<PAGE> 1
FILED PURSUANT TO RULE 424(B)(5)
REGISTRATION NO. 333-02863
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 25, 1996)
$40,000,000
HEALTH AND RETIREMENT PROPERTIES TRUST
7.25% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
------------------------
Health and Retirement Properties Trust (the "Company" or "HRP") is hereby
offering (the "Offering")
$40,000,000 aggregate principal amount of its 7.25% Convertible Subordinated
Debentures Due 2001, (the "Debentures"). The Company is a health care real
estate investment trust ("REIT") which invests principally in retirement
communities, assisted living centers, nursing homes and other income producing
health care related real estate.
The Debentures will rank equally with other unsecured debt of the Company
but will be subordinated in right of payment to Senior Indebtedness (as defined)
and certain other debt. Upon completion of the Offerings (as defined) and the
application of the net proceeds therefrom, the Company will have outstanding
approximately $125,000,000 of indebtedness that will rank senior to the
Debentures. There is no limitation on the amount of Senior Indebtedness which
the Company may incur in the future. The Debentures will be convertible at any
time prior to redemption or maturity into the Company's common shares of
beneficial interest (the "Common Shares") at a conversion price of $18.00 per
share, subject to adjustment under certain circumstances (the "Conversion
Shares"). Prior to October 1, 1999, the Debentures will not be redeemable by the
Company except for certain reasons intended to protect the Company's status as a
REIT. Thereafter, the Debentures will be redeemable at the option of the Company
at any time upon 30 days' notice, in whole or in part, at a redemption price
equal to 100% of the principal amount thereof, plus accrued and unpaid interest
thereon. Interest on the Debentures will be payable semi-annually on April 1 and
October 1 each year, commencing on April 1, 1997. Concurrent with this Offering,
the Company is also offering (the "Series A Offering") $70,000,000 aggregate
principal amount of the Company's 7.50% Convertible Subordinated Debentures Due
2003, Series A (the "Series A Debentures"). The Company is additionally offering
outside of the United States under Regulation S promulgated under the Securities
Act of 1933, as amended (the "Regulation S Offering" and together with this
Offering and the Series A Offering the "Offerings"), $130,000,000 aggregate
principal amount of the Company's 7.50% Convertible Subordinated Debentures Due
2003, Series B (the "Regulation S Debentures"). The Series A Debentures and the
Regulation S Debentures will be pari passu in all respects with the Debentures.
See "Description of the Debentures".
Prior to the Offering, there has been no public market for the Debentures.
Application will be made to have the Debentures and the Conversion Shares listed
on the New York Stock Exchange ("NYSE"). The Company's Common Shares are listed
on the NYSE under the symbol HRP and on October 1, 1996, the reported last sale
price on the NYSE of the Common Shares was $17.875 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERIT OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL
<TABLE>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Debenture................................ 100% 1.50% 98.50%
- ------------------------------------------------------------------------------------------------
Total Debentures............................. $40,000,000 $600,000 $39,400,000
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<FN>
(1) Plus accrued interest, if any, on the Debentures from date of issuance to
date of delivery.
(2) The Debentures are being offered by the Company to select institutional
investors. National Westminster Bank PLC, New York Branch ("NatWest"), 175
Water Street, New York, New York 10038 has been retained to act as placement
agent for the Company in connection with the arrangement of such offers and
sales on a best efforts, all or none, basis. The Company has agreed (i) to
pay NatWest a fee in connection with the arrangement of this transaction and
(ii) to indemnify NatWest against certain liabilities including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). It is
anticipated that the Debentures will be delivered against payment therefor
on October 7, 1996; the Offering will not continue after such date. See
"Plan of Distribution."
(3) Before deducting estimated expenses of $60,000 payable by the Company.
</TABLE>
------------------------
The date of this Prospectus Supplement is October 2, 1996
<PAGE> 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents incorporated by reference or deemed
incorporated by reference into the prospectus dated June 25, 1996 (the
"Prospectus"), which Prospectus is supplemented by this Prospectus Supplement,
the following documents, which have been filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), are hereby incorporated in this Prospectus
Supplement and specifically made a part hereof by reference: the consolidated
financial statements of Marriott International, Inc. ("Marriott International"),
Commission File No. 1-12188, at and for the fiscal quarters ended March 22, 1996
and June 14, 1996 incorporated herein by reference from Marriott International's
Reports on Form 10-Q for such quarters. All documents filed by the Company
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Debentures offered by the Company shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated
herein by reference shall be deemed to be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein, or
in any other subsequently filed document that also is or is deemed to be
incorporated herein by reference, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus Supplement.
The Company will provide without charge to each person to whom this
Prospectus Supplement is delivered, upon the written or oral request of such
person, a copy of any and all of the information that has been incorporated by
reference in this Prospectus Supplement (excluding exhibits unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus Supplement incorporates). Requests for such copies should be made to
the Company at its principal executive offices, 400 Centre Street, Newton,
Massachusetts 02158, Attention: Investor Relations, telephone (617) 332-3990.
------------------------
FOR THE UNITED KINGDOM PURCHASERS: THE DEBENTURES MAY NOT BE OFFERED OR
SOLD TO PERSONS IN THE UNITED KINGDOM EXCEPT TO PERSONS WHOSE ORDINARY
ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF
INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR BUSINESS, OR
OTHERWISE IN CIRCUMSTANCES WHICH WILL NOT RESULT IN AN OFFER TO THE PUBLIC IN
THE UNITED KINGDOM WITHIN THE MEANING OF THE PUBLIC OFFERS OF SECURITIES
REGULATIONS 1995, AND THIS PROSPECTUS SUPPLEMENT MAY NOT BE PASSED ON TO ANY
PERSON IN THE UNITED KINGDOM WHO DOES NOT FALL WITHIN ARTICLE 11(3) OF THE
FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1996
OR WHO IS NOT A PERSON TO WHOM THE PROSPECTUS SUPPLEMENT MAY OTHERWISE LAWFULLY
BE ISSUED OR PASSED ON.
ii
<PAGE> 3
SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere or incorporated by
reference in the accompanying Prospectus or this Prospectus Supplement. Unless
otherwise noted, the information contained in this Prospectus Supplement assumes
(i) that the over-allotment options in the Offerings are not exercised and (ii)
completion of the Offerings and the application of the proceeds as described in
"Use of Proceeds".
THE COMPANY
The Company is one of the largest publicly traded REITs in the United
States with over 66 million Common Shares outstanding and had an equity market
capitalization on October 1, 1996 of approximately $1.2 billion. The Company has
investments in 163 health care related properties, located in 28 states, which
are leased to or operated by over 30 separate companies. The Company's unsecured
senior debt is rated "investment grade" by Standard & Poor's Ratings Services,
Moody's Investors Service, Inc. and Fitch Investors Service, L.P. Approximately
84% of the Company's investments, at cost, are leased to or operated by public
companies or private companies with investment grade ratings. The Company's
largest tenant is Marriott International.
PORTFOLIO BY OPERATOR
[The pie chart shows the Company's properties by operator as of September 16,
1996 in the following percentages:
Other Public Healthcare Companies (Community Care of America, GranCare, Vencor,
Horizon/CMS, Integrated Health Services, Multicare, Sun Healthcare, ARV
Assisted Living, Inc.)-38.990; Medical Office/Clinic Buildings (U.S. Dept. of
Veterans' Affairs, Boston Children's Medical Center, Boston's Beth Israel
Hospital, Harvard Community Health Plan, Dana Farber Cancer Institute, Unilab,
International-10.990; Hospitality Properties Trust-9.190; 22 Private
Companies-12.090.]
Approximately 81% of the Company's investments, at cost, are in nursing
homes, retirement centers, specialty health and assisted living facilities. In
addition to its health care property investments, the Company holds an equity
investment of $100 million in Hospitality Properties Trust ("HPT"), a NYSE
listed hotel REIT which was founded by the Company.
PORTFOLIO BY TYPE OF PROPERTY
(DOLLARS IN MILLIONS)
[This pie chart describes the various uses of the Company's properties and shows
the following dollar values (in millions) attributable thereto at September 16,
1996:
Long Term Care - $360.4;
Retirement/Assisted Living - $351.1
Medical Office/Clinic Buildings - $112.4
Specialty Health Services - $170.6
Equity Investment in HPT - $100.0]
S-1
<PAGE> 4
During the past ten years, the Company has paid 38 consecutive quarterly
dividends and has increased its dividend rate 11 times. The current quarterly
dividend rate is $.36/share or $1.44/share on an annualized basis.
DIVIDEND GROWTH CHART
[This bar chart shows the Company's dividend growth since 1987 and contains the
following information: 1987-$1.06; 1988-$1.12; 1989-1.14; 1990-$1.17;
1991-$1.23; 1992-$1.26; 1993-$1.30; 1994-$1.33; 1995-$1.38; and for the quarter
ending September 30, 1996 (annualized)-$1.44]
Since the Company's initial public offering in December 1986, an investment
in the Common Shares has provided shareholders an average total return, assuming
reinvestment of dividends and including share price appreciation, of
approximately 18% per annum. The following table shows how $100 invested in
Common Shares at December 17, 1986 would have grown to $499 as of September 16,
1996, as compared with the return an investor would have realized from a $100
investment in the equity securities represented by the Standard & Poor's 500
Index or the National Association of Real Estate Investments Trusts ("NAREIT")
Index.
<TABLE>
<CAPTION>
VALUE AT SEPTEMBER 16, 1996
AVERAGE ANNUAL OF A $100 INVESTMENT
RETURN ON DECEMBER 17, 1986
-------------- ---------------------------
<S> <C> <C>
HRP............................................ 18% $ 499
S&P Index...................................... 14 357
NAREIT Index................................... 7 193
</TABLE>
During the 12 months ended August 31, 1996, the average trading volume of
the Common Shares as reported by the NYSE was 652,994 shares/week. For the past
three years, the high and low closing prices for the Company's Common Shares, on
a quarterly basis, as reported by the NYSE were as follows:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1993
Third Quarter................. $15.13 $12.50
Fourth Quarter................ 16.75 14.00
1994
First Quarter................. 16.38 14.38
Second Quarter................ 15.38 14.00
Third Quarter................. 15.75 14.25
Fourth Quarter................ 14.88 13.00
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter................. $15.25 $13.25
Second Quarter................ 15.38 14.63
Third Quarter................. 16.38 14.88
Fourth Quarter................ 16.88 15.50
1996
First Quarter................. 17.38 16.00
Second Quarter................ 17.88 16.38
Third Quarter................. 18.13 16.38
</TABLE>
S-2
<PAGE> 5
THE DEBENTURES
The following summary of certain terms of the Debentures is not complete
and is qualified by all of the terms contained in the Debentures and in the
Supplemental Indenture and the Indenture (as defined). Copies of such documents
will be furnished to investors upon request. See "Description of the
Debentures".
<TABLE>
<S> <C>
ISSUE........................................ $40,000,000 of 7.25% Convertible Subordinated
Debentures due 2001.
MATURITY..................................... October 1, 2001 (5 years).
COUPON....................................... 7.25% per annum, payable semi-annually on
April 1 and October 1, commencing April 1,
1997.
CONVERSION RIGHTS............................ The Debentures are convertible at any time
prior to redemption or maturity, at the
holder's option, into the Company's Common
Shares at a price of $18.00 per share (the
"Conversion Price"). The Conversion Price is
subject to adjustment under certain
conditions.
USE OF PROCEEDS.............................. Repayment of (i) the Series A Floating Rate
Notes (as defined) and (ii) indebtedness under
the Company's bank credit facility and for
general business purposes.
OPTIONAL REDEMPTION.......................... The Debentures will not be redeemable prior to
October 1, 1999 except to the extent necessary
to preserve and protect the Company's status
as a REIT. Thereafter, the Debentures will be
redeemable at the option of the Company, in
whole or in part, on 30 days' notice. In
either case, the redemption price shall be
equal to 100% of the principal amount thereof,
plus accrued and unpaid interest thereon.
MANDATORY REDEMPTION......................... The Company is not required to make any
mandatory redemption or annual sinking fund
payments prior to maturity of the Debentures.
RESTRICTIONS ON CONSOLIDATION,
MERGER OR SALE OF ALL ASSETS............... The Company may not consolidate with, merge
into or transfer all or substantially all of
its assets to another person unless (i) such
person assumes all the obligations of the
Company under the Debentures and the
Supplemental Indenture and the Indenture, (ii)
no Default or Event of Default (each as
defined) shall have occurred and be continuing
and (iii) certain other conditions are met.
RANKING...................................... The Debentures will be expressly subordinated
to, and subject in right of payment to, the
prior payment in full of the principal of,
premium, if any, and interest on Senior
Indebtedness.
LISTING...................................... Application will be made to list the
Debentures and the Conversion Shares on the
NYSE.
</TABLE>
S-3
<PAGE> 6
SELECTED FINANCIAL DATA
Set forth below are selected financial data for the Company for the periods
and dates indicated which have been derived from audited and unaudited financial
statements. This data should be read in conjunction with, and is qualified in
its entirety by reference to, the financial statements and accompanying notes
incorporated by reference in this Prospectus Supplement and the Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995
and its Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30,
1996 incorporated by reference in the accompanying Prospectus or this Prospectus
Supplement. Amounts are in thousands, except per share information.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- ----------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental income........ $ 36,806 $ 43,029 $ 46,069 $ 63,856 $ 89,602 $ 44,796 $ 46,277
Interest income...... 7,029 5,706 10,416 22,827 23,076 11,694 10,286
-------- -------- -------- -------- -------- -------- --------
Total revenues......... 43,835 48,735 56,485 86,683 112,678 56,490 56,563
Income before
extraordinary item
and gain (loss) on
sale of properties... 22,079 27,243 37,738 57,878 61,760 31,500 40,674
Net income............. 22,079 27,243 33,417(1) 49,919(2) 64,236(3) 33,976 38,231
Dividends(4)........... 27,179 33,079 44,869 76,317 83,954 40,246 46,328
PER SHARE:
Income before
extraordinary item
and gain (loss) on
sale of properties... $ 1.01 $ 1.02 $ 1.10 $ 1.10 $ 1.04 $ .54 $ .61
Net income............. 1.01 1.02 .97(1) .95(2) 1.08(3) .58 .58
Dividends(4)........... 1.23 1.26 1.30 1.33 1.38 .68 .70
Average shares
outstanding.......... 21,834 26,760 34,407 52,738 59,227 58,869 66,177
OTHER DATA:
Funds From
Operations(5)........ $ 28,801 $ 35,365 $ 46,566 $ 71,851 $ 84,638 $ 41,497 $ 49,000
<CAPTION>
AT JUNE 30, 1996
AT DECEMBER 31, ----------------------------
-------------------------------------------------------- AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(6)
-------- -------- -------- -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate properties,
net.................. $262,557 $310,882 $349,842 $633,513 $722,356 $750,766 $750,766
Real estate mortgages,
net.................. 31,760 47,173 157,281 133,477 141,307 150,113 150,113
Total assets........... 340,718 374,468 527,662 840,206 999,677 1,043,304 1,091,304
Total borrowings....... 103,000 138,500 73,000 216,513 269,759 316,262 364,262
Total shareholders'
equity............... 234,427 228,301 441,135 602,039 685,592 708,062 708,062
- ---------------
(1) Includes, as an extraordinary charge, the write-off of $4.3 million in
deferred finance charges (approximately $.13 per share) resulting from early
extinguishment of debt.
(2) Includes a gain on sale of property of $4.0 million (approximately $.08 per
share), a provision for loss on sale of properties of $10.0 million
(approximately $.19 per share) and, as an extraordinary charge, the
write-off of deferred finance charges of $2.0 million (approximately $.04
per share) resulting from the early extinguishment of debt.
(3) Includes a gain on sale of property of $2.5 million (approximately $.04 per
share).
(4) Amounts represent dividends declared with respect to the periods shown.
(5) The Company's "Funds From Operations" represents net income (computed in
accordance with GAAP), before gain (loss) on sale of properties and
extraordinary items, depreciation and other non-cash items, and includes its
pro rata share of Hospitality Properties Trust's Funds From Operations.
Management considers Funds From Operations to be a measure of the financial
performance of an equity REIT that provides a relevant basis for comparison
among REITs, and Funds From Operations is presented to assist in analyzing
the performance of the Company. Funds From Operations does not represent
cash flows from operating activities (as determined in accordance with GAAP)
and should not be considered as an alternative to net income as an indicator
of the Company's financial performance or to cash flows as a measure of
liquidity.
(6) Adjusted to give effect to the consummation of the Offerings and the
application of the net proceeds therefrom. See "Capitalization".
</TABLE>
S-4
<PAGE> 7
RECENT DEVELOPMENTS
Concurrent Offering of Series A and Regulation S Debentures. Concurrent
with this Offering, the Company is also offering $70,000,000 aggregate principal
amount of the Company's 7.50% Convertible Subordinated Debentures due 2003,
Series A (exclusive of an option to purchase up to $10,500,000 aggregate
principal amount Series A Debentures to cover overallotments, if any). In
addition, the Company is offering outside the United States under Regulation S
promulgated under the Securities Act, $130,000,000 aggregate principal amount of
the Company's 7.50% Convertible Subordinated Debentures due 2003, Series B
(exclusive of an option to purchase up to $19,500,000 aggregate principal amount
Series B Debentures to cover overallotments, if any). The Series A Debentures
and the Regulation S Debentures will be pari passu in all respects with the
Debentures. NatWest Securities Limited and Merrill Lynch & Co. are acting as
underwriters in connection with the offering of the Series A Debentures. NatWest
Securities Limited and Merrill Lynch International are acting as lead managers
in connection with the offering of the Regulation S Debentures. See
"Underwriting" and "Use of Proceeds".
From January 1, 1996 through October 1, 1996, the Company engaged in the
following activities:
Repayment of Secured Indebtedness. At January 1, 1996, the only
outstanding secured indebtedness of the Company was a $17.6 million mortgage on
one retirement living center in Arlington Heights, Illinois. The mortgage was in
effect at the time the Company acquired this property. In April 1996, the
Company retired this debt and the mortgage was released. Today, none of the
assets of the Company or its subsidiaries are encumbered by secured
indebtedness.
Revolving Bank Credit Facility. The Company maintains a $250 million
unsecured revolving credit facility with a syndicate of banks. This facility is
used for interim acquisition funding until equity or long term debt is raised,
and for working capital and general business purposes. At January 1, 1996, this
facility was scheduled to mature in 1998 and drawings bore interest at LIBOR
plus 125 basis points. During March 1996, this revolving bank credit facility
was amended to extend the maturity until 2000 and to lower the spread for
LIBOR-based borrowings to 87.5 basis points. Aggregate borrowings under the
revolving bank credit facility at October 1, 1996 were $147.0 million. Some of
the proceeds of the Offerings will be used to repay indebtedness outstanding
under this credit facility. See "Use of Proceeds" and "Investment and Financing
Policy".
Investments in Clinics Leased to Health Insurance Plan of Greater New
York. In February and June 1996, the Company made investments totaling $19.9
million in two health clinics leased to and operated by Health Insurance Plan of
Greater New York, a not-for-profit health maintenance organization which had
annual revenues of approximately $1.8 billion and net worth of $155.6 million at
December 31, 1995. One of these properties is located in Brooklyn, New York and
contains 71,500 square feet of medical office and clinic space plus a structured
parking garage. The second property is located in White Plains, New York and
contains 50,000 square feet of medical office and clinic space plus a structured
parking garage. The Company is actively seeking additional investments in this
property sector.
Initial Investment with ARV Assisted Living, Inc. In February 1996, the
Company made a $5.0 million mortgage loan to ARV Assisted Living, Inc. ("ARV").
This loan is secured by a 248 unit independent living and assisted living
property located in Jacksonville, Florida. ARV completed its initial public
offering of common stock in 1995, and it has been rapidly expanding its assisted
living business since that time. The Company has previously made significant
financial investments in independent and assisted living properties, the
majority of which are properties leased to Marriott International. The Company
anticipates that it will make additional investments in this property sector.
Increasing Investments in Medical Office Buildings. In September 1996, the
Company purchased a 188,000 square foot medical office building located in
Washington, DC for $24.9 million. This property, which is managed by an
affiliate of HRPT Advisors, Inc. ("Advisors"), the investment advisor to the
Company, is leased to approximately 60 tenants and includes underground parking.
The Company made its initial investments in multi-tenant medical office
buildings in September 1995 when it purchased two such properties with 387,000
square feet located in Boston, Massachusetts for $48.3 million. These Boston
properties are leased principally to Harvard Medical School-affiliated teaching
hospitals and their affiliates. The Company anticipates that it will make
additional investments in this property sector.
S-5
<PAGE> 8
Improvement Financings. In the ordinary course of its business the Company
occasionally provides financing for improvements to properties owned or
mortgaged by the Company. When such improvement funding is provided, the rent or
interest payable to the Company is correspondingly increased. From January 1,
1996 to September 16, 1996, such improvement funding totaled $6.1 million. At
September 16, 1996, the Company had outstanding commitments to provide such
improvement funding in the future totaling $18.2 million.
Mortgage Repayments and Prepayments. In the ordinary course of business
the Company receives regular payments and occasional prepayments of principal
which reduce the outstanding balances of its owned mortgage portfolio. From
January 1, 1996 though September 16, 1996, these repayments and prepayments
totaled approximately $8.7 million.
Discussions with Horizon/CMS Healthcare Corporation. During 1995 and 1996
Horizon/CMS Healthcare Corporation ("Horizon") announced its intention to
discontinue operations at certain properties, including eight properties owned
by the Company. The Company has invested $117.8 million, at cost, in these eight
properties. During 1996 Horizon and others have initiated occasional discussions
with the Company concerning the possibility of another healthcare operating
company assuming financial responsibility for the rents due for these eight
properties, but no agreements have yet been achieved. Horizon is contractually
responsible for the rents for three of these properties, representing a $35.8
million investment, until 1999 and for the remaining five properties until 2007.
The Company has the right to approve any new tenants for all eight of these
properties. Based upon information provided to it, the Company believes the
operating cash flow of these properties is currently not sufficient to cover the
rent due the Company. However, these eight properties are subject to cross
default provisions with five additional properties leased by Horizon from the
Company, and Horizon has guaranteed these rental obligations. According to
Horizon's Form 10-K for the fiscal year ended May 31, 1996, Horizon had a net
worth of $651.3 million and net cash provided by operating activities during
such fiscal year was $32.6 million. The Company believes that Horizon will
continue to meet its obligations with respect to these properties.
Transactions with Community Care of America, Inc. The Company has invested
$107.5 million, at cost, in nursing homes and other properties operated by
Community Care of America, Inc. ("CCA"), of which $25.8 million has occurred in
1996. In July 1996, CCA announced that it was taking a pre-tax charge of $17.2
million to write down its investments in certain properties and other assets.
CCA has stated to the Company that none of these write downs arose in connection
with any property leased from or mortgage financed by the Company. In August
1996, CCA advised the Company that it was considering several financing
alternatives and requested that the Company agree to defer lease and interest
payments due from CCA on or about September 1 and October 1, 1996 until November
1996 and to waive compliance with certain financial covenants. The Company
agreed to that request. The Company currently holds a cash security deposit of
over $6 million to secure CCA's obligations and, based upon information provided
to it, the Company believes that its owned and mortgaged properties operated by
CCA produced operating cash flow in excess of 1.5 times the rents and mortgage
payments due to the Company for the twelve months ended June 30, 1996.
Discussions with GranCare, Inc. The Company has invested approximately
$98.0 million, at cost, in properties leased to or mortgaged by GranCare, Inc.
("GranCare"). GranCare is a NYSE-listed company. In September 1996, GranCare
announced that it had entered into an agreement to spin off to its shareholders
all of its nursing home operations and to merge its pharmacy operations with
another public company. GranCare has advised the Company that the Company's
approval will be required for GranCare to effect the proposed spin off and
merger transaction. Because discussions with GranCare have only recently begun,
the Company is unable to state whether or on what terms the Company may consent
to the proposed GranCare transaction. Based upon information provided to it, the
Company believes that its owned and mortgaged properties operated by GranCare
produced operating cash flow in excess of 1.7 times the rents and mortgage
payments due to the Company for the twelve months ended June 30, 1996.
Other Transactions. In the ordinary course of its business, the Company
regularly evaluates investment opportunities and enters into contracts to
purchase and lease or mortgage finance real estate. Several such possible
investments are currently under consideration and at various stages of the
contractual process. Similarly, the Company is regularly engaged in discussions
concerning lease and loan extensions and other modifications of the terms of
existing leases and mortgages. The Company does not believe the consummation of
any one or all of such various pending transactions would have a material impact
upon its financial condition or operations.
S-6
<PAGE> 9
THE COMPANY
The Company invests principally in retirement communities, assisted living
centers, nursing homes and other income producing health care related real
estate. At September 16, 1996, the Company had investments in 163 health care
related properties in 28 states throughout the United States, which are leased
to or operated by over 30 separate companies.
LOCATION OF COMPANY PROPERTIES
[The map of the United States set forth below shows the states, as of September
16, 1996, in which the Company owns properties shaded in gray as noted in the
location table on S-7]
<TABLE>
<CAPTION>
TOTAL
NUMBER OF INVESTMENT
STATE PROPERTIES (IN THOUSANDS)
- ----------------------- --------- --------------
<S> <C> <C>
Arizona................ 5 $ 28,062
California............. 15 77,263
Colorado............... 11 37,067
Connecticut............ 9 89,401
District of Columbia... 1 25,001
Florida................ 7 147,923
Georgia................ 6 17,625
Illinois............... 2 39,453
Iowa................... 13 21,558
Kansas................. 8 11,088
Louisiana.............. 1 19,398
Maryland............... 1 33,080
Massachusetts.......... 8 145,637
Michigan............... 2 9,361
Missouri............... 3 5,612
Nebraska............... 16 16,170
New Hampshire.......... 1 3,689
New Jersey............. 1 13,007
New York............... 2 19,893
North Carolina......... 9 23,191
Ohio................... 6 22,983
Pennsylvania........... 2 18,482
South Dakota........... 3 7,589
Texas.................. 6 16,893
Vermont................ 8 29,763
Virginia............... 3 57,666
Washington............. 1 5,193
Wisconsin.............. 9 44,063
Wyoming................ 4 8,406
--- --------------
Total Health Care
Related Properties... 163 $ 994,517
HPT Investment......... 100,000
--------------
Total Investments...... $1,094,517
</TABLE>
S-7
<PAGE> 10
DISTRIBUTIONS
The Company has paid 38 consecutive quarterly dividends since its initial
public offering in December 1986. The regular quarterly dividend of $.36 per
share for the period ending September 30, 1996 will be paid on or about November
22, 1996 to shareholders of record on October 17, 1996.
The Company intends to continue to declare and pay future dividends in cash
on a quarterly basis, but may, from time to time, declare and pay special
dividends. There can be no assurance that the Company will be able to increase
its quarterly dividend or maintain it at the current level. Payment of dividends
by the Company is subject to continued compliance with certain restrictions
contained in the Company's loan agreements. In the past, the Company's dividends
have been based upon Funds From Operations, which has exceeded earnings. Cash
available for distribution may not necessarily equal Funds From Operations as
the cash flow of the Company is affected by other factors not included in the
Funds From Operations calculation. Management expects that the Company will
continue to pay dividends based upon Funds From Operations and that such
dividends may exceed earnings. Accordingly, the Company expects a portion of the
Company's dividends on Common Shares to be considered a return of capital which
may not be subject to income tax until the shares are sold. Information about
dividends on a quarterly basis is summarized in the following table:
DECLARED DIVIDENDS PER SHARE(1)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter......... $ .275(2) $ .28 $ .28 $ .29 $ .30 $ .31 $ .32 $ .33 $ .34 $ .35
Second Quarter........ .26 .28 .28 .29 .31 .31 .32 .33 .34 .35
Third Quarter......... .27 .28 .29 .29 .31 .32 .33 .33 .35 .36
Fourth Quarter........ .28 .28 .29 .30 .31 .32 .33 .34 .35
----- ---- ---- ---- ---- ---- ---- ---- ----
Total................. $1.085 $1.12 $1.14 $1.17 $1.23 $1.26 $1.30 $1.33 $1.38
- ---------------
(1) Dividends are generally paid in the quarter following declaration. With
respect to dividends paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993,
1994, 1995 and the first three quarters of 1996, $.289, $.065, $.332,
$.267, $.104, $.218, $.335, $.081, $.161 and $.105 (estimated),
respectively, represent a return of capital.
(2) Includes $.025 for the period from December 23, 1986 (commencement of the
Company's operations) through December 31, 1986.
</TABLE>
S-8
<PAGE> 11
CAPITALIZATION
The capitalization of the Company as of June 30, 1996 and as adjusted to
give effect to the completion of the Offerings and the application of the net
proceeds therefrom is as follows (see "Use of Proceeds"):
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
100%
ACTUAL AS ADJUSTED CONVERSION(1)
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
7.50% Convertible Subordinated Debentures due 2003..... $ -- $ 200,000 $ --
7.25% Convertible Subordinated Debentures due 2001..... -- 40,000 --
Bank notes payable..................................... 117,000 -- --
Notes and bonds payable, net........................... 199,262 124,262 124,262
Shareholders' equity:
Preferred Shares of Beneficial Interest, par value
$.01 per share; 50,000,000 authorized, none
issued............................................ -- -- --
Common Shares of Beneficial Interest, par value $.01
per share; 100,000,000 shares authorized;
66,209,476 shares issued and outstanding and as
adjusted; 79,542,809 shares as converted.......... 662 662 795
Additional paid-in capital........................... 783,258 783,258 1,017,375
Cumulative net income................................ 271,275 271,275 271,275
Dividends............................................ (347,133) (347,133) (347,133)
---------- ---------- ----------
Total shareholders' equity................... 708,062 708,062 942,312
---------- ---------- ----------
Total capitalization......................... $1,024,324 $ 1,072,324 $1,066,574
========== ========== ==========
- ---------------
(1) Based on the initial Conversion Price.
</TABLE>
RATIO OF EARNINGS TO FIXED CHARGES
Set forth below are the ratios of earnings to fixed charges for the Company
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
YEAR ENDED DECEMBER 31, 1996
---------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 ACTUAL AS ADJUSTED
---- ---- ---- ---- ---- ---- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges.................. 2.8x 3.6x 6.8x 6.7x 3.4x 3.6x 4.9x 3.5x
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges,
income before gain (loss) on sale of properties and extraordinary items has been
added to fixed charges, and that sum has been divided by such fixed charges.
Fixed charges consist of interest expense and amortization of deferred financing
costs.
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are expected to be
approximately $234.3 million ($263.5 million if the overallotment options are
exercised in full). Net proceeds from the Offerings will be used to redeem the
Company's Series A Floating Rate Senior Notes due 1999 in the aggregate original
principal amounts of $75.0 million (the "Series A Floating Rate Notes"), plus
accrued and unpaid interest thereon, on or about January 13, 1997, although the
Company may choose to redeem the Series A Floating Rate Notes at a later
quarterly interest payment date. At September 16, 1996, the interest rate
applicable to the Series A Floating Rate Notes was 6.74% per annum. Net proceeds
will also be used to reduce amounts outstanding under the Company's credit
facilities and for working capital and other general business purposes. At
September 16, 1996, $147 million was outstanding under the Company's $250
million revolving credit facility. Outstanding amounts bear interest, at the
Company's option, at prime or a spread over LIBOR, and the revolving credit line
expires in 2000. At September 16, 1996, the weighted average interest rate
applicable to borrowings under the revolving credit facility was 6.33% per
annum.
S-9
<PAGE> 12
INVESTMENT AND FINANCING POLICY
The population of the United States is aging. According to information from
the U.S. Census Bureau, the segment of the U.S. population age 65 and over is
increasing and is expected to increase sharply through the year 2020. The
Company believes that the demand for services provided at retirement
communities, assisted living centers and nursing homes should increase as the
population ages. Currently proposed federal legislation seeks to limit the
amount of growth in government expenditures for Medicare and Medicaid. These
limitations, if enacted, may adversely affect the profitability of health care
operating companies and might, in certain circumstances, affect their ability to
pay rent or service debt. These government funding limitations will likely also
make it less profitable to construct new health care facilities and thus may
increase the value of existing facilities. The Company believes that the net
effect of both these demographics and legislative changes will be to make it
less profitable to provide services and facilities for government funded
patients and more profitable to provide services and facilities for
non-government supported patients. The Company intends to respond to these
changes in three ways: (i) by focusing new investments in properties that are
not directly dependent upon a high percentage of Medicaid or Medicare revenues,
including retirement housing, assisted living facilities, medical office
buildings and nursing homes with a high percentage of private pay revenues; (ii)
by encouraging and making funding available to the operators of the Company's
existing properties to improve these properties in order to attract a greater
amount of non-government revenues; and (iii) whenever possible, by making new
investments in properties leased to well capitalized operators.
The Company considers equity offerings when, in the Company's judgment,
doing so will improve the Company's capital structure, while not materially
adversely affecting the market value of its Common Shares or impeding the
Company's ability to increase regularly its per share dividend rate. In addition
to the use of equity, the Company utilizes short term and long term borrowings
to finance investments and to pay operating expenses. The Company's unsecured
senior indebtedness has been rated "investment grade" by Standard & Poor's
Ratings Services (BBB-), Moody's Investors Service, Inc. (Baa3) and Fitch
Investors Service, L.P. (BBB+). When variable rate debt is utilized, the Company
regularly purchases interest rate futures contracts to hedge against changes in
interest rates. As of June 30, 1996, the Company had outstanding borrowings
totaling $316.3 million, which amount increased to $346.3 million as of
September 16, 1996. After the Offerings, and assuming the use of proceeds as
described under "Use of Proceeds", the Company's total debt outstanding as of
June 30, 1996 would have been approximately $364.3 million. The Company's
borrowing guidelines established in its revolving credit facility and by its
Board of Trustees prohibit the Company from maintaining a debt to equity ratio
of greater than 1 to 1, except in certain limited circumstances. As of June 30,
1996, the Company's debt to equity ratio was .45 to 1. After the Offerings, and
assuming the use of proceeds as described under "Use of Proceeds", the Company's
debt to equity ratio as of June 30, 1996 would have been approximately .51 to 1.
The Company may in the future choose to modify its debt to equity guidelines.
There can be no assurance that equity or debt capital will be available in the
future on reasonable terms to fund the Company's operations or growth.
The Company's $250 million revolving credit facility (the "Credit
Facility") places certain limitations on the incurrence of debt by the Company.
The Regulation S Debentures contain a contingent redemption obligation
applicable to bearer debentures which may violate one of such limitations, and
as a result, the issuance of the Regulation S Debentures may result in a
technical default under the Credit Facility. After giving effect to the
application of the net proceeds of the Offerings, as described under "Use of
Proceeds" above, the Company would have no borrowings outstanding under the
Credit Facility, but the Company is not entitled to borrow under the Credit
Facility if a default has occurred and is continuing. Based on a discussion with
the lead bank under the Credit Facility. The Company expects in due course to
obtain a waiver of such limitation applicable to the Regulations S Debentures.
In the event a waiver is not obtained, the Company expects that it would be able
to obtain a replacement revolving credit facility. There can be no assurance,
however, that such a waiver will be granted or that a replacement credit
facility would be available to the Company or, if available, would be on terms
favorable to the Company.
S-10
<PAGE> 13
LEASE EXPIRATION AND MORTGAGE MATURITY SCHEDULES
The following table sets forth the expiration and maturity dates of the
Company's leases and mortgages for the years from 1996 to 2005, together with
the percentage of the Company's current revenues at September 16, 1996 derived
from base rent and interest payments under leases and mortgages expiring or
maturing in each year shown:
<TABLE>
<CAPTION>
PERCENT
OF
NO. OF NO. OF COMPANY'S
LEASES MORTGAGES CURRENT
YEAR EXPIRING MATURING REVENUES
---- -------- --------- ---------
<S> <C> <C> <C>
1996................................................. -- 4 .79%
1997................................................. 1 3 1.69
1998................................................. 4 3 5.24
1999................................................. -- 10 1.83
2000................................................. -- 2 1.06
2001................................................. 4 1 4.75
2002................................................. -- 4 1.45
2003................................................. -- -- --
2004................................................. -- -- --
2005 and thereafter(1)............................... 101 26 83.19
--
--- ------
Total...................................... 110 53 100.00%
=== == ======
<FN>
- ---------------
(1) In addition, the Company has a $100 million investment in HPT which
currently owns 82 hotels, all of which have leases expiring after 2008. The
Company's investment represents an approximately 15% ownership interest in
HPT. The Company is entitled to receive dividends on its shares in HPT. The
Company's financial statements include its share of HPT's operating results
under the equity method of accounting.
</TABLE>
THE LESSEES AND MORTGAGORS
The Company's financial condition depends in large part upon the financial
condition of the operators of the Company's properties. Approximately 84% of the
Company's investments are in properties leased to or operated by public
companies or private companies with investment grade ratings. Certain
information about the three largest operators of the Company's properties (based
on the Company's revenues) contained in their filings with the Commission or
other public sources, or provided by these companies, is set forth in the chart
below.
OPERATOR DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PROPERTIES
---------------------------------------
TOTAL TOTAL SHARE- INVESTMENT
OPERATOR FACILITIES ANNUAL HOLDERS' NET INCOME FACILITIES (% OF TOTAL
(STOCK SYMBOL) (UNITS)(1) REVENUES(1) EQUITY(1) (LOSS)(1) (UNITS)(2) OCCUPANCY(1) INVESTMENT)(2)
- ----------------------- ---------- ----------- ---------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Marriott
International........ 974 $8,961,000 $1,054,000 $247,000 14 96% $325,520
(NYSE:MAR) (200,028) (3,932) (29.7%)
Horizon/CMS
Healthcare........... 578 1,753,084 651,348 (24,776) 15 91% 171,533
(NYSE:Horizon) (34,841) (2,323) (15.6%)
GranCare............... 136 816,462 172,599 20,564 27 90% 97,983
(NYSE:GranCare) (17,161) (3,750) (8.9%)
<FN>
- ---------------
(1) As of the operator's most recent fiscal year end.
(2) As of September 16, 1996.
</TABLE>
Additional Security. In addition to fee ownership of the leased properties
and mortgage liens on the mortgaged properties, certain of the Company's leases
and mortgages contain additional security features. Generally, with respect to
investments originated by the Company, each obligation of an operator to the
Company is subject to cross default provisions with respect to all other
obligations of that operator to the Company and any collateral pledged by an
operator to the Company constitutes collateral for all obligations of
S-11
<PAGE> 14
that operator. Certain operators have pledged additional collateral or provided
corporate guarantees, security deposits, and, in some cases, personal
guarantees.
EQUITY INVESTMENT IN HPT
The Company owns four million shares of HPT, which constitutes
approximately 15% of the total HPT shares outstanding. HPT is a REIT in the
business of owning hotels and leasing them to independent hotel operating
companies. HPT currently owns 53 Courtyard by Marriott(R) Hotels, 11 Wyndham
Garden(R) Hotels, and 18 Residence Inn by Marriott(R) Hotels. The hotels are
located in 26 states and contain 11,728 rooms. The Company receives dividends on
its HPT shares at the current quarterly rate of $.58/share or $2.32/share on an
annualized basis. The Company's financial reports include its share of HPT's
operating results under the equity method of accounting. HPT shares are listed
on the NYSE and, on October 1, 1996, the last reported sale price for such
shares was $26.63.
MANAGEMENT
The Trustees and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- ---- --------
Barry M. Portnoy................. 51 Managing Trustee
Gerard M. Martin................. 61 Managing Trustee
Bruce M. Gans, M.D............... 49 Trustee
Rev. Justinian Manning, C.P...... 70 Trustee
Ralph J. Watts................... 49 Trustee
David J. Hegarty................. 39 President, Chief Operating Officer and
Secretary
Ajay Saini....................... 36 Treasurer and Chief Financial Officer
Adam D. Portnoy.................. 26 Vice President
Barry M. Portnoy has been a partner in the law firm of Sullivan & Worcester
LLP, since 1978. Mr. Portnoy was a founder and has been a Trustee of the Company
since its organization in 1986. From 1985 until the merger of Greenery
Rehabilitation Group, Inc. ("Greenery") into Horizon in February 1994 (the
"Greenery/Horizon Merger"), Mr. Portnoy served as a Director of Greenery.
Following the Greenery/ Horizon Merger, Mr. Portnoy was a Director of Horizon
until July 1996 and currently serves as a Managing Trustee of HPT.
Gerard M. Martin is a private investor in real estate. Mr. Martin was a
founder and has been a Trustee of the Company since its organization in 1986.
From 1985 until the Greenery/Horizon Merger, Mr. Martin served as the Chief
Executive Officer and Chairman of the Board of Directors of Greenery. Following
the Greenery/Horizon Merger, Mr. Martin was a Director of Horizon until July
1996 and also serves as a Managing Trustee of HPT.
Bruce M. Gans, M.D. is President of the Rehabilitation Institute of
Michigan, a specialty hospital affiliated with Wayne State University School of
Medicine. Dr. Gans is also a Professor and Chairman of the Department of
Physical Medicine and Rehabilitation at Wayne State University School of
Medicine and a Senior Vice President of the Detroit Medical Center. Prior to
assuming his current position in 1989, Dr. Gans was Chairman of the Department
of Rehabilitation Medicine at New England Medical Center and a Professor and
Chairman of Rehabilitation Medicine at the Tufts University School of Medicine
in Boston, Massachusetts. Dr. Gans is a graduate of the University of
Pennsylvania School of Medicine and is active in a number of medical
professional organizations including serving as the current Chairman of the
Injury Prevention Grant Review Committee for the Centers for Disease Control and
Prevention in Atlanta, Georgia.
The Reverend Justinian Manning C.P. has been, since September 1993, the
pastor of St. Gabriel's parish in Brighton, Massachusetts. From 1984 until
September 1990, he was the Treasurer of the Provincial Council of Passionist
Provincialate. He is also on the Board of Directors of Charlesview, a low and
moderate income
S-12
<PAGE> 15
housing program, and St. Elizabeth's Hospital Foundation. He is a past Treasurer
and a former Director of St. Paul's Benevolent, Educational and Missionary
Institute, a New Jersey corporation, which oversees foundations in
Massachusetts, Connecticut, New York, Pennsylvania, Maryland, Florida and the
Institute's Overseas Missions. He was formerly on the Board of Directors of St.
Paul's Monastery Manor in Pittsburgh, Pennsylvania, a congregate housing
facility. He belongs to the Provincial Council of the Passionist Provincialate.
Ralph J. Watts is President and Chief Executive Officer of Cardiovascular
Ventures, Inc., a privately held company which develops, owns and operates
outpatient cardiac catheterization laboratories and is engaged in physician
practice management. Mr. Watts has held this position since 1992. From 1988 to
1992, Mr. Watts was President and CEO of Ramsay Health Care, Inc., a public
company which owned and operated 18 hospitals in 13 states and had approximately
2,000 employees.
David J. Hegarty is the President, Chief Operating Officer and Secretary of
the Company. He has been employed by the Company in various capacities since
1987, prior to which he was an audit manager with Ernst & Young LLP. Mr. Hegarty
is a certified public accountant.
Ajay Saini is the Treasurer and Chief Financial Officer of the Company. Mr.
Saini has been employed by the Company in various capacities since June 1990,
prior to which he was a senior accountant with Ernst & Young LLP. Mr. Saini is a
certified public accountant.
Adam D. Portnoy is a Vice President of the Company. Mr. Portnoy has been
employed by Advisors since October 1995 and is currently a Vice President. He
has been a Vice President of HPT since March 1996. Prior to his employment by
Advisors, Mr. Portnoy was employed as Manager of Strategic Planning for Phase
Metrics, Inc. a privately held manufacturer of computer testing equipment, and
as a merchant banking analyst at Donaldson, Lufkin and Jenrette Securities
Corporation. Adam Portnoy is the son of Barry Portnoy.
Dr. Gans, Mr. Watts and Fr. Manning are the Company's Independent Trustees,
that is Trustees who are not affiliated with any of the Company's lessees or
mortgagors or with Advisors. Under the Company's Declaration of Trust, a
majority of the Company's Trustees will at all times consist of Independent
Trustees. All investment and policy decisions affecting the Company are made by
its Board of Trustees. All day to day operations of the Company are conducted by
Advisors pursuant to an investment advisory contract. Advisors is owned by
Messrs. Martin and Portnoy. Messrs. Hegarty and Saini, as well as all other
personnel involved in the Company's operations, are employees of Advisors.
Advisors is paid an annual advisory fee calculated on the basis of total assets
under management (0.7% of the first $250 million, plus 0.5% of additional
assets) and an annual incentive fee calculated on the basis of increases in
operating cash flow per share (as defined) above threshold amounts (15% of cash
flow above the threshold amount of $1.47/share in 1996, which threshold
increases by $.05/share annually thereafter), but no more than $.01/share.
Advisors currently owns 1,049,210 Common Shares. All incentive fees which may be
earned by Advisors will be paid in Common Shares. The Company believes that its
total administrative costs, measured as a percentage of assets under management
or as a percentage of revenues, are below the industry average.
DESCRIPTION OF THE DEBENTURES
The Debentures will be issued under an Indenture to be dated as of
September 20, 1996, as supplemented by the Third Supplement thereto (the
"Indenture"), between the Company and Fleet National Bank, as trustee (the
"Trustee"). The terms of the Debentures and the Indenture include those stated
in the Debentures and the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). A copy of the form of the Indenture is filed as an exhibit to the
Registration Statement relating to this Prospectus Supplement and incorporated
herein by reference. The following is a summary of certain provisions of the
Indenture and does not purport to be complete and is qualified in its entirety
by reference to the detailed provisions of the Indenture, including the
definition of certain terms therein which reference is hereby made, for a
complete statement of such provisions. Wherever particular articles or sections
of the Indenture or terms defined therein are referred to herein, such
provisions or definitions are incorporated herein by reference.
S-13
<PAGE> 16
General. The Debentures are unsecured general obligations of the Company,
subject to the rights of holders of Senior Indebtedness of the Company, and will
mature on October 1, 2001. The Debentures will be limited to $40 million
aggregate principal amount and will bear interest semiannually on April 1 and
October 1 of each year commencing April 1, 1997 at the rate per annum shown on
the cover page of this Prospectus Supplement. Interest will be calculated on the
basis of a 360 day year consisting of twelve 30-day months. The first payment,
for the period from the date of issuance to April 1, 1997, will amount to $36.25
per $1,000 principal amount of the Debentures (assuming a closing date of
October 7, 1996). The Company will pay interest on the Debentures to the persons
who are registered holders of Debentures ("Debentureholders") at the close of
business on the March 15 or September 15 preceding the interest payment date.
The Company may pay principal and interest by check and may mail an interest
check to a holder's registered address; provided, however, that payments to The
Depository Trust Company, New York, New York (the "Debt Depositary") will be
made by wire transfer of immediately available funds to the account of the Debt
Depositary or its nominee. Holders must surrender Debentures to a Paying Agent
to collect final principal payments.
The Debentures will be in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. A holder may transfer
or exchange Debentures in accordance with the Indenture. No service charge will
be made for any registration of transfer, exchange or conversion of Debentures,
except for any tax or other governmental charges that may be imposed in
connection therewith. The Registrar need not transfer or exchange any Debentures
selected for redemption. Also, in the event of a partial redemption, it need not
transfer or exchange any Debentures for a period of 15 days before selecting the
Debentures to be redeemed. The registered holder of a Debenture may be treated
as its owner for all purposes. The Indenture does not contain any financial
covenants or restrictions on the incurrence of Senior Indebtedness or, in the
absence of an Event of Default, restrictions on the payment of dividends or the
issuance or repurchase of securities of the Company, except to the extent
described under "--Subordination of Debentures" or "-- Dividends, Distributions
and Acquisitions of Common Shares". In addition, the Indenture does not contain
any provision requiring the Company to repurchase the Debentures at the option
of the holders thereof in the event of a leveraged buyout, recapitalization or
similar restructuring of the Company, even though the Company's creditworthiness
and the market value of the Debentures may decline significantly as a result of
such transaction. The Indenture does not protect holders of the Debentures
against any decline in credit quality, whether resulting from any such
transaction or from any other cause.
Initially, Fleet National Bank will act as Paying Agent, Registrar and
Conversion Agent. The Company may change any Paying Agent, Registrar, Conversion
Agent or co-registrar and may act in any such capacity itself.
Conversion. The holders of the Debentures will be entitled at any time
prior to maturity, subject to prior redemption, to convert the Debentures or
portions thereof (which are $1,000 or integral multiples thereof) into Common
Shares at the conversion price set forth on the cover page of this Prospectus
Supplement (subject to adjustments as described below). No payment or adjustment
will be made for accrued interest on a converted Debenture. If any Debenture not
called for redemption is converted between a record date for the payment of
interest and the next succeeding interest payment date (other than the October
1, 1999 Interest Payment Date), such Debenture must be accompanied by funds
equal to the interest payable to the registered holder on such interest payment
date on the principal amount so converted. The Company will not issue fractional
Common Shares upon conversion of Debentures and, instead, will deliver a check
for the fractional Common Shares based upon the market value of the Common
Shares on the last trading day prior to the conversion date. If the Debentures
are called for redemption, conversion rights will expire at the close of
business on the second business day preceding the redemption date, unless the
Company defaults in payment due upon such redemption.
To protect the Company's status as a REIT, a holder may not own any
Debenture if as a result of such ownership any Person would then be deemed to
beneficially own, directly or indirectly, 8.5% or more of the Company's Common
Shares. Any Debentures owned in violation of such restriction may not be
converted into Common Shares. For purposes of determining a Person's beneficial
ownership of Common Shares, the Debentures beneficially owned by such Person
will be deemed converted and added to the Common Shares
S-14
<PAGE> 17
beneficially owned by such Person for purposes of determining whether such
Person beneficially owns in excess of 8.5% of the Common Shares.
The conversion price is subject to adjustment, as set forth in the
Indenture, in certain events, including the payment of dividends or
distributions on the Company's shares of beneficial interest in Common Shares or
other securities issued by the Company; the issuance to all holders of Common
Shares of rights, options or warrants entitling them to subscribe for Common
Shares (or securities convertible into Common Shares), subdivisions or
combinations of the Common Shares into a greater or smaller number of shares,
and reclassification of Common Shares resulting in an issuance of any of the
Company's shares of beneficial interest. No adjustment is provided in the case
of distributions to holders of Common Shares of indebtedness or assets
(including securities, other than those rights, options, warrants, dividends and
distributions referred to above), other than a distribution of the Company's
ownership interest in HPT. No adjustment in the conversion price need be made
unless such adjustment would require a change of at least 1% in the conversion
price; however, any adjustment that would otherwise be required to be made shall
be carried forward and taken into account in any subsequent adjustment. A
conversion price adjustment made according to the provisions of the Debentures
(or the absence of provision for such an adjustment) might result in a
constructive distribution to the holders of Debentures or holders of Common
Shares that would be subject to taxation as a dividend. The Company may, at its
option, make such reduction in the conversion price, in addition to those set
forth above, as the Board of Trustees of the Company deems advisable to avoid or
diminish any income tax to holders of Common Shares resulting from any dividend
or distribution of equity securities (or rights to acquire equity securities) or
from any event treated as such for income tax purposes or for any other reason.
The Board of Trustees will also have the power to resolve any ambiguity or
correct any error in the provisions relating to the adjustment of the conversion
price of the Debentures and its actions in so doing shall be final and
conclusive.
If the Company combines or merges with, or sells or transfers substantially
all of its assets to, another corporation or trust, the holders of the
Debentures then outstanding will be entitled thereafter to convert such
Debentures into the kind and amount of shares of capital stock, other
securities, cash or other assets which they would have owned immediately after
such event had such Debentures been converted before the effective date of the
transaction.
Subordination of Debentures. The indebtedness evidenced by the Debentures
will be subordinated and junior in right of payment to the extent set forth in
the Indenture to the prior payment in full of amounts then due on all Senior
Indebtedness (as defined) and is effectively subordinated to all liabilities of
the Company's subsidiaries. No payment shall be made by the Company on account
of principal of or interest on the Debentures or on account of the purchase or
other acquisition of Debentures (other than payments made in Common Shares or
certain other equity securities or subordinated debt securities of the Company),
if there shall have occurred and be continuing a default with respect to any
Senior Indebtedness permitting the holders to accelerate the maturity thereof or
with respect to the payment of any Senior Indebtedness, and such default shall
be the subject of a judicial proceeding or the Company shall have received
notice of such default from any holder of Senior Indebtedness, unless and until
such default or event of default shall have been cured or waived or shall have
ceased to exist. By reason of these provisions, in the event of default on any
Senior Indebtedness, whether now outstanding or hereafter issued, payments of
principal of and interest on the Debentures may not be permitted to be made
until such Senior Indebtedness is paid in full, or the event of default on such
Senior Indebtedness is cured or waived.
Upon any acceleration of the principal of the Debentures or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debentures or the Trustee are entitled to receive or retain
any assets so distributed in respect of the Debentures. By reason of this
provision, in the event of insolvency, holders of the Debentures may recover
less, ratably, than holders of Senior Indebtedness.
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"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post-filing interest is allowed in such proceeding), fees,
charges, expenses, reimbursements and indemnification obligations, and all other
amounts payable under or in respect of (i) any Indebtedness of the Company and
(ii) any and all deferrals, renewals, extensions, refundings and refinancings
(whether direct or indirect) of any such Indebtedness, whether any such
Indebtedness exists as of the date of this Prospectus Supplement or is hereafter
created, incurred, assumed or guaranteed; provided, however, that Senior
Indebtedness will not include (A) the Debentures, the Regulation S Debentures or
the Series A Debentures or, (B) Indebtedness of the Company owed or owing to a
subsidiary or any officer, director, trustee or employee of the Company or any
subsidiary, (C) Indebtedness of the Company which, pursuant to the terms of the
instrument creating or evidencing such Indebtedness, is expressly made pari
passu with or subordinate in right of payment to the Debentures or (D) any
liability for taxes owed or owing by the Company.
"Indebtedness" as applied to the Company, means (a) all liabilities and
obligations, contingent or otherwise, of the Company (i) in respect of borrowed
money whether or not evidenced by a promissory note, draft or similar instrument
(whether or not the recourse of the lender is to the whole of the assets of the
Company or only to a portion thereof); (ii) evidenced by bonds, notes,
debentures or similar instruments; (iii) evidenced by a letter of credit or
reimbursement obligation of the Company with respect to any letter of credit;
(iv) evidenced by bankers' acceptances or similar instruments issued or accepted
by banks; (v) for the payment of money relating to obligations with respect to
any lease that is properly classified as a liability on a balance sheet in
accordance with generally accepted accounting principles; and (vi) representing
the balance deferred and unpaid for all or any part of the purchase price of
property or services (except any such balance that constitutes (A) a trade
payable or an accrued liability arising in the ordinary course of business or
(B) a trade draft or note payable issued in the ordinary course of business in
connection with the purchase of goods or services); (b) all net obligations of
the Company under interest swap and hedging obligations; (c) all liabilities of
others described in the preceding clauses (a) and (b) which the Company has
guaranteed or for which it is otherwise liable and all obligations to purchase,
redeem or acquire any shares of beneficial interest of the Company; and (d) any
and all deferrals, amendments, renewals, extensions, supplements, refinancings
or refundings (whether direct or indirect) of any liability or obligations
described in any of the preceding clauses (a), (b) or (c), or this clause (d),
whether or not between or among the same parties.
Optional Redemption. The Debentures will be subject to redemption, in
whole or in part, at any time or from time to time commencing October 1, 1999,
at the option of the Company on at least 30 days' prior notice by mail at a
redemption price equal to 100% of the principal amount thereof, plus interest
accrued to the date of redemption. The Debentures will not be redeemable prior
to October 1, 1999; provided, however, the Debentures will be subject to
redemption, in whole or in part, at any time for certain reasons intended to
protect the Company's status as a REIT, at the option of the Company on at least
30 days' prior notice by mail at a redemption price equal to 100% of the
principal amount, plus interest accrued to the date of redemption. The Company
may redeem Debentures prior to October 1, 1999 solely with respect to the
Debentures of a holder or holders who pose a threat to the Company's REIT status
and only to the extent deemed necessary by the Company's Board of Trustees to
preserve such status. The Company may at any time buy Debentures on the open
market at prices which may be greater or less than the optional redemption price
listed above.
Dividends, Distributions, and Acquisitions of Common Shares. The Indenture
provides that the Company will not (i) declare or pay any dividend or make any
distribution on its shares of Common Shares or to holders of Common Shares
(other than dividends or distributions payable in Common Shares or other than as
the Company determines in good faith is necessary to maintain its status as a
REIT) or (ii) purchase, redeem or otherwise acquire or retire for value any of
its Common Shares, if at the time of such action an Event of Default has
occurred and is continuing or would exist immediately after such action. The
foregoing, however, will not prevent (i) the payment of any dividend within 60
days after the date of declaration when the payment would have complied with the
foregoing provision on the date of declaration, or (ii) the Company's retirement
of any of its Common Shares by exchange for, or out of the proceeds of the
substantially concurrent sale of, other Common Shares.
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Consolidation, Merger or Sale. The Indenture provides that the Company may
consolidate with, or sell, lease or convey all or substantially all of its
assets to, or merge with or into, any other entity, provided that (i) either the
Company shall be the continuing entity or the successor entity (if other than
the Company) formed by or resulting from any such consolidation or merger or
which shall have received the transfer of such assets shall expressly assume
payment of the principal of and interest on all of the Debentures and the due
and punctual performance and observance of all of the covenants and conditions
contained in the Indenture; (ii) immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of the
Company or any subsidiary as a result thereof as having been incurred by the
Company or such subsidiary at the time of such transaction, no Event of Default
under the Indenture, and no event which, after notice or the lapse of time, or
both, would become such an Event of Default (a "Default"), shall have occurred
and be continuing; and (iii) an officer's certificate and legal opinion more
fully described in the Indenture shall be delivered to the Trustee.
Events of Default. The Indenture will provide that the following events
are "Events of Default" with respect to the Debentures: (a) default for 30 days
in the payment of any installment interest on the Debentures, the Regulation S
Debentures or the Series A Debentures (each, a "Series"); (b) default in the
payment of the principal of any Series at their maturity; (c) default for 60
days in the Company's obligations to convert any Series; (d) default in the
performance of any other covenant of the Company contained in the Indenture
(other than a covenant added to the Indenture solely for the benefit of a series
of Senior Indebtedness issued thereunder), such default having continued for 60
days after written notice as provided in the Indenture; (e) default in the
payment of an aggregate principal amount exceeding $25 million of any
Indebtedness of the Company or any mortgage, indenture or other instrument under
which such Indebtedness is issued or by which such Indebtedness is secured, such
default having occurred after the expiration of any applicable grace period and
having resulted in the acceleration of the maturity of such Indebtedness, but
only if such Indebtedness is not discharged or such acceleration is not
rescinded or annulled; or (f) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company.
If an Event of Default (other than an Event of Default described in clause
(f) above) under the Indenture with respect to Debentures occurs and is
continuing, then in every such case the Trustee or the holders of not less than
a majority in principal amount of a Series may declare the principal amount of
such Series to be due and payable immediately by written notice thereof to the
Company (and to the Trustee if given by the holders). If an Event of Default
described in clause (f) above shall occur, the principal amount of all Series
will automatically, and without any action by the Trustee or any holder, become
immediately due and payable. However, at any time after such a declaration of
acceleration with respect to a Series or all Series, has been made, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of not less than a majority in outstanding principal amount
of a Series (in the case of a declaration of acceleration with respect to such
Series) or the holders of all Series, as the case may be, may rescind such
declaration and its consequences if (i) the Company shall have deposited with
the Trustee all required payments of the principal of and interest on such
Series or all Series, as the case may be, plus certain fees, expenses,
disbursements and advances of the Trustee, and (ii) all Events of Default, other
than the non-payment of accelerated principal (or specified portion thereof) or
interest on such Series or all Series, as the case may be, have been cured or
waived as provided in the Indenture. The Indenture will also provide that the
holders of not less than a majority in outstanding principal amount of a Series
may waive any past default with respect to such Series and its consequences,
except a default (i) in the payment of the principal of or interest on a Series
or (ii) in respect of a covenant or provision contained in the Indenture that
cannot be modified or amended without the consent of each holder of such Series.
Summaries of certain additional information relating to Defaults or Events
of Default, the exercise of remedies by the Trustee or holders of Debentures and
limitations thereon and related notices and waivers is set forth in the
accompanying Prospectus under "Description of Debt Securities -- Events of
Default, Notice and Waiver".
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Book Entry: Delivery and Form. The Debentures may be evidenced by one or
more global debentures (each, a "Global Debenture") which will be deposited
with, or on behalf of, the Debt Depositary and registered in the name of Cede &
Co. ("Cede") as the Debt Depositary's nominee.
So long as Cede, as the nominee of the Debt Depositary, is the registered
owner of a Global Debenture, Cede for all purposes will be considered the sole
holder of such Global Debenture. Except as otherwise provided in the Indenture,
owners of beneficial interests in a Global Debenture will not be entitled to
have certificates registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive form, and will not be
considered the holders thereof.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance of the Debt Depositary or its participants or indirect participants
of their respective obligations under the rules and procedures governing their
operations. The Debt Depositary has advised the Company that it will take any
action permitted to be taken by a holder of Debentures (including, without
limitation, the presentation of Debentures for exchange as described below) only
at the direction of one or more participants to whose account with the Debt
Depositary interests in a Global Debenture are credited, and only in respect of
the principal amount of the Debentures represented by a Global Debenture as to
which such participant or participants has or have given such direction.
The Debt Depositary has advised the Company as follows: the Debt Depositary
is a limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Debt
Depositary was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Certain of such participants (or
their representatives), together with other entities, own the Debt Depositary.
Indirect access to the Debt Depositary's systems is available to others such as
banks, brokers, dealers and trust companies that clear through, or maintain a
custodial relationship, with a participant, either directly or indirectly.
Ownership of beneficial interests in any Global Debenture will be limited
to persons that have accounts with the Debt Depositary ("participants") or
persons that may hold interests through participants. Upon the issuance of a
Global Debenture, the Debt Depositary will credit, on its book-entry
registration and transfer system, the participants' accounts with the respective
principal amounts of the Debenture represented by such Global Debenture
beneficially owned by such participants. The accounts to be credited will be
designated by any dealers, underwriters or agents participating in the
distribution of such Debentures. Ownership of beneficial interests in such
Global Debenture will be shown on, and the transfer of such ownership interests
will be effected only through, records maintained by the Debt Depositary (with
respect to interests of participants) and on the records of participants (with
respect to interests of persons holding through participants). The laws of some
states may require that certain purchasers of securities take physical delivery
of such securities in definitive form. Such limits and such laws may impair the
ability to own, transfer or pledge beneficial interests in a Global Debenture.
Each person owning a beneficial interest in a Global Debenture must rely on
the procedures of the Debt Depositary and, if such person is not a participant,
on the procedures of the participant through which such person owns its
interest, to exercise any rights of a holder under the Indenture. The Company
understands that under existing industry practices, if it requests any action of
holders or if an owner of a beneficial interest in a Global Debenture desires to
give or take any action which a holder is entitled to give or take under the
Indenture, the Debt Depositary would authorize the participants holding the
relevant beneficial interests to give or take such action, and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instructions of beneficial
owners holding through them.
Principal and interest payments on Debentures represented by a Global
Debenture registered in the name of the Debt Depositary or its nominee will be
made to the Debt Depositary or its nominee, as the case may be,
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as the registered owner of such Global Debenture. None of the Company, the
Trustee or any other agent of the Company or agent of the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in such Global
Debenture or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that the Debt Depositary for any Debentures represented
by a Global Debenture upon receipt of any payment of principal, premium or
interest in respect of such Global Debenture will immediately credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in such Global Debenture as shown on the records
of Debt Depositary. The Company also expects that payments by participants to
owners to beneficial interests in a Global Debenture held through such
participants will be governed by standing customer instructions and customary
practices, as is now the case with the securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participants.
If the Debt Depositary for any Debenture represented by a Global Debenture
is at any time unwilling or unable to continue as Debt Depositary or ceases to
be a clearing agency under the Exchange Act, and a successor Debt Depositary
registered as a clearing agency under the Exchange Act is not appointed by the
Company within 90 days, the Company will issue such Debentures in definitive
form in exchange for such Global Debenture. In addition, the Company may at any
time and in its sole discretion determine not to have any of the Debentures
represented by a Global Debenture and, in such event, will issue Debentures in
definitive form in exchange for the Global Debenture representing such
Debentures. Any Debentures issued in definitive form in exchange for a Global
Debenture will be registered in such name or names as the Debt Depositary shall
instruct the Trustee. It is expected that such instructions will be based upon
directions received by the Debt Depositary from participants with respect to
ownership of beneficial interests in the Global Debenture.
Certain Other Provisions. The accompanying Prospectus contains summaries
of certain additional provisions of the Indenture with respect to, among other
things, modifications of the Indenture with or without the consent of holders of
the Debentures and discharge, defeasance and covenant defeasance (which,
pursuant to the Indenture, will apply to the Debentures). See "Description of
Debt Securities -- Modification of the Indenture" and "-- Discharge, Defeasance
and Covenant Defeasance".
REGULATION S DEBENTURES
Concurrently with the Offering, the Company is offering $130 million
aggregate principal amount of 7.50% Convertible Subordinated Debentures due
2003, Series B (exclusive of an option to purchase up to $19.5 million aggregate
principal amount Series B Debentures to cover overallotments, if any), outside
of the United States pursuant to the provisions of Regulation S under the
Securities Act. The Regulation S Debentures will be issued under a separate
supplemental indenture under the Indenture and will be pari passu with the
Debentures in all respects. See "Recent Developments".
The terms and conditions of the Regulation S Debentures, including
redemption and conversion provisions, are substantially the same as those of the
Debentures, except that (i) the Regulation S Debentures bear interest at a rate
of 7.50% per annum and have a maturity date of October 1, 2003, (ii) the
Regulation S Debentures are not convertible until following a 40-day period
beginning on the closing date for the issuance thereof, (iii) the Regulation S
Debentures may be issued in bearer or registered form and, subject to certain
limitations, may be exchanged from one form to another, (iv) the holders thereof
may be entitled to receive certain additional payments in respect of the
imposition of certain tax withholding or, in lieu thereof, the Company may
redeem the Regulation S Debentures (on a date which may be prior to October 1,
1999) at a redemption price equal to 100% of the principal amount, plus interest
accrued to the date of redemption, as a result of changes in certain laws,
regulations or rulings relating to taxation. Application has been made for the
Regulation S Debentures to be listed on the Luxembourg Stock Exchange, and (v)
in certain circumstances the Company may be required to redeem Regulation S
Debentures in bearer form in the event of the applicability of or changes in
certain laws relating to certification, identification or information reporting
requirements with regard to the nationality, residence or identity of the
beneficial owner thereof at a
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redemption price equal to 100% of the principal amount thereof, plus interest
accrued to the date of redemption.
SERIES A DEBENTURES
Concurrently with the Offering, the Company is also offering $70 million
aggregate principal amount of 7.50% Convertible Subordinated Debentures due
2003, Series A (exclusive of an option to purchase up to $10.5 million aggregate
principal amount Series A Debentures to cover overallotments, if any). The
Series A Debentures will be issued under a separate supplemental indenture under
the Indenture and will be pari passu with the Debentures in all respects.
The terms and conditions of the Series A Debentures, including redemption
and conversion provisions, are substantially the same as those of the
Debentures, except that the Series A Debentures bear interest at a rate of 7.50%
per annum and have a maturity date of October 1, 2003. Application has been made
for the Series A Debentures to be listed on the NYSE.
FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF CERTAIN MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS REGARDING THE DEBENTURES, AND IS BASED ON CURRENT LAW, IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. THIS DISCUSSION DOES NOT PURPORT
TO DEAL WITH ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT TO PARTICULAR HOLDERS
OF DEBENTURES IN LIGHT OF THEIR PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR TO
CERTAIN TYPES OF HOLDERS OF DEBENTURES, INCLUDING INSURANCE COMPANIES,
TAX-EXEMPT ORGANIZATIONS FINANCIAL INSTITUTIONS OR BROKER-DEALERS.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP,
CONVERSION AND SALE OF THE DEBENTURES INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX AND ERISA CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP,
CONVERSION AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF HOLDERS OF DEBENTURES
Stated Interest
Holders of Debentures will be required to include stated interest on the
Debentures in gross income for federal income tax purposes as ordinary income in
accordance with their methods of accounting for tax purposes. The Debentures
will not be issued with original issue discount.
Market Discount
Purchasers of Debentures should be aware that the holding and disposition
of Debentures may be affected by the market discount provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). These rules generally provide
that, subject to a statutorily-defined de minimis exception, if a holder of a
debt instrument purchases it at a market discount and thereafter recognizes gain
on a disposition of the debt instrument (including a gift or payment on
maturity), the lesser of such gain (or appreciation, in the case of a gift) or
the portion of the market discount that accrued while the debt instrument was
held by such holder will be treated as ordinary interest income at the time of
the disposition. For this purpose, a purchase at a market discount includes a
purchase after original issuance at a price below the debt instrument's stated
principal amount. The market discount rules also provide that a holder who
acquires a debt instrument at a market discount (and who does not elect, as
described below, to include such market discount in income on a current basis)
may be required to defer a portion of any interest expense that may otherwise be
deductible on any indebtedness incurred or maintained to purchase or carry such
debt instrument until the holder disposes of the debt instrument in a taxable
transaction.
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The Debentures provide that they may be redeemed, in whole or in part,
before maturity only for certain tax reasons relating to the Company's status as
a REIT under Sections 856 through 860 of the Code. If some or all of the
Debentures are redeemed in part, each holder of a Debenture acquired at a market
discount would be required to treat the principal payment as ordinary interest
income to the extent of any accrued market discount on such Debenture.
A holder of a debt instrument acquired at a market discount may elect to
include the market discount in income as the discount thereon accrues, either on
a straight line basis or, if elected, on a constant interest rate basis. The
current inclusion election, once made, applies to all market discount
obligations acquired by such holder on or after the first day of the first
taxable year to which the election applies, and may not be revoked without the
consent of the Internal Revenue Service ("IRS"). If a holder of a Debenture
elects to include market discount in income in accordance with the preceding
sentence, the foregoing rules with respect to the recognition of ordinary income
on a sale or certain other dispositions of such Debenture and the deferral of
interest deductions on indebtedness related to such Debenture would not apply.
Amortizable Bond Premium
Generally, if the tax basis of an obligation held as a capital asset
exceeds the amount payable at maturity of the obligation, such excess may
constitute amortizable bond premium that the holder may elect to amortize under
the constant interest rate method and deduct over the period from his
acquisition date to the obligation's maturity date. The amortization election,
once made, applies to all bonds yielding taxable interest held by such holder on
the first day of the first taxable year to which such election applies and to
all bonds yielding taxable interest thereafter acquired by such holder, and such
election may not be revoked without the consent of the IRS. A holder who elects
to amortize bond premium must reduce his tax basis in the related obligation by
the amount of the aggregate deductions allowable for amortizable bond premium.
The amortizable bond premium deduction is treated as an offset to interest
income on the related security for federal income tax purposes. Each prospective
purchaser is urged to consult his tax advisor as to the consequences of the
treatment of such premium as an offset to interest income for federal income tax
purposes.
Disposition
In general, a holder of a Debenture will recognize gain or loss upon the
sale, exchange, redemption, payment upon maturity or other taxable disposition
of the Debenture measured by the difference between (i) the amount of cash and
the fair market value of property received (except to the extent that such cash
or other property is attributable to the payment of accrued interest not
previously included in income, which amount will be taxable as ordinary income)
and (ii) the holder's tax basis in the Debenture (as increased by any market
discount previously included in income by the holder and decreased by any
amortizable bond premium deducted over the term of the Debenture). Subject to
the market discount and amortizable bond premium rules above, any such gain or
loss will generally be long-term capital gain or loss, provided the Debenture
was a capital asset in the hands of the holder and had been held for more than
one year.
Conversion
A holder of a Debenture should not recognize gain or loss on the conversion
of a Debenture solely into Common Shares except with respect to cash in lieu of
fractional shares and except to the extent that the Common Shares issued upon
conversion are treated as attributable to accrued interest on the Debentures. To
the extent the Debentures converted are subject to accrued market discount, the
amount of the accrued market discount will carry over to the Common Shares on
conversion and will be treated as ordinary income on disposition of the Common
Shares. If Common Shares are received by a holder of a Debenture without
recognition of gain or loss, the holding period of the Common Shares received
upon conversion of the Debenture will include the period during which the
Debenture was held (provided the Debenture was a capital asset in the hands of
the holder prior to the conversion), and the holder's aggregate basis in the
Common Shares received upon conversion of the Debenture will be equal to the
holder's aggregate basis in the Debenture exchanged therefor (less a portion
thereof allocable to any fractional share exchanged for cash). A holder of a
Debenture will recognize taxable gain or loss on cash received in lieu of
fractional Common Shares
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in an amount equal to the difference between the amount of cash received and the
holder's basis in such fractional share. Such gain or loss should be capital
gain or loss if the fractional share is a capital asset in the hands of the
holder, and should be long-term capital gain or loss if the fractional share has
been deemed held for the then requisite holding period. The fair market value of
Common Shares received which is attributable to accrued interest will be taxable
as ordinary interest income.
Adjustments in the conversion price of the Debentures made pursuant to the
anti-dilution provisions thereof to reflect distributions to holders of Common
Shares may result in constructive distributions to holders of Debentures that
could be taxable to them as dividends pursuant to Section 305 of the Code.
Non-U.S. Debentureholders
The rules governing United States federal income taxation of the ownership
and disposition of Debentures by holders that are, for purposes of such
taxation, nonresident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts (collectively, "Non-U.S.
Debentureholders") are complex, and no attempt is made herein to provide more
than a brief summary of such rules. Accordingly, the discussion does not address
all aspects of United States federal income tax and does not address state,
local or foreign tax consequences that may be relevant to a Non-U.S.
Debentureholder in light of its particular circumstances. In addition, this
discussion is based on current law, which is subject to change. Prospective
Non-U.S. Debentureholders should consult with their own tax advisors to
determine the impact of federal, state, local and foreign income tax laws with
regard to the purchase of Debentures, including any reporting requirements.
The United States generally will impose a withholding tax at a 30% rate
(subject to reduction or elimination in the case of Non-U.S. Debentureholders
eligible for a lower treaty rate) on payments of interest received from sources
within the United States by a Non-U.S. Debentureholder, unless such income is
effectively connected with his conduct of a United States trade or business.
This tax does not apply to payments of "portfolio interest." Payments of
interest on the Debentures will qualify as portfolio interest, provided that (i)
the Non-U.S. Debentureholder does not own 10% or more (directly or
constructively) of the total combined voting power of all classes of stock of
the Company entitled to vote; (ii) the Non-U.S. Debentureholder is not a
"controlled foreign corporation" (generally, a foreign corporation controlled by
United States stockholders related to the Company); (iii) the Non-U.S.
Debentureholder is not a bank receiving the interest on an extension of credit
made pursuant to a loan agreement entered into in the ordinary course of its
trade or business; (iv) the interest is not "contingent interest" within the
meaning of Section 871(h)(4) of the Code; and (v) the beneficial owner of the
Debentures and, if relevant, a financial institution on the beneficial owner's
behalf, complies with certain certification requirements regarding the
beneficial owner's status as a foreign person. The certification requirement
referred to in (v) requires the beneficial owner of the Debentures to provide to
the Company (or, if appropriate, to the relevant financial institution which
financial institution then provides to the Company) a statement under penalties
of perjury on IRS Form W-8 (or a substantially similar substitute form) as to
its status as a foreign person.
Interest paid on Debentures should not constitute contingent interest
within the meaning of Section 871(h)(4) of the Code. Thus, as long as the
Non-U.S. Debentureholder satisfies requirement (v) above and the Company has no
reason to believe that requirements (i), (ii) or (iii) above are not satisfied
or that such interest is effectively connected with the conduct of a United
States trade or business, the Company will treat the interest paid on the
Debentures as "portfolio interest" and will not withhold tax from such interest
paid to such Non-U.S. Debentureholder. In addition, if the interest paid on the
Debentures to a foreign holder is effectively connected with the conduct of a
United States trade or business and the Non-U.S. Debentureholder provides the
requisite statement to such effect, then the Company will not withhold tax from
such interest (and the Non-U.S. Debentureholder will be subject to United States
federal income tax as described below).
A Non-U.S. Debentureholder will not be subject to United States federal
income tax or withholding tax on gain realized on the sale, exchange or
redemption of a Debenture (including the conversion of such Debenture for Common
Shares and the receipt of cash in lieu of fractional Common Shares on such a
conversion, but excluding gain attributable to accrued and unpaid interest which
will generally be treated as
S-22
<PAGE> 25
interest), provided that (i) such gain is not effectively connected with the
conduct of a trade or business in the United States by such Non-U.S.
Debentureholder, (ii) such Non-U.S. Debentureholder is not an individual who is
present in the United States for 183 or more days during the taxable year in
which such gain is realized and (iii) the certification requirements referred to
in clause (v) of the second preceding paragraph are met with respect to such
Non-U.S. Debentureholder. This paragraph assumes that the Company is a
"domestically controlled REIT," which is defined generally as a REIT in which at
all times during a specified testing period less than 50% in value of the stock
was held directly or indirectly by foreign persons. It is currently anticipated
that the Company will be a domestically controlled REIT.
In general, a Non-U.S. Debentureholder will be subject to (i) United States
federal income tax on interest or gain on a Debenture that is effectively
connected with its conduct of a United States trade or business and (ii) a
United States branch profits tax equal to 30% of its "effectively connected
earnings and profits" (as adjusted) for the taxable year if the Non-U.S.
Debentureholder is a corporation, unless it qualifies for exemption from the
branch profits tax or a lower rate of such tax under an applicable treaty.
Alternatively, an individual Non-U.S. Debentureholder who is present in the
United States for 183 days or more in a taxable year and has a "tax home" in the
United States will generally be taxed at a rate of 30% on any United States
source capital gain (net of any United States source capital losses) recognized
during such year on the Debentures that is not effectively connected with its
conduct of a United States trade or business.
Adjustments in the conversion price of the Debentures made pursuant to the
anti-dilution provisions thereof to reflect distribution to holders of Common
Shares may result in constructive dividends to Non-U.S. Debentureholders. Such
deemed dividends would be taxable to a Non-U.S. Debentureholder in the same
manner as dividends paid on the Common Shares. Where such deemed dividends would
otherwise be subject to withholding taxes, such tax may be collected through
subsequent payments on the Debentures.
Backup Withholding
Domestic Holders of Debentures
Under the backup withholding rules, a domestic holder of Debentures may be
subject to backup withholding at the rate of 31% with respect to interest or
dividends paid on, and gross proceeds from the sale of, the Debentures unless
such holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of Debentures who does not provide the Company with
his current taxpayer identification number may be subject to penalties imposed
by the IRS. Any money paid as backup withholding will be creditable against the
holder's federal income tax liability.
The Company will report to holders of Debentures and the IRS the amount of
any "reportable payments" (including any interest or dividends paid) and any
amount withheld with respect to the Debentures during the calendar year.
Non-U.S. Debentureholder
Backup withholding tax and information reporting will generally not apply
to payments of principal and interest made to Non-U.S. Debentureholders if the
certification requirements referred to above are satisfied (see "--Non-U.S.
Debentureholders"). As a general matter, backup withholding and information
reporting will not apply to a payment of the proceeds of a sale of Debentures by
or through a foreign office of a foreign broker. Information reporting (but not
backup withholding) will apply, however, to a payment of the proceeds of a sale
of Debentures by a foreign office of a broker that (a) is a United States
person, (b) derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States or (c) is a controlled
foreign corporation for United States federal income tax purposes, unless the
payee is an exempt recipient or the broker has documentary evidence in its
records that the payee is a Non-U.S. Debentureholder and certain other
conditions are met. Payment to or through a United States office of a broker of
the proceeds of a sale of Debentures is subject to both backup withholdings and
information reporting unless the payee certifies under penalties of perjury that
it is a Non-U.S. Debentureholder and certain other requirements are met, or the
payee otherwise establishes an exemption. A Non-U.S. Debenture-
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<PAGE> 26
holder may obtain a refund of any amounts withheld under the backup withholding
rules by the appropriate claim for refund with the IRS.
The backup withholding and information reporting rules are under review by
the United States Treasury, and their applications to the Debentures could be
changed prospectively by future Treasury regulations. On April 15, 1996, the IRS
issued proposed regulations that would change in certain respects the
certification requirements in respect of claims for exemptions from information
reporting and backup withholding in respect of payments made after December 31,
1997 on, or in respect of proceeds from the disposition of, Debentures. It is
not currently possible to predict whether, or in what form, any such regulations
ultimately will be adopted.
OTHER INCOME TAXATION MATTERS AND ERISA CONSIDERATIONS
The following description of certain Federal income tax matters and
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
considerations relating to the Company is qualified in its entirety by reference
to the more detailed description thereof contained in the Company's Annual
Report on Form 10-K, which is incorporated herein by reference.
The Company is and intends to remain qualified as a REIT under the Code. As
a REIT, the Company's net income which is distributed as dividends to
shareholders will be exempt from Federal taxation. Distributions to the
Company's shareholders generally will be includable in their income; however,
dividends distributed which are in excess of current or accumulated earnings
will be treated for tax purposes as a return of capital to the extent of a
shareholder's basis, and will reduce the basis of shareholders' Common Shares.
The Company intends to conduct its affairs so that the assets of the
Company will not be deemed to be "plan assets" of any individual retirement
account, employee benefit plan subject to Title I of ERISA , or other qualified
retirement plan subject to Section 4975 of the Code which acquires its Common
Shares. The Company believes that, under present law, its distributions do not
create "unrelated business taxable income" to tax-exempt entities such as
pension trusts, subject, however, to certain new rules which apply to pension
trusts holding more than 10% of the Common Shares.
Under Section 279 of the Code, deductions otherwise allowable to a
corporation for interest expense may be reduced or eliminated in the case of
"corporate acquisition indebtedness," which is defined generally to include
certain subordinated convertible debt which was issued to provide consideration
for the acquisition of stock or a substantial portion of the assets of another
corporation, where the issuer does not meet certain debt/equity and earnings
coverage tests. It is possible that this disallowance would apply to an issuance
of subordinated convertible debt used to refinance other debt if the issuance of
the subordinated convertible debt was contemplated when the refinanced debt was
incurred for the purpose of the corporate acquisition. The Company expects that
its interest expense with respect to the Debentures will not be materially
reduced under Section 279 of the Code.
PLAN OF DISTRIBUTION
The Debentures are being offered for sale by the Company principally to
selected unaffiliated institutional investors. Some of the Debentures may be
offered to institutional investors outside of the United States. NatWest has
been retained to act as placement agent for the Company in connection with the
arrangement of such offers, and sales on a best efforts, all or nothing, basis.
It is anticipated that NatWest will obtain indications of interest from
potential investors for the amount of the Offering and that no investor funds
will be accepted until indications of interest have been received for the full
amount of the Offering. Confirmations and definitive prospectuses will be
distributed to all investors at the time of pricing, informing investors of the
closing date, which will be scheduled for three business days after pricing.
Prior to the closing date, all investor funds will promptly be placed in escrow
with Citibank N.A., as escrow agent ("Citibank"), in an escrow account
established for the benefit of the investors. Citibank will invest such funds in
accordance with Rule 15c2-4 under the Exchange Act, as amended. Prior to the
closing date, Citibank will advise the Company that payments for the purchase of
the Debentures have been affirmed by the investors and that the investors have
deposited the requisite funds in the escrow account. Upon receipt of such
notice, the Company will deposit with the Depository Trust Company ("DTC"), as
Depository, the Debentures to be credited to the respective accounts of the
investors. Investor funds together with interest thereon, if any, will only be
S-24
<PAGE> 27
collected by the Company through the facilities of Citibank on the scheduled
closing date. The Offering will not continue after the closing date. In the
event that investor funds are not received in the full amount necessary to
satisfy the requirements of the Offering, Citibank will return all escrowed
investor funds to the respective investors as promptly as practicable. The
Company has agreed (i) to pay NatWest approximately 1.50% of the gross proceeds
to the Company from the Offering and (ii) to indemnify NatWest against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Debentures offered by the Company
have been passed upon for the Company by Sullivan & Worcester LLP, Boston,
Massachusetts and will be passed upon for the placement agent by Stroock &
Stroock & Lavan, New York, New York. Sullivan & Worcester LLP has relied, and
Stroock & Stroock & Lavan will rely, as to all matters of Maryland law, upon the
opinion of Piper & Marbury, L.L.P., Baltimore, Maryland. Sullivan & Worcester
LLP has also given its opinion as to certain Federal income tax matters and
certain ERISA considerations relating to the Company. See "Federal Income Tax
and ERISA Considerations". Barry M. Portnoy, a partner in the firm of Sullivan &
Worcester LLP, is a Managing Trustee of the Company and of HPT, a director and
50% shareholder of Advisors, and a director and/or significant shareholder of
certain lessees and mortgagors of the Company, including Horizon. Sullivan &
Worcester LLP represents Advisors, certain of such lessees and mortgagors and
certain affiliates of each of the foregoing on various matters.
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING THE COMPANY,
DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE
"DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT
PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS
TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER,
SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL
LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE
COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO
THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY
OBLIGATION.
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<PAGE> 28
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY THE DEBENTURES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Information
by Reference............................. ii
Summary.................................... S-1
Selected Financial Data.................... S-4
Recent Developments........................ S-5
The Company................................ S-7
Distributions.............................. S-8
Capitalization............................. S-9
Ratio of Earnings to Fixed Charges......... S-9
Use of Proceeds............................ S-9
Investment and Financing Policy............ S-10
Lease Expiration and Mortgage Maturity
Schedules................................ S-11
The Lessees and Mortgagors................. S-11
Equity Investment in HPT................... S-12
Management................................. S-12
Description of the Debentures.............. S-13
Federal Income Tax Considerations.......... S-20
Plan of Distribution....................... S-24
Legal Matters.............................. S-25
PROSPECTUS
Available Information...................... ii
Incorporation of Certain Documents by
Reference................................ ii
The Company................................ 1
Use of Proceeds............................ 1
Ratio of Earnings to Fixed Charges......... 1
Description of Debt Securities............. 1
Description of Shares...................... 12
Description of Preferred Shares............ 12
Description of Depositary Shares........... 18
Description of Warrants.................... 21
Limitation of Liability; Shareholder
Liability................................ 21
Redemption; Business Combinations and
Control Share Acquisitions............... 22
Plan of Distribution....................... 25
Legal Matters.............................. 26
Experts.................................... 26
</TABLE>
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$40,000,000
HEALTH AND RETIREMENT
PROPERTIES TRUST
7.25% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE 2001
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PROSPECTUS SUPPLEMENT
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OCTOBER 2, 1996
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