
Illinois 2 201 86 54 475 4
Indiana 13 1,709 82 49 6,863 13
Iowa 1 201 90 37 656 1
Kansas 3 323 89 58 1,776 1
Kentucky 1 100 97 60 406 4
Louisiana 1 120 96 37 669 7
Maryland 3 438 87 28 2,287 20
Massachusetts 5 615 95 42 2,804 4
Michigan 3 286 86 61 908 4
Mississippi 1 120 100 6 358 4
Missouri 2 393 50 45 1,938 2
Montana 1 80 80 47 281 1
New Mexico 1 102 96 31 307 5
North Carolina 9 1,056 82 52 3,962 9
Ohio 9 1,226 92 54 5,970 3
Oklahoma 2 207 87 81 1,654 1
Oregon 1 110 82 45 332 --
South Carolina 2 52 90 100 392 13
Tennessee 10 1,754 97 43 5,170 4
Texas 10 1,094 59 35 3,023 3
Washington 1 84 73 60 290 1
Wisconsin 8 1,133 84 50 4,017 5
- - --------------------------------------------------------------------------------------------------------
Sub-Total 135 16,335 85 48 64,652 7
- - --------------------------------------------------------------------------------------------------------
Acute Care Hospitals
Arizona 1 21 3 100 375 15
California 1 182 56 92 3,820 1
Florida 1 285 34 92 1,147 5
Louisiana 2 325 43 92 5,153 5
Texas 3 199 38 100 3,260 5
- - --------------------------------------------------------------------------------------------------------
Sub-Total 8 1,012 41 94 13,755 4
- - --------------------------------------------------------------------------------------------------------
Rehabilitation Facilities
Arizona 1 60 74 100 1,917 1
Arkansas 1 60 74 100 1,874 3
Colorado 1 64 65 100 1,525 3
Florida 1 108 95 100 2,250 14
Kansas 1 75 70 100 2,677 1
Texas 1 108 64 100 2,099 5
- - ---------------------------------------------------------------------------------------------------------
Sub-Total 6 475 75 100 12,342 6
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average
Number Private
Number of Beds/ Average Patient Annual Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (5) (2),(5) Interest Term
- - --------------------------- ---------- -------- ---------- -------- --------- ----------
(Thousands) (Years)
<S> <C> <C> <C> <C> <C> <C>
Physician Group Practice Clinics (4)
Arkansas 1 --- --- 100 2,534 12
California 1 --- --- 100 1,956 14
Tennessee 1 --- --- 100 520 11
- - ------------------------------------------------------------------------------------------------------------
Sub-Total 3 --- --- 100 5,010 13
- - ------------------------------------------------------------------------------------------------------------
Psychiatric Facility - Georgia 1 108 14 100 560 ---
- - ------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama (3) 1 84 --- --- --- ---
Arkansas 1 17 92 100 27 12
Arizona 1 97 77 100 490 10
California (3) 11 1,013 83 100 4,113 13
Colorado 1 98 95 100 667 1
Delaware 1 52 89 100 375 10
Florida (3) 6 425 73 98 1,555 12
Georgia 1 40 97 100 230 13
Idaho 1 117 18 100 726 15
Kansas 1 110 81 100 583 1
Louisiana (3) 5 449 100 100 1,616 9
Maryland 1 86 37 100 794 12
Michigan (3) 1 100 --- --- --- ---
Missouri 1 73 74 100 428 4
New Jersey 3 195 71 100 1,266 12
New Mexico 2 285 55 100 1,935 13
New York 1 74 84 100 410 10
North Carolina 3 229 95 100 1,306 12
Ohio 1 156 93 100 776 13
Oregon 1 58 99 81 378 11
Pennsylvania 3 232 92 100 1,600 11
Rhode Island 1 172 99 100 1,531 3
South Carolina 5 400 90 100 2,514 13
Texas (3) 16 1,373 70 100 7,659 13
Virginia (3) 1 90 --- --- --- 15
Washington 2 139 93 87 673 10
- - ------------------------------------------------------------------------------------------------------------
Sub-Total 72 6,164 78 99 31,652 12
- - ------------------------------------------------------------------------------------------------------------
Medical Office Buildings (4)
Alaska 1 --- --- 100 841 3
California 7 --- --- 100 6,493 1
Minnesota 1 --- --- 100 1,300 ---
Texas 9 --- --- 100 4,817 9
Utah 1 --- --- 100 557 12
- - ------------------------------------------------------------------------------------------------------------
Sub-Total 19 --- --- 100 14,008 4
- - ------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 244 24,094 78% 62% $ 141,979 8
============================================================================================================
</TABLE>
(1) Congregate Care and Assisted Living Centers are measured in units.
Physician Group Practice Clinics and Medical Office Buildings are measured
in square feet and encompass approximately 437,000 and 955,000 square feet,
respectively. All other facilities are measured by bed count.
(2) All revenues, including Medicare revenues but excluding Medicaid revenues,
are included in "Private Patient" revenues.
(3) Includes facilities under construction, except for average occupancy data.
(4) Physician Group Practice Clinics and Medical Office Building lessees have
use of the leased facilities for their own use or for the use of
sub-lessees.
(5) This information is derived from information provided by the Company's
Lessees.
<PAGE>
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1997, the Company owned an interest in 244 Properties
located in 40 states, which are operated by 59 operators. Listed below are the
Company's major operators and the annualized revenue and the percentage of
annualized revenue derived from such operators.
<TABLE>
<CAPTION>
Percentage
Annualized of Annualized
Operators Facilities Revenue Revenue
- - --------------------------------------------------------------------
<S> <C> <C> <C>
Vencor 51 $23,301,000 16%
HealthSouth 6 12,342,000 9
Emeritus 23 11,038,000 8
Beverly 25 9,915,000 7
Tenet 3 8,855,000 6
Columbia 12 8,202,000 6
</TABLE>
Lessees of 51 of the Company's 244 Properties are subsidiaries of Vencor
(formerly subsidiaries of The Hillhaven Corporation). Based upon public
reports filed by Vencor with the Securities and Exchange Commission ("SEC"),
Vencor's revenue and net income for the year ended December 31, 1997 were
approximately $3.1 billion and $130.9 million, respectively; and Vencor's total
assets and stockholders' equity as of December 31, 1997 were approximately
$3.3 billion and $905.4 million, respectively.
Through 1997, Tenet was financially responsible to the Company under a
guarantee through the primary lease term on four Properties, including the three
properties leased to subsidiaries of Tenet. In addition, Tenet has guaranteed
all of the properties leased to Vencor (see prior paragraph). However, as
discussed in more detail below, as part of an agreement reached between Tenet
and the Company during the fourth quarter, Tenet will no longer guarantee the
rental revenue on the Vencor facilities beyond the base term of the leases.
During 1997, one such lease expired and 14 more will expire during 1998. Tenet
is one of the nation's largest health care services companies, providing a broad
range of services through the ownership and management of health care
facilities. Based upon public reports filed by Tenet with the SEC for the six
months ended November 30, 1997, Tenet reported net operating revenue and net
income of approximately $4.8 billion and $254 million, respectively. At
November 30, 1997, Tenet's total assets and shareholders' equity were
approximately $12.1 billion and $3.5 billion, respectively. Based on public
reports filed by Tenet with the SEC, for the year ended May 31, 1997, Tenet
reported net operating revenue and net loss of approximately $8.7 billion and
$254 million, respectively, and total assets and shareholders' equity of
approximately $11.7 billion and $3.2 billion, respectively. For certain
additional financial data with respect to Tenet, see Appendix I, attached
hereto.
The Company leases 15 facilities to Beverly. In addition, it is providing
a mortgage loan to Beverly that is secured by 10 facilities. Based upon public
reports filed by Beverly with the SEC, Beverly's net operating revenue and net
income for the nine months ended September 30, 1997 were approximately $2.4
billion and $66.6 million, respectively. Beverly's total assets and
stockholder's equity as of September 30, 1997 were approximately $2.5 billion
and $1.1 billion, respectively. For the year ended December 31, 1996, Beverly
reported net operating revenue and net income of approximately $3.2 billion and
$50.3 million, respectively, and total assets and stockholder's equity of $2.5
billion and $861.1 million, respectively. According to a recent press release
issued by Beverly, Beverly's net operating revenue and net income for the year
ended December 31, 1997 were $3.2 billion and $58.6 million, respectively.
<PAGE>
The Company separately concluded agreements with Tenet and Beverly in the
fourth quarter of 1997 that result in their forbearance or waiver of certain
renewal and purchase options and related rights of first refusal on facilities
currently leased to Vencor and Beverly. Options and related rights of first
refusal on up to 51 facilities operated by Vencor and eight facilities operated
by Beverly are covered under the agreements. As part of these agreements,
continued ownership of the facilities will remain with the Company.
The Company leases six rehabilitation hospitals to HealthSouth, including
three rehabilitation hospitals previously operated by Horizon discussed below.
Based upon public reports filed by HealthSouth with the SEC, HealthSouth's
revenue and net income for the nine months ended September 30, 1997 were
approximately $2.2 billion and $231.8 million, respectively. HealthSouth's
total assets and stockholders' equity at September 30, 1997 were approximately
$4.2 billion and $1.9 billion, respectively. HealthSouth reported revenue and
net income for the year ended December 31, 1996 of approximately $2.4 billion
and $220.8 million, respectively. HealthSouth's total assets and stockholders'
equity as of December 31, 1996 were approximately $3.4 billion and $1.5 billion,
respectively. According to a recent press release issued by HealthSouth,
HealthSouth's revenue and net income for the year ended December 31, 1997 were
$3.0 billion and $330.6 million, respectively.
During 1997, the Company had leased eight facilities to Horizon/CMS
Healthcare Corporation ("Horizon"), including the three rehabilitation hospitals
described above, four long-term care facilities and one congregate care
facility. HealthSouth purchased Horizon in October 1997, and subsequently sold
Horizon's long-term and congregate care operations to Integrated Health Services
("IHS"). These operations included four long-term care facilities and one
congregate care facility which are now leased to IHS by the Company.
The Company holds Loans (defined below) which initially totaled $34.5
million and which are secured by one hospital and two medical office buildings
operated by a wholly owned subsidiary of Columbia. At December 31, 1997, the
Company has provided or has committed to provide approximately $44 million in
acquisition or construction funds for eight medical office buildings which are
leased by HealthTrust, a wholly owned subsidiary of Columbia. All of these
medical office buildings have been completed with the exception of some tenant
improvements. In addition, Columbia leases one other medical office building.
Based upon public reports filed by Columbia with the SEC, Columbia's revenue and
net income for the nine months ended September 30, 1997 were approximately $14.4
billion and $988 million, respectively; and Columbia's total assets and
stockholders' equity as of September 30, 1997 were approximately $23.1 billion
and $8.9 billion, respectively. For the year ended December 31, 1996, Columbia
reported revenue and net income of approximately $19.9 billion and $1.5 billion,
respectively, and total assets and stockholders' equity of approximately $21.3
billion and $8.6 billion, respectively. According to a recent press release
issued by Columbia, Columbia's revenue and net loss for the year ended December
31, 1997 were $18.8 billion and $305.0 million, respectively.
According to publicly filed SEC reports, Columbia recently has been the
subject of various significant government investigations regarding its
compliance with Medicare, Medicaid and similar programs. According to such SEC
reports filed by Columbia, while it is too early to predict the outcome of any
of the on-going investigations or the initiation of any additional
investigations, were Columbia to be found in violation of federal or state laws
relating to Medicare, Medicaid or similar programs, Columbia could be subject to
substantial monetary fines, civil and criminal penalties, and exclusion from
participation in the Medicare and Medicaid programs. Columbia's senior debt
ratings remain investment grade, but have recently been reduced by Moody's to
Baa2 and by Standard & Poor's to BBB.
<PAGE>
The Company leases 19 assisted living and congregate care facilities and
three long-term care facilities to Emeritus. The Company also provided a
mortgage loan on an assisted living facility operated by Emeritus. Based on
public reports filed by Emeritus with the SEC, total operating revenue and net
loss for the nine months ended September 30, 1997 were approximately $85.0
million and $14.8 million, respectively. Emeritus' total assets and
shareholders' equity at September 30, 1997 were $203.6 million and $12.7
million, respectively. For the year ended December 31, 1996, Emeritus reported
total operating revenue and net loss of approximately $68.9 million and $8.2
million, respectively, and total assets and shareholders' equity of $158 million
and $26.2 million respectively. Subsequent to September 30, 1997, Emeritus
raised $25 million in additional preferred equity. According to a recent press
release issued by Emeritus, Emeritus' total operating revenue and net loss for
the year ended December 31, 1997 were $117.8 million and $28.2 million,
respectively.
Vencor, Tenet, Beverly, HealthSouth, Columbia and Emeritus are subject to
the informational filing requirements of the Securities Exchange Act of 1934, as
amended, and accordingly file periodic financial statements on Form 10-K and
Form 10-Q with the Securities and Exchange Commission. All of the financial and
other information presented herein with respect to such companies was obtained
from such publicly filed reports except where indicated where certain additional
information was obtained from press releases issued by those companies.
LEASES AND LOANS
The initial base rental rates of the Leases entered into by the Company
during the three years ended December 31, 1997 have generally ranged from 9% to
12% per annum of the acquisition price of the related property. Rental rates
vary by lease, taking into consideration many factors, including, but not
limited to, creditworthiness of the Lessee, operating performance of the
facility, interest rates at the commencement of the lease or interest, location,
and type and physical condition of the facility. Most of the Leases provide for
additional rents which are based upon a percentage of increased revenue over
specific base period revenue of the leased Properties. Initial interest rates
on mortgage loans ("Loans") held by the Company and entered into during the
three years ended December 31, 1997 have generally ranged from 9% to 12% per
annum. Certain Leases and Loans have fixed rent or interest increases or rent or
interest increases based on inflation indices or other factors. Additional
Rental and Interest Income (see Note 2 to the Consolidated Financial Statements
in this Annual Report on Form 10-K) received for the years ended December 31,
1997, 1996 and 1995 were $21.1 million, $20.9 million and $18.1 million,
respectively. The primary or fixed terms of the Leases generally range from 10
to 15 years, and generally have one or more five-year (or longer) renewal
options. The average remaining base lease term on the Company's portfolio of
properties is approximately eight years; the average remaining term on the Loans
is approximately ten years.
Most Leases contain credit enhancements in the form of guarantees, as well
as grouped lease renewals, grouped purchase options, and cross default and cross
collateralization features that may be employed when multiple facilities are
leased to a single operator. Obligations under the Leases, in most cases, have
corporate parent or shareholder guarantees; 120 Leases and Loans covering 14
facilities are backed by irrevocable letters of credit from various financial
institutions which cover from three to eighteen months of Lease or Loan
payments. The Lessees and Mortgagors are required to renew such letters of
credit during the Lease or Loan term in amounts which may change based upon the
passage of time, improved operating cash flow or improved credit ratings.
Currently, the Company has approximately $39.6 million in irrevocable standby
letters of credit from financial institutions. The letters of credit relating
to an individual Lease or Loan may be drawn upon in the event of a Lessee's or
Mortgagor's default under terms of a Lease or Loan. Amounts available under
letters of credit change from time to time; such changes may be material.
<PAGE>
The Company believes that the credit enhancements discussed above provide
it with significant protection for its investment portfolio. The Company is
currently receiving rents and interest in a timely manner from all Lessees and
Mortgagors as provided under the terms of the Leases or Loans. Based upon
information provided to the Company by Lessees or Mortgagors, certain facilities
that are current with respect to monthly rents and mortgage payments are
presently underperforming financially. Individual facilities may underperform
as a result of inadequate Medicaid reimbursement, low occupancy, less than
optimal patient mix, excessive operating costs, other operational issues or
capital needs. Management believes that, even if these facilities remain at
current levels of performance, the Lease and Loan provisions contain sufficient
security to assure that material rental and mortgage obligations will continue
to be met for the remainder of the Lease or Loan terms. In the future it is
expected that the Company will have certain properties which the Lessees may
choose not to renew their Leases at existing rental rates (see Table below).
Many Lessees have the right of first refusal to purchase the Properties
during the Lease terms; many Leases provide one or more five-year (or longer)
renewal options at existing Lease rates and continuing additional rent formulas
although certain Leases provide for Lease renewals at fair market value.
Certain Lessees also have options to purchase the Properties, generally for fair
market value, and generally at the expiration of the primary Lease term and/or
any renewal term under the Lease. If options are exercised, many such
provisions require Lessees to purchase or renew several facilities together,
precluding the possibility of Lessees purchasing or renewing only those
facilities with the best financial outcomes. Thirty-nine Properties are not
subject to purchase options until 2008 or later, and an additional 103 leased
Properties do not have any purchase options.
A table recapping Lease expirations, mortgage maturities, properties
subject to purchase options and financial underperformance follows:
<TABLE>
<CAPTION>
Current Annualized Revenue of
-----------------------------------------------------
Properties Subject to
Lease Expirations,
Purchase Options and Properties Subject Possible Revenue
Mortgage Maturities to Purchase Options (Loss)/Gain at Lease
Year (1) (2) Expiration(3),(4)
----- --------------------- ------------------- ----------------------
(Amounts in thousands, except percentages) % Amount
------- ----------
<S> <C> <C> <C> <C>
1998 $ 10,369 $ 3,177 (0.6) $ (800)
1999 19,103 12,298 (1.9) (2,600)
2000 10,794 9,666 (1.2) (1,600)
2001 17,035 7,599 0.2 300
2002 9,705 1,514 0.5 700
Thereafter 67,601 59,356 -- --
--------- --------- ----- -------
$ 134,607 $ 93,610 (3.0) $(4,000)
========= ========= ===== =======
</TABLE>
<PAGE>
(1) This column includes the revenue impact by year and the total annualized
rental and interest income associated with the Properties subject to
Lessees' renewal options and/or purchase options and mortgage maturities.
(2) This column includes the revenue impact by year and the total annualized
rental and interest income associated with Properties subject to purchase
options. If a purchase option is exercisable at more than one date, the
convention used in the table is to show the revenue subject to the purchase
option at the earliest possible purchase date. Although certain purchase
option periods commenced in earlier years, lessees have not exercised their
purchase options as of this time. The total for this column (2) is a
component (subset) of column (1), the total current annualized revenue of
properties subject to lease expirations, purchase options and mortgage
maturities ($134,607,000).
(3) Based on current market conditions, management estimates that there could
be a revenue loss (compared to current rental rates) upon the expiration of
the current term of the Leases in the percentages and amounts shown in the
table for Lease Expirations. Total revenue of the Company has grown at a
compound annual growth rate of 8.6% in the past five years. The percentages
are computed by taking the possible revenue loss as a percentage of 1997
total revenue.
(4) The Company estimates that in addition to the possible reduction in income
from Lease expirations, it may also have a reduction of approximately
$400,000 in 1998 due to the reinvestment of cash received from mortgage
maturities and exercises of purchase option. This amount is calculated
based on current interest rate levels and is not estimated in years
subsequent to 1998 due to the unpredictable levels of interest rates
and their impact on Lessees' purchase options and mortgage maturities.
There are numerous factors that could have an impact on Lease renewals or
purchase options, including the financial strength of the Lessee, expected
facility operating performance, the relative level of interest rates and
individual Lessee financing options. Based upon management expectations of the
Company's continued growth, the facilities subject to renewal and/or purchase
options and mortgage maturities and any possible rent loss therefrom should
represent a smaller percentage of revenue in the year of renewal or purchase.
Each Lease is a triple net lease and the Lessee is responsible thereunder,
in addition to the minimum and additional rents, for all additional charges,
including charges related to non-payment or late payment of rent, taxes and
assessments, governmental charges with respect to the leased property and
utility and other charges incurred with the operation of the leased property.
Each Lessee is required, at its expense, to maintain its leased property in
good order and repair. The Company is not required to repair, rebuild or
maintain the Properties.
Each Lessee, at its expense, may make non-capital additions, modifications
or improvements to its leased property. All such alterations, replacements and
improvements must comply with the terms and provisions of the Lease, and become
the property of the Company or its affiliates upon termination of the Lease.
Each Lease requires the Lessee to maintain adequate insurance on the leased
property, naming the Company or its affiliates and any Mortgagees as additional
insureds. In certain circumstances, the Lessee may self-insure pursuant to a
prudent program of self-insurance if the Lessee or the guarantor of its Lease
obligations has substantial net worth. In addition, each Lease requires the
Lessee to indemnify the Company or its affiliates against certain liabilities in
connection with the leased property.
DEVELOPMENT PROGRAM
The Company has a number of "build-to-suit" type agreements that by their
terms require conversions, upon the completion of the development of the
facilities to lease agreements or mortgage loans. During the construction of
the projects, funds are advanced pursuant to draw requests made by the
developers in accordance with the terms and conditions of the applicable
development agreements which require site visits prior to each advancement of
funds.
<PAGE>
Since 1987, the Company has committed to the development of 44 facilities,
including five rehabilitation hospitals, 24 congregate care and assisted living
facilities, five long-term care facilities, seven medical office buildings and
three acute care hospitals representing an aggregate investment of approximately
$335 million. As of December 31, 1997, costs of approximately $248.1 million
have been funded and 32 facilities have been completed. The 32 completed
facilities comprise five rehabilitation hospitals, 13 congregate care and
assisted living facilities, five long-term care facilities, seven medical office
buildings and two acute care hospitals. The 12 remaining development projects
are scheduled for completion in 1998 and 1999. Simultaneously with the
commencement of each of the development programs and prior to funding, the
Company enters into a lease agreement with the developer/operator. The base
rent under the lease is generally established at a rate equivalent to a
specified number of basis points over the yield on the 10 year United States
Treasury note at the inception of the lease agreement.
The development program generally includes a variety of additional forms of
credit enhancement and collateral beyond those provided by the Leases. During
the development period, the Company generally requires additional security and
collateral in the form of more than one of the following: (a) irrevocable
letters of credit from financial institutions; (b) payment and performance
bonds; and (c) completion guarantees by either one or a combination of the
developer's parent entity, other affiliates or one or more of the individual
principals who control the developer. In addition, prior to any advance of
funds by the Company under the development agreement, the developer must provide
(a) satisfactory evidence in the form of an endorsement to the Company's title
insurance policy that no intervening liens have been placed on the property
since the date of the Company's previous advance; (b) a certificate executed by
the project architect that indicates that all construction work completed on the
project conforms with the requirements of the applicable plans and
specifications; (c) a certificate executed by the general contractor that all
work requested for reimbursement has been completed; and (d) satisfactory
evidence that the funds remaining unadvanced are sufficient for the payment of
all costs necessary for the completion of the project in accordance with the
terms and provisions of the agreement. As a further safeguard during the
development period, the Company generally will retain 10% of construction funds
incurred until it has received satisfactory evidence that the project will be
fully completed in accordance with the applicable plans and specifications. The
Company also monitors the progress of the development of each project and the
accuracy of the developer's draw requests by having its own in-house inspector
perform regular on-site inspections of the project prior to the release of any
requested funds.
FUTURE ACQUISITIONS
The Company anticipates acquiring additional health care related facilities
and leasing them to health care operators or investing in mortgages secured by
health care facilities.
TAXATION OF THE COMPANY
Management of the Company believes that the Company has operated in such a
manner as to qualify for taxation as a real estate investment trust ("REIT")
under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable year ended December 31, 1985, and the
Company intends to continue to operate in such a manner. No assurance can be
given that it has operated or will be able to continue to operate in a manner so
as to qualify or to remain so qualified. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretation thereof.
<PAGE>
If the Company qualifies for taxation as a REIT, it will generally not be
subject to Federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (i.e., at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will continue to
be subject to federal income tax under certain circumstances.
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable, but for Sections 856 through
860 of the Code, as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, actually or constructively, by five or
fewer individuals; and (vii) which meets certain other tests, described below,
regarding the amount of its distributions and 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 12 months, or during a proportionate part of
a taxable year of less than 12 months.
There presently are two gross income requirements and, with respect to
taxable years of the Company beginning before August 6, 1997, there was a third
gross income requirement. First, at least 75% of the Company's gross income
(excluding gross income from Prohibited Transactions as defined below) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property or from certain types of temporary
investment income. Second, at least 95% of the Company's gross income
(excluding gross income from Prohibited Transactions) for each taxable year must
be derived from income that qualifies under the 75% test and all other
dividends, interest and gain from the sale or other disposition of stock or
securities. Third, for taxable years of the Company beginning before August 6,
1997, short-term gains from the sale or other disposition of stock or
securities, gains from Prohibited Transactions and gains on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income for each such taxable year. A Prohibited
Transaction is a sale or other disposition of property (other than foreclosure
property) held for sale to customers in the ordinary course of business.
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 must be represented by real estate
assets (including stock or debt instruments held for not more than one year,
purchased with the proceeds of a stock offering or long-term (more than five
years) public debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
<PAGE>
The Company owns interests in various partnerships and limited liability
companies. In the case of a REIT that is a partner in a partnership or a member
of a limited liability company that is treated as a partnership under the Code,
Treasury Regulations provide that for purposes of the REIT income and asset
tests, the REIT will be deemed to own its proportionate share of the assets of
the partnership or limited liability company and will be deemed to be entitled
to the income of the partnership or limited liability company attributable to
such share. The ownership of an interest in a partnership or limited liability
company by a REIT may involve special tax risks, including the challenge by the
Internal Revenue Service of the allocations of income and expense items of the
partnership or limited liability company, which would affect the computation of
taxable income of the REIT, and the status of the partnership or limited
liability company as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. The Company also owns interests
in a number of subsidiaries which are intended to be treated as qualified real
estate investment trust subsidiaries (each a "QRS"). The Code provides that
such subsidiaries will be ignored for federal income tax purposes and all
assets, liabilities and items of income, deduction and credit of such
subsidiaries will be treated as assets, liabilities and such items of the
Company. If any partnership or subsidiary in which the Company owns an interest
were treated as a regular corporation (and not as a partnership or QRS) for
federal income tax purposes, the Company would likely fail to satisfy the REIT
asset tests described above and would therefore fail to qualify as a REIT. The
Company believes that each of the partnerships and subsidiaries in which it owns
an interest will be treated for tax purposes as a partnership or QRS,
respectively, although no assurance can be given that the Internal Revenue
Service will not successfully challenge the status of any such organization.
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "real estate
investment trust taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income, if
any (after tax), from foreclosure property, minus (B) the sum of certain items
of non-cash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year, if paid on or before the
first regular dividend payment date after such declaration and if the Company so
elects and specifies the dollar amount in its tax return. To the extent that
the Company does not distribute all of its net long-term capital gain or
distributes at least 95%, but less than 100%, of its "real estate investment
trust taxable income," as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its real estate
investment trust ordinary income for such year, (ii) 95% of its real estate
investment capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distributions over the amounts actually
distributed.
If the Company fails to qualify for taxation as a REIT in any taxable year,
and certain 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. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to the statutory relief. Failure to qualify for even one year could
substantially reduce distributions to stockholders and could result in the
Company's incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
<PAGE>
In addition, President Clinton's Fiscal 1999 budget proposal includes a
provision which, if enacted in its present form, would result in the immediate
taxation of all gain inherent in a C corporation's assets upon an election by
the corporation to become a REIT in taxable years beginning after January 1,
1999, and thus could effectively preclude the Company from reelecting to be
taxed as a REIT if there were a loss of its REIT status.
Distributions made to the Company's taxable U.S. stockholders out of
current or accumulated earnings and profits, unless designated as capital gain
distributions, will be taken into account by them as ordinary income. Such
distributions will not be eligible for the dividends received deductions for
corporations as long as the Company qualifies as a REIT. Distributions made by
the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. stockholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time the Company held the assets which produced such gains, and on certain
designations, if any, which may be made by the Company, such gains may be
taxable to non-corporate U.S. stockholders at a 20%, 25% or 28% rate. Corporate
stockholders may, however, be required to treat up to 20% of any such capital
gain dividend as ordinary income. Distributions in excess of current or
accumulated earnings and profits will not be taxable to a U.S. stockholder to
the extent that they do not exceed the adjusted basis of the stockholder's
shares. To the extent that such distributions exceed the adjusted basis of a
U.S. stockholder's shares they will be included in income as capital gain (as
described below with respect to the sale or exchange of the shares) assuming the
shares are held as a capital asset in the hands of the stockholder.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition, for tax years of
the Company beginning on or after January 1, 1998, to the extent designated by
the Company, a U.S. stockholder generally would (i) include its proportionate
share of such undistributed long-term capital gains in computing its long-term
capital gains in its return for its taxable year in which the last day of the
Company's taxable year falls (subject to certain limitations as to the amount so
includable), (ii) be deemed to have paid the capital gains tax imposed on the
Company on the designated amounts included in such stockholder's long-term
capital gains, (iii) receive a credit or refund for such amount of tax deemed
paid by it, (iv) increase the adjusted basis of its shares by the difference
between the amount of such includable gains and the tax deemed to have been paid
by it, and (v) in the case of a U.S. stockholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
In general, any gain or loss upon a sale or exchange of shares by a taxable
U.S. stockholder who has held such shares as a capital asset will be taxable as
long-term capital gain if the shares have been held for more than eighteen
months, mid-term capital gain if the shares have been held for more than one
year but not more than eighteen months, or short-term capital gain if the shares
have been held for one year or less; provided however, any loss on the sale or
exchange of shares that have been held by such stockholder for six months or
less will be treated as a long-term capital loss to the extent of distributions
from the Company required to be treated by such stockholder as long-term capital
gain.
<PAGE>
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above.
GOVERNMENT REGULATION
The health care industry is heavily regulated by federal, state and local
laws. The Company is affected by government regulation of the health care
industry in that (i) the Company receives rent and debt payments from Lessees
and Mortgagors whose financial ability to make such payments may be affected by
government regulations such as licensure, certification for participation in
government programs, and government reimbursement, and (ii) the Company's
additional rents are generally based on its Lessees' gross revenue from
operations.
The underlying value of the Company's facilities depends on the revenue and
profit that a facility is able to generate. Aggressive efforts by health
insurers and governmental agencies to limit the cost of hospital services and to
reduce utilization of hospital and other health care facilities may reduce
future revenues or slow revenue growth from inpatient facilities and shift
utilization from inpatient to outpatient facilities. See the Health Care Reform
section below.
The various federal and state governments have made detecting and
eliminating fraud and abuse in government programs a high priority. Various
laws and regulations have been passed or considered to eliminate fraud and
abuse. The goal of these laws and regulations is to prohibit, through the
imposition of criminal and civil penalties that may include exclusion from
reimbursement programs, payment arrangements that include compensation for
patient referrals. Violations of these laws may jeopardize a Lessee's and
Mortgagor's ability to operate a facility or to make rent and debt payments,
thereby potentially adversely affecting the Company.
The Company's lease arrangements with Lessees may also be subject to these
fraud and abuse laws. Contingent or percentage rent arrangements are subject to
federal and state laws and regulations governing illegal rebates and kickbacks
where the Company's co-investors are physicians or others in a position to refer
patients to the facilities. Although only limited interpretive or enforcement
guidance is available, the Company has structured its rent arrangements in a
manner which it believes complies with such laws and regulations.
Health care facilities are subject to licensure in order to operate.
Failure to obtain licensure or loss of licensure would prevent the facility from
operating which could adversely affect the facility operator's ability to make
rent and debt payments. Expansion, including the addition of new beds or
services or acquisition of medical equipment, and occasionally the contraction
of health care facilities, may be subject to state and local regulatory approval
through certificate of need ("CON") programs. States vary in their utilization
of CON controls. In addition, health care facilities are also subject to the
Americans with Disabilities Act and building and safety codes which govern
access, physical design requirements for facilities and building standards.
Health care facilities are also subject to a wide variety of federal, state
and local environmental and occupational health and safety laws and regulations
which affect facility operations. In addition, an owner of real property may be
liable in certain circumstances for the costs of remediation or removal of
hazardous or toxic substances, regardless of whether the owner of the real
property knew of or was responsible for the presence or disposal of the
hazardous or toxic substances. The Company's arrangements with its Lessees
generally require the Lessees to indemnify the Company for certain environmental
liabilities, but the scope of such indemnifications are limited and there is no
assurance that the Lessees would be able to fulfill their indemnification
obligations. The presence or improper disposal of hazardous or toxic substances
could adversely affect the value of the property which would affect the owner's
ability to sell or rent such property, or to use the property as collateral.
<PAGE>
Revenues of Lessees and Mortgagors are generally derived from payments for
patient care. Such payments are received from the federal Medicare program,
state Medicaid programs, private insurance carriers, health care service plans,
health maintenance organizations, preferred provider arrangements, self-insured
employers as well as directly from patients. Efforts to reduce costs by these
payors should be expected to continue, which may result in reduced or slower
growth in reimbursement for certain services provided by some of the Company's
Lessees and Mortgagors. In addition, the failure of any of the Company's
Lessees and Mortgagors to comply with various laws and regulations could
jeopardize their ability to be certified to participate in the Medicare and
Medicaid programs.
Medicare payments for psychiatric, long-term and rehabilitative care are
based on allowable costs plus a return on equity for proprietary facilities.
Medicare payments to acute care hospitals for inpatient services are made
pursuant to the Prospective Payment System ("PPS") under which a hospital is
paid a prospectively established rate based on the category of the patient's
diagnosis ("Diagnostic Related Groups" or "DRGs"). In 1991, Medicare began to
phase-in over a period of years, reimbursement to hospitals for capital-related
inpatient costs under PPS using a federal rate rather than the cost-based
reimbursement system previously used. DRG rates are subject to adjustment on an
annual basis as part of the federal budget reconciliation process.
Medicaid programs generally pay for acute, rehabilitative and psychiatric
care based on reasonable costs at fixed rates; long-term care facilities are
generally reimbursed using fixed daily rates. Both Medicare and Medicaid
payments are generally below retail rates for Lessee-operated facilities.
Increasingly, states have introduced managed care contracting techniques in the
administration of Medicaid programs. Such mechanisms could have the impact of
reducing utilization of and reimbursement to Lessee-operated facilities.
Third party payors in various states and areas base payments on costs,
retail rates or, increasingly, negotiated rates, including discounts from normal
charges, fixed daily rates and prepaid capitated rates.
LONG-TERM CARE FACILITIES. Regulation of long-term care facilities is
exercised primarily through the licensing of such facilities against a common
background established by federal law enacted as part of the Omnibus Budget
Reconciliation Act of 1987. Regulatory authorities and licensing standards
vary from state to state, and in some instances from locality to locality.
These standards are constantly reviewed and revised. Agencies periodically
inspect facilities, at which time deficiencies may be identified which must be
corrected as a condition to continued licensing or certification and
participation in government reimbursement programs. Depending on the nature of
such deficiencies, remedies can be routine or costly. Similarly, compliance
with regulations which cover a broad range of areas such as patients' rights,
staff training, quality of life and quality of resident care may increase
facility start-up and operating costs.
ACUTE CARE HOSPITALS. Acute care hospitals are subject to extensive
federal, state and local regulation. Acute care hospitals undergo periodic
inspections regarding standards of medical care, equipment and hygiene as a
condition of licensure. Various licenses and permits also are required for
purchasing and administering narcotics, operating laboratories and pharmacies
and the use of radioactive materials and certain equipment. Each of the
Lessees' facilities, the operation of which requires accreditation, is
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
<PAGE>
Acute care hospitals must comply with requirements for various forms of
utilization review. In addition, under PPS, each state must have a Peer Review
Organization carry out federally mandated reviews of Medicare patient
admissions, treatment and discharges in acute care hospitals.
PSYCHIATRIC AND REHABILITATION HOSPITALS. Psychiatric and rehabilitation
hospitals are subject to extensive federal, state and local legislation,
regulation, inspection and licensure requirements similar to those of acute care
hospitals. For psychiatric hospitals, there are specific laws regulating civil
commitment of patients and disclosure of information. Many states have adopted
a "patient's bill of rights" which sets forth certain higher standards for
patient care that are designed to decrease restrictions and enhance dignity in
treatment. Insurance reimbursement for psychiatric treatment generally is more
limited than for general health care.
PHYSICIAN GROUP PRACTICE CLINICS. Physician group practice clinics are
subject to extensive federal, state and local legislation and regulation. Every
state imposes licensing requirements on individual physicians and on facilities
and services operated by physicians. In addition, federal and state laws
regulate health maintenance organizations and other managed care organizations
with which physician groups may have contracts. Many states require regulatory
approval, including CONs, before establishing certain types of
physician-directed clinics, offering certain services or making expenditures in
excess of statutory thresholds for health care equipment, facilities or
programs. In connection with the expansion of existing operations and the entry
into new markets, physician clinics and affiliated practice groups may become
subject to compliance with additional regulation.
HEALTH CARE REFORM
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control costs,
the migration of patients from acute care facilities into extended care and home
care settings and the vertical and horizontal consolidation of health care
providers. The pressure to control health care costs intensified during 1994
and 1995 as a result of the national health care reform debate and continued
into 1997 as Congress attempted to slow the rate of growth of federal health
care expenditures as part of its effort to balance the federal budget. For
example, the Balanced Budget Act of 1997 adopted a variety of changes to the
Medicare and Medicaid programs which may have an effect upon the revenues of the
operators of Properties owned by the Company. These changes, which will be
implemented at various times, include (i) the adoption of the Medicare+Choice
program, which expands the Medicare beneficiaries' choices to include
traditional Medicare fee-for-service, private fee-for-service medical savings
accounts, various managed care plans, and provider sponsored organizations,
among others, (ii) the expansion and restriction of reimbursement for various
Medicare benefits, (iii) the freeze in hospital rates in 1998 and more limited
annual increases in hospital rates for 1999-2002, (iv) the adoption of a
prospective pay system for skilled nursing facilities, home health agencies,
hospital outpatient departments, and rehabilitation hospitals, (v) the repeal of
the Boren amendment in Medicaid so that states have the exclusive authority to
determine provider rates and providers have no federal right of action, (vi) the
reduction in Medicare disproportionate share payments to hospitals, and (vii)
the removal of the $150,000,000 limit on tax-exempt bonds for nonacute hospital
capital projects. In addition, the Balanced Budget Act of 1997 strengthens the
anti-fraud and abuse laws to provide for stiffer penalties for fraud and abuse
violations.
<PAGE>
In addition to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. Congress and state legislatures can be expected to continue to
review and assess alternative health care delivery systems and payment
methodologies and public debate of these issues can be expected to continue in
the future. These changes in the law, new interpretations of existing laws, and
changes in payment methodology may have a dramatic effect on the definition of
permissible or impermissible activities, the relative costs associated with
doing business and the amount of reimbursement by both government and other
third-party payors and may be applied retroactively. The ultimate timing or
effect of legislative efforts cannot be predicted and may impact the Company in
different ways.
Spending in the U.S. health care industry during 1997 was estimated by the
Congressional Budget Office at approximately $1.085 trillion, representing 13.4%
of Gross Domestic Product. The Company believes that government and private
efforts to contain or reduce health care costs will continue. These trends are
likely to lead to reduced or slower growth in reimbursement for certain services
provided by some of the Company's Lessees. The Company believes that the vast
nature of the health care industry, the financial strength and operating
flexibility of its operators and the diversity of its portfolio will mitigate
the impact of any such diminution in reimbursements. However, the Company
cannot predict whether any of the above proposals or any other proposals will be
adopted and, if adopted, no assurance can be given that the implementation of
such reforms will not have a material adverse effect on the Company's financial
condition or results of operations.
OBJECTIVES AND POLICIES
The Company is organized to invest in income-producing health care related
facilities. In evaluating potential investments, the Company considers such
factors as (1) the geographic area, type of property and demographic profile;
(2) the location, construction quality, condition and design of the property;
(3) the current and anticipated cash flow and its adequacy to meet operational
needs and lease obligations and to provide a competitive market return on equity
to the Company's investors; (4) the potential for capital appreciation, if any;
(5) the growth, tax and regulatory environment of the communities in which the
properties are located; (6) occupancy and demand for similar health facilities
in the same or nearby communities; (7) an adequate mix of private and government
sponsored patients; (8) potential alternative uses of the facilities; and (9)
prospects for liquidity through financing or refinancing.
There are no limitations on the percentage of the Company's total assets
that may be invested in any one property or partnership. The Investment
Committee of the Board of Directors may establish limitations as it deems
appropriate from time to time. No limits have been set on the number of
properties in which the Company will seek to invest, or on the concentration of
investments in any one facility or any one city or state. The Company acquires
its investments primarily for income.
At December 31, 1997, the Company has preferred stock and two classes of
debt securities which are senior to the Common Stock. The Company may, in the
future, issue additional debt or equity securities which will be senior to the
Common Stock. The Company has authority to offer shares of its capital stock in
exchange for investments which conform to its standards and to repurchase or
otherwise acquire its shares or other securities.
<PAGE>
The Company may incur additional indebtedness when, in the opinion of its
management and Directors, it is advisable. For short-term purposes the Company
from time to time negotiates lines of credit, or arranges for other short-term
borrowings from banks or otherwise. The Company may arrange for long-term
borrowings through public offerings or from institutional investors. Under its
Bylaws, the Company is subject to various restrictions with respect to
borrowings.
In addition, the Company may incur additional mortgage indebtedness on real
estate which it has acquired through purchase, foreclosure or otherwise. Where
leverage is present on terms deemed favorable, the Company invests in properties
subject to existing loans, or secured by mortgages, deeds of trust or similar
liens on the properties. The Company also may obtain non-recourse or other
mortgage financing on unleveraged properties in which it has invested or may
refinance properties acquired on a leveraged basis.
In July, 1990, the Company adopted a Rights Agreement whereby Company
stockholders received, for each share of Common Stock owned, one right to
purchase shares of Common Stock of the Company, or securities of an acquiring
entity, at one-half market value (the "Rights"). The Rights will be exercisable
only if and when certain circumstances occur, including the acquisition by a
person or group of 15% or more of the Company's outstanding common shares, or
the making of a tender offer for 30% or more of the Company's common shares.
The Rights are intended to protect stockholders of the Company from takeover
tactics that could deprive them of the full value of their shares.
The Company will not, without the prior approval of a majority of
Directors, acquire from or sell to any Director, officer or employee of the
Company, or any affiliate thereof, as the case may be, any of the assets or
other property of the Company.
The Company provides to its stockholders annual reports containing audited
financial statements and quarterly reports containing unaudited information.
The policies set forth herein have been established by the Board of
Directors of the Company and may be changed without stockholder approval.
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that are not historical factual
statements are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The statements include, among other
things, statements regarding the intent, belief or expectations of the Company
and its officers and can be identified by the use of terminology such as "may",
"will", "expect", "believe", "intend", "plan", "estimate", "should" and other
comparable terms or the negative thereof. In addition, the Company, through its
senior management, from time to time makes forward looking oral and written
public statements concerning the Company's expected future operations and other
developments. Shareholders and investors are cautioned that, while forward
looking statements reflect the Company's good faith beliefs and best judgment
based upon current information, they are not guarantees of future performance
and are subject to known and unknown risks and uncertainties. Actual results
may differ materially from the expectations contained in the forward looking
statements as a result of various factors. Such factors include (i) legislative,
regulatory, or other changes in the healthcare industry at the local, state or
federal level which increase the costs of or otherwise affect the operations of
the Company's Lessess; (ii) changes in the reimbursement available to the
Company's Lessees by governmental or private payors, including changes in
Medicare and Medicaid payment levels and the availability and cost of third
party insurance coverage; (iii) competition for tenants and mortgagors,
including with respect to new leases and mortgages and the renewal or roll-over
of existing leases; (iv) competition for the acquisition and financing of health
care facilities; (v) the ability of the Company's Lessees and Mortgagors to
operate the Company's properties in a manner sufficient to maintain or increase
revenues and to generate sufficient income to make rent and loan payments; and,
(vi) changes in national or regional economic conditions, including changes in
interest rates and the availability and cost of capital to the Company.
<PAGE>
Item 2. PROPERTIES
See Item 1. for details.
Item 3. LEGAL PROCEEDINGS
During 1997, the Company was not a party to any material legal
proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange. Set
forth below for the fiscal quarters indicated are the reported high and low
sales prices of the Company's Common Stock on the New York Stock Exchange.
<TABLE>
<CAPTION>
1997 1996 1995
High Low High Low High Low
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $37 1/8 $33 1/8 $35 1/2 $31 1/2 $30 3/8 $28
Second Quarter 35 3/4 32 33 7/8 31 32 3/4 29 1/2
Third Quarter 38 3/4 35 7/8 34 1/2 32 5/8 34 7/8 31 5/8
Fourth Quarter 40 5/16 37 5/8 37 1/2 32 1/2 35 1/4 31 1/2
</TABLE>
As of March 1, 1998 there were approximately 1,562 stockholders of record
and in excess of 40,000 beneficial stockholders of the Company's Common Stock.
It has been the Company's policy to declare quarterly dividends to the
holders of its shares of Common Stock so as to comply with applicable sections
of the Internal Revenue Code governing REITs. The cash dividends per share paid
by the Company on Common Stock are set forth below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
First Quarter $ .60 $ .56 $ .52
Second Quarter .61 .57 .53
Third Quarter .62 .58 .54
Fourth Quarter .63 .59 .55
</TABLE>
<PAGE>
On November 21, 1997, the Company completed the acquisition of a managing
member interest in Cambridge Medical Properties, LLC, a Delaware limited
liability company ("CMP"). In connection with the acquisition, Cambridge
Medical Center of San Diego, LLC ("Cambridge") made a capital contribution to
CMP of real property and improvements with an equity value (net of assumed debt)
of $6.5 million in exchange for $1 million in cash and 142,450 non-managing
member units of CMP ("LLC Units") (representing a minority interest in CMP).
CMP also issued 1,048,951 units of membership interest to the Company in
exchange for a capital contribution of $40.5 million.
Beginning on November 21, 1998, the LLC Units held by Cambridge may be
exchanged by Cambridge for Common Stock of the Company or, at the option of the
Company, for cash. The LLC Units are exchangeable for Common Stock on a one to
one basis (subject to certain adjustments, such as stock splits and reclass-
ifications) or for an amount of cash equal to then-current market value of the
shares of Common Stock into which the LLC Units may be exchanged. CMP relied on
the exemption provided by Section 4(2) of the Securities Act of 1933,
as amended, in connection with the issuance and sale of the LLC Units.
The Company has agreed to provide certain registration rights with respect to
the shares of Common Stock for which the LLC Units may be exchanged.
<PAGE>
PART II
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data with respect to the Company as
of and for the years ended December 31, 1997, 1996, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
--------------------------------------------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Revenue $128,503 $120,393 $105,696 $98,996 $92,549
Net Income Applicable to
Common Shares 63,542 60,641 80,266 49,977 44,087
Basic Earnings per Common Share 2.21 2.12 2.83 1.87 1.66
Diluted Earnings per Common Share 2.19 2.10 2.78 1.86 1.65
BALANCE SHEET DATA:
Total Assets 940,964 753,653 667,831 573,826 549,638
Debt Obligations 452,858 379,504 299,084 271,463 245,291
Stockholders' Equity 442,269 336,806 339,460 269,403 269,873
OTHER DATA:
Funds From Operations (1) 83,442 80,517 72,911 65,274 59,201
Cash Flows From Operating
Activities 87,544 90,585 71,164 65,519 62,707
Cash Flows Used In Investing
Activities 205,238 104,797 80,627 61,383 29,315
Cash Flows Provided By (Used
In) Financing Activities 118,967 15,023 8,535 (24,418) (8,832)
Dividends Paid 71,926 65,905 60,167 52,831 49,030
Dividends Paid Per Common Share 2.460 2.300 2.140 1.980 1.845
</TABLE>
- - ---------------------------
(1) The Company believes that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. The Company adopted the new
definition of FFO prescribed by the National Association of Real Estate
Investment Trusts (NAREIT). FFO is now defined as Net Income applicable to
common shares (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate depreciation, and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not, and is not
intended to, represent cash generated from operating activities in accordance
with generally accepted accounting principles, is not necessarily indicative of
cash available to fund cash needs and should not be considered as an alternative
to Net Income. FFO, as defined by the Company may not be comparable to
similarly entitled items reported by other REITs that do not define it in
accordance with the definition prescribed by NAREIT. FFO for the years
presented has been restated for the new definition. The following table
represents items and amounts being aggregated to compute FFO.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income Applicable to Common Shares $ 63,542 $ 60,641 $ 80,266 $ 49,977 $ 44,087
Real Estate Depreciation 22,667 20,700 16,691 15,829 15,636
Joint Venture Adjustments (720) (824) (496) (532) (522)
Gain on Sale of Real Estate Properties (2,047) --- (23,550) --- ---
------------------------------------------------------
$ 83,442 $ 80,517 $ 72,911 $ 65,274 $ 59,201
======================================================
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is in the business of acquiring health care facilities that it
leases on a long-term basis to health care providers. On a more limited basis,
the Company has provided mortgage financing on health care facilities. As of
December 31, 1997, the Company's portfolio of properties, including equity
investments, consisted of 244 facilities located in 40 states. These facilities
are comprised of 135 long-term care facilities, 72 congregate care and assisted
living facilities, 19 medical office buildings, eight acute care hospitals, six
freestanding rehabilitation facilities, three physician group practice clinics
and one psychiatric care facility. The gross acquisition price of the
properties, which includes joint venture acquisitions, was approximately
$1,112,000,000 at December 31, 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Net Income applicable to common shares for the year ended December 31, 1997
totaled $63,542,000 or $2.21 of basic earnings per common share and $2.19 of
diluted earnings per common share (refer to footnote 9 of the 1997 financial
statements) on revenue of $128,503,000. This compares to Net Income applicable
to common shares of $60,641,000 or $2.12 of basic earnings per common share and
$2.10 of diluted earnings per common share on revenue of $120,393,000 for the
corresponding period in 1996. Included in Net Income applicable to common
shares for the year ended December 31, 1997 is the Gain on Sale of Real Estate
Properties of $2,047,000 or $0.07 per share of common stock. Net Income
applicable to common shares for the year ended December 31, 1996 included
$2,061,000 or $0.07 per share of common stock from the payoff of two mortgage
loans that had been purchased at a discount in 1992.
Base Rental Income for the year ended December 31, 1997 increased by
$8,428,000 to $92,130,000. The majority of this increase was generated by rents
on $226,000,000 of equity investments made in 1997 and a full year of rents on
$117,000,000 of equity investments made in 1996. These amounts represent
significant increases over the acquisition activity of prior years. Higher
Additional Rental and Interest Income from the existing portfolio also
contributed to the increase in revenue. After adjusting for the mortgage loan
income for 1996 described earlier, Additional Rental and Interest Income
increased by $2,196,000 to $21,060,000 from the prior year. The increases noted
above were offset by a decrease in Interest and Other Income for the year ended
December 31, 1997 of $1,232,000 to $14,534,000, due in part to the pay-down or
payoff of certain mortgage loans.
Interest Expense for the year ended December 31, 1997 increased by
$2,191,000 to $28,592,000. The increase in Interest Expense is directly
related to the Company's higher borrowing levels resulting from the significant
increase in new investment activity. The increase in Depreciation/Non Cash
Charges of $2,740,000 to $25,889,000 for the year ended December 31, 1997, is
related to the new investments discussed above.
<PAGE>
The Company believes that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. Historical cost accounting for
real estate assets implicitly assumes that the value of real estate assets
diminishes predictably over time. Since real estate values instead have
historically risen and fallen with market conditions, presentations of operating
results for a real estate investment trust that uses historical cost accounting
for depreciation could be less informative. The term FFO was designed by the
Real Estate Investment Trust ("REIT") industry to address this problem.
The Company has adopted the definition of FFO prescribed by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined as Net
Income applicable to common shares (computed in accordance with generally
accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate depreciation, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect FFO on
the same basis.
Funds From Operations for the years ended December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Amounts in thousands)
<S> <C> <C>
Net Income Applicable to Common Shares $ 63,542 $ 60,641
Real Estate Depreciation 22,667 20,700
Joint Venture Adjustments (720) (824)
Gain on Sale of Real Estate Properties (2,047) ---
-------- --------
Funds From Operations $ 83,442 $ 80,517
======== ========
</TABLE>
FFO for the year ended December 31, 1997, increased $2,925,000 from the
comparable period in the prior year. The increases are attributable to increases
in Base Rental Income, Additional Rental and Interest Income, and offset by
increases in Interest Expense and decreases in Interest and Other Income all of
which are discussed in more detail above.
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to Net Income. FFO, as defined by the Company, may not be
comparable to similarly entitled items reported by other REITs that do not
define it exactly as the NAREIT definition.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Net Income applicable to common shares for the year ended December 31, 1996
totaled $60,641,000 or $2.12 of basic earnings per common share and $2.10 of
diluted earnings per common share on revenue of $120,393,000. This compares to
Net Income applicable to common shares of $80,266,000 or $2.83 of basic earnings
per common share and $2.78 of diluted earnings per common share on revenue of
$105,696,000 for the corresponding period in 1995. Included in Net Income
applicable to common shares and basic earnings per common share for the year
ended December 31, 1995 is the Gain on Sale of Real Estate Properties of
$23,550,000 or $0.83 per share. Net Income applicable to common shares for the
year ended December 31, 1996 was favorably influenced in the amount of
$2,061,000, or $0.07 per share, attributable to the payoff of two mortgage loans
which had been purchased at a discount by the Company in 1992.
<PAGE>
Base Rental Income for the year ended December 31, 1996 increased by
$14,985,000 to $83,702,000. The majority of this increase was generated by rents
on $117,000,000 of equity investments made in 1996 and a full year of rents on
$98,000,000 of equity investments made in 1995. The increase in revenue was
also assisted by higher Additional Rental and Interest Income from the existing
portfolio for the year ended December 31, 1996 of $2,847,000 to $20,925,000.
The growth in Base Rental Income and Additional Rental and Interest Income for
1996 was moderated by the sale and concurrent financing of certain real estate
properties in 1995, which converted the character of the returns on those assets
from rental income to interest income. The increases noted above were offset by
a decrease in Interest and Other Income for the year ended December 31, 1996 of
$2,394,000 to $15,766,000, due in part to the payoff of certain mortgage loans.
Interest Expense for the year ended December 31, 1996 increased by
$7,062,000 to $26,401,000. The increase in Interest Expense is primarily due
to the Company's February 1996 issuance of $115,000,000 6.5% Senior Notes due
2006, the proceeds of which were invested in new long-term investments. The
increase in Depreciation/Non Cash Charges of $3,941,000 to $23,149,000 for the
year ended December 31, 1996, is related to the new investments discussed above.
Funds From Operations for the years ended December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(Amounts in thousands)
<S> <C> <C>
Net Income Applicable to Common Shares $ 60,641 $ 80,266
Real Estate Depreciation 20,700 16,691
Joint Venture Adjustments (824) (496)
Gain on Sale of Real Estate Properties --- (23,550)
-------- --------
Funds From Operations $ 80,517 $ 72,911
======== ========
</TABLE>
FFO for the year ended December 31, 1996, increased $7,606,000 or 10.4%
from the comparable period in the prior year. The increases are attributable to
increases in Base Rental Income, Additional Rental and Interest Income, as
offset by increases in Interest Expense and decreases in Interest and Other
Income all of which are discussed in more detail above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed acquisitions through the sale of common stock,
preferred stock, the issuance of long-term debt, the assumption of mortgage
debt, the use of short-term bank lines and through internally generated cash
flows. Facilities under construction are generally financed by means of cash on
hand or short-term borrowings under the Company's existing bank lines. At the
completion of construction and commencement of the lease, short-term borrowings
used in the construction phase are generally refinanced with new long-term debt
or equity offerings.
On February 15, 1996, the Company issued $115,000,000 of 6.5% Unsecured
Senior Notes due 2006. During March and April 1997, the Company issued two ten
year $10,000,000 Medium Term Notes ("MTNs") with coupon rates of 7.30% and
7.62%, respectively. During June 1997, $12,500,000 in MTNs with coupon rates of
10.20% and 10.30% were redeemed. On September 26, 1997, the Company issued
$60,000,000, 7-7/8% Series A Cumulative Redeemable Preferred Stock. During
December 1997, the Company raised $55,000,000 of equity in a common stock
offering of 1,437,500 shares at $38.3125 per share. The net proceeds of
$57,810,000 and $51,935,000 from the preferred and common stock offerings,
respectively, were utilized to pay down short-term borrowings under the
Company's revolving lines of credit. At December 31, 1997, stockholders' equity
in the Company totaled $442,269,000 and the debt to equity ratio was 1.02 to 1.
For the year ended December 31, 1997, FFO (before interest expense) covered
Interest Expense 3.92 to 1.
<PAGE>
As of December 31, 1997, the Company had approximately $300,000,000
available under its existing shelf registration statements for the future
issuance of debt and equity securities and for its Series B and Series C MTN
programs. These amounts may be issued from time to time in the future based on
Company needs and then existing market conditions. On October 22, 1997, the
Company renegotiated its line of credit with a group of seven banks. The
Company now has two revolving lines of credit, one for $100,000,000 which
expires on October 22, 2002 and one for $50,000,000 which expires on October 22,
1998. The Company expects these agreements to be renewed for one further year
in October 1998. As of December 31, 1997, the Company also had $83,100,000
available on its $150,000,000 revolving lines of credit. The Company's Senior
Notes and Convertible Subordinated Notes have been rated investment grade by
debt rating agencies since 1986. Current ratings are as follows:
<TABLE>
<CAPTION>
Moody's Standard & Poor's Duff & Phelps
-------- ----------------- --------------
<S> <C> <C> <C>
Senior Notes Baa1 BBB+ A-
Convertible
Subordinated Notes Baa2 BBB BBB+
</TABLE>
Since inception in May 1985, the Company has recorded approximately
$594,213,000 in cumulative FFO. Of this amount, a total of $499,440,000 has
been distributed to stockholders as dividends on common and preferred stock.
The balance of $94,773,000 has been retained, and has been an additional source
of capital for the Company.
At December 31, 1997, the Company held approximately $40,000,000 in
irrevocable letters of credit from commercial banks to secure the obligations of
many lessees' lease and borrowers' loan obligations. The Company may draw upon
the letters of credit if there are any defaults under the leases and/or loans.
Amounts available under letters of credit change based upon facility operating
conditions and other factors and such changes may be material.
The Company has concluded a significant number of "facility rollover"
transactions in 1995, 1996 and 1997 on properties that have been under long-term
leases and mortgages. "Facility rollover" transactions principally include lease
renewals and renegotiations, exchanges, sales of properties, and, to a lesser
extent, payoffs on mortgage receivables.
Increase/(Decrease)
Year In FFO
- - ------- -------------------
1995 Completed 20 facility rollovers including the sale
of ten facilities with concurrent "seller financing"
for a gain of $23,550,000. $900,000
1996 Completed 20 facility rollovers including the sale of
nine facilities in Missouri and the exchange of the
Dallas Rehabilitation Institute for the HealthSouth
Sunrise Rehabilitation Hospital in Fort Lauderdale,
Florida. (1,200,000)
1997 Completed or agreed to complete 10 facility rollovers. (1,300,000)
<PAGE>
Through December 31, 2000, the Company has 62 more facilities that are
subject to lease expiration, mortgage maturities and purchase options (which
management believes may be exercised) representing approximately 30% of
annualized revenues. During 1997, the Company concluded agreements with Tenet
and Beverly that result in their forbearance or waiver of certain renewal and
purchase options and related rights of first refusal on up to 59 facilities
currently leased to Vencor and Beverly, of which 29 facilities have leases
expiring through December 31, 2000. As part of these agreements, continued
ownership of the facilities will remain with the Company. As a result of the
forbearance or waiver of these options, the Company believes that, based upon
recent operating results, it may be able to increase rents on approximately 12
facilities whose lease terms expire between 1998 and 2001; however, there can be
no assurance that the Company will be able to realize any increased rents. The
1998 lease expirations include 14, eight, and five long-term care facilities
leased to Vencor, Beverly and Integrated Health Services, respectively. The
Company has completed certain facility rollovers earlier than the scheduled
lease expirations or mortgage maturities and will continue to pursue such
opportunities where it is advantageous to do so.
Management believes that the Company's liquidity and sources of capital are
adequate to finance its operations as well as its future investments in
additional facilities.
YEAR 2000 ISSUE
Management believes it does not have any significant exposure to Year 2000
issues with respect to its own accounting and information systems. The Company
is discussing Year 2000 compliance requirements with its lessees, bankers and
others.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Balance Sheets as of December 31, 1997 and 1996
and its Consolidated Statements of Income, Stockholders' Equity, and Cash Flows
for the years ended December 31, 1997, 1996 and 1995, together with the Report
of Arthur Andersen LLP, Independent Public Accountants, are included elsewhere
herein. Reference is made to the "Index to Consolidated Financial Statements."
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company were as follows on March 18, 1997:
Name Age Position
- - ----------------- ------ --------------------------------------------
Kenneth B. Roath 62 Chairman, President
and Chief Executive Officer
James G. Reynolds 46 Executive Vice President
and Chief Financial Officer
Devasis Ghose 44 Senior Vice President - Finance and Treasurer
Edward J. Henning 45 Senior Vice President, General Counsel
and Corporate Secretary
Stephen R. Maulbetsch 41 Senior Vice President - Acquisitions
There is hereby incorporated by reference the information appearing under
the captions "Board of Directors and Officers" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Registrant's definitive
proxy statement relating to its Annual Meeting of Stockholders to be held on May
12, 1998.
Item 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the caption
"Executive Compensation" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on May 12, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
There is hereby incorporated by reference the information under the
captions "Principal Stockholders" and "Board of Directors and Officers" in the
Registrant's definitive proxy statement relating to its Annual Meeting of
Stockholders to be held on May 12, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the caption
"Certain Transactions" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on May 12, 1998.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a) Financial Statements:
1) Report of Independent Public Accountants
2) Financial Statements
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity - for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - for the years ended
December 31, 1997,1996 and 1995
Notes to Consolidated Financial Statements
Note - All schedules have been omitted because the required information is
presented in the financial statements and the related notes or because the
schedules are not applicable.
b) Reports on Form 8-K:
On December 5, 1997, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission regarding the acquisition of assets with
an aggregate purchase price of $103.5 million as required under Rule 3-14
of Regulation S-X.
On December 15, 1997, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission regarding the Purchase Agreement with
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BT Alex.
Brown and EVEREN Securities, Inc., pursuant to which the Company agreed to
issue and sell up to 1,437,500 shares of the Company's Common Stock.
c) Exhibits:
3.1 Articles of Restatement of the Company./1
3.2 Amendment and Restated Bylaws of the Company./2
3.3 Articles Supplementary of the Company Classifying 2,760,000 Shares
of 7-7/8% Series A Cumulative Redeemable Preferred Stock./3
4.1 Rights Agreement, dated as of July 5, 1990, between the Company
and Manufacturers Hanover Trust Company of California, as
Rights Agent./4
4.2 Indenture dated as of September 1, 1993 between the Company and
The Bank of New York, as Trustee, with respect to the Series B
Medium Term Notes and the Senior Notes due 2006. /5
4.3 Indenture dated as of April 1, 1989 between the Company and The Bank
of New York for Debt Securities. /6
4.4 Form of Fixed Rate Note. /6
4.5 Form of Floating Rate Note. /6
<PAGE>
4.6 Registration Rights Agreement dated November 21, 1997 between the
Company and Cambridge Medical Center of San Diego, LLC.
10.1 Amendment No. 1, dated as of May 30, 1985, to Partnership Agreement
of Health Care Property Partners, a California general partnership
("HCPP"), the general partners of which consist of the Company and
certain affiliates of Tenet Healthcare Corporation ("Tenet"). /7
10.2 Amended and Restated Limited Liability Company Agreement dated
November 21, 1997 of Cambridge Medical Properties, LLC.
10.3 Health Care Property Investors, Inc. Second Amended and Restated
Directors Stock Incentive Plan. /8*
10.4 Health Care Property Investors, Inc. Second Amended and Restated
Stock Incentive Plan. /8*
10.5 Health Care Property Investors, Inc. Second Amended and Restated
Directors Deferred Compensation Plan. /9*
10.6 Employment Agreement dated April 28, 1988 between the Company and
Kenneth B. Roath. /10*
10.7 First Amendment to Employment Agreement dated February 1, 1990
between the Company and Kenneth B. Roath. /11*
10.8 Health Care Property Investors, Inc. Executive Retirement Plan. /12*
10.9 Amendment No. 1 to Health Care Property Investors, Inc. Executive
Retirement Plan. /13*
10.10 Revolving Credit Agreement dated as of October 22, 1997 among Health
Care Property Investors, Inc., the banks named therein and The Bank
of New York. /14
10.11 $50,000,000 Revolving Credit Agreement dated as of October 22, 1997
among Health Care Property Investors, Inc., the banks named therein
and The Bank of New York. /14
10.12 Stock Transfer Agency Agreement between Health Care Property
Investors, Inc. and The Bank of New York dated as of July 1, 1996.
/15
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
1. This exhibit is incorporated by reference to exhibit 3.1 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
2. This exhibit is incorporated by reference to the exhibit numbered 3(ii) in
the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
3. This exhibit is incorporated by reference to the Company's Form 8-A (file
no. 001-08895) filed with the Commission on September 25, 1997.
<PAGE>
4. This exhibit is incorporated by reference to exhibit 1 to the Company's
Form 8-A filed with the Commission on July 17, 1990.
5. This exhibit is incorporated by reference to exhibit 4.1 to the Company's
Registration Statement on Form S-3 dated September 9, 1993.
6. These exhibits are incorporated by reference to exhibits 4.1, 4.2 and 4.3,
respectively, in the Company's Registration Statement on Form S-3 dated
March 20, 1989.
7. This exhibit is incorporated by reference to exhibit 10.1 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1985.
8. These exhibits are incorporated by reference to exhibits 10.43 and 10.44,
respectively, in the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1997 which are incorporated by reference to the Company's
Proxy Statement dated March 21, 1997.
9. This exhibit is incorporated by reference to exhibit number 10.45 filed as
part of the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997.
10. This exhibit is incorporated by reference to exhibit 10.27 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1988.
11. This exhibit is incorporated by reference to Appendix B of the Company's
Annual Report on Form 10-K for the year ended December 31, 1990.
12. This exhibit is incorporated by reference to exhibit 10.28 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1987.
13. This exhibit is incorporated by reference to exhibit 10.39 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
14. These exhibits are incorporated by reference to exhibit numbers 10.37 and
10.38, respectively, filed as part of the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997.
15. This exhibit is incorporated by reference to exhibit 10.40 in the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996.
* Management Contract or Compensatory Plan or Arrangement.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statement on Form S-8
Nos. 33-28483 (filed May 11, 1989):
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Securities Act
of 1933 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 expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1998
HEALTH CARE PROPERTY INVESTORS, INC.
(Registrant)
/s/ Kenneth B. Roath
-----------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature and Title
- - ----- -------------------
/s/ Kenneth B. Roath
March 30, 1998 ------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
(Principal Executive Officer)
/s/ James G. Reynolds
March 30, 1998 ------------------------------------------
James G. Reynolds, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Devasis Ghose
March 30, 1998 ------------------------------------------
Devasis Ghose, Senior Vice President-Finance
and Treasurer (Principal Accounting Officer)
<PAGE>
/s/ Paul V. Colony
March 30, 1998 ------------------------------------------
Paul V. Colony, Director
/s/ Robert R. Fanning, Jr.
March 30, 1998 ------------------------------------------
Robert R. Fanning, Jr., Director
/s/ Michael D. McKee
March 30, 1998 ------------------------------------------
Michael D. McKee, Director
/s/ Orville E. Melby
March 30, 1998 ------------------------------------------
Orville E. Melby, Director
/s/ Harold M. Messmer, Jr.
March 30, 1998 ------------------------------------------
Harold M. Messmer, Jr., Director
/s/ Peter L. Rhein
March 30, 1998 ------------------------------------------
Peter L. Rhein, Director
<PAGE>
EXHIBIT INDEX
Ex. 4.6 Registration Rights Agreement dated November 21, 1997 between the
Company and Cambridge Medical Center San Diego, LLC.
Ex. 10.2 Amended and Restated Limited Liability Company Agreement of Cambridge
Medical Properties, LLC.
Ex. 21.1 List of Subsidiaries
Ex. 23.1 Consent of Independent Public Accountants
Ex. 27.1 Financial Data Schedule
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income -
for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity -
for the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows -
for the years ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 -- F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Health Care Property Investors, Inc.:
We have audited the accompanying consolidated balance sheets of Health Care
Property Investors, Inc. (a Maryland corporation) as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health Care
Property Investors, Inc. as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 19, 1998
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par values)
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Real Estate Investments
Buildings and Improvements $ 837,857 $ 693,586
Accumulated Depreciation (170,502) (147,860)
--------- ---------
667,355 545,726
Construction in Progress 19,627 7,905
Land 99,520 70,103
--------- ---------
786,502 623,734
Loans Receivable 125,381 112,227
Investments in and Advances to Joint Ventures 14,241 6,531
Other Assets 10,756 8,350
Cash and Cash Equivalents 4,084 2,811
--------- ---------
TOTAL ASSETS $ 940,964 $ 753,653
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank Notes Payable $ 66,900 $ ---
Senior Notes Payable 275,023 267,470
Convertible Subordinated Notes Payable 100,000 100,000
Mortgage Notes Payable 10,935 12,034
Accounts Payable, Accrued Expenses and Deferred Income 23,492 19,739
Minority Interests in Joint Ventures 22,345 17,604
Commitments
Stockholders' Equity:
Preferred Stock, 7-7/8% Series A, 50,000,000
shares authorized; 2,400,000 outstanding as of
December 31, 1997. 57,810 ---
Common Stock, $1.00 par value; 100,000,000
shares authorized; 30,216,319 and 28,677,574
outstanding as of December 31, 1997 and 1996. 30,216 28,678
Additional Paid-In Capital 408,924 355,672
Cumulative Net Income 444,759 379,970
Cumulative Dividends (499,440) (427,514)
--------- ---------
Total Stockholders' Equity 442,269 336,806
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 940,964 $ 753,653
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Base Rental Income $ 92,130 $ 83,702 $ 68,717
Additional Rental and Interest Income 21,060 20,925 18,078
Interest and Other Income 14,534 15,766 18,160
Facility Operating Revenue 779 --- 741
--------- --------- ---------
128,503 120,393 105,696
--------- --------- ---------
EXPENSES
Interest Expense 28,592 26,401 19,339
Depreciation/Non Cash Charges 25,889 23,149 19,208
Other Expenses 7,414 6,826 6,034
Facility Operating Expenses 162 --- 720
--------- --------- ---------
62,057 56,376 45,301
--------- --------- ---------
INCOME FROM OPERATIONS 66,446 64,017 60,395
Minority Interests (3,704) (3,376) (3,679)
Gain on Sale of Real Estate Properties 2,047 --- 23,550
--------- --------- ---------
NET INCOME $ 64,789 $ 60,641 $ 80,266
DIVIDENDS TO PREFERRED STOCKHOLDERS 1,247 --- ---
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON SHARES $ 63,542 $ 60,641 $ 80,266
========= ========= =========
BASIC EARNINGS PER COMMON SHARE $ 2.21 $ 2.12 $ 2.83
========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 2.19 $ 2.10 $ 2.78
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 28,782 28,652 28,348
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------- ------------------------------
Par Additional Total
Number of Number of Value Paid In Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Capital Net Income Dividends Equity
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1994 $ --- 26,733 $ 26,733 $ 305,049 $ 239,063 $ (301,442) $ 269,403
Issuance of Common Stock, Net 1,805 1,805 47,613 49,418
Exercise of Stock Options 36 36 504 540
Net Income 80,266 80,266
Dividends Paid - Common Shares (60,167) (60,167)
- - --------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1995 28,574 28,574 353,166 319,329 (361,609) 339,460
Issuance of Common Stock, Net 30 30 1,044 1,074
Exercise of Stock Options 74 74 1,462 1,536
Net Income 60,641 60,641
Dividends Paid - Common Shares (65,905) (65,905)
- - --------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1996 28,678 28,678 355,672 379,970 (427,514) 336,806
Issuance of Preferred Stock, Net 2,400 57,810 57,810
Issuance of Common Stock, Net 1,468 1,468 51,589 53,057
Exercise of Stock Options 70 70 1,663 1,733
Net Income 64,789 64,789
Dividends Paid - Preferred Shares (1,247) (1,247)
Dividends Paid - Common Shares (70,679) (70,679)
- - --------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1997 2,400 $57,810 30,216 $30,216 $408,924 $444,759 $(499,440) $442,269
==========================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 64,789 $ 60,641 $ 80,266
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Real Estate Depreciation 22,667 20,700 16,691
Non Cash Charges 3,222 2,449 2,517
Joint Venture Adjustments (720) (824) (496)
Gain on Sale of Real Estate Properties (2,047) --- (23,550)
Changes in:
Operating Assets (2,457) (973) (1,286)
Operating Liabilities 2,090 8,592 (2,978)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 87,544 90,585 71,164
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate (200,032) (115,308) (83,345)
Proceeds from Sale of Real Estate Properties 8,624 --- 8,387
Advances Repaid by Joint Ventures --- 4,465 ---
Other Investments and Loans (13,830) 6,046 (5,669)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (205,238) (104,797) (80,627)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Bank Notes Payable 66,900 (31,700) 20,500
Repayment of Senior Notes (12,500) --- (75,000)
Issuance of Senior Notes 19,876 113,329 77,607
Cash Proceeds from Issuing Preferred Stock 57,810 --- ---
Cash Proceeds from Issuing Common Stock 53,667 1,536 47,109
Increase in Minority Interests 5,500 --- ---
Final Payments on Mortgages --- --- (637)
Periodic Payments on Mortgages (1,030) (1,324) (1,148)
Dividends Paid (71,926) (65,905) (60,167)
Other Financing Activities 670 (913) 271
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 118,967 15,023 8,535
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 1,273 811 (928)
Cash and Cash Equivalents, Beginning of Period 2,811 2,000 2,928
--------- --------- ---------
Cash and Cash Equivalents, End of Period $ 4,084 $ 2,811 $ 2,000
========= ========= =========
ADDITIONAL CASH FLOW DISCLOSURES
Interest Paid, Net of Capitalized Interest $ 28,832 $ 23,734 $ 21,783
========= ========= =========
Capitalized Interest $ 1,469 $ 1,017 $ 599
========= ========= =========
Mortgages Assumed on Acquired Properties $ --- $ --- $ 5,893
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Health Care Property Investors, Inc. ("HCPI"), a Maryland corporation, was
organized in March 1985 to qualify as a real estate investment trust ("REIT").
HCPI and its affiliated subsidiaries and partnerships (the "Company") were
organized to invest in health care related properties located throughout the
United States, including long-term care facilities, assisted living and
congregate care facilities, medical office buildings, acute care and
rehabilitation hospitals, physician group practice clinics and psychiatric
facilities. As of December 31, 1997, the Company owns interests in 244
properties (the "Properties") located in 40 states and operated by 59 health
care providers. The Properties include 135 long-term care facilities, 72
congregate care and assisted living centers, 19 medical office buildings, eight
acute care hospitals, six rehabilitation hospitals, three physician group
practice clinics and one psychiatric facility.
(2) SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE:
The Company records the acquisition of real estate at cost and uses the
straight-line method of depreciation for buildings and improvements over
estimated useful lives ranging up to 45 years. The Company periodically
evaluates its investments in real estate for potential impairment by comparing
its investment to the future cash flows expected to be generated from the
properties. If such impairments were to occur, the Company would write down its
investment in the property to estimated market value. The Company provides
accelerated depreciation on certain of its investments based primarily on an
estimation of net realizable value of such investments at the end of the primary
lease terms.
Acquisition, development and construction arrangements are accounted for as
real estate investments/joint ventures or loans based on the characteristics of
the arrangements.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS:
HCPI consolidates the accounts of its subsidiaries and certain general and
limited partnerships which are majority owned and controlled. All significant
intercompany investments, accounts and transactions have been eliminated.
INVESTMENTS IN JOINT VENTURES:
HCPI has investments in certain general partnerships in which it has a 50%
interest and serves as the managing general partner. Since the other general
partners in these general partnerships have significant rights relative to
acquisition, sale and refinancing of assets, HCPI accounts for these investments
using the equity method of accounting. HCPI also has an 80% interest in one
long-term care facility, and a 45% interest in a company that is building an
assisted living facility. These investments are accounted for using the equity
method. The accounting policies of these partnerships are substantially
consistent with those of HCPI.
<PAGE>
CASH AND CASH EQUIVALENTS:
Investments purchased with original maturities of three months or less are
considered to be cash and cash equivalents.
FEDERAL INCOME TAXES:
The Company has operated at all times so as to qualify as a REIT under
Sections 856 to 860 of the Internal Revenue Code of 1986. As such, the Company
is not taxed on its income which is distributed to stockholders. At December
31, 1997, the tax bases of the Company's net assets and liabilities are less
than the reported amounts by approximately $18,000,000. This net difference
includes a favorable tax depreciation adjustment attributable to an application
for change in accounting method, which is subject to review by the Internal
Revenue Service.
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial statements due to the
treatment required under the Internal Revenue Code of certain interest income
and expense items, depreciable lives, basis of assets and timing of rental
income.
ADDITIONAL RENTAL AND INTEREST INCOME:
Additional Rental and Interest Income includes the amounts in excess of the
initial annual Base Rental and Interest Income. Additional Rental and Interest
Income is generated by a percentage of increased revenue over specified base
period revenue of the Properties and increases based on inflation indices or
other factors. The Company has certain financing leases which allow the Company
to "put" the facilities to the lessees at lease termination for an amount
greater than the Company's initial investment. These amounts are accreted to
Additional Rental and Interest Income over the lease term. In addition, the
Company may receive payments from its lessees upon transferring or assignment of
existing leases; such amounts received are deferred and amortized over the
remaining term of the leases.
FACILITY OPERATIONS:
During 1997, the Company purchased 90 - 100 percent ownership interests in
seven medical office buildings ("MOBs") which are operated by independent
property management companies on behalf of the Company. These MOBs are leased
to multiple tenants under gross or triple net leases. Rental and any other
income attributable to these properties is recorded as Facility Operating Income
in the accompanying financial statements. Expenses related to the operation of
these MOBs are recorded as Facility Operating Expense.
Periodically, the Company operates facilities as a result of lease
terminations. The related operations of one such facility was included in the
Company's consolidated financial statements under Facility Operating Revenue and
Facility Operating Expenses for the period ended March 31, 1995, when the
facility was sold.
RECLASSIFICATION:
Reclassifications have been made for comparative financial statement
presentation.
<PAGE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
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 expense during the reporting period.
Actual results could differ from those estimates.
(3) REAL ESTATE INVESTMENTS
The Company was organized to make long-term equity-oriented investments
principally in operating, income-producing health care related properties. The
Company's equity investments have been structured as land and building
leasebacks.
Under the terms of the lease agreements, the Company earns fixed monthly
Base Rental Income and may earn periodic Additional Rental Income. At December
31, 1997, minimum future rental income from 208 non-cancelable operating leases
is expected to be approximately $103,100,000 in 1998, $88,000,000 in 1999,
$78,700,000 in 2000, $68,600,000 in 2001, $61,300,000 in 2002 and $449,900,000
in the aggregate thereafter.
During 1997, the Company purchased and leased or agreed to construct a
total of 33 facilities operated by 17 different operators for an aggregate
investment of approximately $224,000,000. These facilities include 21 assisted
living facilities, three acute care facilities, seven MOBs, one physician group
practice clinic and one long-term care facility.
Five of the MOBs were acquired through the purchase of a majority interest
in a company in which the non-managing partner purchased 142,450 non-managing
member units. These units are convertible to HCPI common stock on a one-for-one
basis beginning in November 1998.
The Company separately concluded agreements with Tenet Healthcare
Corporation ("Tenet") and Beverly Enterprises, Inc. ("Beverly") in the fourth
quarter of 1997 that result in their forbearance or waiver of certain renewal
and purchase options and related rights of first refusal on facilities currently
leased to Vencor, Inc. ("Vencor") and Beverly. Options and related rights of
first refusal on up to 51 facilities operated by Vencor and eight facilities
operated by Beverly are covered under the agreements. As part of these
agreements, continued ownership of the facilities will remain with the Company.
In April 1995, the Company sold 10 leased facilities to Beverly for
$43,450,000, resulting in a gain of $23,550,000. Under the terms of the sale
agreement, the Company received net cash proceeds of $8,387,000 and provided a
15 year mortgage with an initial interest rate of 10.4% to Beverly in the
initial amount of $34,760,000.
<PAGE>
The following tabulation lists the Company's total Real Estate Investments
at December 31, 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM CARE FACILITIES
California 16 $ 6,547 $ 26,092 $ 32,639 $ 11,532 $ ---
Florida 8 4,680 26,039 30,719 6,864 ---
Indiana 11 2,725 37,898 40,623 10,059 ---
Maryland 3 1,287 19,177 20,464 6,286 ---
Massachusetts 5 1,587 16,872 18,459 7,876 ---
North Carolina 8 1,552 26,959 28,511 5,180 5,885
Ohio 6 1,125 25,037 26,162 8,945 905
Tennessee 10 1,072 37,838 38,910 10,576 174
Texas 9 744 15,011 15,755 5,794 ---
Wisconsin 7 1,197 17,021 18,218 6,134 ---
Others (17 States) 31 6,240 78,747 84,987 30,861 1,086
- - -------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Care Facilities 114 28,756 326,691 355,447 110,107 8,050
- - -------------------------------------------------------------------------------------------------------------------------------
ACUTE CARE HOSPITALS
Tucson, Arizona 1 630 2,968 3,598 23 ---
Los Gatos, California 1 3,736 17,139 20,875 6,754 ---
Slidell, Louisiana 1 2,520 19,412 21,932 6,046 ---
Plaquemine, Louisiana 1 737 9,722 10,459 1,425 ---
Webster, Texas 1 890 5,167 6,057 37 ---
- - -------------------------------------------------------------------------------------------------------------------------------
Total Acute Care Hospitals 5 8,513 54,408 62,921 14,285 ---
- - -------------------------------------------------------------------------------------------------------------------------------
CONGREGATE CARE AND ASSISTED LIVING CENTERS
California 11 6,206 43,068 49,274 1,712 ---
Florida 5 2,320 12,680 15,000 1,919 ---
Louisiana 3 1,280 11,319 12,599 --- ---
New Jersey 3 719 12,061 12,780 531 ---
New Mexico 2 1,077 16,419 17,496 850 ---
North Carolina 2 420 9,733 10,153 701 ---
Pennsylvania 3 515 17,066 17,581 1,159 ---
South Carolina 5 1,045 30,836 31,881 1,954 ---
Texas 15 4,008 59,688 63,696 1,993 ---
Others (13 States) 14 6,658 54,248 60,906 5,641 810
- - -------------------------------------------------------------------------------------------------------------------------------
Total Congregate Care and Assisted Living Centers 63 24,248 267,118 291,366 16,460 810
- - -------------------------------------------------------------------------------------------------------------------------------
PSYCHIATRIC FACILITY, Georgia 1 738 3,181 3,919 1,585 ---
- - -------------------------------------------------------------------------------------------------------------------------------
REHABILITATION HOSPITALS
Peoria, Arizona 1 1,565 7,051 8,616 1,399 ---
Little Rock, Arkansas 1 709 9,599 10,308 1,665 ---
Colorado Springs, Colorado 1 690 8,346 9,036 1,390 ---
Fort Lauderdale, Florida 1 2,000 16,769 18,769 10,429 ---
Overland Park, Kansas 1 2,316 10,719 13,035 2,196 ---
San Antonio, Texas 1 1,990 13,124 15,114 4,251 ---
- - -------------------------------------------------------------------------------------------------------------------------------
Total Rehabilitation Hospitals 6 $ 9,270 $ 65,608 $ 74,878 $ 21,330 $ ---
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MEDICAL OFFICE BUILDINGS
California 6 $ 16,681 $ 42,484 $ 59,165 $ 171 $ ---
Minnesota 1 117 12,703 12,820 --- ---
Texas 8 1,966 40,100 42,066 3,935 ---
Utah 1 276 5,237 5,513 262 ---
- - -------------------------------------------------------------------------------------------------------------------------------
Total Medical Office Buildings 16 19,040 100,524 119,564 4,368 ---
- - -------------------------------------------------------------------------------------------------------------------------------
PHYSICIAN GROUP PRACTICE CLINICS 3 8,955 39,954 48,909 2,367 2,075
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REAL ESTATE OWNED 208 99,520 857,484 957,004 170,502 10,935
- - -------------------------------------------------------------------------------------------------------------------------------
Partnership Investments,
Including All Partners' Assets 7 --- --- 35,124 --- ---
Financing Leases (See Note 6) 5 --- --- 18,056 --- ---
Mortgage Loans Receivable (See Note 6) 24 --- --- 101,729 --- ---
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 244 $ 99,520 $857,484 $1,111,913 $170,502 $ 10,935
===============================================================================================================================
</TABLE>
(4) MAJOR OPERATORS
Listed below are the Company's major operators which represent five percent
or more of the Company's revenue, the investment in Properties operated by those
health care providers, and the percentage of total revenue from these operators
for the years ended December 31, 1997, 1996 and 1995. All of these operators
are publicly traded companies and are subject to the informational filing
requirements of the Securities and Exchange Act of 1934, as amended, and
accordingly file periodic financial statements on Form 10-K and Form 10-Q with
the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Percentage of Total
Annualized Revenue
Investment at Year Ended December 31,
December 31, 1997 1997 1996 1995
--------------------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Vencor, Inc. $ 156,398 16% 19% 23%
HealthSouth Corporation 74,878 9 5 6
Emeritus Corporation 115,388 8 7 3
Beverly Enterprises, Inc. 66,491 7 8 9
Columbia/HCA Healthcare Corp. 68,610 6 7 7
Tenet Healthcare Corporation 53,781 6 6 7
Horizon/CMS Healthcare Corp. --- -- 8 9
----------- ------ ------ ------
$ 535,546 52% 60% 64%
=========== ====== ====== ======
</TABLE>
<PAGE>
Certain of these facilities have been subleased or assigned to other
operators but with the original lessee remaining liable on the leases.
Tenet guaranteed 26% of the Company's total revenue for the year ended
December 31, 1997 represented by the leases of two acute care hospitals operated
by its subsidiaries, 51 long-term care and assisted living facilities leased by
subsidiaries of Vencor, one rehabilitation hospital operated by a subsidiary of
HealthSouth Corporation ("HealthSouth") and one psychiatric care facility
operated by another health care provider. As part of the agreements discussed
above in Note 3, Tenet will no longer guarantee the revenue on the Vencor
facilities as those leases expire beginning in 1998. During 1997 one such lease
expired, and 14 more will expire in 1998. During 1997, the Vencor facilities
represented 70% of the revenue guaranteed by Tenet, or 16% of the Company's
total revenue.
During 1997, HealthSouth acquired Horizon/CMS Healthcare Corporation in a
stock-for-stock merger. HealthSouth retained the rehabilitation hospital
division, and sold the long-term care division to Integrated Health Services,
Inc.
(5) INVESTMENTS IN JOINT VENTURES
The Company is the general partner and has a 50% equity interest in five
partnerships that each lease a congregate care center. During December 1997,
the Company purchased an 80% interest in a California long-term care facility
and a 45% interest in a Michigan assisted living facility.
Combined summarized financial information of the joint ventures follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- ----------
(Amounts in thousands)
<S> <C> <C>
Real Estate Investments, Net $ 31,224 $ 24,401
Other Assets 2,627 2,369
--------- ---------
Total Assets $ 33,851 $ 26,770
========= =========
Notes Payable to Others $ 19,348 $ 19,880
Accounts Payable 545 439
Other Partners' Deficit (283) (80)
Investments and Advances from the Company, Net 14,241 6,531
--------- ---------
Total Liabilities and Partners' Capital $ 33,851 $ 26,770
========= =========
Rental and Interest Income $ 5,423 $ 4,938
========= =========
Net Income $ 1,741 $ 935
========= =========
Company's Equity in Joint Venture Operations $ 992 $ 634
========= =========
Distributions to the Company $ 916 $ 692
========= =========
</TABLE>
<PAGE>
The Company was the general partner and a 50% equity interest owner in
Health Care Investors I ("HCI"), a limited partnership that was created in 1985
to invest in nine long-term care facilities in Missouri and one long-term care
facility each in Illinois and Arkansas. A Director of the Company was a 15.185%
limited partner in this partnership since inception. In January 1996,
the Company acquired the partnership interests of all of the limited partners
and sold the nine Missouri facilities for $20,675,000. Outstanding mortgage
loans of $15,180,000, which were secured by the partnership assets, were repaid.
The Company now has a 100% investment in the two remaining long-term care
facilities.
(6) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- ----------
(Amounts in thousands)
<S> <C> <C>
Mortgage Loans (See below) $ 101,729 $ 94,424
Financing Leases 18,056 17,136
Other Loans 5,596 667
--------- ---------
Total Loans Receivable $125,381 $ 112,227
========= =========
</TABLE>
The following is a summary of Mortgage Loans Receivable at December 31,
1997:
<TABLE>
<CAPTION>
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- - -------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
2001 2 Monthly payments from $112,500 to $32,000 $21,031
$337,500 including average interest of 12.62%
secured by an acute care hospital and three
medical office buildings leased and operated
by Columbia/HCA Healthcare Corp.
2003 1 Monthly payment of $96,800 including 11,390 10,974
interest of 9.86% on an acute care hospital
located in Florida and operated by
Tenet.
2009 2 Monthly payments from $40,900 to $10,228 $ 9,953
$63,000 including current interest of 11.41%
to 12.01% on one medical office building
and a long-term care facility both located
in California.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- - -------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
2010 1 Monthly payments of $330,500 including $ 34,760 $ 34,090
current interest of 10.60% secured
by a congregate care facility and nine long-
term care facilities operated by Beverly.
2024 1 Construction loan (will convert to mortgage loan) 8,214 8,214
on acute care facility in Texas to be operated by
MedCath, Inc.; current interest rate of 10.5%.
1998-2031 7 Monthly payments from $9,900 to $51,500 including 19,062 17,467
current interest rates from 9.14% to 11.5% on
various facilities in various states.
--- -------- --------
Totals 14 $115,654 $101,729
=== ======== ========
</TABLE>
At December 31, 1997, minimum future principal payments from non-cancelable
Mortgage Loans are expected to be approximately $7,578,000 in 1998, $4,050,000
in 1999, $4,561,000 in 2000, $12,876,000 in 2001, $3,440,000 in 2002 and
$69,224,000 in the aggregate thereafter.
(7) NOTES PAYABLE
SENIOR NOTES PAYABLE:
The following is a summary of Senior Notes outstanding at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
Year Prepayment
Issued 1997 1996 Interest Rate Maturity Without Penalty
- - ------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
1989 $ 10,000 $ 10,000 10.56% 1999 None
1990 --- 12,500 10.20-10.30% 2000 1997-2000
1991 22,500 22,500 9.44-9.88% 2001 1998-2001
1993 10,000 10,000 8.00% 2003 2000-2003
1993 6,000 6,000 6.10-6.70% 1998-2003 None
1994 15,000 15,000 8.81-9.10% 1999-2004 None
1995 58,000 58,000 7.03-8.87% 2000-2005 None
1995 20,000 20,000 6.62-9.00% 2010-2015 2002-2015
1996 115,000 115,000 6.5% 2006 None
1997 20,000 --- 7.30-7.62% 2007 None
--------- ---------
276,500 269,000
Less: Unamortized
Original Issue
Discount (1,477) (1,530)
--------- ----------
$ 275,023 $ 267,470
========= ==========
</TABLE>
<PAGE>
The weighted average interest rate on the Senior Notes was 7.5% and 7.7%
for 1997 and 1996, respectively, and the weighted average balance of the Senior
Note borrowings was approximately $277,646,000 and $254,625,000 during 1997 and
1996, respectively. Original issue discounts are amortized over the term of the
Senior Notes. If held to maturity, the first required Senior Note maturities
would be $5,000,000 in 1998, $15,000,000 in 1999, $10,000,000 in 2000,
$27,500,000 in 2001, $17,000,000 in 2002 and $202,000,000 in the aggregate
thereafter.
CONVERTIBLE SUBORDINATED NOTES PAYABLE:
On November 8, 1993, the Company issued $100,000,000 6% Convertible
Subordinated Notes due November 8, 2000. These Notes are prepayable without
penalty after November 8, 1998. The Notes are convertible into shares of common
stock of the Company at a conversion price of $37.806. A total of 2,645,083
shares of common stock have been reserved for such issuance.
MORTGAGE NOTES PAYABLE:
At December 31, 1997, Mortgage Notes Payable were $10,935,000 secured by 12
health care facilities with a net book value of approximately $35,713,000.
Interest rates on the Mortgage Notes ranged from 5.87% to 10.63%. Required
principal payments on the Mortgage Notes range from $815,000 to $1,382,000 per
year in the next five years and $5,200,000 in the aggregate thereafter.
BANK NOTES:
The Company has two unsecured revolving credit lines aggregating
$150,000,000 with certain banks. The credit lines for $50,000,000 and
$100,000,000 expire on October 22, 1998 and October 22, 2002, respectively, and
bear a total annual facility fee of 0.15% and 0.20%, respectively. These
agreements provide for interest at the Prime Rate, the London Interbank Offered
Rate ("LIBOR") plus 0.40% (LIBOR plus 0.45% for the $50,000,000 credit line) or
at a rate negotiated with each bank at the time of borrowing. Interest rates
incurred by the Company ranged from 7.13% to 5.38%, and 6.5% to 5.43%, on
maximum short-term bank borrowings of $87,400,000 and $84,000,000 for 1997 and
1996, respectively. The weighted average interest rates were approximately
5.91% and 5.77% on weighted average short-term bank borrowings of $39,976,000
and $31,841,000 for the same respective periods.
(8) PREFERRED STOCK
On September 26, 1997, the Company issued 2,400,000 shares of 7-7/8% Series
A Cumulative Redeemable Preferred Stock ("Preferred Stock") which generated net
proceeds of $57,810,000 (net of underwriters' discount and other offering
expenses). Dividends on the Preferred Stock are payable quarterly in arrears in
March, June, September and December, commencing with the quarter ended December
31, 1997. The Preferred Stock is not redeemable prior to September 30, 2002.
After this date, the Preferred Stock may be redeemed at anytime for cash of $25
per share (or $60,000,000 in the aggregate) at the option of the Company. The
Preferred Stock has no stated maturity, will not be subject to any sinking fund
or mandatory redemption and is not convertible into any other securities of the
Company.
<PAGE>
(9) EARNINGS PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accountings Standards
("FASB") No. 128, Earnings Per Share, effective December 15, 1997. As a result,
both basic and diluted earnings per common share are presented for each of the
years ended December 31, 1997, 1996 and 1995. In prior years, only basic
earnings per common share data was disclosed. Basic earnings per common share
is computed by dividing net income applicable to common shares by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share is calculated using only dilutive securities. Options
to purchase shares of common stock which had an exercise price in excess of the
average market price during the period were not included because they are not
dilutive. The convertible debt was included only in 1995 when the effect on
earnings per common share was dilutive.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
<S> <C> <C> <C>
Net Income $ 64,789,000
Less: Preferred Stock Dividends (1,247,000)
------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 63,542,000 28,782,000 $ 2.21
---------
Dilutive Options (See Note 11) --- 196,000
Non Managing Member Units (See Note 3) 40,000 16,000
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 63,582,000 28,994,000 $ 2.19
---------
Year Ended December 31, 1996
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
<S> <C> <C> <C>
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $60,641,000 28,652,000 $ 2.12
----------
Dilutive Options (See Note 11) --- 174,000
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $60,641,000 28,826,000 $ 2.10
----------
Year Ended December 31, 1995
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
<S> <C> <C> <C>
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $80,266,000 28,348,000 $ 2.83
----------
Dilutive Options (See Note 11) --- 166,000
Interest and Amortization applicable to
Convertible Debt (See Note 7) 6,397,000 2,645,000
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $86,663,000 31,159,000 $ 2.78
----------
</TABLE>
<PAGE>
(10) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. The carrying amount for Cash and Cash Equivalents approximates fair
value because of the short-term maturity of those instruments. Fair values for
Mortgage Loans Receivable and long-term debt are based on the estimates of
management and on rates currently prevailing for comparable loans and
instruments of comparable maturities, and are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- ---------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans Receivable $101,729 $111,000 $ 94,424 $103,000
Long-Term Debt $385,958 $396,000 $379,504 $377,000
</TABLE>
(11) STOCK INCENTIVE PLANS
Directors and Officers and key employees of the Company are eligible to
participate in the Company's Directors' Stock Incentive Plan or the Company's
Amended Stock Incentive Plan ("Plans"). A summary of the status of the
Company's Plans at December 31, 1997, 1996 and 1995 and changes during the
years then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Stock Incentive Plan (000's) Price (000's) Price (000's) Price
- - -------------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 896 $28 717 $25 665 $24
Granted 230 36 263 34 88 29
Exercised (70) 26 (74) 19 (36) 15
Forfeited -- -- (10) 29 -- --
------- ------- -------
Outstanding, end of year 1,056 30 896 28 717 25
Exercisable at end of year 543 26 423 25 327 23
Weighted average fair value
of options granted $4.49 $3.66 $9.73
Incentive Stock Awards
- - --------------------------
Issued 32 34 79
Canceled (1) (4) --
</TABLE>
The incentive stock awards ("Awards") are granted at no cost to employees.
The Awards generally vest and are amortized over five-year periods. The stock
options become exercisable on either a one-year or a five-year schedule after
the date of the grant.
<PAGE>
The following table describes the options outstanding as of December 31,
1997.
<TABLE>
<CAPTION>
Weighted
Average Options
Total Options Weighted Contractual Life Exercisable At Weighted
Outstanding Exercise Average Remaining December 31, 1997 Average
(000's) Price Exercise Price (Years) (000's) Exercise Price
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
47 $12 - $20 $16 3 47 $16
526 $22 - $30 $26 6 421 $26
483 $32 - $38 $35 9 75 $34
------ -----
1,056 543
===== =====
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following ranges of assumptions:
risk-free interest rates from 5.75% to 7.75%; expected dividend yields from
5.54% to 7.09% percent; expected lives of 10 years; and expected volatility of
.18% to .20%.
The Company accounts for stock options under Accounting Principles Board
Opinion 25 ("APB25"), Accounting for Stock Issued to Employees, which is
permitted under FASB Statement No. 123 ("FASB 123"), Accounting for Stock Based
Compensation, issued in 1995. Had compensation cost for the Plans been
determined instead in accordance with rules set out in FASB 123, the Company's
Net Income and Basic Earnings Per Common Share on a proforma basis would have
remained at existing levels.
During the years ended December 31, 1997 and 1996, respectively, the
Company made loans totaling $188,000 and $392,000 secured by stock in the
Company to Directors, Officers and key employees. The interest rate charged is
based on the prevailing applicable federal rate as of the inception of the loan.
Loans secured by stock totaling $855,000 and $667,000 were outstanding at
December 31, 1997 and 1996, respectively.
<PAGE>
(12) DIVIDENDS
Common stock dividend payment dates are scheduled approximately 50 days
following each calendar quarter. A dividend of $0.64 per share was declared by
the Board of Directors on January 27, 1998, to be paid on February 20, 1998 to
stockholders of record on February 9, 1998.
In order to qualify as a REIT, the Company must, among other requirements,
distribute at least 95% of its taxable income to its stockholders.
Per share common stock dividend payments made by the Company to its
stockholders were characterized in the following manner for tax purposes:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Ordinary Income $2.3750 $2.1250 $1.3450
Capital Gain Income .0850 .1750 .7950
-------- -------- --------
Total Dividends Paid $2.4600 $2.3000 $2.1400
======== ======== ========
</TABLE>
Dividends on the 7-7/8% preferred stock are paid on the last day of the
quarter. The $.5195 per share preferred dividend payment made on December 31,
1997 was characterized as $.5045 ordinary income and $.0150 capital gain income.
(13) COMMITMENTS
As of March 30, 1998, the Company has outstanding commitments on closed
and to-be-closed development transactions of approximately $90 million and
$30 million, respectively. The Company is also committed to acquire
approximately $98 million of existing health care real estate. The Company
expects that a significant portion of these commitments will be funded; however,
experience suggests that some committed transactions will not close.
Transactions do not close for various reasons including unsatisfied pre-closing
conditions, competitive financing sources, final negotiation differences and the
operator's inability to obtain required internal or governmental approvals.
<PAGE>
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
1997 March 31 June 30 September 30 December 31
- - -------------------------- -------- -------- ------------ ------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $ 30,867 $ 31,751 $ 32,307 $ 33,578
Net Income Applicable To
Common Shares $ 17,119(1) $ 15,394 $ 15,553 $ 15,476
Dividends Paid Per Common
Share $ .60 $ .61 $ .62 $ .63
Basic Earnings Per Common
Share $ .60(1) $ .54 $ .54 $ .53
Diluted Earnings Per
Common Share $ .59(1) $ .53 $ .54 $ .53
1996
Revenue $ 28,943 $ 30,586 $ 29,877 $ 30,987
Net Income Applicable To
Common Shares $ 14,601 $ 15,591 $ 15,028 $ 15,421
Dividends Paid Per Common
Share $ .56 $ .57 $ .58 $ .59
Basic Earnings Per Common
Share $ .51 $ .54 $ .52 $ .55
Diluted Earnings Per
Common Share $ .51 $ .54 $ .52 $ .53
</TABLE>
(1) Includes $2,047 or $0.07 per common share for Gain on Sale of Real Estate
Properties.
<PAGE>
APPENDIX I
TENET HEALTHCARE CORPORATION
SET FORTH BELOW IS CERTAIN CONDENSED FINANCIAL DATA OF TENET HEALTHCARE
CORPORATION ("TENET") WHICH IS TAKEN FROM TENET'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED MAY 31, 1997 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION") UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"), AND THE TENET QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED NOVEMBER 30, 1997 AS FILED WITH THE COMMISSION.
The information and financial data contained herein concerning Tenet was
obtained and has been condensed from Tenet's public filings under the Exchange
Act. The Tenet financial data presented includes only the most recent interim
and fiscal year end reporting periods. The Company can make no representation
as to the accuracy and completeness of Tenet's public filings but has no reason
not to believe the accuracy and completeness of such filings. It should be
noted that Tenet has no duty, contractual or otherwise, to advise the Company of
any events which might have occurred subsequent to the date of such publicly
available information which could affect the significance or accuracy of such
information.
Tenet is subject to the information filing requirements of the Exchange
Act, and, in accordance therewith, is obligated to file periodic reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. Such reports, proxy statements and other
information may be inspected at the offices of the Commission at 450 Fifth
Street, N.W. Washington D.C., and should also be available at the following
Regional Offices of the Commission: Room 1400, 75 Park Place, New York, New
York 10007 and Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Such reports and other information concerning Tenet
can also be inspected at the offices of the New York Stock Exchange, Inc., 20
Broad Street, Room 1102, New York, New
York 10005.
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values)
<TABLE>
<CAPTION>
November 30, May 31,
1997 1997
------------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14 $ 35
Short-term investments in debt securities 125 116
Accounts and notes receivable, less
allowance for doubtful accounts
($215 at November 30 and $224 at May 31) 1,559 1,346
Inventories of supplies, at cost 204 193
Deferred income taxes 213 294
Prepaid expenses and other assets 508 407
------- -------
Total current assets $ 2,623 $ 2,391
------- -------
Investments and other assets 565 678
Property, plant and equipment net 5,677 5,490
Intangible assets, at cost
Less accumulated amortization
($282 at November 30 and $226 at May 31) 3,318 3,146
------- -------
$12,183 $11,705
======= =======
</TABLE>
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values and share amounts)
<TABLE>
<CAPTION>
November 30, May 31,
1997 1997
------------ --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 16 $ 28
Accounts payable 476 540
Employee compensation and benefits 329 309
Reserves related to discontinued operations and
other non-recurring charges 199 423
Other current liabilities 614 569
------- -------
Total current liabilities 1,634 1,869
------- -------
Long-term debt, net of current portion 5,520 5,022
Other long-term liabilities and minority interests 1,260 1,282
Deferred income taxes 309 308
Common stock, $.075 par value; authorized
450,000,000 shares; 309,730,094 shares issued at
November 30, 1997 and 305,501,379 shares issued
at May 31,1997 23 23
Other shareholders' equity 3,507 3,240
Treasury stock, at cost, 3,754,891 shares at
November 30, 1997 and 2,676,091 at May 31, 1997 (70) (39)
------- -------
Total shareholders' equity 3,460 3,224
------- -------
$12,183 $11,705
======= =======
</TABLE>
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Six Months Ended Year Ended,
November 30, 1997 May 31, 1997
------------------ ------------
<S> <C> <C>
Net operating revenues $ 4,760 $ 8,691
-------- --------
Operating expenses (3,906) (7,094)
Depreciation and amortization (219) (443)
Interest expense, net of capitalized portion (230) (417)
Merger, facility consolidation and other
non-recurring charges --- (740)
-------- --------
Total costs and expenses (4,355) (8,694)
-------- --------
Investment earnings 12 26
Equity in earnings of unconsolidated affiliates --- 1
Minority interests in income of consolidated subsidiaries (13) (27)
Net loss on disposals of facilities
and long-term investments --- (18)
Gain from change in value of indexed long-term debt 18 ---
-------- --------
Income (loss) from continuing operations before
income taxes 422 (21)
Taxes on income (168) (52)
-------- --------
Income (loss) from continuing operations 254 (73)
-------- --------
Discontinued operations --- (134)
Extraordinary charge from early extinguishment of debt --- (47)
-------- --------
Net income (loss) $ 254 $ (254)
======== ========
</TABLE>
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Six Months Ended Year Ended,
November 30, 1997 May 31, 1997
------------------ ------------
<S> <C> <C>
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 12 $ 404
(Includes changes in all operating assets and liabilities): -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (215) (406)
Purchase of new businesses, net of cash acquired (381) (787)
Proceeds from sales of facilities, investments and other assets 57 50
Other items (23) 18
-------- --------
Net cash used in investing activities (562) (1,125)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other borrowings (889) (4,512)
Proceeds from other borrowings 1,386 5,117
Proceeds from sales of common stock --- 12
Proceeds from stock options exercised 32 59
Other items --- (23)
-------- --------
Net cash provided by financing activities 529 653
-------- --------
Net decrease in cash and cash equivalents (21) (68)
Cash and cash equivalents at beginning of year 35 107
Pooling adjustment to beginning of period
balance to conform fiscal years --- (4)
-------- --------
Cash and cash equivalents at end of year $ 14 $ 35
======== ========
</TABLE>
_______________________________
1. This exhibit is incorporated by reference to exhibit 10.27 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1988.
2. This exhibit is incorporated by reference to exhibit 10.28 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1987.
3. This exhibit is incorporated by reference to exhibit 10.39 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
4. These exhibits are incorporated by reference to exhibit numbers 10.37 and
10.38, respectively, filed as part of the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997.
5. This exhibit is incorporated by reference to exhibit 10.40 in the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996.
* Management Contract or Compensatory Plan or Arrangement.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000765880
<NAME> HEALTH CARE PROPERTY INVESTORS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,084
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 957,004
<DEPRECIATION> 170,502
<TOTAL-ASSETS> 940,964
<CURRENT-LIABILITIES> 0
<BONDS> 385,958
0
57,810
<COMMON> 30,216
<OTHER-SE> 354,243
<TOTAL-LIABILITY-AND-EQUITY> 940,964
<SALES> 0
<TOTAL-REVENUES> 128,503
<CGS> 0
<TOTAL-COSTS> 29,755
<OTHER-EXPENSES> 7,414
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,592
<INCOME-PRETAX> 64,789
<INCOME-TAX> 0
<INCOME-CONTINUING> 64,789
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,789
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.19
</TABLE>
Exhibit 10.2
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
CAMBRIDGE MEDICAL PROPERTIES, LLC
THIS LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement") is made and
entered into as of November 21, 1997, by and among Health Care Property
Investors, Inc., a Maryland corporation (the "Managing Member"), and the Persons
whose names are set forth on Exhibit A as attached hereto (the "Non-Managing
Members" and together with the Managing Member, the "Members"), for the purpose
of forming Cambridge Medical Properties, LLC, a Delaware limited liability
company (the "Company").
WHEREAS, the Managing Member, the Company, and Cambridge Medical Center of
San Diego, LLC, a California limited liability company (the "Transferor"), have
entered into that certain Contribution Agreement dated as of the date hereof
(the "Contribution Agreement"), providing for the contribution of certain assets
to, and the acquisition of certain interests in, the Company;
WHEREAS, it is a condition to the closing of the transactions contemplated
by the Contribution Agreement that the parties hereto enter this Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Act" means the Delaware Limited Liability Company Act, as it may be
amended from time to time, and any successor to such statute.
"Actions" has the meaning set forth in Section 7.7 hereof.
"Additional Funds" has the meaning set forth in Section 4.3.A hereof.
"Adjusted Capital Account Deficit" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
relevant Fiscal Year, after giving effect to the following adjustments:
(a) decrease such deficit by any amounts that such Member is obligated to
restore pursuant to this Agreement or by operation of law upon liquidation of
such Member's Membership Interest or is deemed to be obligated to restore
pursuant to Regulation Section 1.704-1(b) (2)(ii)(c) or the penultimate sentence
of each of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
(b) increase such deficit by the items described in Regulations Section
1.704-1(b) (2)(ii)(d)(4), (5) and (6).
The foregoing definition of "Adjusted Capital Account Deficit" is intended
to comply with the provisions of Regulations Section 1.704-1(b) (2)(ii)(d) and
shall be interpreted consistently therewith.
"Adjustment Factor" means 1.0; provided, however, that in the event that:
the Managing Member (i) declares or pays a dividend on its outstanding REIT
Shares in REIT Shares or makes a distribution to all Members of its outstanding
REIT Shares in REIT Shares, (ii) splits or subdivides its outstanding REIT
Shares or (iii) effects a reverse stock split or otherwise combines its
outstanding REIT Shares into a smaller number of REIT Shares, the Adjustment
Factor shall be adjusted by multiplying the Adjustment Factor in effect
immediately prior to such adjustment by a fraction, (1) the numerator of which
shall be the number of REIT Shares issued and outstanding on the record date for
such dividend, distribution, split, subdivision, reverse split or combination
(assuming for such purposes that such dividend, distribution, split,
subdivision, reverse split or combination has occurred as of such time) and (2)
the denominator of which shall be the actual number of REIT Shares issued and
outstanding on the record date for such dividend, distribution, split,
subdivision, reverse split or combination (assuming for such purposes that such
dividend, distribution, split, subdivision, reverse split or combination has not
occurred as of such time). Any adjustments to the Adjustment Factor shall
become effective immediately after the effective date of such event, retroactive
to the record date, if any, for such event.
"Affiliate" means, with respect to any Person, any Person directly or
indirectly Controlling or Controlled by or under common Control with such
Person.
"Agreement" means this Amended and Restated Limited Liability Company
Agreement of Cambridge Medical Properties, LLC, as it may be amended,
supplemented or restated from time to time.
"Amortization" means the quarterly amortization of leasing commissions and
tenant improvements which are funded subsequent to the Effective Date (except
for tenant improvements, if any, included in the Capital Repairs) relating to
the Real Properties according to an amortization schedule (i) in the case of
leasing commissions, based on the term of the applicable lease(s) and (ii) in
the case of tenant improvements, based on the longest useful life acceptable for
amortization under generally accepted accounting principles of the applicable
portion(s) of the Real Properties.
"Amortization Shortfall" means the amount (if any) by which (i) all
Amortization accruing subsequent to the Effective Date exceeds (ii) the
aggregate amount previously distributed to the Managing Member pursuant to
Section 5.1.A(3) hereof.
"Appraisal" means, with respect to any assets, the written opinion of an
independent third party appraiser (who is a member of the American Institute of
Real Estate Appraisers, or any successor organization thereto, and has at least
five (5) years of experience in the valuation of medical office buildings in the
general location of the property being appraised), selected by the Managing
Member in good faith. Such opinion may be in the form of an opinion by such
independent third party appraiser that the value for such property or asset as
set by the Managing Member is fair, from a financial point of view, to the
Company.
"Appraised Value" means, with respect to any asset, including any
Contributed Property, the value of such asset as determined by Appraisal.
"Assignee" means a Person to whom one or more LLC Units have been
Transferred in a manner permitted under this Agreement, but who has not become a
Substituted Member, and who has the rights set forth in Section 11.5 hereof.
"Available Cash" means, with respect to any period for which such
calculation is being made.
(a) the sum, without duplication, of:
(1) the Company's net income or net loss (as the case may be) for
such period determined in accordance with generally accepted accounting
principles,
(2) Depreciation and all other noncash charges to the extent deducted
in determining net income or net loss for such period pursuant to the
foregoing clause (a)(1),
(3) the amount of any reduction in reserves of the Company
(including, without limitation, reductions resulting because the Managing
Member determines such amounts are no longer necessary), and
(4) all other cash received (including amounts previously accrued as
net income and amounts of deferred income but excluding any net amounts
borrowed by the Company for such period) that was not included in
determining net income or net loss for such period pursuant to the
foregoing clause (a)(1);
(b) less the sum, without duplication, of:
(1) all principal debt payments made during such period by the
Company,
(2) capital expenditures made by the Company during such period,
(3) all other expenditures and payments not deducted in determining
net income or net loss for such period pursuant to the foregoing clause
(a)(1) (including amounts paid in respect of expenses previously accrued),
(4) any amount included in determining net income or net loss for
such period pursuant to the foregoing clause (a)(1) that was not received
by the Company during such period, and
(5) the amount of any increase in reserves (including, without
limitation, working capital reserves) established during such period
(subject to the limitations set forth in Sections 7.3.B(9) and 7.3.B(10)
hereof) that the Managing Member determines in good faith are necessary or
appropriate for the conduct of the business of the Company.
Notwithstanding the foregoing, Available Cash shall not include (i) any cash
received or reductions in reserves, or take into account any disbursements made,
or reserves established, after dissolution and the commencement of the
liquidation and winding up of the Company, (ii) any Capital Contributions,
whenever received, (iii) any of the items described in the foregoing clauses
(a) or (b) arising out of or resulting from the taxable disposition of any of
the Real Properties or (iv) the proceeds of Refinancing Debt.
"Bankruptcy Law" means Title II, U.S. Code or any similar federal or state
law for the relief of debtors.
"Beneficial Ownership" means ownership of REIT Shares by a Person who is or
would be treated as an owner of such REIT Shares either actually or
constructively through the application of Section 544 of the Code, as modified
by Section 856(h)(1)(b) of the Code. The terms "Beneficially Own,"
"Beneficially Owned," "Beneficially Owns" and "Beneficial Owner" shall have the
correlative meanings.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in Los Angeles, California are authorized or required by
law to close.
"Capital Account" means, with respect to any Member, the Capital Account
maintained for such Member on the Company's books and records in accordance with
the following provisions:
(a) To each Member's Capital Account, there shall be added such
Member's Capital Contributions, such Member's allocable share of Net Income
and any items of income or gain specially allocated pursuant to Section 6.3
hereof, and the principal amount of any Company liabilities assumed by such
Member or that are secured by any property distributed to such Member.
(b) From each Member's Capital Account, there shall be subtracted the
amount of cash and the Gross Asset Value of any property distributed to
such Member pursuant to any provision of this Agreement, such Member's
allocable share of Net Loss and any items of loss or deductions specially
allocated pursuant to Section 6.3 hereof, and the principal amount of any
liabilities of such Member assumed by the Company or that are secured by
any property contributed by such Member to the Company.
(c) In the event any interest in the Company is Transferred in
accordance with the terms of this Agreement, the transferee shall succeed
to the Capital Account of the transferor to the extent that it relates to
the Transferred interest.
(d) In determining the principal amount of any liability for purposes
of subsections (a) and (b) hereof, there shall be taken into account Code
Section 752(c) and any other applicable provisions of the Code and
Regulations.
(e) The provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Regulations Sections 1.704-
1(b) and 1.704-2, and shall be interpreted and applied in a manner
consistent with such Regulations. If the Managing Member shall determine
that it is prudent to modify the manner in which the Capital Accounts are
maintained in order to comply with such Regulations, the Managing Member
may make such modification provided that such modification will not have a
material effect on the amounts distributable to any Member without such
Member's Consent. The Managing Member also shall (i) make any adjustments
that are necessary or appropriate to maintain equality between the Capital
Accounts of the Members and the amount of Company capital reflected on the
Company's balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b) (2)(iv)(q) and (ii) make any appropriate
modifications in the event that unanticipated events might otherwise cause
this Agreement not to comply with Regulations Section 1.704-1(b) or
Section 1.704-2.
"Capital Contribution" means, with respect to any Member, the amount of
money and the initial Gross Asset Value of any Contributed Property that such
Member contributes to the Company pursuant to Section 4.1 or Section 4.3 hereof.
"Capital Repairs" has the meaning set forth in the Contribution Agreement.
"Cash Amount" means an amount of cash equal to the product of (a) the Value
of a REIT Share and (b) the REIT Shares Amount determined as of the applicable
Valuation Date.
"Certificate" means the Certificate of Formation of the Company filed in
the office of the Secretary of State of the State of Delaware, as amended from
time to time in accordance with the terms hereof and the Act.
"Charter" means the Articles of Incorporation of the Managing Member, as
amended, supplemented or restated from time to time.
"Closing Price" means (i) the closing price of a REIT Share on the
principal exchange on which REIT Shares are then trading, if any, or (ii) if
REIT Shares are not traded on an exchange but are quoted on NASDAQ or a
successor quotation system, (1) the last sales price (if the REIT Shares are
then listed as a National Market Issue under the NASD National Market System) or
(2) the mean between the closing representative bid and asked prices (in all
other cases) for a REIT Share are as reported by NASDAQ or such successor
quotation system, (iii) if the REIT Shares are not publicly traded on an
exchange and not quoted on NASDAQ or a successor quotation system, the mean
between the closing bid and asked prices for a REIT Share as reported by a
reliable quotation service designated by the Managing Member, or (iv) .if there
are no publicly available closing bid and asked prices, the price of a REIT
Share determined by the Managing Member acting in good faith on the basis of
information which it considers, in its reasonable judgment, to be appropriate.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time or any successor statute thereto, as interpreted by the
applicable Regulations thereunder. Any reference herein to a specific section
or sections of the Code shall be deemed to include a reference to any
corresponding provision of future law.
"Company" means the limited liability company formed under the Act and
pursuant to this Agreement, and any successor thereto.
"Company Minimum Gain" has the meaning set forth in Regulations Section
1.704-2(b) (2) for the phrase "partnership minimum gain," and the amount of
Company Minimum Gain, as well as any net increase or decrease in Company Minimum
Gain, for a Fiscal Year shall be determined in accordance with the rules of
Regulations Section 1.704-2(d).
"Consent" means the consent to, approval of, or vote on a proposed action
by a Member given in accordance with Article 14 hereof.
"Consent of the Non-Managing Members" means the Consent of a Majority in
Interest of the Non-Managing Members, which Consent shall be obtained prior to
the taking of any action for which it is required by this Agreement and, except
as otherwise provided in this Agreement, may be given or withheld by a Majority
in Interest of the Non-Managing Members, in their reasonable discretion.
"Constructive Ownership" means ownership of REIT Shares, or any other
interest in an entity by a Person who is or would be treated as an owner thereof
either actually or constructively through the application of Section 318 of the
Code, as modified by Section 856(d)(5) of the Code. The terms "Constructively
Own," "Constructively Owned," "Constructively Owns" and "Constructive Owner"
shall have the correlative meanings.
"Contributed Lease" has the meaning set forth in the Contribution
Agreement.
"Contributed Properties" means the "Properties" as that term is defined in
the Contribution Agreement.
"Contribution Agreement" means the Contribution Agreement dated as of
November 21, 1997 by and between the Managing Member, the Company and the
Transferor.
"Control" means, when used with respect to any Person, the possession
directly or indirectly, of the power to direct or cause the direction of the
management and policies of that Person, whether through the ownership of voting
securities, by contract or otherwise, and the terms "controlling" and
"controlled" have correlative meanings.
"Custodian" means any receiver, trustee, assignee, liquidator or other
similar official under any Bankruptcy Law.
"Debt" means, as to any Person, as of any date of determination, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services; (ii) all amounts owed by such Person to banks or
other Persons in respect of reimbursement obligations under letters of credit,
surety bonds and other similar instruments guaranteeing payment or other
performance of obligations by such Person; (iii) all indebtedness for borrowed
money or for the deferred purchase price of property or services secured by any
lien on any property owned by such Person, to the extent attributable to such
Person's interest in such property, even though such Person has not assumed or
become liable for the payment thereof; and (iv) lease obligations of such Person
that, in accordance with generally accepted accounting principles, should be
capitalized.
"Depreciation" means, for each Fiscal Year or other applicable period, an
amount equal to the federal income tax depreciation, amortization or other cost
recovery deduction allowable with respect to an asset for such year or other
period, except that, if the Gross Asset Value of an asset differs from its
adjusted basis for federal income tax purposes at the beginning of such year or
period, Depreciation shall be in an amount that bears the same ratio to such
beginning Gross Asset Value as the federal income tax depreciation, amortization
or other cost recovery deduction for such year or other period bears to such
beginning adjusted tax basis; provided, however, that, if the federal income tax
depreciation, amortization or other cost recovery deduction for such year or
period is zero, Depreciation shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the Managing
Member.
"Effective Date" means the date on which the transactions contemplated by
the Contribution Agreement are consummated at which time the contributions set
forth on Exhibit A that are to be effective on the Effective Date shall become
effective.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess LLC Units" means any LLC Units held by a Non-Managing Member to the
extent that, if such LLC Units were exchanged for the REIT Shares Amount
pursuant to Section 8.6 hereof, such Non-Managing Member would Beneficially Own
or Constructively Own REIT Shares in excess of the Ownership Limit.
"Exchange" has the meaning set forth in Section 8.6.A hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
"Family Members" means, as to a Person that is an individual, (a) such
Person's spouse, (b) such Person's ancestors, (c) such Person's descendants
(whether by blood or by adoption), (d) such Person's brothers and sisters, (e)
inter vivos or testamentary trusts of which only such Person or his spouse,
ancestors, descendants (whether by blood or by adoption), brothers or sisters
are beneficiaries and (f) any partnership or limited liability company all of
whose partners or members consist of such Person or his spouse, ancestors,
descendants (whether by blood or by adoption), brothers or sisters or inter
vivos or testamentary trusts of which only such Person or his spouse, ancestors,
descendants (whether by blood or by adoption), brothers or sisters are
beneficiaries.
"Fiscal Year" means the fiscal year of the Company, which shall be the
calendar year.
"Gross Asset Value" means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a Member to
the Company shall be its fair market value, as agreed to by such Member and the
Managing Member, and set forth on Exhibit A with respect to that Member.
(b) The Gross Asset Values of all Company assets immediately prior to
the occurrence of any event described in clause (1), clause (2), clause (3), or
clause (4) hereof shall be adjusted to equal their respective gross fair market
values, as determined by the Managing Member using such reasonable method of
valuation as it may adopt, as of the following times:
(1) the acquisition of an additional interest in the Company (other
than in connection with the execution of this Agreement) by a new or
existing Member in exchange for more than a de minimis Capital
Contribution, if the Managing Member reasonably determines that such
adjustment is necessary or appropriate to reflect the relative economic
interests of the Members in the Company;
(2) the distribution by the Company to a Member of more than a de
minimis amount of Company property as consideration for an interest in the
Company, if the Managing Member reasonably determines that such adjustment
is necessary or appropriate to reflect the relative economic interests of
the Members in the Company;
(3) the liquidation of the Company within the meaning of Regulations
Section 1.704-1(b) (2)(ii)(g); and
(4) at such other times as the Managing Member shall reasonably
determine necessary or advisable in order to comply with Regulations
Sections 1.704-1(b) and 1.704-2.
(c) The Gross Asset Value of any Company asset distributed to a Member
shall be the gross fair market value of such asset on the date of distribution
as determined by the distributee and the Managing Member, provided that, if the
distributee is the Managing Member or if the distributee and the Managing Member
cannot agree on such a determination, such gross fair market value shall be
determined by Appraisal.
(d) At the election of the Managing Member, the Gross Asset Values of
Company assets shall be increased (or decreased) to reflect any adjustments to
the adjusted basis of such assets pursuant to Code Section 734(b) or Code
Section 743(b) , but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations Section 1.704-
1(b) (2)(iv)(m); provided, however, that Gross Asset Values shall not be
adjusted pursuant to this subsection (d) to the extent that the Managing Member
reasonably determines that an adjustment pursuant to subsection (b) above is
necessary or appropriate in connection with a transaction that would otherwise
result in an adjustment pursuant to this subsection (d).
(e) If the Gross Asset Value of a Company asset has been determined or
adjusted pursuant to subsection (a), subsection (b) or subsection (d) above,
such Gross Asset Value shall thereafter be adjusted by the Depreciation taken
into account with respect to such asset for purposes of computing Net Income and
Net Loss.
"Incapacity" or "Incapacitated" means, (i) as to any Member who is an
individual, death, total physical disability or entry by a court of competent
jurisdiction adjudicating such Member incompetent to manage his or her person or
his or her estate; (ii) as to any Member that is a corporation or limited
liability company, the filing of a certificate of dissolution, or its
equivalent, for the corporation or limited liability company or the revocation
of its charter; (iii) as to any Member that is a partnership, the dissolution
and commencement of winding up of the partnership; (iv) as to any Member that is
an estate, the distribution by the fiduciary of the estate's entire interest in
the Company; (v) as to any trustee of a trust that is a Member, the termination
of the trust (but not the substitution of a new trustee); or (vi) as to any
Member, the bankruptcy of such Member. For purposes of this definition,
bankruptcy of a Member shall be deemed to have occurred when (a) the Member
commences a voluntary proceeding seeking liquidation, reorganization or other
relief of or against such Member under any bankruptcy, insolvency or other
similar law now or hereafter in effect, (b) the Member is adjudged as bankrupt
or insolvent, or a final and non-appealable order for relief under any
bankruptcy, insolvency or similar law now or hereafter in effect has been
entered against the Member, (c) the Member executes and delivers a general
assignment for the benefit of the Member's creditors, (d) the Member files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against the Member in any proceeding of the
nature described in clause (b) above, (e) the Member seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator for the
Member or for all or any substantial part of the Member's properties, (f) any
proceeding seeking liquidation, reorganization or other relief under any
bankruptcy, insolvency or other similar law now or hereafter in effect has not
been dismissed within 120 days after the commencement thereof, (g) the
appointment without the Member's consent or acquiescence of a trustee, receiver
or liquidator has not been vacated or stayed within 90 days of such appointment,
or (h) an appointment referred to in clause (g) above is not vacated within 90
days after the expiration of any such stay.
"Indemnitee" means any Person made a party to a proceeding by reason of its
status as (a) the Managing Member, (b) a Non-Managing Member, or (C) a director
of the Managing Member or a Non-Managing Member or an officer or employee of the
Company or the Managing Member or a Non-Managing Member.
"Initial Non-Managing Members" means the Non-Managing Members (or
successors in interest thereof) who acquired their Non-Managing Member Units in
exchange for the Real Properties on the Effective Date.
"Intended Liquidating Distributions" means, to the extent of the amounts
available for distribution to the Members upon the liquidation of the Company
pursuant to Article 13, the following amounts, and in the following priorities,
with respect to each Member:
(1) First, to the holders of the Non-Managing Member Units (whether
held by a Non-Managing Member or by the Managing Member), in accordance
with their relative Preferred Return Shortfalls, until, as a result of
distributions made to the holders of the Non-Managing Member Units for the
current and all prior fiscal quarters pursuant to Section 5.1.A(1) and this
paragraph (1), their Preferred Return Shortfalls are zero;
(2) Second, to the Managing Member, the Managing Member's Capital
Return Shortfall, until, as a result of distributions made to the Managing
Member for the current and all prior fiscal quarters pursuant to Section
5.1.A(2) and this paragraph (2), the Managing Member's Capital Return
Shortfall is zero;
(3) Third, to the holders of the Non-Managing Member Units (whether
held by a Non-Managing Member or by the Managing Member), in proportion to
the number of outstanding Non-Managing Member Units so held, 28.3% of the
Shared Appreciation Amounts relating to the Real Properties sold as
contemplated by Section 13.1.E during the Fiscal Year in which the
liquidating Event occurs or subsequent Fiscal Years;
(4) Fourth, to Managing Member, the balance of the Shared
Appreciation Amounts relating to the Real Properties sold as contemplated
by Section 13.1.E;
(5) Fifth, to the Managing Member, an amount equal to (i) the amount
of any tenant improvements and leasing commissions funded by the Managing
Member through additional Capital Contributions made pursuant to Section
4.3, subsequent to the Effective Date, less (ii) the amounts previously
distributed to the Managing Member pursuant to Sections 5.1.A(3) or
5.6.A(3);
(6) Sixth, to the holders of Non-Managing Member Units (whether held
by a Non-Managing Member or the Managing Member), in proportion to the
number of outstanding Non-Managing Member Units so held, the amount by
which (i) any amounts which were distributable to such member pursuant to
Section 5.6.A(1) relating to the Real Properties which were subject to a
taxable distribution in prior Fiscal Years, exceeds (ii) the amounts
previously distributed to such Member pursuant to Section 5.6.A(1) or
paragraph (3) or (6) of this definition relating to such properties;
(7) Seventh, to the Managing Member, the amount by which (i) any
amounts which were distributable to the Managing Member pursuant to Section
5.6.A(2) relating to the Real Properties which were subject to a taxable
disposition in prior Fiscal Years, exceeds (ii) the amounts previously
distributed to the Managing Member pursuant to Section 5.6.A(2) or
paragraph (4) of this paragraph (7) of this definition relating to such
properties; and
(8) Eighth, the remaining balance, if any, to the Members pro rata to
their holdings of LLC Units.
"IRS" means the Internal Revenue Service, which administers the internal
revenue laws of the United States.
"Liquidating Event" has the meaning set forth in Section 13.1 hereof.
"Liquidator" has the meaning set forth in Section 13.2.A hereof.
"LLC Distribution Date" means the date established by the Managing Member
subsequent to January 1, 1998 for the payment of actual distributions declared
by the Managing Member pursuant to Sections 5.1 and 5.2, which date shall be the
same as the date established by the Managing Member for the quarterly payment of
dividends to holders of REIT Shares.
"LLC Record Date" means the record date established by the Managing Member
subsequent to January 1, 1998 for the distribution of Available Cash pursuant to
Section 5.1 hereof, which record date shall be the same as the record date
established by the Managing Member for a dividend to holders of REIT Shares.
"LLC Units" means the Managing Member Units and the Non-Managing Member
Units, collectively.
"Loan and Security Agreement" means that certain Loan and Security
Agreement dated November 21, 1997 by and between Health Care Property
Investors, Inc. and the Non-Managing Member.
"Majority in Interest of the Non-Managing Members" means those Non-Managing
Members (other than the Managing Member in its capacity as a holder of Non-
Managing Member Units) holding in the aggregate more than 50% of the aggregate
outstanding Non-Managing Member Units (other than those held by the Managing
Member).
"Majority of Remaining Members" means Non-Managing Members owning a
majority of the Non-Managing Member Units held by Non-Managing Members.
"Managing Member" means Health Care Property Investors, Inc., a Maryland
corporation, in its capacity as a Member, or any successor Managing Member
designated pursuant to the terms of this Agreement.
"Managing Member's Capital Return" means an amount initially equal to zero,
and increased cumulatively on each LLC Record Date by an amount equal to the
Managing Member's Capital Contribution multiplied by the Capital Return
Adjustment Factor. The "Capital Return Adjustment Factor" shall be .0225 for
each of the first four LLC Record Dates occurring during the term of this
Agreement (the fourth such LLC Record Date and each fourth LLC Record Date
thereafter being referred to hereto as the "Fourth Record Date") and for each
LLC Record Date thereafter, the Capital Return Adjustment Factor in effect on
the most recent Fourth Record Date multiplied by 1.02, provided, however, that
the Capital Return Adjustment Factor for the first LLC Record Date occurring
after January 1, 1998 shall be .0225 multiplied by a fraction, the numerator of
which shall be the number of days in the period commencing on the Effective Date
and ending on December 31, 1997, and the denominator of which shall be the
number of days in the period commencing on October 1, 1997 and ending on
December 31, 1997. To illustrate the foregoing, set forth below are examples of
the Capital Return Adjustment Factor in effect on the designated LLC Record
Dates:
LLC Record Date Estimated Month and Capital Return
Occurring After Effective Date Year of LLC Record Date Adjustement Factor
- - ----------------------------- ----------------------- ------------------
First February 1998 .0100(1)
Second May 1998 .0225
Third August 1998 .0225
Fourth November 1998 .0225
Fifth February 1999 .0230(2)
Sixth May 1999 .0230
Seventh August 1999 .0230
Eighth November 1999 .0230
Ninth February 2000 .0235(3)
(1) .0225 x 41/92 = .01
(2) .0225 x 1.02 = .0230
(3) .0230 x 1.02 = .0235
"Managing Member's Capital Return Shortfall" means the sum of (a) the
amount (if any) by which (i) the Managing Member's Capital Return exceeds
(ii) the aggregate amount previously distributed to the Managing Member pursuant
to Section 5.1.A(2) hereof, plus (b) the cumulative interest accrued on the
excess described in the foregoing clause (a).
"Managing Member Unit" means a single unit of Membership Interest of the
Managing Member issued pursuant to Section 4.1 hereof, as the same may be
modified from time to time as provided in this Agreement. The ownership of
Managing Member Units may (but need not in the sole and absolute discretion of
the Managing Member) be evidenced in the form of a Certificate for Managing
Member Units.
"Member Minimum Gain" means an amount, with respect to each Member
Nonrecourse Debt, equal to the Company Minimum Gain that would result if such
Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in
accordance with Regulations Section 1.704-2(i) with respect to "partner
nonrecourse debt minimum gain."
"Member Nonrecourse Debt" has the meaning set forth in Regulations Section
1.704-2(b) (4) for the phrase "partner nonrecourse debt."
"Member Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(i)(2) for the phrase "partner nonrecourse deductions," and the
amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse
Debt for a Fiscal Year shall be determined in accordance with the rules of
Regulations Section 1.704-2(i)(2).
"Members" means the Persons owning Membership Interests, including the
Managing Member, Non-Managing Members and any Substitute Members, named as
Members in Exhibit A attached hereto, which Exhibit A may be amended from time
to time.
"Membership Interest" means an ownership interest in the Company
representing a Capital Contribution by a Member and includes any and all
benefits to which the holder of such a Membership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. A Membership Interest
may be expressed as a number of Managing Member Units or Non-Managing Member
Units, as applicable.
"Net Income" or "Net Loss" means, for each Fiscal Year of the Company, an
amount equal to the Company's taxable income or loss for such year, determined
in accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Net Income (or Net Loss)
pursuant to this definition of "Net Income" or "Net Loss" shall be added to
(or subtracted from, as the case may be) such taxable income (or loss);
(b) Any expenditure of the Company described in Code Section
705(a)(2)(b) or treated as a Code Section 705(a)(2)(b) expenditure
pursuant to Regulations Section 1.704-1(b) (2)(iv)(i), and not otherwise
taken into account in computing Net Income (or Net Loss) pursuant to this
definition of "Net Income" or "Net Loss," shall be subtracted from (or
added to, as the case may be) such taxable income (or loss);
(c) In the event that the Gross Asset Value of any Company asset is
adjusted pursuant to subsection (b) or subsection (c) of the definition of
"Gross Asset Value," the amount of such adjustment shall be taken into
account as gain or loss from the disposition of such asset for purposes of
computing Net Income or Net Loss;
(d) In lieu of the depreciation, amortization and other cost recovery
deductions that would otherwise be taken into account in computing such
taxable income or loss, there shall be taken into account Depreciation for
such Fiscal Year;
(e) To the extent that an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 734(b) or Code Section 743(b) is
required pursuant to Regulations Section 1.704-1(b) (2)(iv)(m)(4) to be
taken into account in determining Capital Accounts as a result of a
distribution other than in liquidation of a Member's interest in the
Company, the amount of such adjustment shall be treated as an item of gain
(if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases the basis of the asset) from the disposition of the
asset and shall be taken into account for purposes of computing Net Income
or Net Loss; and
(f) Notwithstanding any other provision of this definition of "Net
Income" or "Net Loss," any item allocated pursuant to Section 6.3.A hereof
shall not be taken into account in computing Net Income or Net Loss. The
amounts of the items of Company income, gain, loss or deduction available
to be allocated pursuant to Section 6.3.A hereof shall be determined by
applying rules analogous to those set forth in this definition of "Net
Income" or "Net Loss."
"Non-Managing Member" means any Member other than the Managing Member
(except to the extent the Managing Member holds Non-Managing Member Units).
"Non-Managing Member Representative" means Jean-Claude Saada until a
successor Non-Managing Member Representative shall have been appointed pursuant
to Section 15.14 hereof and, thereafter, shall mean the person appointed and
then acting as the Non-Managing Member Representative hereunder.
"Non-Managing Member Unit" means a single unit of Membership Interest of
Non-Managing Member issued pursuant to Section 4.1 or Section 4.2 hereof, as the
same may be modified from time to time as provided in this Agreement. The
ownership of Non-Managing Member Units shall be evidenced in the form of a
certificate for Non-Managing Member Units.
"Nonrecourse Deductions" has the meaning set forth in Regulations Section
1.704-2(b) (1), and the amount of Nonrecourse Deductions for a Fiscal Year shall
be determined in accordance with the rules of Regulations Section 1.704-2(c).
"Nonrecourse Liability" has the meaning set forth in Regulations Section
1.752-1(a)(2).
"Notice of Exchange" means the Notice of Exchange substantially in the form
of Exhibit B attached to this Agreement.
"Ownership Limit" means 9.9% of the number of outstanding REIT Shares.
"Percentage Interest" means, with respect to each Member, its interest in
the Company determined by dividing the number of LLC Units held by such Member
by the total number of LLC Units then outstanding.
"Person" means an individual or a corporation, partnership, trust,
unincorporated organization, association, limited liability company or other
entity.
"Preferred Return Per Unit" means with respect to each Non-Managing Member
Unit outstanding on a LLC Record Date an amount initially equal to zero, and
increased cumulatively on each LLC Record Date by an amount equal to the greater
of (a) $0.62 or (b) the product of (i) the cash dividend per REIT Share
declared by the Managing Member for holders of REIT Shares on that LLC Record
Date, multiplied by (ii) the Adjustment Factor in effect on that LLC Record
Date; provided, however, that the increase that shall occur in accordance with
the foregoing on the first LLC Record Date subsequent to January 1, 1998 shall
be the greater of (a) or (b) above multiplied by a fraction, the numerator of
which shall be the number of days in the period commencing on the Effective Date
and ending on December 31, 1997, and the denominator of which shall be the
number of days in the period commencing on October 1, 1997 and ending on
December 31, 1997.
"Preferred Return Shortfall" means, for any holder of Non-Managing Member
Units, the amount (if any) by which (i) the Preferred Return Per Unit with
respect to all Non-Managing Member Units held by such holder exceeds (ii) the
aggregate amount previously distributed with respect to such Non-Managing Member
Units pursuant to Section 5.1.A(1) hereof, plus (b) the cumulative interest
accrued thereon at the Prime Rate from the applicable LLC Record Date.
"Prime Rate" means on any date, a rate equal to the annual rate on such
date announced by the Bank of New York to be its prime, base or reference rate
for 90-day unsecured loans to its corporate borrowers of the highest credit
standing but in no event greater than the maximum rate then permitted under
applicable law. If the Bank of New York discontinues its use of such prime,
base or reference rate or ceases to exist, the Managing Member shall designate
the prime, base or reference rate of another state or federally chartered bank
based in New York to be used for the purpose of calculating the Prime Rate
hereunder (which rate shall be subject to limitation by all applicable usury
laws).
"Properties" means any assets and property of the Company such as, but not
limited to, interests in real property (including the Real Properties) and
personal property, including, without limitation, fee interests, interests in
ground leases, interests in limited liability companies, joint ventures or
partnerships, interests in mortgages, and Debt instruments as the Company may
hold from time to time.
"Qualified Transferee" means an "accredited investor" as defined in Rule
501 promulgated under the Securities Act.
"Real Properties" has the meaning set forth in Section 7.3.E(2) hereof.
"Reduction Date" has the meaning set forth in Section 5.6.B hereof.
"Reduction Units" has the meaning set forth in Section 5.6.B hereof.
"Refinancing Debt" means any Debt (other than indebtedness to the Managing
Member or any Affiliate of the Managing Member), the repayment of which is
secured by all or any portion of the Real Properties.
"Regulations" means the applicable income tax regulations under the Code,
whether such regulations are in proposed, temporary or final form, as such
regulations may be amended from time to time (including corresponding provisions
of succeeding regulations).
"Regulatory Allocations" has the meaning set forth in Section 6.3.A(7)
hereof.
"REIT" means a real estate investment trust qualifying under Code Section
856, et seq.
"REIT Requirements" has the meaning set forth in Section 5.1 hereof.
"REIT Share" means a share of the Common Stock of the Managing Member, par
value $1.00 per share.
"REIT Shares Amount" means a number of REIT Shares equal to the product of
(a) the number of Tendered Units and (b) the Adjustment Factor; provided,
however, that, in the event that the Managing Member issues to all holders of
REIT Shares as of a certain record date rights, options, warrants or convertible
or exchangeable securities entitling the Managing Member's shareholders to
subscribe for or purchase REIT Shares, or any other securities or property
(collectively, the "Rights"), with the record date for such Rights issuance
falling within the period starting on the date of the Notice of Exchange and
ending on the day immediately preceding the Specified Exchange Date, which
Rights will not be distributed before the relevant Specified Exchange Date, then
the REIT Shares Amount shall also include such Rights that a Member of that
number of REIT Shares would be entitled to receive, expressed, where relevant
hereunder, in a number of REIT Shares determined by the Managing Member in good
faith.
"Related Party" means, with respect to any Person, any other Person whose
actual ownership, Beneficial Ownership or Constructive Ownership of shares of
the Managing Member's capital stock would be attributed to the first such Person
under either (i) Code Section 544 (as modified by Code Section 856(h)(1)(b) ) or
(ii) Code Section 318 (as modified by Code Section 856(d)(5)).
"Rights" has the meaning set forth in the definition of "REIT Shares
Amount."
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Shared Appreciation Amount" means with respect to each Real Property which
is the subject of a taxable disposition, the amount by which the sales price
(net of commissions and other closing costs and expenses), exceeds the Shared
Appreciation Basis for such Real Property.
"Shared Appreciation Basis" means with respect to a Real Property the sum
of (i) the value of such Real Property as agreed between the Managing Member and
the Transferor and set forth on Exhibit C attached hereto, increased by 3%,
compounded annually, on each anniversary of the Effective Date, and (ii) the
amount of any capital additions, tenant improvements and leasing commissions
funded by the Managing Member as an additional Capital Contribution subsequent
to the Effective Date with respect to such Real Property.
"Specified Exchange Date" means the 10th Business Day after the receipt by
the Managing Member of a Notice of Exchange; provided, however, that no
Specified Exchange Date shall occur prior to the first anniversary of the
Effective Date.
"Substituted Member" means an Assignee who is admitted as a Member to the
Company pursuant to Section 11.4 hereof.
"Subsidiary" means, with respect to any Person other than the Company, any
corporation or other entity of which a majority of (i) the voting power of the
voting equity securities or (ii) the outstanding equity interests is owned,
directly or indirectly, by such Person; provided, however, that, with respect to
the Company, "Subsidiary" means solely a partnership or limited liability
company (taxed, for federal income tax purposes, as a partnership and not as an
association or publicly traded partnership taxable as a corporation) of which
the Company is a member unless the Managing Member has received an unqualified
opinion from independent counsel of recognized standing, or a ruling from the
IRS, that the ownership of shares of stock of a corporation or other entity will
not jeopardize the Managing Member's status as a REIT, in which event the term
"Subsidiary" shall include the corporation or other entity which is the subject
of such opinion or ruling.
"Tax Items" has the meaning set forth in Section 6.1 hereof.
"Tendered Units" has the meaning set forth in Section 8.6.A hereof.
"Tendering Party" has the meaning set forth in Section 8.6.A hereof.
"Terminating Capital Transaction" means any sale or other disposition of
all or substantially all of the assets of the Company or a related series of
transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Company.
"Transfer," when used with respect to an LLC Unit or all or any portion of
a Membership Interest, means any sale, assignment, bequest, conveyance, devise,
gift (outright or in trust), pledge, encumbrance, hypothecation, mortgage,
exchange, transfer or other disposition or act of alienation, whether voluntary
or involuntary or by operation of law; provided, however, that, when the term is
used in Article 11 hereof, Transfer does not include any Exchange of LLC Units
by the Non-Managing Member pursuant to Section 8.6 hereof or any sale of Non-
Managing Member Units by an Initial Non-Managing Member to the Managing Member
pursuant to Section 2.2 of the Contribution Agreement, or any Transfer of Non-
Managing Member Units to the Managing Member pursuant to the Loan and Security
Agreement. The terms "Transferred" and "Transferring" have correlative
meanings.
"Transferor" means Cambridge Medical Center of San Diego, LLC, a California
limited liability company.
"Valuation Date" means (a) in the case of a tender of LLC Units for
Exchange, the date of the receipt by the Managing Member of the Notice of
Exchange with respect to those LLC Units or, if such date is not a Business Day,
the immediately preceding Business Day or (b) in any other case, the date
specified in this Agreement or, if such date is not a Business Day, the
immediately preceding Business Day.
"Value" means, on any Valuation Date, the average of the Closing Prices for
the ten (10) consecutive trading days ending on the trading day immediately
prior to the Valuation Date.
ARTICLE 2.
ORGANIZATIONAL MATTERS
Section 2.1. Formation
The Company is a limited liability company formed pursuant to the
provisions of the Act for the purposes and upon the terms and subject to the
conditions set forth in this Agreement. Except as expressly provided herein,
the rights and obligations of the Members and the administration and termination
of the Company shall be governed by the Act.
Section 2.2. Name
The name of the Company is Cambridge Medical Properties, LLC. The Managing
Member may only change the name of the Company (a) without the Consent of the
Non-Managing Members in the event that (and shall change the name of the
Company, if so requested by Jean-Claude Saada, to a name that does not include
"Cambridge" in the event that) (i) the Management Agreement (as defined in the
Contribution Agreement) terminates or expires, (ii) Jean-Claude Saada, either
directly or indirectly through entities Controlled by him ceases to own a number
of Non-Managing Member Units equal to or greater than 20% of the number of Non-
Managing Member Units issued to Cambridge Medical Center of San Diego, LLC on
the Effective Date, or (iii) any Affiliate of Jean-Claude Saada which has at any
time been formed or conducted business under a name which includes "Cambridge"
(a) within the meaning of any Bankruptcy Law (aa) files a petition for relief or
otherwise commences a voluntary or involuntary case, (bb) consents to the entry
of an order for relief in an involuntary case, (cc) consents to the appointment
of a Custodian for itself or for all or substantially all of its property, (dd)
makes a general assessment for the benefit of creditors, or (ee) fails within
ninety (90) days to secure a dismissal of any order or decree for relief in an
involuntary case entered with respect to it, and (b) with the Consent of the
Non-Managing Members, which consent shall not be unreasonably withheld,
conditioned or delayed. In the event the Managing Member changes the name of
the Company to a name which does not include "Cambridge," the Company shall
quitclaim to Jean-Claude Saada all right, title and interest of the Company in
and to the name "Cambridge".
Section 2.3. Registered Office and Agent; Principal Place of Business; Other
Places of Business
The address of the registered office of the Company in the State of
Delaware is located at 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801, and the registered agent for service of process on the Company
in the State of Delaware at such registered office is The Corporation Trust
Company. The principal office of the Company is located at 4675 MacArthur
Court, Suite 900, Newport Beach, California 92660, or such other place as the
Managing Member may from time to time designate by notice to the Members. The
Company may maintain offices at such other place or places within or outside the
State of Delaware as the Managing Member deems advisable.
Section 2.4. [Intentionally Deleted]
Section 2.5. Term
The term of the Company commenced on November 18, 1997, the date that the
original Certificate of Formation of the Company was filed in the office of the
Secretary of State of Delaware in accordance with the Act, and shall continue
until November 30, 2012 unless extended by mutual agreement of the Members or
earlier terminated pursuant the provisions of Section 13 hereof or as otherwise
provided by law.
ARTICLE 3.
PURPOSE
Section 3.1. Purpose and Business
The sole purposes of the Company are (i) to acquire, own, manage, operate,
maintain, improve, expand, redevelop, encumber, sell or otherwise dispose of, in
accordance with the terms of this Agreement, the Contributed Properties, the
property subject to the Contributed Lease and any other Properties acquired by
the Company in a tax-free exchange transaction for a Property or Properties
owned by the Company and invest and ultimately distribute funds, including,
without limitation, funds obtained from owning or otherwise operating the
Contributed Properties and the proceeds from the sale or other disposition of
the Contributed Properties, all in the manner permitted by this Agreement, and
(ii) subject to and in accordance with the terms of this Agreement, to do
anything necessary or incidental to the foregoing. No Member, including the
Managing Member, shall have any authority to take any action on behalf of the
Company that is not consistent with the foregoing purposes.
Section 3.2. Powers
Subject to the express limitations set forth in this Agreement, the Company
is empowered to do any and all acts and things necessary, appropriate, proper,
advisable, incidental to or convenient for the furtherance and accomplishment of
the purposes and business described herein and for the protection and benefit of
the Company including, without limitation, full power and authority, directly or
through its ownership interest in other entities, to enter into, perform and
carry out contracts of any kind, borrow money and issue evidences of
indebtedness, whether or not secured by mortgage, deed of trust, pledge or other
lien, acquire, own, manage, improve and develop real property, and lease, sell,
transfer and dispose of real property; provided, however, that notwithstanding
any other provision in this Agreement, the Managing Member may cause the Company
not to take, or to refrain from taking, any action that, in the judgment of the
Managing Member, in its sole and absolute discretion, (i) could adversely affect
the ability of the Managing Member to continue to qualify as a REIT, (ii) could
subject the Managing Member to any additional taxes under Code Section 857 or
Code Section 4981 or (iii) could violate any law or regulation of any
governmental body or agency having jurisdiction over the Managing Member, its
securities or the Company, unless such action (or inaction) under clause (i),
clause (ii) or clause (iii) above shall have been specifically consented to by
the Managing Member in writing.
Section 3.3. Specified Purposes
The Company shall be a limited liability company only for the purposes
specified in Section 3.1 hereof, and this Agreement shall not be deemed to
create a company, venture or partnership between or among the Members with
respect to any activities whatsoever other than the activities within the
purposes of the Company as specified in Section 3.1 hereof. Except as otherwise
provided in this Agreement, no Member shall have any authority to act for, bind,
commit or assume any obligation or responsibility on behalf of the Company, its
properties or any other Member. No Member, in its capacity as a Member under
this Agreement, shall be responsible or liable for any indebtedness or
obligation of another Member, nor shall the Company be responsible or liable for
any indebtedness or obligation of any Member, incurred either before or after
the execution and delivery of this Agreement by such Member, except as to those
responsibilities, liabilities, indebtedness or obligations incurred pursuant to
and as limited by the terms of this Agreement and the Act.
Section 3.4. Representations and Warranties by the Members; Disclaimer of
Certain Representations
A. Each Member that is an individual (including, without limitation, each
Substituted Member as a condition to becoming a Substituted Member) represents
and warrants to the Company, the Managing Member and each other Member that
(i) such Member has the legal capacity to enter into this Agreement and perform
such Member's obligations hereunder, (ii) the consummation of the transactions
contemplated by this Agreement to be performed by such Member will not result in
a breach or violation of, or a default under, any material agreement by which
such Member or any of such Member's property is bound, or any statute,
regulation, order or other law to which such Member is subject, (iii) such
Member is neither a "foreign person" within the meaning of Code Section 1445(f)
nor a "foreign partner" within the meaning of Code Section 1446(e), (iv) if the
representation hereunder is being made on or prior to December 31, 1997, such
Member (other than the Managing Member) does not own, actually or constructively
under Code Section 318 (as modified by Code Section 856(d)(5)), any shares of
stock of the Managing Member, (v) if the representation hereunder is being made
subsequent to December 31, 1997, such Member (other than the Managing Member)
either (a) does not own, actually or constructively under Code Section 318 (as
modified by Code Section 856(d)(5)), more than 25% of the interests in capital
or profits of the Company or (b) does not own, actually or constructively under
Code Section 318 (as modified by Code Section 856(d)(5)), any interest in any
entity that is a tenant of either the Managing Member, the Company or any
partnership, venture or limited liability company of which the Managing Member
or the Company is a member, and (vi) this Agreement is binding upon, and
enforceable against, such Member in accordance with its terms.
B. Each Member that is not an individual (including, without limitation,
each Substituted Member as a condition to becoming a Substituted Member)
represents and warrants to the Company, the Managing Member and each other
Member that (i) all transactions contemplated by this Agreement to be performed
by it have been duly authorized by all necessary action, including, without
limitation, that of its managing member(s) (or, if there is no managing member,
a majority in interest of all members), committee(s), trustee(s), general
partner(s), beneficiaries, directors and shareholder(s), as the case may be, as
required, (ii) the consummation of such transactions will not result in a breach
or violation of, or a default under, its partnership or operating agreement,
trust agreement, charter or bylaws, as the case may be, any material agreement
by which such Member or any of such Member's properties or any of its partners,
members, beneficiaries, trustees or shareholders, as the case may be, is or are
bound, or any statute, regulation, order or other law to which such Member or
any of its partners, members, trustees, beneficiaries or shareholders, as the
case may be, is or are subject, (iii) such Member is neither a "foreign person"
within the meaning of Code Section 1445(f) nor a "foreign partner" within the
meaning of Code Section 1446(e), (iv) if the representation hereunder is being
made on or prior to December 31, 1997, such Member (other than the Managing
Member) does not own, actually or constructively under Code Section 318 (as
modified by Code Section 856(d)(5)), any shares of stock of the Managing Member,
(v) if the representation hereunder is being made subsequent to December 31,
1997, such Member (other than the Managing Member) either (a) does not own,
actually or constructively under Code Section 318 (as modified by Code Section
856(d)(5)), more than 25% of the interests in capital of profits of the Company
or (b) does not own, actually or constructively under Code Section 318 (as
modified by Code Section 856(d)(5)), any interest in any entity that is a tenant
of either the Managing Member, the Company or any partnership, venture or
limited liability company of which the Managing Member or the Company is a
member, (vi) this Agreement is binding upon, and enforceable against, such
Member in accordance with its terms.
C. Each Member (including, without limitation, each Substituted Member as
a condition to becoming a Substituted Member) represents, warrants and agrees
that it has acquired and continues to hold its interest in the Company for its
own account for investment only and not for the purpose of, or with a view
toward, the resale or distribution of all or any part thereof, nor with a view
toward selling or otherwise distributing such interest or any part thereof at
any particular time or under any predetermined circumstances. Each Member
further represents and warrants that it is an "accredited investor" as defined
in Rule 501 promulgated under the Securities Act and is a sophisticated
investor, able and accustomed to handling sophisticated financial matters for
itself, particularly real estate investments, and that it has a sufficiently
high net worth that it does not anticipate a need for the funds that it has
invested in the Company in what it understands to be a highly speculative and
illiquid investment.
D. The representations and warranties contained in Sections 3.4.A, 3.4.B
and 3.4.C hereof shall survive the execution and delivery of this Agreement by
each Member (and, in the case of a Substituted Member, the admission of such
Substituted Member as a Member in the Company) and the dissolution, liquidation
and termination of the Company.
E. Each Member (including, without limitation, each Substituted Member as
a condition to becoming a Substituted Member) hereby represents that it has
consulted and been advised by its legal counsel and tax advisor in connection
with, and acknowledges that no representations as to potential profit, tax
consequences of any sort (including, without limitation, the tax consequences
resulting from forming or operating the Company, conducting the business of the
Company, executing this Agreement, consummating the transaction provided for in
or contemplated by the Contribution Agreement, making a Capital Contribution,
being admitted to the Company, receiving or not receiving distributions from the
Company, exchanging LLC Units or being allocated Tax Items), cash flows, funds
from operations or yield, if any, in respect of the Company or the Managing
Member have been made by any Member or any employee or representative or
Affiliate of any Member, and that projections and any other information,
including, without limitation, financial and descriptive information and
documentation, that may have been in any manner submitted to such Member shall
not constitute any representation or warranty of any kind or nature, express or
implied.
ARTICLE 4.
CAPITAL CONTRIBUTIONS
Section 4.1. Capital Contributions of the Initial Members
At the time of their respective execution of this Agreement, the Members
shall make Capital Contributions as set forth in Exhibit A to this Agreement.
The Members shall own Managing Member Units and Non-Managing Member Units, as
applicable, in the amounts set forth on Exhibit A. Except as required by law or
as otherwise provided in Sections 4.2 and 4.3, no Member shall be required or
permitted to make any additional Capital Contributions or loans to the Company.
Section 4.2. Loans by Third Parties
The Company may not incur or assume Debt without the Consent of the Non-
Managing Members, except for Refinancing Debt.
Section 4.3. Additional Capital Contributions
A. General. The Managing Member may, at any time and from time to time,
determine that the Company requires additional funds ("Additional Funds") for
the operation of the Company. Additional Funds may be raised by the Company in
accordance with the terms of this Section 4.3. No Person, including, without
limitation, any Member or Assignee, shall have any preemptive, preferential,
participation or similar right or rights to subscribe for or acquire any
Membership Interest.
B. Additional Member Contributions. The Managing Member on behalf of the
Company and with the Consent of the Non-Managing Members may raise all or any
portion of the Additional Funds by making additional Capital Contributions.
Subject to the terms of this Section 4.3 and to the definition of "Gross Asset
Value," the Managing Member shall determine in good faith the amount, terms and
conditions of such additional Capital Contributions. In addition, the Managing
Member shall be solely responsible for making additional Capital Contributions
to the Company in amounts sufficient to fund all necessary capital additions,
tenant improvements and leasing commissions relating to the Real Properties.
The Managing Member shall receive additional Managing Member Units only in
consideration for additional capital contributions made by the Managing Member
in an aggregate amount in excess of Five Hundred Thousand Dollars ($500,000) to
fund capital additions that will add rentable space to the Properties.
C. Timing of Additional Capital Contributions. If additional Capital
Contributions are made by Members on any day other than the first day of a
Fiscal Year, then Net Income, Net Loss, each item thereof and all other items of
income, gain, loss, deduction and credit allocable among Members and Assignees
for such Fiscal Year, if necessary, shall be allocated among such Members and
Assignees by taking into account their varying interests during the Fiscal Year
in accordance with Code Section 706(d), using the "interim closing of the books"
or "daily proration" method or another permissible method selected by the
Managing Member.
Section 4.4. No Interest; No Return
Except as provided herein, no Member shall be entitled to interest on its
Capital Contribution or on such Member's Capital Account. Except as provided
herein or by law, no Member shall have any right to demand or receive the return
of its Capital Contribution from the Company.
ARTICLE 5.
DISTRIBUTIONS
Section 5.1. Requirement and Characterization of Distributions
A. The Managing Member shall cause the Company to distribute quarterly on
the LLC Distribution Date all Available Cash generated by the Company during the
quarter most recently ended prior to the LLC Distribution Date as follows:
(1) First, to the holders of the Non-Managing Member Units (whether
held by a Non-Managing Member or the Managing Member), in accordance with
their relative Preferred Return Shortfalls, until the Preferred Return
Shortfall for each holder of Non-Managing Member Units is zero, provided,
however, that in the event the number of Non-Managing Member Units is
reduced pursuant to Section 5.6.B hereof, a distribution shall be made
under this Section 5.1.A(1) on the first (and only the first) LLC
Distribution Date occurring after such reduction to the holder or holders
of the Reduction Units in an amount determined by multiplying the amount
that would have been distributed on such LLC Distribution Date under this
Section 5.1.A(1) in respect of the Reduction Units had they been
outstanding on such LLC Distribution Date (the "Subsequent Distribution
Date") by a fraction, the numerator of which shall be the number of days in
the period commencing on the LLC Distribution Date most recently preceding
the Reduction Date (the "Prior Distribution Date") and ending on the
Reduction Date and the denominator of which shall be the number of days in
the period commencing on the Prior Distribution Date and ending on the
Subsequent Distribution Date.
(2) Second, to the Managing Member, the Managing Member's Capital
Return Shortfall, until the Managing Member's Capital Return Shortfall is
zero;
(3) Third, to the Managing Member the Amortization until the
Amortization Shortfall is zero; and
(4) Fourth, 17% of the remaining balance, if any, to the holders of
the Non-Managing Member Units (whether held by a Non-Managing Member or the
Managing Member) in proportion to their outstanding Non-Managing Member
Units as of the LLC Record Date; and 83% of such remaining balance to the
holder of the Managing Member Units as of the LLC Record Date.
Set forth on Exhibit D are examples of the application of the provisions of this
Section 5.1.A based upon assumed amounts of Available Cash and other assumptions
reflected in Exhibit D.
B. The Managing Member shall take such reasonable efforts, as determined
by it in its sole and absolute discretion and consistent with its qualification
as a REIT, to cause the Company to distribute sufficient amounts to enable the
Managing Member to pay stockholder dividends that will (a) satisfy the
requirements for qualifying as a REIT under the Code and Regulations ("REIT
Requirements"), and (b) except to the extent the Managing Member elects, in its
sole discretion, not to make such distributions, avoid any federal income or
excise tax liability of the Managing Member.
Section 5.2. Distributions in Kind
No right is given to any Member to demand and receive property other than
cash. The Managing Member may determine, in its sole and absolute discretion,
to make a distribution in kind to the Members of Company assets, and such assets
shall be distributed in such a fashion as to ensure that the fair market value
is distributed and allocated in accordance with Articles 5 and 6 hereof.
Section 5.3. Amounts Withheld
Each Member hereby authorizes the Company to withhold from or pay on behalf
of or with respect to such Member any amount of federal, state, local or foreign
taxes that the Managing Member determines that the Company is required to
withhold or pay with respect to any amount distributable or allocable to such
Member pursuant to this Agreement, including, without limitation, any taxes
required to be withheld or paid by the Company pursuant to Code Section 1441,
Code Section 1442, Code Section 1445 or Code Section 1446. Any amount paid on
behalf of or with respect to a Member shall constitute a loan by the Company to
such Member, which loan shall be repaid by such Member within 15 days after
notice from the Managing Member that such payment must be made unless (i) the
Company withholds such payment from a distribution that would otherwise be made
to the Member or (ii) the Managing Member determines, in its reasonable
discretion, that such payment may be satisfied out of the Available Cash of the
Company that would, but for such payment, be distributed to the Member. Any
amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated
as having been distributed to such Member. Each Member hereby unconditionally
and irrevocably grants to the Company a security interest in such Member's
Membership Interest to secure such Member's obligation to pay to the Company any
amounts required to be paid pursuant to this Section 5.3. In the event that a
Member fails to pay any amounts owed to the Company pursuant to this Section 5.3
when due, the Managing Member may, in its sole and absolute discretion, elect to
make the payment to the Company on behalf of such defaulting Member, and in such
event shall be deemed to have loaned such amount to such defaulting Member and
shall succeed to all rights and remedies of the Company as against such
defaulting Member (including, without limitation, the right to receive
distributions). Any amounts payable by a Member hereunder shall bear interest
at the base rate on corporate loans at large United States money center
commercial banks, as published from time to time in the Wall Street Journal,
plus four (4) percentage points (but not higher than the maximum lawful rate)
from the date such amount is due (i.e., 15 days after demand) until such amount
is paid in full. Each Member shall take such actions as the Company or the
Managing Member shall request in order to perfect or enforce the security
interest created hereunder.
Section 5.4. Distributions Upon Liquidation
Notwithstanding the other provisions of this Article 5, net proceeds from a
Terminating Capital Transaction and any other cash received or reductions in
reserves made after commencement of the liquidation of the Company shall be
distributed to the Members in accordance with Section 13.2 hereof.
Section 5.5. Restricted Distributions
Notwithstanding any provision to the contrary contained in this Agreement,
neither the Company nor the Managing Member, on behalf of the Company, shall
make a distribution to any Member on account of its Membership Interest or
interest in LLC Units if such distribution would violate Section 18-607 of the
Act or other applicable law.
Section 5.6. Distributions of Proceeds from Sale of Real Properties and
Refinancing Debt
A. In the event of a taxable disposition of some, but not all, of the
Real Properties and in the event the Company incurs Refinancing Debt, the
Managing Member shall cause the Company to distribute the net proceeds from such
Refinancing Debt, as the case may be, as follows:
(1) First, to the holders of the Non-Managing Member Units (whether held
by a Non-Managing Member or by the Managing Member) from the net proceeds of the
taxable disposition, in proportion to the number of outstanding Non-Managing
Member Units so held, 28.3% of the Shared Appreciation Amounts relating to the
Real Properties subject to the taxable disposition;
(2) Second, to the holders of the Managing Member Units from the net
proceeds of the taxable disposition, the balance of the Shared Appreciation
Amounts relating to the Real Properties subject to the taxable disposition;
(3) Third, to the Managing Member an amount equal to (i) the amount of any
tenant improvements and leasing commissions funded by the Managing Member
through additional Capital Contributions made pursuant to Section 4.3 subsequent
to the Effective Date with respect to the Real Property or Real Properties which
are the subject of the taxable disposition or secure the repayment of the
Refinancing Debt, less (ii) the amount distributed to the Managing Member under
Section 5.1.A(3) hereof in respect of the amount described in the foregoing
clause (i); and
(4) Fourth, the remaining balance, if any, to the Members pro rata to
their holdings of Managing Member Units and Non-Managing Member Units.
B. The number of LLC Units outstanding on the date of a distribution
pursuant to Section 5.6.A above will be reduced on the date of the distribution
(the "Reduction Date") by the aggregate number of LLC Units (the "Total Units")
determined by dividing the aggregate amount of the distributions so made by the
Value on the Reduction Date. The Non-Managing Member Units shall be reduced by
a number of LLC Units (rounded down to the nearest whole unit) (the "Reduction
Units") determined by multiplying the number of Total Units by a fraction, the
numerator of which is the total number of Non-Managing Member Units outstanding
and the denominator of which is the total number of Non-Managing Member Units
and Managing Member Units outstanding. The Reduction Units shall be allocated
(as closely as practicable in whole units) among the holders of Non-Managing
Member Units in accordance with their respective holdings of Non-Managing Member
Units. The Managing Member Units shall be reduced by a number of Managing
Member Units equal to the difference between the number of Total Units and the
number of Reduction Units. In no event, however, shall the number of Non-
Managing Member Units be reduced below nine (9) Non-Managing Member Units and in
no event shall the number of Managing Member Units be reduced below eighty-five
(85) Managing Member Units. To reflect the foregoing reduction, each Member
shall return to the Managing Member the certificate evidencing the Reduction
Units allocated to him or it or the Managing Member Units so reduced which will
be canceled and a new certificate evidencing the reduced number of Managing
Member Units or Non-Managing Member Units shall be immediately issued to such
Member by the Managing Member on behalf of the Company.
C. The Company shall have no obligation to incur Refinancing Debt for the
purposes of making distributions pursuant to this Section 5.6 or for any other
purpose.
Section 5.7. Offset
Except for offsets authorized by the Loan and Security Agreement, neither
the Company nor the Managing Member shall be entitled to offset against any
distribution payable to the Non-Managing Members pursuant to this Article 5 and
Article 13 any amounts owing or otherwise alleged to be owing to the Company or
the Managing Member; provided, however, that the Managing Member shall be
entitled, at its option, to offset against amounts otherwise payable to Non-
Managing Members hereunder (including, without limitation, amounts payable
pursuant to Section 5.1.A(1) hereof and Section 13.2 hereof) amounts authorized
for offset by the Loan and Security Agreement. Any amounts so offset pursuant
to the foregoing shall be deemed for all purposes to have been distributed or
paid to the Non-Managing Members as required by this Agreement, including for
purposes of calculating Preferred Return Shortfalls.
ARTICLE 6.
ALLOCATIONS
Section 6.1. Timing and Amount of Allocations of Net Income and Net Loss
Net Income and Net Loss of the Company shall be determined and allocated
with respect to each Fiscal Year of the Company as of the end of each such year.
Except as otherwise provided in this Article 6, an allocation to a Member of a
share of Net Income or Net Loss shall be treated as an allocation of the same
share of each item of income, gain, loss or deduction (collectively "Tax Items")
that is taken into account in computing Net Income or Net Loss.
Section 6.2. General Allocations
A. Operating Net Income and Net Loss. Except as otherwise provided in
Sections 6.2.C or 6.3:
(1) Net Income, other than Net Income attributable to a disposition
of any or all of the Real Properties, shall first be allocated to each Non-
Managing Member in an amount equal to the distributions received by such
Member pursuant to Section 5.1.A, less any amounts of Net Income previously
allocated to such Member pursuant to this Section 6.2.A(1).
(2) All remaining Net Income and Net Loss, other than Net Income or
Net Loss attributable to a disposition of any or all of the Real
Properties, shall be allocated to the Managing Member.
B. Net Income and Net Loss from the Disposition of Real Properties.
Except as otherwise provided in Sections 6.2.C or 6.3:
(1) Net Income attributable to a disposition of any or all of the
Real Properties shall be allocated to each Member in an amount equal to the
distributions received by such Member pursuant to Section 5.6.A(1) or (2),
less any amounts of Net Income previously allocated to such Member pursuant
to this Section 6.2.B(1).
(2) Thereafter, any remaining Net Income or Net Loss attributable to
the disposition of any or all of the Real Properties shall be allocated to
the Members in proportion to their LLC Units.
C. Net Income and Net Loss Upon Liquidation. If a Liquidating Event
occurs in a Fiscal Year, Net Income or Net Loss (or, if necessary, separate
items of income, gain, loss and deduction) for such Fiscal Year and any Fiscal
Years thereafter shall, subject to Section 6.3, be allocated among the Members
in such amounts and priorities so that the amounts distributed to each of the
Members pursuant to Section 13.2.A(3) upon the liquidation of the Company will
equal the Intended Liquidating Distributions.
D. Prorations. If the amount of Net Income or Net Loss available for
allocation under any subsection of Sections 6.2.A or B above is less than the
aggregate amount to be allocated pursuant to the applicable subsection (assuming
sufficient Net Income or Net Loss was available), such allocation shall be made
to the Members pro rata to the total amounts to be so allocated pursuant to such
subsection.
Section 6.3. Additional Allocation Provisions
A. Regulatory Allocations.
(1) Minimum Gain Chargeback. Except as otherwise provided in
Regulations Section 1.704-2(f), notwithstanding the provisions of
Section 6.2 hereof, or any other provision of this Article 6, if there
is a net decrease in Company Minimum Gain during any Fiscal Year, each
Member shall be specially allocated items of Company income and gain
for such year (and, if necessary, subsequent years) in an amount equal
to such Member's share of the net decrease in Company Minimum Gain, as
determined under Regulations Section 1.704-2(g). Allocations pursuant
to the previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Member pursuant thereto. The
items to be allocated shall be determined in accordance with
Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section
6.3.A(1) is intended to qualify as a "minimum gain chargeback" within
the meaning of Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.
(2) Member Minimum Gain Chargeback. Except as otherwise provided
in Regulations Section 1.704-2(i)(4) or in Section 6.3.A(1) hereof, if
there is a net decrease in Member Minimum Gain attributable to a
Member Nonrecourse Debt during any Fiscal Year, each Member who has a
share of the Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5), shall be specially allocated items of Company income
and gain for such year (and, if necessary, subsequent years) in an
amount equal to such Member's share of the net decrease in Member
Minimum Gain attributable to such Member Nonrecourse Debt, determined
in accordance with Regulations Section 1.704-2(i)(4). Allocations
pursuant to the previous sentence shall be made in proportion to the
respective amounts required to be allocated to each Member pursuant
thereto. The items to be so allocated shall be determined in
accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2).
This Section 6.3.A(2) is intended to qualify as a "chargeback of
partner nonrecourse debt minimum gain" within the meaning of
Regulations Section 1.704-2(i) and shall be interpreted consistently
therewith.
(3) Member Nonrecourse Deductions. Any Member Nonrecourse
Deductions for any Fiscal Year shall be specially allocated to the
Member(s) who bears the economic risk of loss with respect to the
Member Nonrecourse Debt to which such Member Nonrecourse Deductions
are attributable, in accordance with Regulations Section 1.704-2(i).
(4) Qualified Income Offset. If any Member unexpectedly
receives an adjustment, allocation or distribution described in
Regulations Section 1.704-1(b) (2)(ii)(d)(4), (5) or (6), items of
Company income and gain shall be allocated, in accordance with
Regulations Section 1.704-1(b) (2)(ii)(d), to such Member in an amount
and manner sufficient to eliminate, to the extent required by such
Regulations, the Adjusted Capital Account Deficit of such Member as
quickly as possible, provided that an allocation pursuant to this
Section 6.3.A(4) shall be made if and only to the extent that such
Member would have an Adjusted Capital Account Deficit after all other
allocations provided in this Article 6 have been tentatively made as
if this Section 6.3.A(4) were not in the Agreement. It is intended
that this Section 6.3.A(4) qualify and be construed as a "qualified
income offset" within the meaning of Regulations Section 1.704-
1(b) (2)(ii)(d) and shall be interpreted consistently therewith.
(5) Limitation on Allocation of Net Loss. To the extent that any
allocation of Net Loss would cause or increase an Adjusted Capital
Account Deficit as to any Member, such allocation of Net Loss shall be
reallocated among the other Members in accordance with their
respective LLC Units, subject to the limitations of this Section
6.3.A(5).
(6) Section 754 Adjustment. To the extent that an adjustment to
the adjusted tax basis of any Company asset pursuant to Code Section
734(b) or Code Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b) (2)(iv)(m)(2) or Regulations Section 1.704-
1(b) (2)(iv)(m)(4), to be taken into account in determining Capital
Accounts as the result of a distribution to a Member in complete
liquidation of its interest in the Company, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain
(if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases such basis), and such gain or loss shall be
specially allocated to the Members in accordance with their LLC Units
in the event that Regulations Section 1.704-1(b) (2)(iv)(m)(2)
applies, or to the Members to whom such distribution was made in the
event that Regulations Section 1.704-1(b) (2)(iv)(m)(4) applies.
(7) Curative Allocations. The allocations set forth in Sections
6.3.A(1) through (6) hereof (the "Regulatory Allocations") are
intended to comply with certain regulatory requirements, including the
requirements of Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding the provisions of Sections 6.1 and 6.2 hereof, the
Regulatory Allocations shall be taken into account in allocating other
items of income, gain, loss and deduction among the Members so that,
to the extent possible without violating the requirements giving rise
to the Regulatory Allocations, the net amount of such allocations of
other items and the Regulatory Allocations to each Member shall be
equal to the net amount that would have been allocated to each such
Member if the Regulatory Allocations had not occurred.
B. Allocation of Excess Nonrecourse Liabilities. For purposes of
determining a Member's proportional share of the "excess nonrecourse
liabilities" of the Company within the meaning of Regulations Section 1.752
-3(a)(3), each Member's interest in Company profits shall be such Member's
Percentage Interest.
Section 6.4. Tax Allocations
A. In General. Except as otherwise provided in this Section 6.4,
for income tax purposes under the Code and the Regulations each of the
Company's Tax Items shall be allocated among the Members in the same manner
as its correlative item of "book" income, gain, loss or deduction is
allocated pursuant to Sections 6.2 and 6.3 hereof.
B. Allocations Respecting Section 704(c) Revaluations.
Notwithstanding Section 6.4.A hereof, Tax Items with respect to Property
that is contributed to the Company with a Gross Asset Value that varies
from its basis in the hands of the contributing Member immediately
preceding the date of contribution shall be allocated among the Members for
income tax purposes pursuant to the "traditional method" as described in
Regulations Section 1.704-3(b), utilizing the allocations set forth on
Exhibit C-1 (subject to modification upon the agreement of the Managing
Member and the Non-Managing Members). In the event that the Gross Asset
Value of any Company asset is adjusted pursuant to subsection (b) of the
definition of "Gross Asset Value" (provided in Article 1 hereof),
subsequent allocations of Tax Items with respect to such asset shall take
account of the variation, if any, between the adjusted basis of such asset
and its Gross Asset Value in the same manner as under Code Section 704(c)
and the applicable Regulations and this Section 6.4.B., pursuant to any
method permitted under Regulations Section 1.704-3 as selected by the
Managing Member
Section 6.5. Other Provisions
A. Other Allocations. In the event that (i) any modifications are
made to the Code or any Regulations, (ii) any changes occur in any case law
applying or interpreting the Code or any Regulations, (iii) the IRS changes
or clarifies the manner in which it applies or interprets the Code or any
Regulations or any case law applying or interpreting the Code or any
Regulations or (iv) the IRS adjusts the reporting of any of the
transactions contemplated by this Agreement which, in each case, either
(a) requires allocations of items of income, gain, loss, deduction or
credit or (b) requires reporting of any of the transactions contemplated
by this Agreement in a manner different from that set forth in this Article
6, the Managing Member is hereby authorized to make new allocations or
report any such transactions (as the case may be) in reliance of the
foregoing, and such new allocations and reporting shall be deemed to be
made pursuant to the fiduciary duty of the Managing Member to the Company
and the other Members, and no such new allocation or reporting shall give
rise to any claim or cause of action by any Member.
B. Consistent Tax Reporting. The Members acknowledge and are aware
of the income tax consequences of the allocations made by this Article 6
and hereby agree to be bound by the provisions of this Article 6 in
reporting their shares of Net Income, Net Loss and other items of income,
gain, loss, deduction and credit for federal, state and local income tax
purposes.
Section 6.6. Amendments to Allocation to Reflect Issuance of Additional
Membership Interests
In the event that the Company issues additional Membership Interests to the
Managing or any Additional Member pursuant to Article 4 hereof, the Managing
Member shall make such revisions to this Article 6 as it determines are
necessary to reflect the terms of the issuance of such additional Membership
Interests, including making preferential allocations to certain classes of
Membership Interests.
ARTICLE 7.
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.1. Management
A. Except as otherwise expressly provided in this Agreement, the Managing
Member, in its capacity as a Member of the Company under the Act, shall have
sole and complete charge and management over the business and affairs of the
Company, in all respects and in all matters. The Managing Member shall at all
times act in good faith in exercising its powers hereunder. The Managing Member
shall be an agent of the Company's business, and the actions of the Managing
Member taken in such capacity and in accordance with this Agreement shall bind
the Company. The Managing Member shall at all times be a Member of the Company.
Except as otherwise expressly provided in this Agreement or required by any non-
waivable provisions of applicable law, the Non-Managing Members shall not
participate in the control of the Company, shall have no right, power or
authority to act for or on behalf of, or otherwise bind, the Company and shall
have no right to vote on or consent to any other matter, act, decision or
document involving the Company or its business. The Managing Member may not be
removed by the Members with or without cause, except with the consent of the
Managing Member. In addition to the powers now or hereafter granted a manager
of a limited liability company under applicable law or that are granted to the
Managing Member under any other provision of this Agreement, the Managing
Member, subject to the other provisions hereof including the limitations on the
authority of the Managing Member set forth in Section 7.3, shall have full power
and authority to do all things deemed necessary or desirable by it to conduct
the business of the Company, to exercise all powers set forth in Section 3.2
hereof and to effectuate the purposes set forth in Section 3.1 hereof,
including, without limitation:
(1) the making of any expenditures, the lending or borrowing of money
(including, without limitation, making prepayments on loans and borrowing
money to permit the Company to make distributions to its Members in such
amounts as will permit the Managing Member (so long as the Managing Member
qualifies as a REIT) to avoid the payment of any federal income tax
(including, for this purpose, any excise tax pursuant to Code Section 4981)
and to make distributions to its shareholders sufficient to permit the
Managing Member to maintain REIT status or otherwise to satisfy the REIT
Requirements), the assumption or guarantee of, or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness (including the securing of same by deed to secure debt,
mortgage, deed of trust or other lien or encumbrance on the Company's
assets) and the incurring of any obligations that it deems necessary for
the conduct of the activities of the Company;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Company;
(3) except as restricted pursuant to Section 7.3.E(2) hereof, the
acquisition, sale, transfer, exchange or other disposition of any assets of
the Company (including, but not limited to, the exercise or grant of any
conversion, option, privilege or subscription right or any other right
available in connection with any assets at any time held by the Company);
(4) except as restricted in this Agreement, the mortgage, pledge,
encumbrance or hypothecation of any assets of the Company (including,
without limitation, any Contributed Property), the use of the assets of the
Company (including, without limitation, cash on hand) for any purpose
consistent with the terms of this Agreement which the Managing Member
believes will directly benefit the Company and on any terms that the
Managing Member reasonably sees fit, including, without limitation, the
financing of the conduct or the operations of the Company and the repayment
of obligations of the Company;
(5) the management, operation, leasing, landscaping, repair,
alteration, demolition, replacement or improvement of any Property,
including, without limitation, any Contributed Property, or other asset of
the Company or any Subsidiary;
(6) the negotiation, execution and performance of any contracts,
leases, conveyances or other instruments that the Managing Member considers
useful or necessary to the conduct of the Company's operations or the
implementation of the Managing Member's powers under this Agreement,
including, without limitation, (i) contracting with property managers
(including, without limitation, as to any Contributed Property or other
Property, contracting with the contributing or any other Member or its
Affiliates for property management services), contractors, developers,
consultants, accountants, legal counsel, other professional advisors and
other agents and the payment of their expenses and compensation out of the
Company's assets, and (ii) the execution, delivery and performance of the
Contribution Agreement and the agreements and instruments referred to
therein or contemplated thereby, including the Management Agreement (as
defined in the Contribution Agreement);
(7) the distribution of Company cash or other Company assets in
accordance with this Agreement, the holding, management, investment and
reinvestment of cash and other assets of the Company, and the collection
and receipt of revenues, rents and income of the Company;
(8) the selection and dismissal of employees of the Company or the
Managing Member (including, without limitation, employees having titles or
offices such as "president," "vice president," "secretary" and
"treasurer"), and agents, outside attorneys, accountants, consultants and
contractors of the Company or the Managing Member and the determination of
their compensation and other terms of employment or hiring;
(9) the maintenance of such insurance including casualty, liability,
earthquake and other insurance on the Properties of the Company for the
benefit of the Company and the Members comparable in coverage to that
maintained by the Managing Member with respect to the properties it owns
and otherwise as it deems necessary or appropriate;
(10) the control of any matters affecting the rights and obligations
of the Company, including the settlement, compromise, submission to
arbitration or any other form of dispute resolution, or abandonment, of any
claim, cause of action, liability, debt or damages, due or owing to or from
the Company, the commencement or defense of suits, legal proceedings,
administrative proceedings, arbitrations or other forms of dispute
resolution, and the representation of the Company in all suits or legal
proceedings, administrative proceedings, arbitrations or other forms of
dispute resolution, the incurring of legal expense, and the indemnification
of any Person against liabilities and contingencies to the extent permitted
by law;
(11) the determination of the fair market value of any Company
property distributed in kind using such reasonable method of valuation as
it may adopt; provided that such methods are otherwise consistent with the
requirements of this Agreement;
(12) the enforcement of any rights against any Member pursuant to
representations, warranties, covenants and indemnities relating to such
Member's contribution of property or assets to the Company;
(13) holding, managing, investing and reinvesting cash and other
assets of the Company;
(14) the collection and receipt of revenues and income of the Company;
(15) the exercise, directly or indirectly, through any attorney-in-
fact acting under a general or limited power of attorney, of any right,
including the right to vote, appurtenant to any asset or investment held by
the Company;
(16) the exercise of any of the powers of the Managing Member
enumerated in this Agreement on behalf of or in connection with any
Subsidiary of the Company or any other Person in which the Company has a
direct or indirect interest, or jointly with any such Subsidiary or other
Person;
(17) the maintenance of working capital and other reserves in such
amounts as the Managing Member deems appropriate and reasonable from time
to time, subject to the limitations set forth in Sections 7.3.B(9) and (10)
hereof;
(18) the making, execution and delivery of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties, indemnities,
waivers, releases or legal instruments or agreements in writing necessary
or appropriate in the judgment of the Managing Member for the
accomplishment of any of the powers of the Managing Member enumerated in
this Agreement;
(19) the distribution of cash to acquire LLC Units held by a Member in
connection with a Member's exercise of its Exchange Right under Section 8.6
hereof; and
(20) the amendment and restatement of Exhibit A hereto to reflect
accurately at all times the Capital Accounts, LLC Units, and Percentage
Interests of the Members as the same are adjusted from time to time to the
extent necessary to reflect redemptions, Capital Contributions, the
issuance of LLC Units, the admission of any Substituted Member or
otherwise, as long as the matter or event being reflected in Exhibit A
hereto otherwise is authorized by this Agreement.
B. Each of the Non-Managing Members agrees that, except as provided in
Section 7.3 hereof, the Managing Member is authorized to execute, deliver and
perform the above-mentioned agreements and transactions on behalf of the Company
without any further act, approval or vote of the Non-Managing Members,
notwithstanding any other provision of this Agreement (except as provided in
Section 7.3 hereof), the Act or any applicable law, rule or regulation. The
execution, delivery or performance by the Managing Member or the Company of any
agreement authorized or permitted under this Agreement shall not constitute a
breach by the Managing Member of any duty that the Managing Member may owe the
Company or the Members or any other Persons under this Agreement or of any duty
stated or implied by law or equity.
C. At all times from and after the date hereof, the Managing Member may
cause the Company to obtain and maintain liability insurance for the Indemnities
hereunder.
D. In exercising its permitted authority under this Agreement, the
Managing Member may, but shall be under no obligation to, take into account the
tax consequences to any Member (including the Managing Member) of any action
taken by it. The Managing Member and the Company shall not have liability to a
Member under any circumstances as a result of an income tax liability incurred
by such Member as a result of an action (or inaction) by the Managing Member
pursuant to its authority under this Agreement so long as the action or inaction
is taken in good faith. The provisions of this Section 7.1.D shall not affect
the obligations of the Managing Member under Section 7.3.E hereof.
Section 7.2. Certificate of Formation
To the extent that such action is determined by the Managing Member to be
reasonable and necessary or appropriate, the Managing Member shall file
amendments to and restatements of the Certificate and do all the things to
maintain the Company as a limited liability company under the laws of the State
of Delaware and each other state, the District of Columbia or any other
jurisdiction in which the Company may elect to do business or own property.
Subject to the terms of Section 8.5.A(4) hereof, the Managing Member shall not
be required, before or after filing, to deliver or mail a copy of the
Certificate or any amendment thereto to any Member. The Managing Member shall
use all reasonable efforts to cause to be filed such other certificates or
documents as may be reasonable and necessary or appropriate for the formation,
continuation, qualification and operation of a limited liability company in the
State of Delaware and any other state, or the District of Columbia or other
jurisdiction in which the Company may elect to do business or own property.
Section 7.3. Restrictions on Managing Member's Authority
A. The Managing Member may not take any action in contravention of an
express prohibition or limitation of this Agreement, including, without
limitation:
(1) take any action that would make it impossible to carry on the
ordinary business of the Company, except as otherwise provided in this
Agreement;
(2) possess Company property, or assign any rights in specific
Company property, for other than a Company purpose except as otherwise
provided in this Agreement;
(3) admit a Person as a Member, except as otherwise provided in this
Agreement;
(4) perform any act that would subject a Member to liability as a
Managing Member in any jurisdiction or any other liability except as
provided herein or under the Act; or
(5) enter into any contract, mortgage, loan or other agreement that
expressly prohibits or restricts, or has the effect of prohibiting or
restricting, the ability of (a) the Managing Member or the Company from
satisfying its obligations under Section 8.6 hereof in full or (b) a
Member from exercising its rights to an Exchange in full, except, in either
case, with the written consent of such Member affected by the prohibition.
B. The Managing Member shall not, without the prior Consent of the Non-
Managing Members undertake or have the authority to do or undertake, on behalf
of the Company, any of the following actions or enter into any transaction which
would have the effect of such transactions:
(1) except as provided in Section 7.3.C, amend, modify or terminate
this Agreement other than to reflect the admission, substitution,
termination or withdrawal of Members pursuant to Article 11 or Article 12
hereof;
(2) make a general assignment for the benefit of creditors or appoint
or acquiesce in the appointment of a Custodian for all or any part of the
assets of the Company;
(3) institute any proceeding for bankruptcy on behalf of the Company;
(4) confess a judgment against the Company;
(5) approve or acquiesce to the Transfer of the Membership Interest
of the Managing Member to any Person other than the Company;
(6) admit into the Company any Additional or Substitute Managing
Member;
(7) incur any Debt other than Refinancing Debt;
(8) acquire any additional real property;
(9) establish any reserves during the one-year period commencing on
the Effective Date; or
(10) maintain any reserve at any time subsequent to the first
anniversary of the Effective Date in an amount in excess of the amount
computed by multiplying the number of rentable square feet contained in the
Properties by 50 cents.
C. Notwithstanding Section 7.3.B, the Managing Member shall have the
exclusive power to amend this Agreement as may be required to facilitate or
implement any of the following purposes:
(1) to add to the obligations of the Managing Member or surrender any
right or power granted to the Managing Member or any Affiliate of the
Managing Member for the benefit of the Non-Managing Members;
(2) to reflect the issuance of additional Membership Interests
pursuant to Section 4.3 or the admission, substitution, termination, or
withdrawal of Members in accordance with this Agreement and to amend
Exhibit A in connection with such admission, substitution or withdrawal;
(3) to reflect a change that is of an inconsequential nature and does
not adversely affect the Non-Managing Members in any material respect, or
to cure any ambiguity, correct or supplement any provision in this
Agreement not inconsistent with law or with other provisions, or make other
changes with respect to matters arising under this Agreement that will not
be inconsistent with law or with the provisions of this Agreement;
(4) to satisfy any requirements, conditions, or guidelines contained
in any order, directive, opinion, ruling or regulation of a federal or
state agency or contained in federal or state law;
(5) to reflect such changes as are reasonably necessary for the
Managing Member to maintain its status as a REIT or to satisfy the REIT
Requirements; and
(6) to modify, as set forth in the definition of "Capital Account,"
the manner in which Capital Accounts are computed.
The Managing Member will provide at least ten (10) days' notice to the Non-
Managing Member Representative of any action to be taken under this Section
7.3.C before the action is taken.
D. Notwithstanding Section 7.3.B and 7.3.C hereof, this Agreement shall
not be amended with respect to any Member adversely affected, and no action may
be taken by the Managing Member, without the Consent of such Member adversely
affected if such amendment or action would (i) convert a Non-Managing Member's
interest in the Company into a Managing Member's interest, (ii) modify the
limited liability of a Non-Managing Member, (iii) alter rights of the Member to
receive distributions pursuant to Article 5 or Section 13.2.A(4), or the
allocations specified in Article 6 (except as permitted pursuant to Section 4.3
and Section 7.3.C(3) hereof), (iv) materially alter or modify the rights to an
Exchange as set forth in Section 8.6, and related definitions hereof or (v)
amend this Section 7.3.D. Further, no amendment may alter the restrictions on
the Managing Member's authority set forth elsewhere in this Section 7.3 without
the Consent specified in such section. Any such amendment or action consented
to by any Member shall be effective as to that Member, notwithstanding the
absence of such consent by any other Member.
E. So long as the Initial Non-Managing Members own Non-Managing Member
Units representing at least 3% of the aggregate number of LLC Units issued on
the Effective Date, the Managing Member shall not, on behalf of the Company,
take any of the following actions without the prior Consent of the Non-Managing
Members:
(1) dissolve the Company for a period of five years from the
Effective Date; or
(2) except in connection with a tax-free transaction and except
pursuant to the Option Agreement (as defined in the Contribution
Agreement), sell, dispose, convey or otherwise transfer any of the real
properties (including any personal property related thereto) which the
Company acquired in connection with the transactions consummated pursuant
to the Contribution Agreement (collectively, the "Real Properties") for a
period of five years from the Effective Date.
Section 7.4. Compensation of the Managing Member
The Managing Member shall not be compensated for its services as the
manager of the Company. Distributions, payments and allocations to which the
Managing Member may be entitled in its capacity as the Managing Member shall not
constitute compensation for services rendered by the Managing Member as provided
in this Agreement (including the provisions of Articles 5 and 6 hereof).
Section 7.5. Other Business of Managing Member
The Managing Member shall devote to the Company such time as may be
necessary for the performance of its duties as Managing Member, but the Managing
Member is not required, and is not expected, to devote its full time to the
performance of such duties. The Managing Member may engage independently or
with others in other business ventures of every nature and description,
including, without limitation, the ownership of other properties and the making
or management of other investments. Nothing in this Agreement shall be deemed
to prohibit the Managing Member or any Affiliate of the Managing Member from
dealing, or otherwise engaging in business with, Persons transacting business
with the Company, or from providing services related to the purchase, sale,
financing, management, development or operation of real or personal property and
receiving compensation therefor, not involving any rebate or reciprocal
arrangement that would have the effect of circumventing any restriction set
forth herein upon dealings with the Managing Member or any Affiliate of the
Managing Member. Neither the Company nor any Member shall have any right by
virtue of this Agreement or the relationship created hereby in or to such other
ventures or activities or to the income or proceeds derived therefrom, and the
pursuit of such ventures, even if competitive with the business of the Company,
shall not be deemed wrongful or improper.
Section 7.6. Contracts with Affiliates
Except as expressly permitted by this Agreement, neither the Managing
Member nor any of its Affiliates, directly or indirectly, shall sell, transfer
or convey any property to, or purchase any property from, or borrow funds from,
or lend funds to, the Company or engage in any other transaction with the
Company, except upon terms determined by the Managing Member in good faith to be
fair and reasonable and comparable to terms that could be obtained from an
unaffiliated party in an arm's length transaction.
Section 7.7. Indemnification
A. To the fullest extent permitted by applicable law, the Company shall
indemnify each Indemnitee from and against any and all losses, claims, damages,
liabilities, joint or several, expenses (including, without limitation,
attorney's fees and other legal fees and expenses), judgments, fines,
settlements and other amounts arising from any and all claims, demands, actions,
suits or proceedings, civil, criminal, administrative or investigative, that
relate to the operations of the Company ("Actions") as set forth in this
Agreement in which such Indemnitee may be involved, or is threatened to be
involved, as a party or otherwise unless it is established that: (i) the act or
omission of the Indemnitee was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the Indemnitee actually received an improper
personal benefit in money, property or services; or (iii) in the case of any
criminal proceeding, the Indemnitee had reasonable cause to believe that the act
or omission was unlawful. Without limitation the foregoing indemnity shall
extend to any liability of any Indemnitee, pursuant to a loan guaranty or
otherwise, for any indebtedness of the Company or any Subsidiary of the Company
(including, without limitation, any indebtedness which the Company or any
Subsidiary of the Company has assumed or taken subject to), and the Managing
Member is hereby authorized and empowered, on behalf of the Company, to enter
into one or more indemnity agreements consistent with the provisions of this
Section 7.7 in favor of any Indemnitee having or potentially having liability
for any such indebtedness. The termination of any proceeding by judgment, order
or settlement does not create a presumption that the Indemnitee did not meet the
requisite standard of conduct set forth in this Section 7.7.A. The termination
of any proceeding by conviction or upon a plea of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, creates a
rebuttable presumption that the Indemnitee acted in a manner contrary to that
specified in this Section 7.7.A with respect to the subject matter of such
proceeding. Any indemnification pursuant to this Section 7.7 shall be made only
out of the assets of the Company, and any insurance proceeds from the liability
policy covering the Managing Member and any Indemnitees, and neither the
Managing Member nor any Non-Managing Member shall have any obligation to
contribute to the capital of the Company or otherwise provide funds to enable
the Company to fund its obligations under this Section 7.7.
B. Reasonable expenses incurred by an Indemnitee who is a party to a
proceeding or otherwise subject to or the focus of or is involved in any Action
shall be paid or reimbursed by the Company as incurred by the Indemnitee in
advance of the final disposition of the Action upon receipt by the Company of
(i) a written affirmation by the Indemnitee of the Indemnitee's good faith
belief that the standard of conduct necessary for indemnification by the Company
as authorized in Section 7.7.A has been met, and (ii) a written undertaking by
or on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.
C. The indemnification provided by this Section 7.7 shall be in addition
to any other rights to which an Indemnitee or any other Person may be entitled
under any agreement, pursuant to any vote of the Members, as a matter of law or
otherwise, and shall continue as to an Indemnitee who has ceased to serve in
such capacity unless otherwise provided in a written agreement with such
Indemnitee or in the writing pursuant to which such Indemnitee is indemnified.
D. The Company may, but shall not be obligated to, purchase and maintain
insurance, on behalf of any of the Indemnitees and such other Persons as the
Managing Member shall determine, against any liability that may be asserted
against or expenses that may be incurred by such Person in connection with the
Company's activities, regardless of whether the Company would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
E. In no event may an Indemnitee subject any of the Members to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
F. An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the transaction
with respect to which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
G. The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons. Any
amendment, modification or repeal of this Section 7.7 or any provision hereof
shall be prospective only and shall not in any way affect the limitations on the
Company's liability to any Indemnitee under this Section 7.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
H. If and to the extent any reimbursements to the Managing Member
pursuant to this Section 7.7 constitute gross income to the Managing Member (as
opposed to the repayment of advances made by the Managing Member on behalf of
the Company) such amounts shall constitute guaranteed payments within the
meaning of Code Section 707(c), shall be treated consistently therewith by the
Company and all Members, and shall not be treated as distributions for purposes
of computing the Members' Capital Accounts.
Section 7.8. Liability of the Managing Member
A. Notwithstanding anything to the contrary set forth in this Agreement,
neither the Managing Member nor any of its directors or officers shall be liable
or accountable in damages or otherwise to the Company, any Members or any
Assignees for losses sustained, liabilities incurred or benefits not derived as
a result of errors in judgment or mistakes of fact or law or of any act or
omission if the Managing Member or such director or officer acted in good faith.
B. The Non-Managing Members and the Managing Member expressly acknowledge
that the Managing Member is acting for the benefit of the Company, the Members
and the Managing Member's shareholders collectively, that the Managing Member is
under no obligation to give priority to the separate interests of the Members or
the Managing Member's shareholders (including, without limitation, the tax
consequences to Members, Assignees or the Managing Member's shareholders) in
deciding whether to cause the Company to take (or decline to take) any actions
and that the Managing Member shall not be liable to the Company or to any Member
for monetary damages for losses sustained, liabilities incurred, or benefits not
derived by Non-Managing Members in connection with such decisions, provided that
the Managing Member has acted in good faith and has not breached its express
covenants set forth in this Agreement.
C. Subject to its obligations and duties as Managing Member set forth in
Section 7.1.A hereof, the Managing Member may exercise any of the powers granted
to it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its employees or agents. The Managing Member
shall not be responsible for any misconduct or negligence on the part of any
such agent appointed by it in good faith.
D. Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the Managing Member's, and its officers' and directors',
liability to the Company and the Non-Managing Members under this Section 7.8 as
in effect immediately prior to such amendment, modification or repeal with
respect to claims arising from or relating to matters occurring, in whole or in
part, prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
Section 7.10. Other Matters Concerning the Managing Member
A. The Managing Member may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other paper
or document believed by it in good faith to be genuine and to have been signed
or presented by the proper party or parties.
B. The Managing Member may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers, architects, engineers,
environmental consultants and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the opinion of such
Persons as to matters that the Managing Member reasonably believes to be within
such Person's professional or expert competence shall be conclusively presumed
to have been done or omitted in good faith and in accordance with such opinion.
C. The Managing Member shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers and a duly appointed attorney or attorneys-in-fact. Each such attorney
shall, to the extent provided by the Managing Member in the power of attorney,
have full power and authority to do and perform all and every act and duty that
is permitted or required to be done by the Managing Member hereunder.
D. Notwithstanding any other provisions of this Agreement or the Act, any
action of the Managing Member on behalf of the Company or any decision of the
Managing Member to refrain from acting on behalf of the Company undertaken in
the good faith belief that such action or omission is necessary or advisable in
order (i) to protect the ability of the Managing Member to continue to qualify
as a REIT, (ii) for the Managing Member otherwise to satisfy the REIT
Requirements or (iii) to allow the Managing Member to avoid incurring any
liability for taxes under Section 857 or Section 4981 of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the Non-
Managing Members.
Section 7.10. Title to Company Assets
Title to Company assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Company as an entity,
and no Member, individually or collectively with other Members or Persons, shall
have any ownership interest in such Company assets or any portion thereof. All
Company assets shall be recorded as the property of the Company in its books and
records, irrespective of the name in which legal title to such Company assets is
held.
Section 7.11 Reliance by Third Parties
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Company shall be entitled to assume that the Managing Member
has full power and authority, without the consent or approval of any other
Member or Person, to encumber, sell or otherwise use in any manner any and all
assets of the Company and to enter into any contracts on behalf of the Company,
and take any and all actions on behalf of the Company, and such Person shall be
entitled to deal with the Managing Member as if it were the Company's sole party
in interest, both legally and beneficially. Each Non-Managing Member hereby
waives any and all defenses or other remedies that may be available against such
Person to contest, negate or disaffirm any action of the Managing Member in
connection with any such dealing. In no event shall any Person dealing with the
Managing Member or its representatives be obligated to ascertain that the terms
of this Agreement have been complied with or to inquire into the necessity or
expediency of any act or action of the Managing Member or its representatives.
Each and every certificate, document or other instrument executed on behalf of
the Company by the Managing Member or its representatives shall be conclusive
evidence in favor of any and every Person relying thereon or claiming thereunder
that (i) at the time of the execution and delivery of such certificate, document
or instrument, this Agreement was in full force and effect, (ii) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the Company and (iii)
such certificate, document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and is binding upon
the Company.
ARTICLE 8.
RIGHTS AND OBLIGATIONS OF MEMBERS
Section 8.1. Limitation of Liability
The Non-Managing Members shall have no liability under this Agreement
except as expressly provided in this Agreement or under the Act.
Section 8.2. Managing of Business
No Non-Managing Members or Assignee (other than the Managing Member, any of
its Affiliates or any officer, director, employee, partner, agent or trustee of
the Managing Member, the Company or any of their Affiliates, in their capacity
as such) shall take part in the operations, management or control (within the
meaning of the Act) of the Company's business transact any business in the
Company's name or have the power to sign documents for or otherwise bind the
Company. The transaction of any such business by the Managing Member, any of
its Affiliates or any officer, director, employee, partner, agent or trustee of
the Managing Member, the Company or any of their Affiliates, in their capacity
as such, shall not affect, impair or eliminate the limitations on the liability
of the Non-Managing Members or Assignees under this Agreement.
Section 8.3. Outside Activities of Members
Subject to any agreements entered into by a Member or its Affiliates with
the Managing Member, the Company or a Subsidiary (including, without limitation,
any employment agreement), any Member and any Assignee, officer, director,
employee, agent, trustee, Affiliate or shareholder of any Member shall be
entitled to and may have business interests and engage in business activities in
addition to those relating to the Company, including business interests and
activities that are in direct or indirect competition with the Company or that
are enhanced by the activities of the Company. Neither the Company nor any
Member shall have any rights by virtue of this Agreement in any business
ventures of any Member or Assignee. Subject to such agreements, none of the
Members nor any other Person shall have any rights by virtue of this Agreement
or the relationship established hereby in any business ventures of any other
Person (other than the Managing Member, to the extent expressly provided
herein), and such Person shall have no obligation pursuant to this Agreement,
subject to any agreements entered into by a Member or its Affiliates with the
Managing Member, the Company or a Subsidiary, to offer any interest in any such
business ventures to the Company, any Member or any such other Person, even if
such opportunity is of a character that, if presented to the Company, any Member
or such other Person, could be taken by such Person.
Section 8.4. Return of Capital
Except pursuant to the rights of Exchange set forth in Section 8.6 hereof,
no Member shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent of distributions made pursuant to this
Agreement or upon termination of the Company as provided herein. Except to the
extent provided in Article 5, Article 6 and Article 13 hereof or otherwise
expressly provided in this Agreement, no Member or Assignee shall have priority
over any other Member or Assignee either as to the return of Capital
Contributions or as to profits, losses, distributions or credits.
Section 8.5. Rights of Non-Managing Members Relating to the Company
A. In addition to other rights provided by this Agreement or by the Act,
and except as limited by Section 8.5.C hereof, each Non-Managing Member shall
have the right, for a purpose reasonably related to such Non-Managing Member's
Membership Interest in the Company, upon written demand and at such Non-Managing
Member's own expense:
(1) to obtain a copy of (i) the most recent annual and quarterly
reports filed with the SEC by the Managing Member pursuant to the Exchange
Act and (ii) each report or other written communication sent to the
shareholders of the Managing Member;
(2) to obtain a copy of the Company's federal, state and local income
tax returns for each Fiscal Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Member;
(4) to obtain a copy of this Agreement and the Certificate and all
amendments thereto, together with executed copies of all powers of attorney
pursuant to which this Agreement, the Certificate and all amendments
thereto have been executed; and
(5) to obtain true and full information regarding the amount of cash
and a description and statement of any other property or services
contributed by each Member and that each Member has agreed to contribute in
the future, and the date on which each became a Member.
B. The Company shall notify any Non-Managing Member of the then current
Adjustment Factor or any change made to the Adjustment Factor or to the REIT
Shares Amount within 30 days following such change or adjustment.
C. Notwithstanding any other provision of this Section 8.5, the Managing
Member may keep confidential from the Non-Managing Members, for such period of
time as the Managing Member determines in its sole and absolute discretion to be
reasonable, any information that (i) the Managing Member believes to be in the
nature of trade secrets or other information the disclosure of which the
Managing Member in good faith believes is not in the best interests of the
Company or could damage the Company or its business or (ii) the Company or the
Managing Member is required by law or by agreements with unaffiliated third
parties to keep confidential.
Section 8.6. Exchange Rights
A. On or after the date one year after the Effective Date, each Non-
Managing Member shall have the right (subject to the terms and conditions set
forth herein) to require the Managing Member to acquire all or a portion of the
Non-Managing Member Units held by such Non-Managing Member (such Non-Managing
Member Units being hereafter called "Tendered Units") in exchange
(an "Exchange") for, at the election of and in the sole and absolute discretion
of the Managing Member, either the Cash Amount or a number of REIT Shares equal
to the REIT Shares Amount payable on the Specified Exchange Date. Any Exchange
shall be exercised pursuant to a Notice of Exchange delivered to the Managing
Member by the Non-Managing Member exercising the Exchange right (the "Tendering
Party"). No Tendering Party shall be entitled to tender Non-Managing Member
Units pursuant hereto for exchange on a Specified Exchange Date in an amount
less than the lesser of (i) 1,000 Non-Managing Member Units, or (ii) all of the
Non-Managing Member Units then owned by the Tendering Party. On the Specified
Exchange Date, the Tendering Party shall sell the Tendered Units to the Managing
Member in exchange for, at the election of and in the sole and absolute
discretion of the Managing Member, either the Cash Amount or a number of REIT
Shares equal to the REIT Shares Amount. In the event that on the LLC
Distribution Date most recently preceding the Specified Exchange Date there
shall have been a Preferred Return Shortfall remaining in respect of the
Tendered Units following the payments made on such LLC Distribution Date
pursuant to Section 5.1 hereof, the Managing Member shall pay the Tendering
Party in cash on the Specified Exchange Date the amount of such Preferred Return
Shortfall remaining on such LLC Distribution Date in respect of the Tendered
Units. Any Tendered Units so acquired by the Managing Member pursuant to this
Section 8.6.A shall be held by the Managing Member as Non-Managing Member Units
with all the rights and preferences relating thereto as provided in this
Agreement. The Tendering Party shall submit (i) such information, certification
or affidavit as the Managing Member may reasonably require in connection with
the Ownership Limit and (ii) in the event the REIT Shares issuable upon such
Exchange are not registered for resale by the Tendering Party under the
Securities Act, such written representations, investment letters, legal opinions
or other instruments necessary, in the Managing Member's view, to effect
compliance with the Securities Act. If a Cash Amount is to be delivered upon
the Exchange, the Cash Amount shall be delivered as a certified check payable to
the Tendering Party or, in the Managing Member's sole discretion, in immediately
available funds. If REIT Shares are to be delivered upon the Exchange, the REIT
Shares Amount shall be delivered by the Managing Member as duly authorized,
validly issued, fully paid and nonassessable REIT Shares (and, if applicable,
Rights), free of any pledge, lien, encumbrance or restriction, other than the
Ownership Limit and, in the event the REIT Shares issuable upon such Exchange
are not registered for resale by the Tendering Party under the Securities Act,
the Securities Act and relevant state securities or "blue sky" laws. The
Tendering Party shall be deemed the owner of such REIT Shares and Rights for all
purposes, including, without limitation, rights to vote or consent, receive
dividends, and exercise rights, as of the Specified Exchange Date. REIT Shares
issued upon an acquisition of the Tendered Units by the Managing Member pursuant
to this Section 8.6.A may contain such legends regarding restrictions on
transfer or ownership to protect the Managing Member's tax status as a REIT and
in the event the REIT Shares issuable upon such Exchange are not registered for
resale by the Tendering Party under the Securities Act, restrictions under the
Securities Act and applicable state securities laws as the Managing Member in
good faith determines to be necessary or advisable in order to ensure compliance
with such laws.
B. Notwithstanding the provisions of Section 8.6.A hereof, no Non-
Managing Member shall have any right to tender for Exchange (whether for the
REIT Shares Amount or the Cash Amount) any Excess LLC Units held by such Non-
Managing Member. The Managing Member shall have no obligation to acquire Excess
LLC Units, whether for the REIT Shares Amount or the Cash Amount.
C. Notwithstanding anything herein to the contrary, with respect to any
Exchange pursuant to this Section 8.6 each Tendering Party shall continue to own
all LLC Units subject to any Exchange, and be treated as a Member with respect
to such LLC Units for all purposes of this Agreement, until such LLC Units are
transferred to the Managing Member and paid for or exchanged on the Specified
Exchange Date. Until a Specified Exchange Date and an acquisition of the
Tendered Units by the Managing Member pursuant to Section 8.6.A hereof, the
Tendering Party shall have no rights as a shareholder of the Managing Member
with respect to the REIT Shares issuable in connection with such acquisition.
D. In connection with an exercise of Exchange rights pursuant to this
Section 8.6, the Tendering Party shall submit the following to the Managing
Member, in addition to the Notice of Exchange:
(1) A written affidavit, dated the same date as, and accompanying,
the Notice of Exchange, (a) disclosing the actual and constructive
ownership, as determined for purposes of Code Sections 856(a)(6), 856(h),
856(d)(2)(b) and 856(d)(5), of REIT Shares by (i) such Tendering Party and
(ii) any Related Party and (b) representing that, after giving effect to
the Exchange, neither the Tendering Party nor any Related Party will own
REIT Shares in excess of the Ownership Limit;
(2) A written representation that neither the Tendering Party nor any
Related Party has any intention to acquire any additional REIT Shares prior
to the closing of the Exchange on the Specified Exchange Date; and
(3) An undertaking to certify, at and as a condition to the closing
of the Exchange that either (a) the actual and constructive ownership of
REIT Shares by the Tendering Party and any Related Party remain unchanged
from that disclosed in the affidavit required by Section 8.6.D(1) or (b)
after giving effect to the Exchange, neither the Tendering Party nor any
Related Party shall own REIT Shares in violation of the Ownership Limit.
ARTICLE 9.
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1. Records and Accounting
A. The Managing Member shall keep or cause to be kept at the principal
office of the Company those records and documents required to be maintained by
the Act and other books and records deemed by the Managing Member to be
appropriate with respect to the Company's business, including, without
limitation, all books and records necessary to provide to the Members any
information, lists and copies of documents required to be provided pursuant to
Section 9.3 hereof. Any records maintained by or on behalf of the Company in
the regular course of its business may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, micrographics or any other information
storage device, provided that the records so maintained are convertible into
clearly legible written form within a reasonable period of time.
B. The books of the Company shall be maintained, for financial and tax
reporting purposes, on an accrual basis in accordance with generally accepted
accounting principles, or on such other basis as the Managing Member determines
to be necessary or appropriate.
Section 9.2. Fiscal Year
The Fiscal Year of the Company shall be the calendar year.
Section 9.3. Reports
As soon as practicable, but in no event later than 90 days after the close
of each calendar quarter, the Managing Member shall cause to be mailed to each
Member of record as of the last day of the calendar quarter, a copy of the
general ledger of the Company covering the calendar quarter.
ARTICLE 10.
TAX MATTERS
Section 10.1. Preparation of Tax Returns
The Managing Member shall arrange for the preparation and timely filing of
all returns with respect to Company income, gains, deductions, losses and other
items required of the Company for federal and state income tax purposes and
shall use all reasonable efforts to furnish, within 90 days of the close of each
taxable year, the tax information reasonably required by Members for federal and
state income tax reporting purposes.
Section 10.2. Tax Elections
Except as otherwise provided herein, the Managing Member shall, in its sole
and absolute discretion, determine whether to make any available election
pursuant to the Code, including, without limitation, the election under Section
754 of the Code. The Managing Member shall have the right to seek to revoke any
such election (including, without limitation, any election under Code Sections
754) upon the Managing Member's determination in its sole and absolute
discretion that such revocation is in the best interests of the Members.
Section 10.3. Tax Matters Partner
A. The Managing Member shall be designated and shall operate as "Tax
Matters Partner" (as defined in Code Section 6231), to oversee or handle matters
relating to the taxation of the Company.
B. The Member designated as "Tax Matters Partner" may make all elections
for federal income and all other tax purposes (including, without limitation,
pursuant to Code Section 754).
C. Income tax returns of the Company shall be prepared by such certified
public accountant(s) as the Managing Member shall retain at the expense of the
Company.
Section 10.4. Organizational Expenses
The Company shall elect to deduct expenses, if any, incurred by it in
organizing the Company ratably over a 60-month period as provided in Code
Section 709.
ARTICLE 11.
TRANSFERS AND WITHDRAWALS
Section 11.1. Transfer
A. No part of the interest of a Member shall be subject to the claims of
any creditor, to any spouse for alimony or support, or to legal process, and may
not be voluntarily or involuntarily alienated or encumbered except as may be
specifically provided for in this Agreement.
B. No Membership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article 11.
Any transfer or purported transfer of a Membership Interest not made in
accordance with this Article 11 shall be null and void ab initio.
Section 11.2. Transfer of Managing Member's Membership Interest
A. Except in connection with a transaction described in Section 11.2.B,
the Managing Member shall not withdraw from the Company and shall not transfer
all or any portion of its interest in the Company without the Consent of all of
the Non-Managing Members, which may be given or withheld by each Non-Managing
Member in its sole and absolute discretion. Upon any transfer of the Membership
Interest of the Managing Member in accordance with the provisions of this
Section 11.2, the transferee shall become a Substitute Managing Member for all
purposes herein, and shall be vested with the powers and rights of the
transferor Managing Member, and shall be liable for all obligations and
responsible for all duties of the Managing Member, once such transferee has
executed such instruments as may be necessary to effectuate such admission and
to confirm the agreement of such transferee to be bound by all the terms and
provisions of this Agreement with respect to the Membership Interest so
acquired. It is a condition to any transfer otherwise permitted hereunder that
the transferee assumes, by operation of law or express agreement, all of the
obligations of the transferor Managing Member under this Agreement with respect
to such transferred Membership Interest, and such transfer shall relieve the
transferor Managing Member of its obligations under this Agreement accruing
subsequent to the date of such transfer. In the event the Managing Member
withdraws from the Company, in violation of this Agreement or otherwise, or
otherwise dissolves or terminates, or upon the Incapacity of the Managing
Member, all of the remaining Members may elect to continue the Company business
by selecting a Substitute Managing Member in accordance with the Act.
B. The Managing Member shall not engage in any merger, consolidation or
other combination with or into another person, sale of all or substantially all
of its assets or any reclassification, recapitalization or change of its
outstanding equity interests (a "Termination Transaction"), unless either
(i) the Termination Transaction has been approved by the Consent of the Non-
Managing Members or (ii) in connection with the Termination Transaction, all
holders of LLC Units (other than the Managing Member) either will receive, or
will have the right to elect to receive, for each LLC Unit an amount of cash,
securities, or other property equal to the amount that would have been paid to
the holder had the LLC Unit been Exchanged for REIT Shares pursuant to Section
8.6 hereof immediately prior to the consummation of the Termination Transaction;
provided, however, that, if, in connection with the Termination Transaction, a
purchase, tender or exchange offer shall have been made to and accepted by the
holders of more than fifty percent (50%) of the outstanding REIT Shares, each
Member shall receive, or shall have the right to elect to receive, the greatest
amount of cash, securities, or other property which such Member would have
received had it exchanged its LLC Units for REIT Shares pursuant to Section 8.6
immediately prior to the expiration of such purchase, tender or exchange offer
and had thereupon accepted such purchase, tender or exchange offer.
Section 11.3. Non-Managing Members' Rights to Transfer
A. Right of First Refusal. If any Non-Managing Member proposes to
Transfer all or any portion of its Membership Interest for consideration, it
shall give notice thereof (the "Transfer Notice") to the Managing Member. The
Transfer Notice shall include the name and identity of the prospective
transferee, the date upon which such Transfer is to be consummated, which shall
not be more than 180 days after the date of the Transfer Notice, and the price
and terms on which the Non-Managing Member proposes to Transfer its Membership
Interest. For a period of ten (10) Business Days following its receipt of the
Transfer Notice, the Managing Member shall have an option to purchase the entire
Membership Interest offered at the price and on the terms set forth in the
Transfer Notice. The failure of the Managing Member to exercise its option
shall constitute a waiver thereof by the Managing Member with respect to the
transaction described in the Transfer Notice. Should the option be exercised by
the Managing Member, the sale to the Managing Member shall be consummated on or
before the later of (a) 30 days after the date on which the option was exercised
or (b) the date specified in the Transfer Notice as the date upon which the
proposed Transfer was to be consummated, for the price and on the terms set
forth in the Transfer Notice, and the transferring Non-Managing Member shall
execute and deliver all documents necessary to effectuate the Transfer of the
Membership Interest to the Managing Member. Should the option not be exercised
by the Managing Member, the Non-Managing Member may transfer the Membership
interested so offered, on or before the date specified in the Transfer Notice,
for the price, on the terms and to the transferee specified in the Transfer
Notice, subject to the limitations and provisions set forth in this Article 11.
Should such a Transfer not be timely consummated as aforesaid, then the
Membership Interest shall again become subject to the foregoing right of first
refusal. If the right of first refusal described in this Section 11.3.A is
exercised by the Managing Member, then the costs of the transaction, including
without limitation recording fees, escrow costs and attorneys' fees reasonably
incurred by the Company in connection with the Transfer, shall be shared equally
by the Managing Member and the transferring Non-Managing Member. If the
transferring Non-Managing Manager transfers its Membership Interest to a
purchaser other than the Managing Member, all costs of the transaction shall be
borne by the transferring Non-Managing Member. The transferring Non-Managing
Manager shall deliver all appropriate transfer documents, which shall be in form
and content satisfactory to the Managing Member.
B. Conditions to Transfer. It is a condition to any Transfer otherwise
permitted hereunder that the transferee assume by operation of law or express
agreement all of the obligations of the transferor Member under this Agreement
with respect to such Transferred Membership Interest. Notwithstanding the
foregoing, any transferee of any Transferred Membership Interest shall be
subject to the Ownership Limits and any and all ownership limitations contained
in the Charter. Any transferee, whether or not admitted as a Substituted
Member, shall take subject to the obligations of the transferor hereunder.
Unless admitted as a Substituted Member, no transferee, whether by a voluntary
Transfer, by operation of law or otherwise, shall have any rights hereunder,
other than the rights of an Assignee as provided in Section 11.5 hereof.
C. Incapacity. If a Non-Managing Member is subject to Incapacity, the
executor, administrator, trustee, committee, guardian, conservator or receiver
of such Non-Managing Member's estate shall have all the rights of a Non-Managing
Member, but not more rights than those enjoyed by other Non-Managing Members,
for the purpose of settling or managing the estate, and such power as the
Incapacitated Non-Managing Member possessed to Transfer all or any part of its
interest in the Company. The Incapacity of a Non-Managing Member, in and of
itself, shall not dissolve or terminate the Company.
D. Opinion of Counsel. In connection with any Transfer of a Membership
Interest, the Managing Member shall have the right to receive an opinion of
counsel reasonably satisfactory to it to the effect that the proposed Transfer
may be effected without registration under the Securities Act and will not
otherwise violate any federal or state securities laws or regulations applicable
to the Company or the Membership Interests Transferred. If, in the opinion of
such counsel, such Transfer would require the filing of a registration statement
under the Securities Act or would otherwise violate any federal or state
securities laws or regulations applicable to the Company or the LLC Units, the
Managing Member may prohibit any Transfer by a Member of Membership Interests
otherwise permitted under this Section 11.3.
E. Adverse Tax Consequences. No Transfer by a Member of its Membership
Interests (excluding any Exchange pursuant to Section 8.6) may be made to any
Person if (i) in the opinion of legal counsel for the Company, it could result
in the Company being treated as an association taxable as a corporation for
federal income tax or for state income or franchise tax purposes, (ii) in the
opinion of legal counsel for the Company, it could adversely affect the ability
of the Managing Member to continue to qualify as a REIT or could subject the
Managing Member to any additional taxes under Code Section 857 or Code Section
4981 or (iii) such Transfer is effectuated through an "established securities
market" or a "secondary market (or the substantial equivalent thereof)" within
the meaning of Code Section 7704 (as determined in the sole discretion of the
Managing Member).
F. Transfers to Lenders. No Transfer of any LLC Units may be made to a
lender to the Company or any Person who is related (within the meaning of
Section 1.752-4(b) of the Regulations) to any lender to the Company whose loan
constitutes a Nonrecourse Liability, without the consent of the Managing Member,
in its sole and absolute discretion; provided that, as a condition to such
consent, the lender will be required to enter into an arrangement with the
Company and the Managing Member to redeem or exchange for the REIT Shares Amount
any LLC Units in which a security interest is held simultaneously with the time
at which such lender would be deemed to be a member in the Company for purposes
of allocating liabilities to such lender under Code Section 752.
G. Pledge of Non-Managing Member Units. A Non-Managing Member shall be
entitled to pledge the Non-Managing Member Units owned by him or it to a lender
as security for a loan made by the lender to the Non-Managing Member. Subject
to compliance with the Ownership Limit and Section 11.3.F hereof, the Non-
Managing Member Units so pledged may be Transferred to the lender, and the
lender, at its option, shall become a Substituted Member in respect of the Non-
Managing Member Units so Transferred to it, upon foreclosure of the pledge or
other exercise of the rights of the lender as a secured party so long as the
lender represents to the Company and the Managing Member, in form and substance
satisfactory to the Managing Member in its reasonable discretion, that it is an
accredited investor within the meaning of Regulation D under the Securities Act
and that it is acquiring its interest in the Non-Managing Member Units for
investment only and not with a view to the distribution of the Non-Managing
Member Units in violation of the Securities Act.
H. Distribution of Non-Managing Member Units Upon Dissolution of
Cambridge Medical Center of San Diego, LLC. Cambridge Medical Center of San
Diego, LLC, a Non-Managing Member, shall be entitled to Transfer Non-Managing
Member Units held by it upon its dissolution and liquidation so long as each
party so receiving Non-Managing Member Units represents to the Company, in form
and substance satisfactory to the Managing Member in its reasonable discretion,
that it, he or she (i) is an "accredited investor" within the meaning of
Regulation D under the Securities Act, and (ii) is acquiring the Non-Managing
Member Units for investment only and not with a view to the distribution of the
Non-Managing Member Units in violation of the Securities Act.
Section 11.4. Substituted Members
A. No Member shall have the right to substitute a transferee (including
any transferees pursuant to Transfers permitted by Section 11.3 hereof) as a
Member in its place. The Managing Member shall, however, have the right to
consent to the admission of a transferee of the interest of a Member pursuant to
this Section 11.4 as a Substituted Member, which consent may be given or
withheld by the Managing Member in its sole and absolute discretion. The
Managing Member's failure or refusal to permit a transferee of any such
interests to become a Substituted Member shall not give rise to any cause of
action against the Company or any Member.
B. A transferee who has been admitted as a Substituted Member in
accordance with this Article 11 shall have all the rights and powers and be
subject to all the restrictions and liabilities of a Member under this
Agreement. The admission of any transferee as a Substituted Member shall be
subject to the transferee executing and delivering to the Company an acceptance
of all of the terms and conditions of this Agreement (including without
limitation, the provisions of Section 2.4 and such other documents or
instruments as may be required to effect the admission).
C. Upon the admission of a Substituted Member, the Managing Member shall
amend Exhibit A to reflect the name, address, Capital Account, number of LLC
Units and Percentage Interest of such Substituted Member and to eliminate or
adjust, if necessary, the name, address, Capital Account, number of LLC Units
and Percentage Interest of the predecessor of such Substituted Member (and any
other Member, as necessary).
Section 11.5. Assignees
If the Managing Member, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 hereof
as a Substituted Member, as described in Section 11.4 hereof, such transferee
shall be considered an Assignee for purposes of this Agreement. An Assignee
shall be entitled to all the rights of an assignee of a limited liability
company interest under the Act, including the right to receive distributions
from the Company and the share of Net Income, Net Loss and other items of
income, gain, loss, deduction and credit of the Company attributable to the LLC
Units assigned to such transferee, the rights to Transfer the LLC Units provided
in this Article 11, and the right of Exchange provided in Section 8.6, but shall
not be deemed to be a Member of LLC Units for any other purpose under this
Agreement, and shall not be entitled to effect a Consent or vote with respect to
such LLC Units on any matter presented to the Members for approval (such right
to Consent or vote, to the extent provided in this Agreement or under the Act,
fully remaining with the transferor Member). In the event that any such
transferee desires to make a further assignment of any such LLC Units, such
transferee shall be subject to all the provisions of this Article 11 to the same
extent and in the same manner as any Members desiring to make an assignment of
LLC Units. The Managing Member shall have no liability under any circumstance
with respect to any Assignee as to which it does not have notice.
Section 11.6. General Provisions
A. No Non-Managing Member may withdraw from the Company other than (i) as
a result of a permitted Transfer of all of such Non-Managing Member's LLC Units
in accordance with this Article 11 and the transferee(s) of such LLC Units being
admitting to the Company as a Substituted Member or (ii) pursuant to an Exchange
by the Non-Managing Member of all of its LLC Units under Section 8.6 hereof.
B. Any Member who shall Transfer all of its LLC Units in a Transfer
(i) permitted pursuant to this Article 11 where such transferee was admitted as
a Substituted Member or (ii) pursuant to the exercise of its rights to effect an
Exchange of all of its LLC Units under Section 8.6 hereof, shall cease to be a
Member.
C. Transfers pursuant to this Article 11 (other than pledges pursuant to
Section 11.3.G Transfers upon dissolution pursuant to Section 11.3.H) may only
be made on the first day of a fiscal quarter of the Company, unless the Managing
Member otherwise agrees.
D. All distributions of Available Cash attributable to an LLC Unit with
respect to which the LLC Record Date is before the date of a Transfer or an
Exchange of the LLC Unit shall be made to the transferor Member and all
distributions of Available Cash thereafter attributable to such LLC Unit shall
be made to the transferee Member.
E. Notwithstanding anything to the contrary set forth herein, in addition
to any other restrictions on Transfer herein contained, in no event may any
Transfer or assignment of a Membership Interest by any Member (including any
Exchange or any other acquisition of LLC Units by the Company) be made:
(a) to any person or entity who lacks the legal right, power or
capacity to own a Membership Interest;
(b) in violation of applicable law;
(c) if such Transfer would, in the opinion of counsel to the Company
or the Managing Member, cause an increased tax liability to any other
Member or Assignee as a result of the termination of the Company, in either
case for federal or state income or franchise tax purposes (except as a
result of the Exchange of all LLC Units held by all Members);
(d) if such Transfer could, in the opinion of legal counsel to the
Company, cause the Company either (i) to cease to be classified as a
partnership or (ii) to be classified as a publicly traded partnership
treated as a corporation, in either case for federal or state income tax
purposes (except as a result of the Exchange of all LLC Units held by all
Members);
(e) if such Transfer would cause the Company to become, with respect
to any employee benefit plan subject to Title I of ERISA, a "party-in-
interest" (as defined in ERISA Section 3(14)) or a "disqualified person"
(as defined in Code Section 4975(c));
(f) if such Transfer would, in the opinion of legal counsel to the
Company, cause any portion of the assets of the Company to constitute
assets of any employee benefit plan pursuant to Department of Labor
Regulations Section 2510.2-101;
(g) if such Transfer causes the Company (as opposed to the Managing
Member) to become a reporting company under the Exchange Act;
(h) if such Transfer subjects the Company to regulation under the
Investment Company Act of 1940, the Investment Advisors Act of 1940 or
ERISA, each as amended; or
(i) without the consent of the Managing Member, which may be given or
withheld in its sole discretion, if such Transfer would result in the
Company having more than 100 Members (including as Members those persons
indirectly owning an interest in the Company through a partnership, limited
liability company, S corporation or grantor trust (such entity, a "flow
through entity"), but only if substantially all of the value of such
person's interest in the flow through entity is attributable to the flow
through entity's interest (direct or indirect) in the Company).
ARTICLE 12.
ADMISSION OF MEMBERS
Section 12.1. Admission of Successor Managing Member
A successor to all of the Managing Member's Membership Interest pursuant to
Section 11.2 hereof who is proposed to be admitted as a successor Managing
Member shall be admitted to the Company as the Managing Member, effective
immediately upon such Transfer. Any such successor shall carry on the business
of the Company without dissolution. In each case, the admission shall be
subject to the successor Managing Member executing and delivering to the Company
an acceptance of all of the terms, conditions and applicable obligations of this
Agreement and such other documents or instruments as may be required to effect
the admission.
Section 12.2. Amendment of Agreement and Certificate
For the admission to the Company of any Member, the Managing Member shall
take all steps necessary and appropriate under the Act to amend the records of
the Company and, if necessary, to prepare as soon as practical an amendment of
this Agreement (including an amendment of Exhibit A) and, if required by law,
shall prepare and file an amendment to the Certificate and may for this purpose
exercise the power of attorney granted pursuant to Section 2.4 hereof.
Section 12.3. Limitation on Admission of Substituted Members
No Person shall be admitted to the Company as a Substituted Member if, in
the opinion of legal counsel for the Company, it would result in the Company
being treated as a corporation for federal income tax purposes or otherwise
cause the Company to become a reporting company under the Exchange Act.
ARTICLE 13.
DISSOLUTION, LIQUIDATION AND TERMINATION
Section 13.1. Dissolution
The Company shall not be dissolved by the admission of Substituted Members
or by the admission of a successor Managing Member in accordance with the terms
of this Agreement. Upon the withdrawal of the Managing Member, any successor
Managing Member shall continue the business of the Company without dissolution.
However, the Company shall dissolve, and its affairs shall be wound up, upon the
first to occur of any of the following (each a "Liquidating Event"):
A. the expiration of its term as provided in Section 2.5 hereof, in which
case the Managing Member shall have the right to purchase any outstanding Non-
Managing Member Units and any of the Company's Properties at their fair market
value at such time;
B. an event of withdrawal of the Managing Member, as defined in the Act
(other than an event of bankruptcy), unless, within 90 days after the
withdrawal, a Majority of Remaining Members agree in writing to continue the
business of the Company and to the appointment, effective as of the date of
withdrawal, of a substitute Managing Member;
C. subject to the provisions of Section 7.3.E hereof, an election to
dissolve the Company made by the Managing Member;
D. entry of a decree of judicial dissolution of the Company pursuant to
the provisions of the Act;
E. the sale of all or substantially all of the assets and properties of
the Company;
F. a final and non-appealable judgment is entered by a court of competent
jurisdiction ruling that the Managing Member is bankrupt or insolvent, or a
final and non-appealable order for relief is entered by a court with appropriate
jurisdiction against the Managing Member, in each case under any Bankruptcy Law
as now or hereafter in effect, unless prior to or within ninety days after the
entry of such order or judgment a Majority of Remaining Members Consent in
writing to continue the business of the Company and to the appointment,
effective as of a date prior to the date of such order or judgment, of a
substitute Managing Member;
G. the Incapacity of the Managing Member, unless prior to or within 90
days after such Incapacity a Majority of Remaining Members agree in writing to
continue the business of the Company and to the appointment, effective as of a
date prior to the date of such Incapacity, of a substitute Managing Member; or
H. the Exchange of all LLC Units (other than those held by the Managing
Member).
Section 13.2. Winding Up
A. Upon the occurrence of a Liquidating Event, the Company shall continue
solely for the purposes of winding up its affairs in an orderly manner,
liquidating its assets and satisfying the claims of its creditors and Members.
After the occurrence of a Liquidating Event, no Member shall take any action
that is inconsistent with, or not necessary to or appropriate for, the winding
up of the Company's business and affairs. The Managing Member (or, in the event
that there is no remaining Managing Member, any Person elected by a Majority in
Interest of the Non-Managing Members (the Managing Member or such other Person
being referred to herein as the "Liquidator")) shall be responsible for
overseeing the winding up and dissolution of the Company and shall take full
account of the Company's liabilities and property, and the Company property
shall be liquidated as promptly as is consistent with obtaining the fair value
thereof, and the proceeds therefrom (which may, to the extent determined by the
Managing Member, include shares of stock in the Managing Member) shall be
applied and distributed in the following order:
(1) First, to the satisfaction of all of the Company's debts and
liabilities to creditors other than the Members and their Assignees
(whether by payment or the making of reasonable provision for payment
thereof);
(2) Second, to the satisfaction of all of the Company's debts and
liabilities to the Managing Member incurred with the consent of the Non-
Managing Members (whether by payment or the making of reasonable provision
for payment thereof), and to the satisfaction of all of the Company's debts
and liabilities to the other Members and any Assignees with the consent of
the Managing Member (whether by payment or the making of reasonable
provision for payment thereof), pro rata based upon the amount of the debts
and liabilities owing to the respective Managing Member, other Member and
Assignee; and
(3) The balance, if any, to the Members in accordance with and
proportion to their positive Capital Account balances, after giving effect
to all contributions, distributions and allocations for all periods,
including allocation made pursuant to Section 6.2.C to reflect Intended
Liquidating Distributions.
The Managing Member shall not receive any additional compensation for any
services performed pursuant to this Article 13.
B. Notwithstanding the provisions of Section 13.2.A hereof that require
liquidation of the assets of the Company, but subject to the order of priorities
set forth therein, if prior to or upon dissolution of the Company the Liquidator
determines that an immediate sale of part or all of the Company's assets would
be impractical or would cause undue loss to the Members, the Liquidator may, in
its sole and absolute discretion, defer for a reasonable time the liquidation of
any assets except those necessary to satisfy liabilities of the Company
(including to those Members as creditors) and/or distribute to the Members, in
lieu of cash, as tenants in common and in accordance with the provisions of
Section 13.2.A hereof, undivided interests in such Company assets as the
Liquidator deems not suitable for liquidation. Any such distributions in kind
shall be made only if, in the good faith judgment of the Liquidator, such
distributions in kind are in the best interest of the Members, and shall be
subject to such conditions relating to the disposition and management of such
properties as the Liquidator deems reasonable and equitable and to any
agreements governing the operation of such properties at such time. The
Liquidator shall determine the fair market value of any property distributed in
kind using such reasonable method of valuation as it may adopt.
C. In the event that the Company is "liquidated" within the meaning of
Regulations Section 1.704-1(b) (2)(ii)(g), distributions shall be made pursuant
to this Article 13 to the Members and Assignees that have positive Capital
Accounts in compliance with Regulations Section 1.704-1(b) (2)(ii)(b) (2) to the
extent of, and in proportion to, their positive Capital Account balances. If
any Member has a deficit balance in its Capital Account (after giving effect to
all contributions, distributions and allocations for all taxable years,
including the year during which such liquidation occurs), such Member shall have
no obligation to make any contribution to the capital of the Company with
respect to such deficit, and such deficit shall not be considered a debt owed to
the Company or to any other Person for any purpose whatsoever. In the sole and
absolute discretion of the Managing Member or the Liquidator, a pro rata portion
of the distributions that would otherwise be made to the Members pursuant to
this Article 13 may be withheld or escrowed to provide a reasonable reserve for
Company liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the Company, provided that such
withheld or escrowed amounts shall be distributed to the Members in the manner
and order of priority set forth in Section 13.2.A hereof as soon as practicable.
Section 13.3. Deemed Distribution and Recontribution
Notwithstanding any other provision of this Article 13, in the event that
the Company is liquidated within the meaning of Regulations Section 1.704-
1(b) (2)(ii)(g), but no Liquidating Event has occurred, the Company's Property
shall not be liquidated, the Company's liabilities shall not be paid or
discharged and the Company's affairs shall not be wound up. Instead, for
federal and state income tax purposes, the Company shall be deemed to have
distributed its assets in kind to the Members, who shall be deemed to have
assumed and taken such assets subject to all Company liabilities, all in
accordance with their respective Capital Accounts. Immediately thereafter, the
Members shall be deemed to have recontributed the Company assets in kind to the
Company, which shall be deemed to have assumed and taken such assets subject to
all such liabilities.
Section 13.4. Rights of Members
Except as otherwise provided in this Agreement, (a) each Member shall look
solely to the assets of the Company for the return of its Capital Contribution,
(b) no Member shall have the right or power to demand or receive property other
than cash from the Company and (c) except as provided in this Agreement, no
Member shall have priority over any other Member as to the return of its Capital
Contributions, distributions or allocations.
Section 13.5. Notice of Dissolution
In the event that a Liquidating Event occurs or an event occurs that would,
but for an election or objection by one or more Members pursuant to Section 13.1
hereof, result in a dissolution of the Company, the Managing Member shall,
within 30 days thereafter, provide written notice thereof to each of the Members
and, in the Managing Member's sole and absolute discretion or as required by the
Act, to all other parties with whom the Company regularly conducts business (as
determined in the sole and absolute discretion of the Managing Member), and the
Managing Member may, or, if required by the Act, shall, publish notice thereof
in a newspaper of general circulation in each place in which the Company
regularly conduct business (as determined in the sole and absolute discretion of
the Managing Member).
Section 13.6. Cancellation of Certificate
Upon the completion of the liquidation of the Company cash and property as
provided in Section 13.2 hereof, the Company shall be terminated and the
Certificate and all qualifications of the Company as a foreign limited liability
company in jurisdictions other than the State of Delaware shall be cancelled and
such other actions as may be necessary to terminate the Company shall be taken.
Section 13.7. Reasonable Time for Winding-Up
A reasonable time shall be allowed for the orderly winding-up of the
business and affairs of the Company and the liquidation of its assets pursuant
to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon
such winding-up, and the provisions of this Agreement shall remain in effect
between the Members during the period of liquidation.
Section 13.8. Liability of Liquidator
The Liquidator shall be indemnified and held harmless by the Company from
and against any and all claims, liabilities, costs, damages, and causes of
action of any nature whatsoever arising out of or incidental to the Liquidator's
taking of any action authorized under or within the scope of this Agreement;
provided, however, that the Liquidator shall not be entitled to indemnification,
and shall not be held harmless, where the claim, demand, liability, cost, damage
or cause of action at issue arises out of (i) a matter entirely unrelated to the
Liquidator's action or conduct pursuant to the provisions of this Agreement or
(ii) the proven willful misconduct or gross negligence of the Liquidator.
ARTICLE 14.
PROCEDURES FOR ACTIONS AND CONSENTS
OF MEMBERS; AMENDMENTS; MEETINGS
Section 14.1. Procedures for Actions and Consents of Members
The actions requiring consent or approval of Non-Managing Members pursuant
to this Agreement, including Section 7.3 hereof, or otherwise pursuant to
applicable law, are subject to the procedures set forth in this Article 14.
Section 14.2. Amendments
Amendments to this Agreement consistent with the terms of this Agreement
may be proposed by the Managing Member or by a Majority in Interest of the Non-
Managing Members. Following such proposal, the Managing Member shall submit any
proposed amendment to the Members. The Managing Member shall seek the written
Consent of the Members on the proposed amendment or shall call a meeting to vote
thereon and to transact any other business that the Managing Member may deem
appropriate. The affirmative vote or consent, as applicable, of the holders of
a majority of the outstanding LLC Units is required for the approval of a
proposed amendment. For purposes of obtaining a written consent, the Managing
Member may require a response within a reasonable specified time, but not less
than 15 days, and failure to respond in such time period shall constitute a
consent that is consistent with the Managing Member's recommendation with
respect to the proposal; provided, however, that an action shall become
effective at such time as requisite consents are received even if prior to such
specified time.
Section 14.3. Meetings of the Members
A. Meetings of the Members may be called by the Managing Member and shall
be called upon the receipt by the Managing Member of a written request by a
Majority in Interest of the Non-Managing Members. The call shall state the
nature of the business to be transacted. Notice of any such meeting shall be
given to all Members not less than seven days nor more than 30 days prior to the
date of such meeting. The meeting shall be held at the headquarters office of
the Managing Member or at such other location as may be designated by the
Managing Member. Members may vote in person or by proxy at such meeting.
Whenever the vote or Consent of Members is permitted or required under this
Agreement, such vote or Consent may be given at a meeting of Members or may be
given in accordance with the procedure prescribed in Section 14.3.B hereof.
B. Any action required or permitted to be taken at a meeting of the
Members may be taken without a meeting if a written consent setting forth the
action so taken is signed by Members holding a majority of the LLC Units (or
such other percentage as is expressly required by this Agreement for the action
in question). Such consent may be in one instrument or in several instruments,
and shall have the same force and effect as a vote of Members holding a majority
of the LLC Units (or such other percentage as is expressly required by this
Agreement). Such consent shall be filed with the Managing Member. An action so
taken shall be deemed to have been taken at a meeting held on the effective date
so certified.
C. Each Member may authorize any Person or Persons to act for it by proxy
on all matters in which a Member is entitled to participate, including waiving
notice of any meeting, or voting or participating at a meeting. Every proxy
must be signed by the Member or its attorney-in-fact. No proxy shall be valid
after the expiration of 11 months from the date thereof unless otherwise
provided in the proxy (or there is receipt of a proxy authorizing a later date).
Every proxy shall be revocable at the pleasure of the Member executing it, such
revocation to be effective upon the Company's receipt of written notice of such
revocation from the Member executing such proxy.
D. Each meeting of Members shall be conducted by the Managing Member or
such other Person as the Managing Member may appoint pursuant to such rules for
the conduct of the meeting as the Managing Member or such other Person deems
appropriate in its sole and absolute discretion. Without limitation, meetings
of Members may be conducted in the same manner as meetings of the Managing
Member's shareholders and may be held at the same time as, and as part of, the
meetings of the Managing Member's shareholders.
ARTICLE 15.
GENERAL PROVISIONS
Section 15.1. Addresses and Notice
Any notice, demand, request or report required or permitted to be given or
made to a Member or Assignee under this Agreement shall be in writing and shall
be deemed given or made when delivered in person or when sent by first class
United States mail or by other means of written communication (including by
telecopy, facsimile, or commercial courier service) (i) in the case of a Member,
to that Member at the address set forth in Exhibit A or such other address of
which the Member shall notify the Managing Member in writing and (ii) in the
case of an Assignee, to the address of which such Assignee shall notify the
Managing Member in writing.
Section 15.2. Titles and Captions
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" or
"Sections" are to Articles and Sections of this Agreement.
Section 15.3. Pronouns and Plurals
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 15.4. Further Action
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
Section 15.5. Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 15.6. Creditors
Other than as expressly set forth herein with respect to Indemnitees, none
of the provisions of this Agreement shall be for the benefit of, or shall be
enforceable by, any creditor of the Company.
Section 15.7. Waiver
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
Section 15.8. Counterparts
This Agreement may be executed in counterparts, all of which together shall
constitute one agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Section 15.9. Applicable Law
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the principles
of conflicts of law. In the event of a conflict between any provision of this
Agreement and any non-mandatory provision of the Act, the provisions of this
Agreement shall control and take precedence.
Section 15.10. Entire Agreement
This Agreement, the Contribution Agreement and the other agreements
executed on the Effective Date as provided in the Contribution Agreement contain
all of the understandings and agreements between and among the Members with
respect to the subject matter of this Agreement and the rights, interests and
obligations of the Members with respect to the Company.
Section 15.11 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 15.12. Limitation to Preserve REIT Status
Notwithstanding anything else to the contrary in this Agreement, to the extent
that any amount paid or credited to the Managing Member or its officers,
directors, employees or agents pursuant to Section 7.7 would constitute gross
income to the Managing Member for purposes of Sections 856(c)(2) or 856(c)(3) of
the Code (a "Managing Member Payment") then, notwithstanding any other provision
of this Agreement, the amount of such Managing Member Payments for any fiscal
year shall not exceed the lesser of:
(i) an amount equal to the excess, if any, of (a) 4.17% of the
Managing Member's total gross income (but not including the amount of any
Managing Member Payments) for the fiscal year which is described in
subsections (a) through (H) of Section 856(c)(2) of the Code over (b) the
amount of gross income (within the meaning of Section 856(c)(2) of the
Code) derived by the Managing Member from sources other than those
described in subsections (a) through (H) of Section 856(c)(2) of the Code
(but not including the amount of any Managing Member Payments); or
(ii) an amount equal to the excess, if any, of (a) 25% of the Managing
Member's total gross income (but not including the amount of any Managing
Member Payments) for the fiscal year which is described in subsections
(a) through (i) of Section 856(c)(3) of the Code over (b) the amount of
gross income (within the meaning of Section 856(c)(3) of the Code) derived
by the Managing Member from sources other than those described in
subsections (a) through (i) of Section 856(c)(3) of the Code (but not
including the amount of any Managing Member Payments);
provided, however, that Managing Member Payments in excess of the amounts set
forth in subparagraphs (i) and (ii) above may be made if the Managing Member, as
a condition precedent, obtains an opinion of tax counsel that the receipt of
such excess amounts would not adversely affect the Managing Member's ability to
qualify as a REIT. To the extent Managing Member Payments may not be made in a
year due to the foregoing limitations, such Managing Member Payments shall carry
over and be treated as arising in the following year; provided, however, that
such amounts shall not carry over for more than five years, and if not paid
within such five year period, shall expire; provided, further, that (a) as
Managing Member Payments are made, such payments shall be applied first to carry
over amounts outstanding, if any and (b) with respect to carry over amounts for
more than one Fiscal Year, such payments shall be applied to the earliest Fiscal
Year first.
Section 15.13. No Partition
No Member nor any successor-in-interest to a Member shall have the right
while this Agreement remains in effect to have any property of the Company
partitioned, or to file a complaint or institute to any proceeding at law or in
equity to have such property of the Company partitioned, and each Member, on
behalf of itself and its successors and assigns hereby waives any such right.
It is the intention of the Members that the rights of the parties hereto and
their successors-in-interest to Company property, as among themselves, shall be
governed by the terms of this Agreement, and that the rights of the Members and
their successors-in-interest shall be subject to the limitations and
restrictions as set forth in this Agreement.
Section 15.14. Non-Managing Member Representative
A. All actions taken by the Non-Managing Member Representative pursuant
to those provisions of this Agreement which authorize the Non-Managing Member
Representative to so act shall be binding upon all Non-Managing Members as if
they had individually taken such action and each Non-Managing Member, by
entering into or agreeing to be bound by the provisions of this Agreement,
authorize the Non-Managing Member Representative to take such actions on his,
her or its behalf and agree that the actions so taken shall be binding upon him,
her or it to the same extent as if he, she or it had taken the action directly.
B. The holders of a majority of the outstanding Non-Managing Members
Units shall be entitled to replace the Non-Managing Member Representative by
delivering to the Managing Member a written notice signed by the holders of a
majority of the outstanding Non-Managing Members Units stating (i) that the
notice is being provided to the Managing Member pursuant to this Section
15.14.B, (ii) that the Members signing the notice own of record on the books of
the Company a majority of the outstanding Non-Managing Members Units, (iii) that
the Members signing the notice desire to replace the person then serving as the
Non-Managing Member Representative with the person named in the notice, and
(iv) specifying the date on which the appointment of the named individual to
replace the then serving Non-Managing Member Representative shall be effective
(which shall be a date not earlier than the fourteenth day after the date on
which the notice shall have been delivered to the Managing Member). The
appointment of the new Non-Managing Member Representative specified in the
notice shall be effective on the date specified in the notice and upon
effectiveness, the individual previously serving as the Non-Managing Member
Representative shall cease to be entitled to act in that capacity under this
Agreement.
[Signatures appear on following page]
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the
date first written above.
MANAGING MEMBER:
HEALTH CARE PROPERTY INVESTORS, INC.,
a Maryland corporation
By:
Name:
Title:
NON-MANAGING MEMBERS:
CAMBRIDGE MEDICAL CENTER OF SAN DIEGO, LLC,
a California limited company
By: 8008 Frost, Inc., its Managing Member
By:
Name: Jean-Claude Saada
Title: President
<TABLE>
<CAPTION>
EXHIBIT A
MEMBERS' CAPITAL CONTRIBUTIONS
Gross Asset Less Debt Non-
Value of Assumed or Managing Managing
Cash Contributed Taken Subject Member Member
Name of Member Contributions Property to by Company Units Units
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Managing Member $40,500,000 1,048,951
Health Care Property Investors, Inc.
Non Managing Members
Cambridge Medical Center of
San Diego, LLC $47,000,000 $40,500,000 168,350
Totals $40,500,000 $47,000,000 $40,500,000 1,048,951 168,350
</TABLE>
<PAGE>
EXHIBIT B
NOTICE OF EXCHANGE
To: Health Care Property Investors, Inc.
4675 MacArthur Court, Suite 900
Newport Beach, California 92660
The undersigned Member or Assignee hereby irrevocably tenders for Exchange
___________ LLC Units in Cambridge Medical Properties, LLC in accordance with
the terms of the Amended and Restated Limited Liability Company Agreement of
Cambridge Medical Properties, LLC, dated as of November ___, 1997 (the
"Agreement"), and the Exchange rights referred to therein. The undersigned
Member or Assignee:
(a) undertakes (i) to surrender such LLC Units and any certificate
therefor at the closing of the Exchange and (ii) to furnish to the Managing
Member, prior to the Specified Exchange Date, the documentation, instruments and
information required under Section 8.6.D of the Agreement;
(b) directs that, at the sole discretion of the Managing Member, either
(i) a certified check representing the Cash Amount deliverable upon closing of
the Exchange be delivered to the address specified below or (ii) a
certificate(s) representing the REIT Shares deliverable upon the closing of such
Exchange be delivered to the address specified below;
(c) represents, warrants, certifies and agrees that: (1) the undersigned
Member or Assignee has, and at the closing of the Exchange will have, good,
marketable and unencumbered title to such LLC Units, free and clear of the
rights or interests of any other person or entity, (2) the undersigned Member or
Assignee has, and at the closing of the Exchange will have, the full right,
power and authority to tender and surrender such LLC Units as provided herein,
(3) the undersigned Member or Assignee has obtained the consent or approval of
all persons and entities, if any, having the right to consent to or approve such
tender and surrender, and (4) such Exchange is in compliance with the provisions
of Section 8.6 of the Agreement; and
(d) acknowledges that it will continue to own such LLC Units until and
unless such Exchange transaction closes.
All capitalized terms used herein and not otherwise defined shall have the same
meaning ascribed to them respectively in the Agreement.
Dated:
---------------------------------
Name of Member or Assignee:
---------------------------------
(Signature of Member or Assignee)
----------------------------------
(Street Address)
----------------------------------
(City) (State) (Zip)
Signature Guaranteed by:
Issue REIT Shares in the name of: -------------------------
Please insert social security or identifying number: ---------------------
<PAGE>
EXHIBIT C
Agreed Values of Real Properties
Property/ Rentable Initial Agreed
Property Type Square Feet Upon Values
- - ----------------- ----------- --------------
7910 Frost Street 20,355 $ 3,550,000
7920 Frost Street 24,820 3,950,000
7930 Frost Street 36,199 7,500,000
8008 Frost Street 46,438 11,100,000
8010 Frost Street 85,648 20,900,000
----------- -------------
TOTAL 213,460 $47,000,000
=========== =============
<PAGE>
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
CAMBRIDGE MEDICAL PROPERTIES, LLC
a Delaware limited liability company
Dated as of November 21, 1997
TABLE OF CONTENTS
Page
------
ARTICLE 1. DEFINED TERMS 1
ARTICLE 2. ORGANIZATIONAL MATTERS 17
Section 2.1. Formation 17
Section 2.2. Name 18
Section 2.3. Registered Office and Agent; Principal Place of
Business; Other Places of Business 18
Section 2.4. [Intentionally Deleted] 18
Section 2.5. Term 18
ARTICLE 3. PURPOSE 19
Section 3.1. Purpose and Business 19
Section 3.2. Powers 19
Section 3.3. Specified Purposes 19
Section 3.4. Representations and Warranties by the Members;
Disclaimer of Certain Representations 19
ARTICLE 4. CAPITAL CONTRIBUTIONS 22
Section 4.1. Capital Contributions of the Initial Members 22
Section 4.2. Loans by Third Parties 22
Section 4.3. Additional Capital Contributions 22
Section 4.4. No Interest; No Return 23
ARTICLE 5. DISTRIBUTIONS 23
Section 5.1. Requirement and Characterization of Distributions 23
Section 5.2. Distributions in Kind 23
Section 5.3. Amounts Withheld 23
Section 5.4. Distributions Upon Liquidation 24
Section 5.5. Restricted Distributions 24
Section 5.6. Distributions of Proceeds from Sale of Real
Properties and Refinancing Debt 24
Section 5.7. Offset 25
ARTICLE 6. ALLOCATIONS 25
Section 6.1. Timing and Amount of Allocations of Net Income
and Net Loss 25
Section 6.2. General Allocations 27
Section 6.3. Additional Allocation Provisions 28
Section 6.4. Tax Allocations 29
Section 6.5. Other Provisions 30
Section 6.6. Amendments to Allocation to Reflect Issuance
of Additional Membership Interests 29
ARTICLE 7. MANAGEMENT AND OPERATIONS OF BUSINESS 30
Section 7.1. Management 30
Section 7.2. Certificate of Formation 33
Section 7.3. Restrictions on Managing Member's Authority 34
Section 7.4. Compensation of the Managing Member 35
Section 7.5. Other Business of Managing Member 36
Section 7.6. Contracts with Affiliates 36
Section 7.7. Indemnification 36
Section 7.8. Liability of the Managing Member 37
Section 7.9. Other Matters Concerning the Managing Member 37
Section 7.10. Title to Company Assets 37
Section 7.11. Reliance by Third Parties 37
ARTICLE 8. RIGHTS AND OBLIGATIONS OF MEMBERS 37
Section 8.1. Limitation of Liability 37
Section 8.2. Managing of Business 37
Section 8.3. Outside Activities of Members 37
Section 8.4. Return of Capital 37
Section 8.5. Rights of Non-Managing Members Relating to the Company 37
Section 8.6. Exchange Rights 37
ARTICLE 9. BOOKS, RECORDS, ACCOUNTING AND REPORTS 37
Section 9.1. Records and Accounting 37
Section 9.2. Fiscal Year 37
Section 9.3. Reports 37
ARTICLE 10. TAX MATTERS 37
Section 10.1. Preparation of Tax Returns 37
Section 10.2. Tax Elections 37
Section 10.3. Tax Matters Partner 37
Section 10.4. Organizational Expenses 37
ARTICLE 11. TRANSFERS AND WITHDRAWALS 37
Section 11.1. Transfer 37
Section 11.2. Transfer of Managing Member's Membership Interest 37
Section 11.3. Non-Managing Members' Rights to Transfer 37
Section 11.4. Substituted Members 37
Section 11.5. Assignees 37
Section 11.6. General Provisions 37
ARTICLE 12. ADMISSION OF MEMBERS 37
Section 12.1. Admission of Successor Managing Member 37
Section 12.2. Amendment of Agreement and Certificate 37
Section 12.3. Limitation on Admission of Substituted Members 37
ARTICLE 13. DISSOLUTION, LIQUIDATION AND TERMINATION 37
Section 13.1. Dissolution 37
Section 13.2. Winding Up 37
Section 13.3. Deemed Distribution and Recontribution 37
Section 13.4. Rights of Members 37
Section 13.5. Notice of Dissolution 37
Section 13.6. Cancellation of Certificate 37
Section 13.7. Reasonable Time for Winding-Up 37
Section 13.8. Liability of Liquidator 37
ARTICLE 14. PROCEDURES FOR ACTIONS AND CONSENTS OF MEMBERS;
AMENDMENTS; MEETINGS 37
Section 14.1. Procedures for Actions and Consents of Members 37
Section 14.2. Amendments 37
Section 14.3. Meetings of the Members 37
ARTICLE 15. GENERAL PROVISIONS 37
Section 15.1. Addresses and Notice 37
Section 15.2. Titles and Captions 37
Section 15.3. Pronouns and Plurals 37
Section 15.4. Further Action 37
Section 15.5. Binding Effect 37
Section 15.6. Creditors 37
Section 15.7. Waiver 37
Section 15.8. Counterparts 37
Section 15.9. Applicable Law 37
Section 15.10. Entire Agreement 37
Section 15.11. Invalidity of Provisions 37
Section 15.12. Limitation to Preserve REIT Status 37
Section 15.13. No Partition 37
Section 15.14. Non-Managing Member Representative 37
Exhibit A Member Information A-1
Exhibit B Notice of Exchange B-1
Exhibit C Agreed Values of Real Properties C-1
Exhibit C-1 Allocations C-1-1
Exhibit D Distribution Illustrations D-1
Exhibit 4.6
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of November 21, 1997,
is entered into by and between Health Care Property Investors, Inc., a
Maryland corporation (the "Company"), and Cambridge Medical Center of San
Diego, LLC, a California limited liability company (the "Unitholder").
RECITALS
WHEREAS, the Company, the Unitholder and Cambridge Medical
Properties, LLC, a Delaware limited liability company (the "Operating LLC")
have entered into that certain Contribution Agreement dated as of the date
hereof (the "Contribution Agreement") providing, among other things, for the
contribution of certain property by the Unitholder to the Operating LLC and
the contribution of cash by the Company to the Operating LLC; and
WHEREAS, it is a condition to the closing of the transactions
contemplated by the Contribution Agreement that the parties hereto enter into
this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions.
The following capitalized terms, as used in this Agreement, have
the following meanings:
"Agreement" means this Registration Rights Agreement, as it may be
amended, supplemented or restated from time to time.
"Business Day" means any day except a Saturday, Sunday or other day
on which commercial banks in New York, New York or Los Angeles, California
are authorized by law to close.
"Closing Price" means (i) the closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any, or (ii) if the Common Stock is not traded on an exchange but
is quoted on NASDAQ or a successor quotation system, (1) the last sales price
(if the Common Stock is then listed as a National Market Issue under the NASD
National Market System) or (2) the mean between the closing representative
bid and asked prices (in all other cases) for the Common Stock as reported by
NASDAQ or such successor quotation system or (iii) if the Common Stock is not
publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the mean between the closing bid and asked prices for the
Common Stock.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, par value $1.00 per share,
of the Company.
"Contribution Agreement" has the meaning set forth in the recitals
to this Agreement.
"Demand Registration" has the meaning set forth in Section 3.2 (a)
hereof.
"Demand Registration Statement" has the meaning set forth in
Section 3.2 (a) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchangeable LLC Units" means LLC Units which may be exchanged for
Common Stock pursuant to the LLC Agreement.
"Filing Date" has the meaning set forth in Section 2.1 hereof.
"Full Conversion Date" has the meaning set forth in Section 2.1
hereof.
"Holder" means any Person (including the Unitholder) who is the
record or beneficial owner of any Registrable Security or any assignee or
transferee of such Registrable Security (including assignments or transfers
of Registrable Securities to such assignees or transferees as a result of the
foreclosure on any loans secured by such Registrable Securities) unless such
Registrable Security is acquired in a sale pursuant to a registration
statement under the Securities Act or pursuant to a transaction exempt from
registration under the Securities Act, in each such case where the security
sold in such transaction may be resold without subsequent registration under
the Securities Act.
"Issuance Registration Statement" has the meaning set forth in
Section 2.1.
"LLC Agreement" means the Amended and Restated Limited Liability
Company Agreement of the Operating LLC dated as of the date of this
Agreement, as the same may be amended, modified or restated from time to
time.
"LLC Units" has the meaning set forth in the LLC Agreement.
"Person" means an individual or a corporation, partnership, limited
liability company, association, trust, or any other entity or organization,
including a government or political subdivision or an agency or
instrumentality thereof.
"Piggy-Back Registration Statement" means any registration
statement of the Company in which Registrable Securities are included
pursuant to Section 3.2 hereof.
"Registrable Securities" means shares of Common Stock of the
Company issued upon exchange of Exchangeable LLC Units pursuant to the terms
of the LLC Agreement at any time owned, either of record or beneficially, by
any Holder unless and until (i) a registration statement covering such shares
has been declared effective by the Commission and the shares have been issued
by the Company to Holder upon exchange of Exchangeable LLC Units pursuant to
the effective registration statement or have been sold or transferred by
Holder to another Person pursuant to the effective registration statement,
(ii) such shares are sold pursuant to the provisions of Rule 144 under the
Securities Act (or any similar provisions then in force) ("Rule 144"), (iii)
such shares are held by a Holder who is not an affiliate of the Company
within the meaning of Rule 144 (a "Rule 144 Affiliate") and may be sold
pursuant to Rule 144(k) under the Securities Act, (iv) such shares are held
by a Holder who is a Rule 144 Affiliate and all such shares may be sold
pursuant to Rule 144 within a period of three months in accordance with the
volume limitations set forth in Rule 144(e)(1), or (iv) such shares have been
otherwise transferred in a transaction that would constitute a sale under the
Securities Act and such shares may be resold without subsequent registration
under the Securities Act.
"Resale Prospectus" has the meaning set forth in Section 3.5.
"Resale Registration Statement" has the meaning set forth in
Section 3.5.
"Reinstatement Period" has the meaning set forth in Section 3.1.
"S-3 Expiration Date" means the date on which Form S-3 (or a
similar successor form of registration statement) is not available to the
Company for the registration of Registrable Securities pursuant to the
Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means a Holder who is selling Registrable
Securities pursuant to a Demand Registration Statement or a Piggyback
Registration Statement.
"Supplemental Rights Period" has the meaning set forth in Section
3.1.
ARTICLE II
REGISTRATION
SECTION 2.1. Registration Statement Covering Issuance of Common
Stock. Subject to the provisions of Article III hereof, the Company will
file with the Commission a registration statement on Form S-3 (the "Issuance
Registration Statement") under Rule 415 under the Securities Act covering the
issuance to Holders of shares of Common Stock in exchange for Exchangeable
LLC Units, such filing to be made within the two (2) week period following
the date (the "Filing Date") which is the later of (i) a date which is thirty
(30) days prior to the first date on which the Exchangeable LLC Units issued
pursuant to the Contribution Agreement may be exchanged for shares of Common
Stock pursuant to the provisions of the LLC Agreement or (ii) such other date
as may be required by the Commission pursuant to its interpretation of
applicable federal securities laws and the rules and regulations promulgated
thereunder. The Company shall use its reasonable efforts to cause the
Issuance Registration Statement filed with the Commission to be declared
effective by the first anniversary of the date of this Agreement. In the
event the Company is unable to cause the Issuance Registration Statement to
be declared effective by the Commission by the first anniversary of the date
of this Agreement, then the rights of the Holders set forth in Section 3.1
hereof shall apply to Common Stock received by Holders upon exchange of the
Exchangeable LLC Units for shares of Common Stock. Notwithstanding the
availability of rights under Section 3.1 hereof, the Company shall continue
to use its reasonable efforts to cause the Issuance Registration Statement to
be declared effective by the Commission and if it shall be declared effective
by the Commission, the obligations of the Company under Section 3.1 hereof
shall cease, except to the extent expressly provided in the first sentence of
Section 2.1. The Company agrees to use its reasonable efforts to keep the
Issuance Registration Statement continuously effective (a) until the earlier
of (i) the S-3 Expiration Date, or (ii) the first date (the "Full Conversion
Date") on which no Exchangeable LLC Units (other than those held by the
Company) remain outstanding, and (b) during any Reinstatement Period.
ARTICLE III
REGISTRATION RIGHTS
SECTION 3.1. Registration Rights if Form S-3 is Not Available.
The following provisions shall apply with respect to Registrable
Securities during the period, if any, beginning on the S-3 Expiration Date
(or, if the S-3 Expiration Date shall occur before the first date on which
the Exchangeable LLC Units issued pursuant to the Contribution Agreement may
be exchanged for shares of Common Stock, beginning on such first date) and
ending on the date when the Company would no longer be obligated to maintain
the applicable registration statement in effect pursuant to the terms of
Section 2.1 if the S-3 Expiration Date had not occurred (the "Supplemental
Rights Period"), provided, however, that the Supplemental Rights Period shall
not include any period following the S-3 Expiration Date and prior to the
Full Conversion Date if during that period (the "Reinstatement Period") the
Company shall again be entitled to use Form S-3 or a similar successor form
of registration statement) for registration of the Registrable Securities.
During the Supplemental Rights Period, the Holders shall have the following
rights:
(a) Demand Right. Holders may make a written demand for
registration under the Securities Act of all or part of the Registrable
Securities (a "Demand Registration") and upon such demand the Company shall
be obligated to register such Registrable Securities under the Securities Act
in accordance with the provisions of this Agreement; provided, however, that
(i) the Company shall not be obligated to effect more than one Demand
Registration for Holders in any twelve month period, and (ii) the number of
Registrable Securities proposed to be sold by the Holders making such written
request either (i) shall be all the Registrable Securities owned by all
holders of Registrable Securities, or (ii) shall have an estimated market
value at the time of such request (based upon the then market price of a
share of Common Stock) of at least $1,000,000. The Company shall file any
registration statement required by this Section 3.1(a) (a "Demand
Registration Statement") with the SEC within thirty (30) days of receipt of
the requisite Holder demand and shall use its reasonable efforts to cause the
Demand Registration Statement to be declared effective by the SEC as soon as
practicable thereafter. The Company shall use its reasonable efforts to keep
each such Demand Registration Statement continuously effective for a period
of ninety (90) days, unless the offering pursuant to the Demand Registration
Statement is an underwritten offering and the managing underwriter requires
that the Demand Registration Statement be kept effective for a longer period
of time, in which event the Company shall maintain the effectiveness of the
Demand Registration Statement for such longer period up to one hundred twenty
(120) days (such period, in each case, to be extended by the number of days,
if any, during which Holders were not permitted to make offers or sales under
the Demand Registration Statement by reason of Section 3.3 hereof). The
Company may elect to include in any Demand Registration Statement additional
shares of Common Stock to be issued by the Company , subject, in the case of
an underwritten secondary Demand Registration, to cutback by the managing
underwriters. A registration shall not constitute a Demand Registration
under this Section 3.1(a) until the Demand Registration Statement has been
declared effective.
(b) Piggyback Rights. If the Company at any time during the
Supplemental Rights Period proposes to file a registration statement under
the Securities Act with respect to an offering of shares of Common Stock for
its own account or for the account of any holders of shares of its Common
Stock, in each case solely for cash (other than an Issuance Registration
Statement or a registration statement (i) on Form S-8 or any successor form
to Form S-8 or in connection with any employee or director welfare, benefit
or compensation plan, (ii) in connection with an exchange offer or an
offering of securities exclusively to existing security holders of the
Company or its subsidiaries or (iii) relating to a transaction pursuant to
Rule 145 of the Securities Act), the Company shall give written notice of the
proposed registration to the record owners of Registrable Securities at least
twenty (20) days prior to the filing of the registration statement. The
Holders of Registrable Securities shall have the right to request that all or
any part of the Registrable Securities be included in the registration by
giving written notice to the Company within ten (10) days after the giving of
the foregoing notice by the Company; provided, however, (A) if the
registration relates to an underwritten primary offering on behalf of the
Company and the managing underwriters of the offering determine in good faith
that the aggregate amount of securities of the Company which the Company,
Holders of Registrable Securities and holders of other piggyback registration
rights propose to include in the registration statement exceeds the maximum
amount of securities that could practicably be included therein, the Company
will include in the registration, up to such maximum amount, first, the
securities which the Company proposes to sell, and second, pro rata, the
Registrable Securities and the securities proposed to be included by any
holders of other piggyback registration rights, and (B) if the registration
is an underwritten secondary registration on behalf of any of the other
security holders of the Company (the "Secondary Offering Security Holders")
and the managing underwriters determine in good faith that the aggregate
amount of securities which the Holders of Registrable Securities, the
Secondary Offering Security Holders and the holders of other piggyback
registration rights propose to include in the registration exceeds the
maximum amount of securities that could practicably be included therein, the
Company will include in the registration, up to such maximum amount, first,
the securities to be sold for the account of the Secondary Offering Security
Holders, and second, pro rata, the Registrable Securities and the securities
proposed to be included by any holders of other piggyback registration
rights. (It is understood, however, that the underwriters shall have the
right to terminate entirely the participation of the Holders of Registrable
Securities if the underwriters eliminate entirely the participation in the
registration of all the other holders electing to include securities in the
registration (other than the Company and the Secondary Offering Security
Holders) because it is not practicable to include such securities in the
registration.) If the registration is not an underwritten registration, then
all of the Registrable Securities requested to be included in the
registration shall be included. Registrable Securities proposed to be
registered and sold pursuant to an underwritten offering for the account of
the Holders of Registrable Securities shall be sold to prospective
underwriters selected by such Holders and approved by the Company and on the
terms and subject to the conditions of one or more underwriting agreements
negotiated between the Company, the Secondary Offering Security Holders, the
Holders of Registrable Securities and any other holders demanding
registration and the prospective underwriters. Registrable Securities need
not be included in any registration statement pursuant to this provision if
in the opinion of counsel to the Company reasonably acceptable to the record
owners of Registrable Securities (a copy of which opinion is delivered to
such record owners) registration under the Securities Act is not required for
public distribution of the Registrable Securities. The Company shall have
the right to terminate or withdraw any registration initiated by it under
this Section 2.2(b) prior to the effectiveness of the registration statement
whether or not any holder has elected to include any Registrable Securities
in the registration statement.
(c) Company Repurchase. Upon receipt by the Company of a
registration request pursuant to this Section 3.1, the Company may, but will
not be obligated to, purchase for cash from any Holder so requesting
registration all, but not less than all, of the Registrable Securities which
are the subject of the request at a price per share equal to the average of
the Closing Prices of a share of Common Stock for the ten (10) trading days
immediately preceding the date of receipt by the Company of the registration
request. In the event the Company elects to purchase the Registrable
Securities which are the subject of a registration request, the Company shall
notify the Holder within five Business Days of the date of receipt of the
request by the Company, which notice shall indicate (i) that the Company will
purchase for cash the Registrable Securities held by the Holder which are the
subject of the request, (ii) the price per share, calculated in accordance
with the preceding sentence, which the Company will pay the Holder and (iii)
the date upon which the Company shall purchase the Registrable Securities,
which date shall not be later than the tenth business day after receipt of
the registration request. If the Company so elects to purchase the
Registrable Securities which are the subject of a registration request, then
upon such purchase the Company shall be relieved of its obligations under
this Section with respect to such Registrable Securities.
SECTION 3.2. Additional Registration Procedures.
In connection with any registration statement covering Registrable
Securities filed by the Company pursuant to Section 2.1 or 3.1 hereof:
(a) Each Holder agrees to provide in a timely manner
information requested by the Company regarding the proposed distribution by
that Holder of the Registrable Securities and all other information
reasonably requested by the Company in connection with the preparation of the
registration statement covering the Registrable Securities..
(b) In connection with any Demand Registration Statement or
Piggyback Registration Statement, the Company will furnish to each Selling
Holder of Registrable Securities that number of copies of the registration
statement or prospectus in conformity with the requirements of the Securities
Act and such other documents as the Selling Holder may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by
the Selling Holder.
(c) After the filing of the registration statement, the
Company will promptly notify each Selling Holder of Registrable Securities
covered by the registration statement of any stop order issued or threatened
by the Commission and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered.
(d) In connection with any Demand Registration Statement or
Piggyback Registration Statement, the Company will use reasonable efforts to
register or qualify the Registrable Securities under such securities or blue
sky laws of those jurisdictions in the United States (where an exemption is
not available) as any Selling Holder or managing underwriter or underwriters,
if any, reasonably (in light of the Selling Holder's intended plan of
distribution) requests, provided, however, that the Company will not be
required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this paragraph (d), (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction.
(e) In connection with any Demand Registration Statement or
Piggyback Registration Statement, the Company will enter into customary
agreements (including an underwriting agreement, if any, in customary form)
as are reasonably required in order to expedite or facilitate the disposition
of Registrable Securities pursuant to the Demand Registration Statement or
Piggyback Registration Statement. Each Selling Holder participating in an
underwritten offering shall also enter into and perform its or his
obligations under the underwriting agreement.
(f) The Company will use its reasonable efforts to cause all
such Registrable Securities to be listed on each securities exchange on which
similar securities issued by the Company are then listed.
SECTION 3.3. Material Developments; Suspension of Offering.
(a) Notwithstanding the provisions of Sections 2.1 or 3.1
hereof or any other provisions of this Agreement to the contrary, the Company
shall not be required to file a registration statement or to keep any
registration statement effective if the negotiation or consummation of a
transaction by the Company or any of its subsidiaries is pending or an event
has occurred, which negotiation, consummation or event would require
additional disclosure by the Company in the registration statement of
material information which the Company (in the judgment of management of the
Company) has a bona fide business purpose for keeping confidential and the
nondisclosure of which in the registration statement might cause the
registration statement to fail to comply with applicable disclosure
requirements; provided, however, that the Company (i) will promptly notify
the Holders of Registrable Securities otherwise entitled to registration of
the foregoing and (ii) may not delay, suspend or withdraw the registration
statement for such reason more than twice in any twelve (12) month period or
three times in any twenty-four (24) month period or for more than ninety (90)
days at any time. Upon receipt of any notice from the Company of the
happening of any event during the period the registration statement is
effective which is of a type specified in the preceding sentence or as a
result of which the registration statement or related prospectus contains any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statement therein, in
light of the circumstances under which they were made not misleading, Holders
agree that they will immediately discontinue offers and sales of the
Registrable Securities under the registration statement (until they receive
copies of a supplemental or amended prospectus that corrects the
misstatements or omissions and receive notice that any post-effective
amendment has become effective). If so directed by the Company, Holders will
deliver to the Company any copies of the prospectus covering the Registrable
Securities in their possession at the time of receipt of such notice. In the
event the Company shall give notice of the happening of an event of the kind
described in this Section 3.3(a), the Company shall extend the period during
which the affected registration statement is required to be maintained
pursuant to this Agreement by the number of days during the period from and
including the date of the giving of notice pursuant to this Section 3.3(a) to
the date when the Company shall make available a prospectus supplemented or
amended to conform with the requirements of the Securities Act.
(b) If all reports required to be filed by the Company
pursuant to the Exchange Act have not been filed by the required date without
regard to any extension, or if the consummation of any business combination
by the Company has occurred or is probable for purposes of Rule 3-05 or
Article 11 of Regulation S-X under the Securities Act, upon written notice
thereof by the Company to the Holders, the rights of the Holders to acquire
Registrable Securities pursuant to the Issuance Registration Statement or to
offer, sell or distribute any Registrable Securities pursuant to any Demand
Registration Statement or Piggyback Registration Statement or to require the
Company to take action with respect to the registration of any Registrable
Securities pursuant to this Agreement shall be suspended until the date on
which the Company has filed such reports or obtained and filed the financial
information required by Rule 3-05 or Article 11 of Regulation S-X to be
included or incorporated by reference, as applicable, in the Issuance
Registration Statement, the Demand Registration Statement or the Piggyback
Registration Statement and the Company shall notify the Holders as promptly
as practicable when such suspension is no longer required.
SECTION 3.4. Registration Expenses.
In connection with any registration statement required to be filed
hereunder, the Company shall pay the following registration expenses incurred
in connection with the registration (the "Registration Expenses"): (i) all
registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws, (iii) printing expenses, (iv) internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), (v) the fees and expenses
incurred in connection with the listing of the Registrable Securities on each
securities exchange on which similar securities issued by the Company are
then listed, (vi) fees and disbursements of counsel for the Company and the
independent public accountants of the Company, and (vii) the fees and
expenses of any experts retained by the Company in connection with such
registration. The Holders shall be responsible for the payment of any and
all other expenses incurred by them in connection with the registration and
sale of Registrable Securities, including, without limitation, brokerage and
sales commissions, underwriting fees, discounts and commissions attributable
to the Registrable Securities, fees and disbursements of counsel representing
the Holder, and any transfer taxes relating to the sale or disposition of the
Registrable Securities.
SECTION 3.5. Indemnification by the Company.
The Company agrees to indemnify and hold harmless each Selling
Holder, its officers, directors and agents, and each Person, if any, who
controls such Selling Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and all
losses, claims, damages and liabilities caused by any untrue statement or
alleged untrue statement of a material fact contained in any Demand
Registration Statement or Piggyback Registration Statement (individually, a
"Resale Registration Statement") or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were
made, not misleading, or arising out of any untrue statement or alleged
untrue statement of a material fact contained in any prospectus contained in
a Resale Registration Statement at the time it became effective (a "Resale
Prospectus"), or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information furnished in writing to the Company by such Selling Holder or on
such Selling Holder's behalf expressly for inclusion therein; provided,
however, that the Company will not be liable in any case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based
upon any untrue statement or omission contained in a Resale Prospectus which
was corrected in a supplement or amendment thereto if such claim is brought
by a purchaser of Registrable Securities from the Selling Holder and the
Selling Holder failed to deliver to such purchaser the supplement or
amendment to the Resale Prospectus in a timely manner.
SECTION 3.6. Indemnification by Holders of Registrable Securities.
Each Selling Holder of Resale Registrable Securities covered by a
Registration Statement agrees to indemnify and hold harmless the Company,
its officers, directors and agents and each Person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the indemnity set forth
in Section 3.6 from the Company to Selling Holders, but only with respect to
information relating to such Selling Holder furnished in writing by such
Selling Holder or on such Selling Holder's behalf expressly for use in any
Resale Registration Statement or Resale Prospectus or any amendment or
supplement thereto. Each Holder also agrees to indemnify and hold harmless
underwriters of the Registrable Securities, their officers and directors and
each Person who controls such underwriters within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act on substantially the
same basis as that of the indemnification of the Company provided in this
Section 3.7.
SECTION 3.7. Conduct of Indemnification Proceedings.
Each indemnified party shall give reasonably prompt notice to each
indemnifying party of any action or proceeding commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify
the indemnifying party (i) shall not relieve it from any liability which it
may have under the indemnity agreement provided in Section 3.5 or 3.6 above,
unless and to the extent it did not otherwise learn of such action and the
lack of notice by the indemnified party results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) shall not, in
any event, relieve the indemnifying party from any obligations to the
indemnified party other than the indemnification obligation provided under
Section 3.5 or 3.6 above. If the indemnifying party so elects within a
reasonable time after receipt of notice, the indemnifying party may assume
the defense of the action or proceeding at the indemnifying party's own
expense with counsel chosen by the indemnifying party and approved by the
indemnified party, which approval shall not be unreasonably withheld;
provided, however, that if the defendants in any such action or proceeding
include both the indemnified party and the indemnifying party and the
indemnified party reasonably determines based upon advice of legal counsel
experienced in such matters, that there may be legal defenses available to it
which are different from or in addition to those available to the
indemnifying party, then the indemnified party shall be entitled to separate
counsel at the indemnifying party's expense, which counsel shall be chosen by
the indemnified party and approved by the indemnifying party, which approval
shall not be unreasonably withheld; provided further, that it is understood
that the indemnifying party; shall not be liable for the fees, charges and
disbursements of more than one separate firm. If the indemnifying party does
not assume the defense, after having received the notice referred to in the
first sentence of this Section, the indemnifying party will pay the
reasonable fees and expenses of counsel for the indemnified party; in that
event, however, the indemnifying party will not be liable for any settlement
effected without the written consent of the indemnifying party. If an
indemnifying party assumes the defense of an action or proceeding in
accordance with this Section, the indemnifying party shall not be liable for
any fees and expenses of counsel for the indemnified party incurred
thereafter in connection with that action or proceeding except as set forth
in the proviso in the second sentence of this Section 3.7. Unless and until
a final judgment is rendered that an indemnified party is not entitled to the
costs of defense under the provisions of this Section, the indemnifying party
shall reimburse, promptly as they are incurred, the indemnified party's costs
of defense.
SECTION 3.8. Contribution.
(a) If the indemnification provided for in Section 3.5 or 3.6
hereof is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages or liabilities referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by indemnified party as a result of
such losses, claims, damages or liabilities as between the Company on the one
hand and each Selling Holder on the other, in such proportion as is
appropriate to reflect the relative fault of the Company and of each Selling
Holder in connection with such statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand
and of each Selling Holder on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or such Selling Holder, and
the Company's and the Selling Holder's relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(b) The Company and the Selling Holders agree that it would not be
just and equitable if contribution pursuant to this Section 3.8 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in Section
3.8(a). The amount paid or payable by an indemnifying party as a result of
the losses, claims, damages or liabilities referred to in Sections 3.5 and
3.6 hereof shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by the indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 3.8 no Selling Holder shall be
required to contribute any amount in excess of the amount by which the total
price at which the securities of such Selling Holder were offered to the
public exceeds the amount of any damages which such Selling Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
SECTION 3.9. Participation in Underwritten Registrations.
No Holder may participate in any underwritten registration
hereunder unless the Holder (a) agrees to sell his or its Registrable
Securities on the basis provided in the applicable underwriting arrangements
and (b) completes and executes all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents in customary form as
reasonably required under the terms of such underwriting arrangements.
SECTION 3.10. Holdback Agreements.
Each Holder whose securities are included in a Demand Registration
Statement or Piggyback Registration Statement agrees not to effect any sale
or distribution of the securities registered or any similar security of the
Company, or any securities convertible into or exchangeable or exercisable
for such securities, including a sale pursuant to Rule 144 under the
Securities Act, during the 14 days prior to, and during the 60-day period
beginning on, the effective date of such registration statement (except as
part of such registration), if and to the extent requested in writing by the
Company in the case of a non-underwritten public offering or if and to the
extent requested in writing by the managing underwriter or underwriters in
the case of an underwritten public offering.
ARTICLE IV
MISCELLANEOUS
SECTION 4.1. Specific Performance.
The parties hereto acknowledge that there would be no adequate
remedy at law if any party fails to perform any of its obligations hereunder,
and accordingly agree that each party, in addition to any other remedy to
which it may be entitled at law or in equity, shall be entitled to compel
specific performance of the obligation of any other party under this
Agreement in accordance with the terms and conditions of this Agreement in
any court of the United States or any State thereof having jurisdiction,
SECTION 4.2. Amendments and Waivers.
The provisions of this Agreement, including the provisions of this
sentence, may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given without
the prior written consent of the Company and the Holders holding at least two-
thirds (2/3) of the then outstanding Registrable Securities and Exchangeable
LLC Units (other than Exchangeable LLC Units held by the Company). No
failure or delay by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon any breach thereof shall constitute a waiver
of any such breach or any other covenant, duty, agreement or condition.
SECTION 4.3. Notices.
Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been given (a) when delivered
by hand or upon transmission by telecopier or similar facsimile transmission
device, (b) on the date delivered by a courier service, or (c) on the third
Business Day after mailing by registered or certified mail, postage prepaid,
return receipt requested, in any case addressed as follows:
(1) if to any Holder, to Jean-Claude Saada, 1700 Pacific Avenue,
49th Floor, Dallas, Texas 75201, or to such other address and to such other
Persons as the Holders may hereafter notify the Company in writing; and
(2) if to the Company, to Health Care Property Investors, Inc.,
4675 MacArthur Court, Suite 900, Newport Beach, California 92660 (Attention:
Edward J. Henning), or to such other address as the Company may hereafter
specify in writing.
SECTION 4.4. Successors and Assigns.
The rights and obligations of the Holders under this Agreement
shall not be assignable by any Holder to any Person that is not a Holder.
This Agreement shall be binding upon the parties hereto, the Holders and
their respective successors and assigns.
SECTION 4.5. Counterparts.
This Agreement may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
SECTION 4.6. Governing Law
This Agreement shall be governed by and construed in accordance
with the internal laws of the State of California without regard to the
conflicts of law provisions thereof.
SECTION 4.7. Severability.
In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any
such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
SECTION 4.8. Entire Agreement.
This Agreement is intended by the parties as a final expression of
their agreement and intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to the subject matter of this
Agreement.
SECTION 4.9. Headings.
The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning of any provision of
this Agreement.
SECTION 4.10. Selling Holders Become Party to this Agreement.
By asserting or participating in the benefits of registration of
Registrable Securities pursuant to this Agreement, each Holder agrees that it
or he will be deemed a party to this Agreement and be bound by each of its
terms.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
HEALTH CARE PROPERTY INVESTORS, INC.,
a Maryland corporation
By:
Name:
Its:
CAMBRIDGE MEDICAL CENTER
OF SAN DIEGO, LLC
a California limited liability company
By: 8008 Frost, Inc., its Managing Member
By:__________________________________
Jean-Claude Saada
President
EXHIBIT 21.1
HEALTH CARE PROPERTY INVESTORS, INC.
LIST OF SUBSIDIARIES
- - --------------------
TEXAS HCP, INC., a Maryland Corporation
HCPI MORTGAGE CORP., a Delaware Corporation
HCPI CHARLOTTE, INC., a Delaware Corporation
HCPI KNIGHTDALE, INC., a Delaware Corporation
TEXAS HCP G.P., INC. a Delaware Corporation
HCPI TRUST, a Maryland Real Estate Investment Trust
CAMBRIDGE MEDICAL PROPERTIES, LLC, a Delaware Limited Liability Company
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 19, 1998 included in
Registration Statement File No. 33-66676. It should be noted that we have
not audited any financial statements of the Company subsequent to
December 31, 1997 or performed any audit procedures subsequent to the dates
of our report.
ARTHUR ANDERSEN LLP
Los Angeles
March 16, 1998
