<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1995
REGISTRATION NO. 33-61895
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN HEALTH PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4084878
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
6400 SOUTH FIDDLER'S GREEN CIRCLE, SUITE 1800
ENGLEWOOD, COLORADO 80111
(303) 796-9793
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOSEPH P. SULLIVAN
6400 SOUTH FIDDLER'S GREEN CIRCLE, SUITE 1800
ENGLEWOOD, COLORADO 80111
(303) 796-9793
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PAUL HILTON FRANK H. GOLAY, JR.
DAVIS, GRAHAM & STUBBS, L.L.C. SULLIVAN & CROMWELL
370 17TH STREET, SUITE 4700 444 SOUTH FLOWER STREET
DENVER, COLORADO 80202 LOS ANGELES, CALIFORNIA 90071
(303) 892-9400 (213) 955-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement, as determined
by the Registrant.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
(Cover continued on following page)
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<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED(1) REGISTERED PER UNIT(2)(3) OFFERING PRICE(4)(5) FEE(4)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt
Securities(6)....
- --------------------------------------------------------------------------------------------------
Preferred Stock,
$.01 par value,
Depositary
Shares.............
- --------------------------------------------------------------------------------------------------
Common Stock, $.01
par value(7)(8)....
- --------------------------------------------------------------------------------------------------
Warrants...........
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Total.............. $275,000,000 100% $275,000,000 $94,828(9)
==================================================================================================
</TABLE>
(1) Any securities registered hereunder may be sold separately or as units with
other securities registered hereunder. Subject to Footnote (4), there are
being registered hereunder an indeterminate principal amount of Debt
Securities, Preferred Stock (and Depositary Shares with respect thereto),
Common Stock and Warrants as may be sold from time to time by the
Registrant. This Registration Statement also covers contracts that may be
issued by the Registrant under which the counterparty may be required to
purchase Debt Securities, Preferred Stock, Depositary Shares, Common Stock
or Warrants. Such contracts would be issued with Debt Securities, Preferred
Stock, Depositary Shares, Common Stock or Warrants. There are also being
registered hereunder an indeterminate principal amount of Debt Securities,
Preferred Stock, Depositary Shares, Common Stock and Warrants as may be
issuable upon conversion of Debt Securities, Preferred Stock or Warrants or
pursuant to antidilution provisions thereof. This Registration Statement
does not cover Common Stock that may be issuable upon exchange of the
Psychiatric Group Stock.
(2) In U.S. dollars or the equivalent thereof in one or more foreign currencies
or currency units or composite currencies, including the European Currency
Unit.
(3) The proposed maximum offering price per unit will be determined from time to
time by the Registrant in connection with the issuance by the Registrant of
the securities registered hereunder.
(4) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). In no event will the aggregate initial offering
price of the Debt Securities, Preferred Stock, Depositary Shares, Common
Stock and Warrants issued under this Registration Statement exceed
$275,000,000 or the equivalent thereof in one or more foreign or composite
currencies.
(5) No separate consideration will be received for (i) Debt Securities, shares
of Common Stock or Preferred Stock or Depositary Shares that are issued upon
conversion of Debt Securities, Preferred Stock or Depositary Shares or (ii)
Debt Securities, shares of Common Stock or Preferred Stock or Depositary
Shares that are issued upon exercise of Warrants registered hereby.
(6) If any such Debt Securities are issued at an original issue discount, then
the offering price shall be in such greater principal amount as shall result
in an aggregate initial offering price of up to $275,000,000.
(7) The aggregate amount of Common Stock registered hereunder is limited to that
which is permissible under Rule 415(a)(4) under the Securities Act of 1933,
as amended.
(8) This Registration Statement also covers Preferred Stock Purchase Rights
under the Registrant's Preferred Stock Purchase Rights Plan, which are
attached to and tradeable only with the shares of Common Stock registered
hereby. No registration fees are required for such shares and such rights as
they will be issued for no additional consideration.
(9) Registration fee paid on August 17, 1995.
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus supplement shall
not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT
Dated September 26, 1995
(To Prospectus Dated September , 1995)
2,500,000 SHARES
LOGO
COMMON STOCK
------------------------
The 2,500,000 shares of Common Stock, $.01 par value (the "Common Stock"),
offered hereby are being sold by American Health Properties, Inc. (the
"Company," which term refers to the Company and its subsidiaries
unless the context otherwise requires). The Company is a real
estate investment trust that invests in health care
facilities. See "Business and Properties."
------------------------
In July 1995, the Company sought to separate the economic attributes of its core
portfolio of investments (the "Core Group") and its portfolio of psychiatric
hospital investments (the "Psychiatric Group") into two distinct portfolios,
with two distinct classes of publicly traded shares intended to represent
those portfolios, by creating a new series of preferred stock designated as
Psychiatric Group Preferred Stock ("Psychiatric Group Stock"). However,
each holder of the Company's Common Stock is a holder of an issue
of capital stock of the entire Company and is subject to risks
associated with an investment in the Company and all of its
businesses, assets and liabilities. The securities offered
through delivery of this Prospectus Supplement and the
accompanying Prospectus include only Common Stock and do
not include Psychiatric Group Stock (NASDAQ: AHEPZ).
------------------------
The Company's Common Stock is traded on The New York Stock Exchange, Inc. (the
"NYSE") under the symbol "AHE." On September 25, 1995, the last reported sale
price of the Common Stock on the NYSE was $21.75 per share. See "Price Range
of Common Stock and Dividends" in the accompanying Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) THE COMPANY(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Per Share $ $ $
Total(3) $ $ $
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) For information regarding indemnification, see "Underwriting."
(2) Before deducting expenses estimated at $450,000, which are payable by the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 375,000 shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
all such shares are purchased, the total "Price to Public," "Underwriting
Discounts and Commissions" and "Proceeds to the Company" will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
The shares of Common Stock are offered by the several Underwriters named
herein, when, as and if received and accepted by them, subject to their right to
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of share certificates will be made in New York, New York
on or about October , 1995.
------------------------
DEAN WITTER REYNOLDS INC.
ALEX. BROWN & SONS
INCORPORATED
GOLDMAN, SACHS & CO.
NATWEST SECURITIES LIMITED
October , 1995
<PAGE> 4
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP FACILITIES(1)
MAP
FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby or
sold in the United Kingdom other than to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments,
whether as principal or agent (except in circumstances that do not constitute an
offer to the public within the meaning of the Public Offers of Securities Act
1995 or the Financial Services Act 1986), and this Prospectus Supplement and the
accompanying Prospectus may only be issued or passed on to any person in the
United Kingdom if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP FACILITIES(1)
<TABLE>
<S> <C> <C>
ACUTE CARE HOSPITALS LOCATIONS OPERATORS
Austin Diagnostic Hospital Austin, Texas Columbia/HCA Healthcare Corporation
Chesterfield General Hospital Cheraw, South Carolina Dynamic Health, Inc.
Cleveland General Hospital Cleveland, Texas Dynamic Health, Inc.
Concho Valley Regional Hospital San Angelo, Texas Quorum Health Group, Inc.
Desert Valley Hospital Victorville, California Quorum Health Group, Inc.
Elmwood Medical Center Jefferson, Louisiana Paracelsus Healthcare Corporation
Frye Regional Medical Center Hickory, North Carolina Tenet Healthcare Corporation
Halstead Hospital Halstead, Kansas Paracelsus Healthcare Corporation
Irvine Medical Center Irvine, California Tenet Healthcare Corporation
Kendall Regional Medical Center Miami, Florida Columbia/HCA Healthcare Corporation
Lucy Lee Hospital Poplar Bluff, Missouri Tenet Healthcare Corporation
Marlboro Park Hospital Bennettsville, South Dynamic Health, Inc.
Carolina
North Fulton Medical Center Roswell, Georgia Tenet Healthcare Corporation
Palm Beach Gardens Medical Center Palm Beach Gardens, Tenet Healthcare Corporation
Florida
Tarzana Regional Medical Center Tarzana, California Tenet Healthcare Corporation
REHABILITATION HOSPITALS LOCATIONS OPERATORS
HCA Wesley Rehabilitation Hospital Wichita, Kansas Horizon/CMS Healthcare Corporation
MountainView Regional Rehabilitation Morgantown, West Virginia HealthSouth Corporation
Hospital
Northwest Arkansas Rehabilitation Hospital Fayetteville, Arkansas Horizon/CMS Healthcare Corporation
LONG-TERM CARE FACILITIES LOCATIONS OPERATORS
Arkansas Manor Denver, Colorado Signature Health Care Corporation
Cornerstone Care Lakewood, Colorado Signature Health Care Corporation
Douglas Manor Douglas, Arizona Signature Health Care Corporation
Safford Care Safford, Arizona Signature Health Care Corporation
ASSISTED LIVING FACILITIES LOCATIONS OPERATORS
Alhambra Lodge(2) El Paso, Texas Emeritus Corporation
Garrison Creek Lodge(2) Walla Walla, Washington Emeritus Corporation
Sherwood Place(2) Odessa, Texas Emeritus Corporation
Summer Wind Residence Boise, Idaho Emeritus Corporation
ALZHEIMER'S CARE FACILITY LOCATION OPERATOR
Pinehaven(2) Houston, Texas Diversified Health Services
MEDICAL OFFICE BUILDING LOCATION OPERATOR
Walsh Medical Arts Center Murrieta, California Rancho California Medical
Association
</TABLE>
- ---------------
(1) Does not include the Company's portfolio of investments in psychiatric
facilities, which are intended to be represented by the Psychiatric Group
Stock not offered by this Prospectus Supplement and the accompanying
Prospectus.
(2) Currently under construction.
<PAGE> 6
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Supplement Summary......................................................... S-5
Use of Proceeds....................................................................... S-8
Capitalization........................................................................ S-8
Selected Combined Financial Information -- Core Group................................. S-9
Selected Consolidated Financial Information -- The Company............................ S-10
Selected Combined Financial Information -- Psychiatric Group.......................... S-11
Management's Discussion and Analysis of Core Group Combined Financial Condition
and Results of Operations........................................................... S-12
Management's Discussion and Analysis of Consolidated Financial Condition and Results
of Operations....................................................................... S-15
Investment Strategy................................................................... S-18
Recent Developments................................................................... S-18
Business and Properties............................................................... S-20
Federal Income Tax Considerations..................................................... S-30
Underwriting.......................................................................... S-34
PROSPECTUS
Available Information................................................................. 2
Incorporation of Certain Documents By Reference....................................... 2
The Company........................................................................... 4
Recent Developments................................................................... 5
Management and Accounting Policies.................................................... 8
Price Range of Common Stock and Dividends............................................. 10
Use of Proceeds....................................................................... 11
Ratios of Earnings to Fixed Charges................................................... 11
Description of Common Stock and Psychiatric Group Stock............................... 12
Description of Debt Securities........................................................ 18
Description of Preferred Stock........................................................ 26
Description of Depository Shares...................................................... 29
Description of Warrants............................................................... 32
Plan of Distribution.................................................................. 32
Validity of Securities................................................................ 33
Experts............................................................................... 33
Glossary.............................................................................. 34
</TABLE>
S-4
<PAGE> 7
PROSPECTUS SUPPLEMENT SUMMARY
The following summary information is qualified in its entirety by reference
to the more detailed information and financial statements, including the notes
thereto, appearing elsewhere or incorporated by reference in this Prospectus
Supplement or the accompanying Prospectus. Certain capitalized terms used in
this summary are defined elsewhere in this Prospectus Supplement or the
accompanying Prospectus. Unless otherwise indicated, the information contained
in this Prospectus Supplement assumes that the Underwriters' over-allotment
option will not be exercised. Unless otherwise indicated or the context
otherwise requires, all references to the Company include American Health
Properties, Inc. and its subsidiaries.
THE COMPANY
American Health Properties, Inc. is a self-administered real estate
investment trust ("REIT") that commenced operations in 1987. The Company has
investments in health care facilities that are operated by qualified third party
health care providers, as well as one medical office building.
In July 1995, the Company sought to separate the economic attributes of its
core portfolio of investments and its portfolio of psychiatric hospital
investments into two distinct portfolios, with two distinct classes of publicly
traded shares intended to represent those portfolios, by creating a new series
of preferred stock designated as Psychiatric Group Preferred Stock. However,
each holder of the Company's Common Stock is a holder of an issue of capital
stock of the entire Company and is subject to risks associated with an
investment in the Company and all of its businesses, assets and liabilities. The
securities offered through delivery of this Prospectus Supplement and the
accompanying Prospectus include only Common Stock and do not include Psychiatric
Group Stock (NASDAQ: AHEPZ).
The Company's current Core Group portfolio consists of 15 acute care
hospitals, three physical rehabilitation hospitals, four long-term care
facilities, four assisted living facilities (of which three facilities are under
construction), one Alzheimer's care facility currently under construction and
one medical office building. As of June 30, 1995, the net book value of the Core
Group's assets was $544 million. Of the Core Group's real estate assets at that
date, 90% in net book value represented the acute care segment, 6% represented
the rehabilitation segment, 2% represented the long-term care segment, including
the Alzheimer's care facility, and 2% represented the medical office building.
As of June 30, 1995, 95% in net book value of the Core Group's real estate
assets were held in fee and 5% were held as construction and/or mortgage
financing.
The Core Group's facilities are diversified geographically across 15
states, are distributed among large and small population centers, and are
operated by 11 experienced management companies. These operators include the
following companies or their subsidiaries: Columbia/HCA Healthcare Corporation,
Dynamic Health, Inc., Horizon/CMS Healthcare Corporation (formerly Continental
Medical Systems, Inc.), HealthSouth Corporation, Paracelsus Healthcare
Corporation, Quorum Health Group, Inc., Signature Health Care Corporation,
Emeritus Corporation and Tenet Healthcare Corporation ("Tenet," formerly
American Medical International, Inc.). Facilities operated by Tenet represented
55% of the Core Group's revenues for the six months ended June 30, 1995.
Approximately 83% of the Core Group's property revenues for the six months
ended June 30, 1995 were secured by corporate guarantees of these operating
companies or their subsidiaries. Also, as of June 30, 1995, letters of credit
from commercial banks and cash deposits aggregating $13 million were available
to the Core Group as security for lease financings. Leases for nine of the Core
Group's facilities, representing 80% of the Core Group's property revenues for
the six months ended June 30, 1995, contain cross-default provisions. All of the
Company's leases are on a triple "net" basis, and the lessees are responsible
thereunder, in addition to the base and additional rents, for all additional
charges with respect to the leased properties.
The Company's current Psychiatric Group portfolio consists of three
psychiatric hospitals owned by the Company and two mortgage loans secured by
psychiatric hospitals. As of June 30, 1995, the net book value of the
Psychiatric Group assets was $64.9 million. Of the Psychiatric Group's real
estate assets at that date, 36% in net book value were held in fee and 64% in
net book value were held as mortgages.
S-5
<PAGE> 8
The operators of the Company's facilities derive a substantial percentage
of their total revenues from federal and state health care programs such as
Medicare and Medicaid and from other third party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators are also subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third party payors or
an operator's failure to maintain its certification under the Medicare or
Medicaid programs could adversely affect revenues to the Company's facilities.
See "Business and Properties -- Government Regulations and Payor Arrangements."
The Company's principal executive office is located at 6400 South Fiddler's
Green Circle, Suite 1800, Englewood, Colorado 80111, and its telephone number at
such address is (303) 796-9793.
INVESTMENT STRATEGY
The Company seeks to invest in vertically integrated health care delivery
systems, including hospitals, long-term care facilities, assisted living
facilities, Alzheimer's care facilities, medical office buildings and other
specialty health care facilities. The Company's growth strategy is directed
toward building long-term relationships with the operators of these systems and
becoming a valued provider not only of capital, but of expertise over the long
term. The Company intends to divide future investments approximately equally
between the acute care sector and the long-term care sector of the health care
industry. In making new investments, the Company will focus on facilities that
are managed by operators with substantial experience in managing health care
operations and where there is likely an opportunity for follow-on investments in
facilities managed by such operators.
RECENT DEVELOPMENTS
CORE GROUP
Additional Investments. In August 1995, the Company entered into agreements
to provide $16.6 million of financing for three 80-unit assisted living
facilities to be constructed in Walla Walla, Washington, El Paso, Texas and
Odessa, Texas. The Company is providing construction financing and will purchase
the facilities upon completion. Construction of the facilities has commenced and
will take approximately ten months to complete. In addition, in September 1995
the Company purchased for $3.0 million an assisted living facility located in
Boise, Idaho containing 50 assisted living units. Each of these four facilities
will be leased to and operated by Emeritus Corporation (formerly Assisted Living
of America) of Seattle, Washington ("Emeritus") pursuant to ten-year operating
leases, each of which will contain cross-default provisions. Emeritus is one of
the national leaders in the emerging assisted living facility industry and is
managed by executives with substantial experience in managing multiple facility
long-term care operations.
Also in August 1995, the Company completed a $7.6 million purchase of two
long-term care facilities containing a total of 192 skilled nursing beds and 124
living units, located in Safford and Douglas, Arizona. The Company has leased
the facilities to affiliates of Signature Health Care Corporation ("Signature")
of Denver, Colorado. Signature operates 11 nursing homes in Colorado and
Arizona, including two facilities in Denver, Colorado that are leased from the
Company. The leases for all of the four long-term care facilities leased by
Signature from the Company contain cross-default provisions.
PSYCHIATRIC GROUP
Distribution of Psychiatric Group Stock. In July 1995, the Company made a
distribution of one Psychiatric Group Depositary Share (the "Depositary Shares")
for every ten shares of Common Stock held of record on July 14, 1995, each such
Depositary Share representing a one-tenth interest in one share of Psychiatric
Group Stock. By way of the issuance of the Psychiatric Group Stock, the Company
sought to
S-6
<PAGE> 9
separate the economic attributes of the Psychiatric Group and the Core Group
into two distinct portfolios, with two distinct classes of publicly traded
shares intended to represent those portfolios. The assets, liabilities and
expenses of the Company have been allocated between the two portfolios. In
addition to consolidated financial statements, the Company publishes separate
financial statements for each Group. Dividends and other payouts or
distributions with respect to the Common Stock and Psychiatric Group Stock are
expected to be primarily a function of the individual financial performance of
the Core Group and the Psychiatric Group, respectively. However, the change in
the capital structure of the Company effected by the issuance of the Psychiatric
Group Stock does not affect the respective legal title to assets or
responsibility for liabilities of the Company, and each holder of the Company's
Common stock is a holder of an issue of capital stock of the entire Company and
is subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. See "Recent Developments -- Distribution of
Psychiatric Group Stock," "Management and Accounting Policies" and "Description
of Common Stock and Psychiatric Group Stock" in the accompanying Prospectus.
The securities offered through delivery of this Prospectus Supplement and
the accompanying Prospectus do not include Psychiatric Group Stock. The Company
does not intend to issue additional Psychiatric Group Stock except upon exercise
of options granted in connection with the initial issuance of Psychiatric Group
Stock.
Recent Inquiries. The Company has recently received information from the
operator of its two psychiatric hospitals in Florida regarding wide-ranging
objections by several large insurance companies and other payors with respect to
claims presented for services rendered. There have also been a series of
negative stories in the national media and the local press in Florida on
psychiatric care provided in Florida, including criticism of admissions policies
and practice patterns at psychiatric hospitals in the State generally, and at
these two facilities. There have been legislative hearings in Florida on these
issues, and the Company believes that regulatory investigations are being
conducted. At this time both of these facilities remain current on their rent
and interest obligations to the Company, and the Company is continuing to
monitor this situation closely.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered By the Company(1)............. 2,500,000 shares
Common Stock to be Outstanding after the 23,365,539 shares(2)(3)
Offering.........................................
Use of Proceeds.................................... Net cash proceeds will be used to reduce
outstanding borrowings under the
Company's revolving credit facility and
for general corporate purposes. See "Use
of Proceeds."
New York Stock Exchange Symbol..................... AHE
</TABLE>
- ---------------
(1) Does not include Psychiatric Group Stock.
(2) Based upon the number of shares outstanding at June 30, 1995.
(3) Does not include, as of June 30, 1995, (i) 204,338 shares of Common Stock
that are issuable upon conversion of $6,268,000 aggregate principal amount
of the Company's 8 1/2% Convertible Dual Currency Subordinated Bonds (the
"Swiss Bonds") and (ii) up to 984,260 shares of Common Stock issuable upon
exercise of outstanding Company stock options.
S-7
<PAGE> 10
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of the Common Stock
offered hereby are estimated to be $51,200,000 ($58,947,500 if the Underwriters'
over-allotment option is exercised in full), based on an assumed offering price
of $21.75 per share, the last reported sale price of the Common Stock on the
NYSE on September 25, 1995, and after deducting the estimated underwriting
discount and estimated offering expenses payable by the Company. The Company
anticipates using the net proceeds from the sale of the Common Stock offered
hereby to repay outstanding borrowings under the Company's revolving credit
facility, which matures on December 31, 1996. As of September 15, 1995, the
Company's $48,000,000 of outstanding borrowings under its revolving credit
facility bore interest at an average rate of 7.13%. The remaining proceeds, if
any, will be used to reduce the Company's $24,000,000 term loan, which matures
on April 30, 1997 and which as of September 15, 1995 bore interest at a rate of
7.44%. The remaining proceeds, if any, will be used for general corporate
purposes, including possible future investments.
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of June 30, 1995 and as adjusted to reflect the sale of the
Common Stock offered hereby and the receipt of the estimated net proceeds
therefrom, estimated to be $51,200,000 ($58,947,500 if the Underwriters'
over-allotment option is exercised in full), and the application thereof. See
"Use of Proceeds." The information set forth below should be read in conjunction
with the Company's financial statements and notes thereto contained in the
Company's Current Report on Form 8-K dated August 14, 1995 and the Company's
Quarterly Report on Form 10-Q for the six months ended June 30, 1995, both of
which are incorporated by reference in the accompanying Prospectus. Except as
set forth in Note 2 below, there have been no material changes in the
capitalization of the Company since June 30, 1995.
<TABLE>
<CAPTION>
JUNE 30, 1995
--------------------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C>
Bank loans payable:
Term facility...................................................... $ 24,000 $ 20,800
Revolving facility(1).............................................. 33,500 0
--------- ----------
Total bank loans payable............................................. $ 57,500 $ 20,800
========= ==========
Notes and bonds payable.............................................. $ 207,268 207,268
Stockholders' equity:
Preferred stock $.01 par value, 1,000 shares authorized, none
issued and outstanding(2)....................................... -- --
Common stock $.01 par value, 100,000,000 shares authorized,
20,865,539 issued and outstanding, 23,365,539 shares issued and
outstanding as adjusted(3)...................................... 209 234
Additional paid-in capital......................................... 427,012 478,187
Cumulative net income.............................................. 189,143 189,143
Cumulative dividends............................................... (313,426) (313,426)
--------- ----------
Total stockholders' equity................................. 302,938 354,138
--------- ----------
Total capitalization (excluding bank loans)................ $ 510,206 $ 561,406
========= ==========
</TABLE>
- ---------------
(1) Reflects repayment of $48,000,000 of outstanding borrowings, the amount
outstanding as of September 15, 1995, with the proceeds of this offering.
(2) On July 21, 1995, the Company made a distribution of one Depositary Share
for every ten shares of Common Stock held of record on July 14, 1995, each
such Depositary Share representing a one-tenth interest in one share of
Psychiatric Group Stock. See "Recent Developments -- Distribution of
Psychiatric Group Stock" in the accompanying Prospectus.
(3) Does not include, as of June 30, 1995, (i) 204,338 shares of Common Stock
that are issuable upon conversion of $6,268,000 aggregate principal amount
of the Swiss Bonds and (ii) up to 984,260 shares of Common Stock issuable
upon exercise of outstanding Company stock options.
S-8
<PAGE> 11
SELECTED COMBINED FINANCIAL INFORMATION
CORE GROUP
The selected combined financial data relating to the Core Group (a business
unit of the Company) for the five years ended December 31, 1994 are derived from
the Core Group combined financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants. See "Experts" in the accompanying
Prospectus. The data presented for the six month periods ended June 30, 1994 and
June 30, 1995 relating to the Core Group are derived from the unaudited combined
financial statements of the Core Group and include, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the data for such periods. The financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Core Group Combined Financial Condition and Results of Operations"
and the Core Group combined financial statements and notes thereto incorporated
by reference in the accompanying Prospectus. For discussions of the financial
condition and results of operations of the consolidated Company and the
Psychiatric Group, see the management's discussion and analysis of financial
condition and results of operations of the consolidated Company and the
Psychiatric Group included elsewhere in this Prospectus Supplement or
incorporated by reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Base Rental and Interest Income......... $ 36,701 $ 51,584 $ 58,510 $ 56,223 $ 59,755 $ 29,224 $ 31,604
Additional Rental and Interest Income... 5,366 7,895 8,300 8,674 8,908 4,453 5,027
Total Revenues.......................... 51,707 69,845 75,962 73,036 75,680 37,473 39,541
Net Income(1)........................... 21,595 25,987 36,194 48,616 32,548 16,562 16,182
Net Income Per Share(2)................. 1.46 1.61 2.10 2.58 1.56 0.79 0.77
CASH FLOW STATEMENT DATA:
Cash Flows From Operating Activities.... $ 32,972 $ 38,572 $ 38,799 $ 41,276 $ 46,258 $ 21,791 $ 23,387
Dividends Declared...................... 29,277 34,935 40,936 38,078 39,303 19,287 20,664
Dividends Declared Per Share(2)......... 1.97 2.12 2.36 1.91 1.88 0.924 0.990
BALANCE SHEET DATA (AT PERIOD END):
Total Assets............................ $474,481 $538,725 $522,127 $532,461 $528,686 $520,500 $543,551
Total Attributed Debt................... 263,852 301,176 286,859 245,423 245,663 235,556 264,768
Attributed Equity....................... 193,219 214,512 213,230 263,832 259,199 263,078 254,916
OTHER DATA:
Funds From Operations(3)................ $ 29,636 $ 37,513 $ 39,745 $ 41,967 $ 45,475 $ 22,569 $ 23,570
Weighted Average Shares
Outstanding(2)........................ 14,754 16,168 17,247 18,843 20,856 20,836 20,906
</TABLE>
- ---------------
(1) Includes gains of $19,742 and $11,064 in 1993 and 1992, respectively, on the
sale of properties or partnership interests therein.
(2) For purposes of computing per share and weighted average data for periods
prior to the July 21, 1995 distribution of Psychiatric Group Stock, the
number of shares of Common Stock are assumed to be the same as the
corresponding number of shares of Common Stock outstanding prior to July 21,
1995, while the number of Depositary Shares are assumed to be one-tenth of
the corresponding number of shares of Common Stock outstanding prior to July
21, 1995.
(3) Funds From Operations is defined as net income (loss), excluding gains
(losses) from sales of property, adjusted for write-downs of mortgage notes
and certain other non-cash items, primarily depreciation and amortization.
This definition conforms to a definition of funds from operations previously
adopted by the National Association of Real Estate Investment Trusts
("NAREIT"). NAREIT recently adopted a modified definition of funds from
operations, and has recommended that the new definition be used commencing
January 1, 1996. Using the new definition of funds from operations adopted
by NAREIT, funds from operations for the twelve months ended December 31,
1990, 1991, 1992, 1993 and 1994 and for the six months ended June 30, 1994
and 1995 would be $28,817, $35,888, $38,689, $40,862, $44,127, $21,881 and
$22,683, respectively. The amounts shown for funds from operations under
both the old and new definitions include certain adjustments for the impact
of items that management does not consider to be routine costs of ongoing
operations. These nonroutine items include: in 1992, costs related to the
termination of a purchase commitment of $2,225; in 1993, accrued relocation
costs of $690; and in 1994, reversal of accrued relocation costs of $617.
There were no adjustments for nonroutine items in 1990 and 1991. For the six
month period ended June 30, 1994, nonroutine items include reversal of
accrued relocation costs of $617. There were no adjustments for nonroutine
items in the six month period ended June 30, 1995. The primary differences
between the old and new NAREIT definitions of funds from operations are
amortization of debt issuance costs and non-cash stock compensation expense.
Funds From Operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles, is
not necessarily indicative of cash available to fund cash needs and should
not be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flow as a
measure of liquidity.
S-9
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL INFORMATION
THE COMPANY
The selected consolidated financial data relating to the Company for the
five years ended December 31, 1994 are derived from the consolidated financial
statements of the Company, which have been audited by Arthur Andersen LLP,
independent public accountants. See "Experts" in the accompanying Prospectus.
The data presented for the six month periods ended June 30, 1994 and June 30,
1995 are derived from the unaudited consolidated financial statements of the
Company and include, in the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the data for such
periods. The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus Supplement or incorporated by
reference in the accompanying Prospectus. For discussions of the financial
condition and results of operations of the Core Group and the Psychiatric Group,
see the management's discussion and analysis of financial condition and results
of operations of the Core Group and the Psychiatric Group included elsewhere in
this Prospectus Supplement or incorporated by reference in the accompanying
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- --------------------
1990 1991 1992(1) 1993 1994(2) 1994 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Base Rental and Interest Income......... $ 50,458 $ 70,355 $ 72,905 $ 70,242 $ 73,519 $ 36,296 $ 36,234
Additional Rental and Interest Income... 5,427 8,164 8,529 9,334 9,506 4,723 5,353
Total Revenues.......................... 59,409 80,129 82,079 81,523 87,027 43,206 43,704
Net Income (Loss)(3).................... 28,032 33,753 (6,317) 50,987 9,693 (9,472) 19,212
Net Income (Loss) Per Share Attributable
To:(4)
Core Group............................ 1.46 1.61 2.10 2.58 1.56 0.79 0.77
Psychiatric Group..................... 4.36 4.80 (24.64) 1.26 (10.96) (12.49) 1.45
CASH FLOW STATEMENT DATA:
Cash Flows From Operating Activities.... $ 40,946 $ 46,805 $ 43,486 $ 45,884 $ 54,984 $ 27,088 $ 27,086
Dividends Declared...................... 35,929 43,243 45,747 44,766 47,982 24,004 24,004
Dividends Declared Per Share:(4)
Core Group Common Stock............... 1.97 2.12 2.36 1.91 1.88 0.924 0.990
Psychiatric Group Depositary Shares... 4.48 5.03 2.78 3.36 4.16 2.260 1.600
BALANCE SHEET DATA (AT PERIOD END):
Total Assets............................ $541,584 $630,511 $566,394 $614,453 $579,503 $572,617 $593,855
Total Debt.............................. 263,852 301,176 286,859 245,423 245,663 235,556 264,768
Total Equity............................ 256,982 303,069 255,349 343,303 307,501 312,130 302,938
OTHER DATA:
Funds From Operations(5)................ $ 36,370 $ 46,428 $ 44,416 $ 49,527 $ 55,905 $ 27,832 $ 27,412
Weighted Average Shares Outstanding:(4)
Core Group Common Stock............... 14,754 16,168 17,247 18,843 20,856 20,836 20,906
Psychiatric Group Depositary Shares... 1,475 1,617 1,725 1,884 2,086 2,084 2,091
</TABLE>
- ---------------
(1) Amounts for the year ended December 31, 1992 include the Company's
write-downs totalling $45 million on two of its psychiatric facilities.
(2) Amounts for the year ended December 31, 1994 include the Company's
write-downs totalling $30 million on its psychiatric properties.
(3) Includes gains of $19,742 and $11,064 in 1993 and 1992, respectively, on the
sale of properties or partnership interests therein.
(4) For purposes of computing per share and weighted average data for periods
prior to the July 21, 1995 distribution of Psychiatric Group Stock, the
number of shares of Common Stock are assumed to be the same as the
corresponding number of shares of Common Stock outstanding prior to July 21,
1995, while the number of Depositary Shares are assumed to be one-tenth of
the corresponding number of shares of Common Stock outstanding prior to July
21, 1995.
(5) Funds From Operations is defined as net income (loss), excluding gains
(losses) from sales of property, adjusted for write-downs of mortgage notes
and certain other non-cash items, primarily depreciation and amortization.
This definition conforms to a definition of funds from operations previously
adopted by NAREIT. NAREIT recently adopted a modified definition of funds
from operations, and has recommended that the new definition be used
commencing January 1, 1996. Using the new definition of funds from
operations adopted by NAREIT, funds from operations for the twelve months
ended December 31, 1990, 1991, 1992, 1993 and 1994 and for the six months
ended June 30, 1994 and 1995 would be $35,497, $44,724, $43,285, $48,299,
$54,390, $27,056 and $26,443, respectively. The amounts shown for funds from
operations under both the old and new definitions include certain
adjustments for the impact of items that management does not consider to be
routine costs of ongoing operations. These nonroutine items include: in
1992, litigation costs of $786 and costs related to the termination of a
purchase commitment of $2,225; in 1993, litigation costs of $2,234 and
accrued relocation costs of $850; and in 1994, targeted stock issuance costs
of $1,450 and reversal of accrued relocation costs of $750. There were no
adjustments for nonroutine items in 1990 and 1991. For the six month periods
ended June 30, these nonroutine items include: in 1994, reversal of accrued
relocation costs of $750; and in 1995, targeted stock issuance costs of
$300. The primary differences between the old and new NAREIT definitions of
funds from operations are amortization of debt issuance costs and non-cash
stock compensation expense. Funds From Operations does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles, is not necessarily indicative of cash available to
fund cash needs and should not be considered as an alternative to net income
as an indicator of the Company's operating performance or as an alternative
to cash flow as a measure of liquidity.
S-10
<PAGE> 13
SELECTED COMBINED FINANCIAL INFORMATION
PSYCHIATRIC GROUP
The selected combined financial data relating to the Psychiatric Group (a
business unit of the Company) for the five years ended December 31, 1994 are
derived from the Psychiatric Group combined financial statements, which have
been audited by Arthur Andersen LLP, independent public accountants. See
"Experts" in the accompanying Prospectus. The data presented for the six month
periods ended June 30, 1994 and June 30, 1995 relating to the Psychiatric Group
are derived from the unaudited combined financial statements of the Psychiatric
Group and include, in the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the data for such
periods. The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Psychiatric Group Combined Financial
Condition and Results of Operations" and the Psychiatric Group combined
financial statements and notes thereto incorporated by reference in the
accompanying Prospectus. For discussions of the financial condition and results
of operations of the consolidated Company and the Core Group, see the
management's discussion and analysis of financial condition and results of
operations of the consolidated Company and the Core Group included elsewhere in
this Prospectus Supplement.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- -------------------
1990 1991 1992(1) 1993 1994(2) 1994 1995(3)
-------- -------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Base Rental and Interest Income.......... $ 13,757 $ 18,771 $ 14,395 $ 14,019 $ 13,764 $ 7,072 $ 4,630
Additional Rental and Interest Income.... 61 269 229 660 598 270 326
Total Revenues........................... 13,954 19,434 15,163 15,317 15,388 7,810 5,332
Net Income (Loss)........................ 6,437 7,766 (42,511) 2,371 (22,855) (26,034) 3,030
Net Income (Loss) Per Depositary
Share(4)............................... 4.36 4.80 (24.64) 1.26 (10.96) (12.49) 1.45
CASH FLOW STATEMENT DATA:
Cash Flows From Operating Activities..... $ 7,974 $ 8,233 $ 4,687 $ 4,608 $ 8,726 $ 5,297 $ 3,699
Dividends Declared....................... 6,652 8,308 4,811 6,688 8,679 4,717 3,340
Dividends Declared Per Depositary
Share(4)............................... 4.48 5.03 2.78 3.36 4.16 2.26 1.60
BALANCE SHEET DATA (AT PERIOD END):
Total Assets............................. $142,885 $161,032 $116,188 $116,820 $ 80,245 $ 86,141 $64,867
Total Attributed Debt.................... 75,782 69,246 71,921 34,828 29,428 34,024 14,563
Attributed Equity........................ 63,763 88,557 42,119 79,471 48,302 49,052 48,022
OTHER DATA:
Funds From Operations(5)................. $ 6,734 $ 8,915 $ 4,671 $ 7,560 $ 10,430 $ 5,263 $ 3,842
Weighted Average Depositary Shares
Outstanding(4)......................... 1,475 1,617 1,725 1,884 2,086 2,084 2,091
</TABLE>
- ---------------
(1) Amounts for the year ended December 31, 1992 include the Company's
write-downs totalling $45 million on two of its psychiatric facilities.
(2) Amounts for the year ended December 31, 1994 include the Company's
write-downs totalling $30 million on its psychiatric properties.
(3) Base rental and interest income from the Psychiatric Group decreased in 1995
principally due to the sale of three facilities and the restructuring of the
obligations relating to two other facilities.
(4) For purposes of computing per share and weighted average data for periods
prior to the July 21, 1995 distribution of Psychiatric Group Stock, the
number of shares of Common Stock are assumed to be the same as the
corresponding number of shares of Common Stock outstanding prior to July 21,
1995, while the number of Depositary Shares are assumed to be one-tenth of
the corresponding number of shares of Common Stock outstanding prior to July
21, 1995.
(5) Funds From Operations is defined as net income (loss), excluding gains
(losses) from sales of property, adjusted for write-downs of mortgage notes
and certain other non-cash items, primarily depreciation and amortization.
This definition conforms to a definition of funds from operations previously
adopted by NAREIT. NAREIT recently adopted a modified definition of funds
from operations, and has recommended that the new definition be used
commencing January 1, 1996. Using the new definition of funds from
operations adopted by NAREIT, funds from operations for the twelve months
ended December 31, 1990, 1991, 1992, 1993 and 1994 and for the six months
ended June 30, 1994 and 1995 would be $6,680, $8,836, $4,596, $7,437,
$10,263, $5,175 and $3,760, respectively. The amounts shown for funds from
operations under both the old and new definitions include certain
adjustments for the impact of items that management does not consider to be
routine costs of ongoing operations. These nonroutine items include: in
1992, litigation costs of $796; in 1993, litigation costs of $2,234 and
accrued relocation costs of $160; and in 1994, targeted stock issuance costs
of $1,450 and reversal of accrued relocation costs of $133. There were no
adjustments for nonroutine items in 1990 and 1991. For the six month periods
ended June 30, these nonroutine items include: in 1994, reversal of accrued
relocation costs of $133; and in 1995, targeted stock issuance costs of
$300. The primary differences between the old and new NAREIT definitions of
funds from operations are amortization of debt issuance costs and non-cash
stock compensation expense. Funds From Operations does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles, is not necessarily indicative of cash available to
fund cash needs and should not be considered as an alternative to net income
as an indicator of the Company's operating performance or as an alternative
to cash flow as a measure of liquidity.
S-11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and results
of operations of the Core Group, which should be read in conjunction with (a)
the Selected Combined Financial Information for the Core Group, (b) the combined
financial statements and accompanying notes of the Core Group, and (c) the
financial statements and accompanying notes of the Company and the Psychiatric
Group incorporated by reference in the accompanying Prospectus.
OPERATING RESULTS
Second Quarter and Year to Date 1995 Compared With 1994
For the second quarter of 1995, the Core Group reported net income of
$8,206,000 or $.39 per share compared with net income of $8,638,000 or $.41 per
share for the second quarter of 1994. For the six months ended June 30, 1995,
the Core Group reported net income of $16,182,000 or $.77 per share compared
with net income of $16,562,000 or $.79 per share for the first six months of
1994.
Rental income was $16,000,000 for the second quarter of 1995, an increase
of $1,235,000 or 8% from $14,765,000 for the second quarter of 1994. Rental
income was $31,604,000 for the six months ended June 30, 1995, an increase of
$2,380,000 or 8% from $29,224,000 for the comparable period in 1994. This
increase was primarily attributable to rental income from new properties
acquired and various capital additions subsequent to the first quarter of 1994.
These property additions also resulted in an increase in depreciation and
amortization of $329,000 to $3,337,000 for the second quarter of 1995 compared
with the second quarter of 1994 and an increase of $573,000 to $6,563,000 for
the six months ended June 30, 1995 compared with the same period in 1994.
Additional rental income was $2,586,000 for the second quarter of 1995, an
increase of $346,000 or 15% from $2,240,000 for the second quarter of 1994.
Additional rental income was $5,027,000 for the six months ended June 30, 1995,
an increase of $574,000 or 13% from $4,453,000 for the comparable period in
1994. This increase was primarily attributable to first-time additional rent
from several properties.
Other interest income increased $272,000 to $946,000 for the second quarter
of 1995 from $674,000 for the second quarter of 1994. Other interest income
increased $22,000 to $1,741,000 for the six months ended June 30, 1995 from
$1,719,000 for the same period in 1994. An increase in interest income resulting
from a higher average construction loan balance during 1995 was partially offset
by a decrease in interest income resulting from a lower average balance of
short-term investments. In addition, the second quarter and first half of 1994
included the recognition of $215,000 and $710,000, respectively, of fee income
related to the prepayment of a construction loan in February 1994.
Interest income on inter-Group loans to the Psychiatric Group was $434,000
for the second quarter of 1995, a decrease of $608,000 or 58% from $1,042,000
for the second quarter of 1994. Interest income on inter-Group loans to the
Psychiatric Group was $1,169,000 for the six months ended June 30, 1995, a
decrease of $908,000 or 44% from $2,077,000 for the comparable period in 1994.
The decrease reflects a lower average balance outstanding on loans to the
Psychiatric Group primarily as a result of $15,150,000 of repayments by the
Psychiatric Group from the proceeds of asset sales and the paydown of borrowings
under revolving credit agreements provided to psychiatric hospital operators.
Interest expense was $6,906,000 for the second quarter of 1995, an increase
of $615,000 or 10% from $6,291,000 for the second quarter of 1994. Interest
expense was $13,734,000 for the six months ended June 30, 1995, an increase of
$915,000 or 7% from $12,819,000 for the comparable period in 1994. This increase
was primarily attributable to higher average short-term borrowings during the
second quarter and first half of 1995 and a reduction in capitalized interest in
1995 compared to 1994. The first quarter of 1994 included interest expense from
mortgage notes payable until the balance of $14.4 million was prepaid in
February 1994.
General and administrative expenses increased to $1,460,000 for the second
quarter of 1995 from $689,000 for the second quarter of 1994. For the first half
of 1995, general and administrative expenses
S-12
<PAGE> 15
increased to $2,900,000 from $1,938,000 for the first half of 1994. This
variation was attributable to an increase in the Company's consolidated general
and administrative expenses which are allocated between the Core Group and
Psychiatric Group primarily based on revenues, and an increase in Core Group
revenues relative to the Company's consolidated revenues. The increase in the
Company's consolidated general and administrative expenses for the second
quarter and first half of 1995 was primarily attributable to higher expense from
the Company's stock incentive plans and increased shareholder reporting costs
associated with the distribution of the Psychiatric Group Depositary Shares. In
the second quarter of 1994, the Company reversed $750,000 of a corporate
relocation accrual recorded in the fourth quarter of 1993, after the Company
decided to maintain its headquarters in Denver, Colorado.
In connection with an IRS audit of 1992 and 1993, certain adjustments have
been proposed that would recharacterize or disallow certain capital losses for
1992. The Company believes that the proposed adjustments are not meritorious and
will not have a material adverse effect on the Company or its shareholders.
Future Operating Results
The nature of health care delivery in the United States is currently
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. The Company's Board and management are
monitoring potential changes closely. The Company believes that these potential
changes may pose risks for certain institutions that are unwilling or unable to
respond. However, the Company believes that this changing health care
environment will provide the Core Group with new opportunities for investment in
its current facilities as well as new facilities.
The Company recognizes that the health care industry in the United States
is undergoing significant evolution. The ongoing changes in the health care
industry include trends toward shorter lengths of hospital stay, increased use
of outpatient services, increased federal, state and third party oversight of
health care company operations and business practices, and increased demand for
capitated health care services (delivery of services at a fixed price per capita
basis to a defined group of covered parties). Furthermore, federal, state and
third party payors continue to propose and adopt various cost containment
measures that restrict the scope of reimbursable health care services and limit
increases in reimbursement rates for such services. Payors are also continuing
to aggressively enforce compliance with program requirements and pursue
providers that they believe have not complied with such requirements. Outpatient
business is expected to increase as advances in medical technologies allow more
procedures to be performed on an outpatient basis and as payors continue to
direct more patients from inpatient care to outpatient care. In addition, the
entrance of insurance companies into managed care programs is accelerating the
introduction of managed care in new localities, and states and insurance
companies continue to negotiate actively the amounts they will pay for services.
Moreover, the percentage of health care services that are reimbursed under the
Medicare and Medicaid programs continues to increase as the population ages and
as states expand their Medicaid programs. Continued eligibility to participate
in these programs is crucial to a provider's financial strength. As a result of
the foregoing, the revenues and margins may decrease at the Core Group's
facilities. See "Business and Properties -- Government Regulation and Payor
Arrangements."
Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local basis
and that well-managed, high-quality, cost-controlled facilities will continue to
be an integral part of local health care delivery systems. The Company also
believes that certain acute care hospitals will need to reconfigure or expand
existing facilities or to affiliate themselves with other providers so as to
become part of comprehensive and cost-effective health care systems. Such
systems will likely include lower cost treatment settings, such as ambulatory
care clinics, outpatient surgery centers, skilled nursing facilities and medical
office buildings. In general, the Core Group facilities are part of local health
care delivery systems or are in the process of becoming integrated into such
systems.
The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio
S-13
<PAGE> 16
are generally further supported by one or more credit enhancements that take the
form of cross-default provisions, letters of credit, corporate and personal
guarantees, security interests in cash reserve funds, accounts receivable or
other personal property and requirements to maintain specified financial ratios.
In addition, financial effects arising from the Psychiatric Group that affect
the Company's consolidated results of operations, financial condition or
borrowing costs could affect the results of operations, financial condition or
borrowing costs of the Core Group. Fundamental changes in the psychiatric
industry continue to negatively impact the facility specific operating cash flow
at the Psychiatric Group hospitals. Accordingly, the Core Group's financial
statements should be read in conjunction with the financial statements of the
Psychiatric Group and the Company's consolidated financial statements.
Additional rental income from the Core Group's existing investments will be
affected by changes in the revenues of the underlying business operations upon
which such income is based. The Core Group's acute care investments accounted
for 93% of net additional rental income for the first half of 1995, while
rehabilitation investments accounted for 7%. Historically, a substantial portion
of the Core Group s additional rental income has been attributable to six of the
Core Group's original acute care properties (the "Original Properties"). With
the significant revenue growth at a majority of the Original Properties in
recent years, two properties had reached the additional rent transition point at
the end of 1994 and it is anticipated that other properties may do so over the
next few years. The Core Group's revenue participation rate on the incremental
increase in revenues for the six Original Properties declines from 5% to 1% when
the additional rent transition point is reached. At December 31, 1994, the
amount of potential additional rent at the 5% revenue participation rate for the
six Original Properties was approximately $2.8 million per annum.
The future operating results of the Core Group will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
will also be affected by the availability and terms of the Company s future
equity and debt financings. The Company's financing strategy includes the
objective to reduce its cost of capital over time and enhance its financial
flexibility to facilitate future growth. The Company believes that the
distribution of the Psychiatric Group Depositary Shares will facilitate
achievement of this objective.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the Core Group had $5,388,000 outstanding under its
revolving inter-Group loan to the Psychiatric Group. Under management policies
currently in effect, the Core Group may provide the Psychiatric Group with
revolving inter-Group loans of up to $8,750,000. In addition, as of June 30,
1995, the Core Group had $9,175,000 in fixed rate inter-Group loans to the
Psychiatric Group.
As of September 15, 1995, the Core Group had commitments of $29.7 million
to fund construction obligations and capital expenditures over approximately the
next twelve months.
The Company recently increased its total unsecured credit facility to $124
million to include a $24 million term loan facility which was used for the sole
purpose of funding a $24 million senior note maturity on May 31, 1995. The $100
million revolving portion of the unsecured credit facility matures on December
31, 1996, and as of September 15, 1995, the Company had $48.0 million of
revolving borrowings. The term loan portion of the unsecured credit facility
matures on April 30, 1997, and as of September 15, 1995, the Company had $24
million of term borrowings. As of September 15, 1995, the Company had $279.3
million of total indebtedness. The Company will utilize its revolving credit
facility to fund acquisitions and future working capital needs. Although the
Company does not have any current intention to borrow beyond the Company's
revolving credit line, the Company may incur additional indebtedness or
refinance existing indebtedness if the Company determines that opportunities to
pursue such transactions would be attractive. The Company currently believes it
has sufficient capital to meet its commitments and that its cash flow and
liquidity will continue to be sufficient to fund current operations and to
provide for the payment of dividends to stockholders in compliance with the
applicable sections of the Internal Revenue Code governing real estate
investment trusts.
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<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the consolidated financial condition and
results of operations of the Company, which should be read in conjunction with
(a) Selected Consolidated Financial Information for the Company, (b) the
consolidated financial statements and accompanying notes of the Company, and (c)
the combined financial statements and accompanying notes of the Core Group and
the Psychiatric Group incorporated by reference in the accompanying Prospectus.
OPERATING RESULTS
Second Quarter and Year to Date 1995 Compared With 1994
For the second quarter of 1995, the Company reported net income of
$9,545,000 compared with a net loss of ($19,256,000) for the second quarter of
1994. For the six months ended June 30, 1995, the Company reported net income of
$19,212,000 compared with a net loss of ($9,472,000) for the first six months of
1994. The net loss for the second quarter and first six months of 1994 included
a $30,000,000 write-down of psychiatric real estate investments as a result of
accelerating negative trends in the psychiatric industry. See "Selected
Consolidated Financial Information" for the comparative gross and per share
amounts of net income or loss attributable to the Core Group Common Stock and
the Psychiatric Group Depositary Shares.
Rental income was $16,681,000 for the second quarter of 1995, a decrease of
$175,000 or 1% from $16,856,000 for the second quarter of 1994. Rental income
was $33,295,000 for the six months ended June 30, 1995, a decrease of $111,000
or less than 1% from $33,406,000 for the comparable period in 1994. This net
decrease was primarily attributable to a reduction in rental income due to the
sale of three psychiatric properties and the lease restructurings of two
psychiatric investments partially offset by rental income from new properties
acquired and various capital additions subsequent to the first quarter of 1994.
These factors, combined with lower depreciation expense on psychiatric
properties written down in June 1994, resulted in a net decrease in depreciation
and amortization of $156,000 to $3,523,000 for the second quarter of 1995
compared with the second quarter of 1994 and a net decrease of $339,000 to
$6,993,000 for the six months ended June 30, 1995 compared with the same period
in 1994.
Additional rental and interest income was $2,717,000 for the second quarter
of 1995, an increase of $285,000 or 12% from $2,432,000 for the second quarter
of 1994. Additional rental and interest income was $5,353,000 for the six months
ended June 30, 1995, an increase of $630,000 or 13% from $4,723,000 for the
comparable period in 1994. This increase was primarily attributable to
first-time additional rent from several properties.
Other interest income increased $186,000 to $1,106,000 for the second
quarter of 1995 from $920,000 for the second quarter of 1994. Other interest
income for the six months ended June 30, 1995 decreased $70,000 to $2,117,000
from $2,187,000 for the comparable period in 1994. An increase in interest
income resulting from a higher average construction loan balance during 1995 was
partially offset by a decrease in interest income resulting from a lower average
balance of short-term investments. In addition, the second quarter and first
half of 1994 included the recognition of $215,000 and $710,000, respectively, of
fee income related to the prepayment of a construction loan in February 1994.
Interest expense was $6,906,000 for the second quarter of 1995, an increase
of $615,000 or 10% from $6,291,000 for the second quarter of 1994. Interest
expense was $13,734,000 for the six months ended June 30, 1995, an increase of
$915,000 or 7% from $12,819,000 for the comparable period in 1994. This increase
was primarily attributable to higher average short-term borrowings during the
second quarter and first half of 1995 and a reduction in capitalized interest in
1995 compared to 1994. The first quarter of 1994 included interest expense from
mortgage notes payable until the balance of $14.4 million was prepaid in
February 1994.
General and administrative expenses increased to $1,642,000 for the second
quarter of 1995 from $844,000 for the second quarter of 1994. For the first half
of 1995, general and administrative expenses increased to $3,303,000 from
$2,363,000 for the first half of 1994. The increase for the second quarter and
first
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<PAGE> 18
half of 1995 was primarily attributable to higher expense from the Company's
stock incentive plans and increased shareholder reporting costs associated with
the distribution of the Psychiatric Group Depositary Shares. In the second
quarter of 1994, the Company reversed $750,000 of a corporate relocation accrual
recorded in the fourth quarter of 1993, after the Company decided to maintain
its headquarters in Denver, Colorado.
The $300,000 targeted stock issuance costs was an additional accrual made
in the second quarter of 1995 to reflect the increased costs of the
Distribution. The increased costs primarily reflect higher legal and accounting
fees and printing and shipping costs as a result of the extended filing period.
In connection with an IRS audit of 1992 and 1993, certain adjustments have
been proposed that would recharacterize or disallow certain capital losses for
1992. The Company believes that the proposed adjustments are not meritorious and
will not have a material adverse effect on the Company or its shareholders.
Future Operating Results
The Company's future operating results could be affected by the operating
performance of the Company's lessees and borrowers. The rental and interest
obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Company's
portfolio are generally further supported by one or more credit enhancements
that take the form of cross-default provisions, letters of credit, corporate and
personal guarantees, security interests in cash reserve funds, accounts
receivable or other personal property and requirements to maintain specified
financial ratios.
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Company's psychiatric
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions include
decreasing the inpatient length of stay, intensively reviewing utilization,
directing patients from inpatient care to outpatient care and negotiating
reduced reimbursement rates for services. In addition, such institutions have
extended the length of time for making payments, resulting in increases in
accounts receivable. The wider use of psychotropic drugs has also resulted in
significant declines in the average length of stay. Although the operators of
the psychiatric hospitals are responding by developing lower cost outpatient and
daypatient programs, increasing case management and reducing operating costs,
their efforts are generally not consistently mitigating the negative impact of
these fundamental psychiatric industry changes.
The Company is currently providing financing under revolving credit
agreements to the operators of three of its psychiatric hospitals. As of
September 15, 1995, outstanding borrowings under such agreements totaled
$4,475,000, and the Company has committed to fund an additional $1,225,000 of
borrowings upon request, subject to certain conditions. These borrowings, which
are secured by accounts receivable and certain personal property and which
contain events of default that would be triggered by defaults under the lease or
mortgage loan relating to the relevant psychiatric hospital, are the primary
source of financing for these operators' operating and capital needs. These
psychiatric hospitals have, from time to time, been unable to generate
sufficient cash flow for working capital and the development of new programs. In
certain cases, these psychiatric hospitals have not been able to pay down the
outstanding borrowings under the revolving credit agreements provided by the
Company or to secure replacement financing from third-party lenders. To the
extent the psychiatric hospitals have increased working capital needs in the
future, the Psychiatric Group may be the only source of such financing. In the
event the Company's board of directors determines that it is appropriate to
provide additional working capital financing to a psychiatric hospital, it may
cause the Core Group to make revolving inter-Group loans to the Psychiatric
Group to fund such financing (to the extent consistent with its then existing
policies), although the Company's board of directors is under no obligation to
do so.
The Company is currently discussing with the operator of the two Four Winds
psychiatric hospitals in New York possible alternatives for creating additional
available capital for the development and expansion of the hospitals' programs,
including the release of certain collateral securing the Company's mortgage loan
investments. The Company is currently reviewing the operator's plan for these
new programs which are
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<PAGE> 19
intended to address the potential negative consequences of the expected changes
in Medicaid reimbursement and the increase in managed care penetration in the
State of New York.
In 1992, the Company recorded a $45,000,000 write-down of its investments
in two psychiatric hospitals and restructured the payment obligations of these
two facilities. In addition, at June 30, 1994, in view of negative trends that
caused declining cash flow at a number of the psychiatric hospitals, the Company
recorded a $30,000,000 write-down of its investments in the psychiatric
hospitals. Although management believes that the recorded investments in
psychiatric hospitals are realizable, if the cash flow at the psychiatric
hospitals continues to decline, the Company may be required to further
restructure payment obligations or make additional write-downs of the value of
its investments in the psychiatric hospitals. In July 1994, the Company
announced its intention to pursue alternatives for the psychiatric portfolio
including selected sales of hospitals to operators or other parties,
restructuring of financial obligations or other approaches that might allow the
effective separation of these assets from the Company's core portfolio of acute
care and rehabilitation hospitals, long-term care facilities and a medical
office building. As part of this initiative, the Company sold its psychiatric
property in Torrance, California in October 1994 for $5,772,000 in cash (at net
book value), sold two of its psychiatric properties in Massachusetts in February
1995 for $13,825,000 in cash (at net book value), restructured the leases and
revolving credit agreements of its two Florida psychiatric investments in March
1995 and has issued the Psychiatric Group Depositary Shares.
Additional rental income and interest income from the Company's existing
investments will be affected by changes in the revenues of the underlying
business operations upon which such income is based. The Company's acute care
investments accounted for 88% of net additional rental and interest income for
the first half of 1995, while rehabilitation and psychiatric investments each
accounted for 6%. Historically, a substantial portion of the Company's
additional rental and interest income has been attributable to the Original
Properties. With the significant revenue growth at a majority of the Original
Properties in recent years, two properties had reached the additional rent
transition point at the end of 1994 and it is anticipated that other properties
may do so over the next few years. The Company's revenue participation rate for
the six Original Properties declines from 5% to 1% when the additional rent
transition point is reached. At December 31, 1994, the amount of potential
additional rent at the 5% revenue participation rate for the six Original
Properties was approximately $2.8 million per annum.
The future operating results of the Company will be affected by additional
factors including the amount, timing and yield of additional real estate
investments and the competition for such investments. Operating results will
also be affected by the availability and terms of the Company's future equity
and debt financing. The Company's financing strategy includes the objective to
reduce its cost of capital over time and enhance its financial flexibility to
facilitate future growth. The Company believes that the distribution of the
Psychiatric Group Depositary Shares will facilitate achievement of this
objective.
LIQUIDITY AND CAPITAL RESOURCES
As of September 15, 1995, the Company had commitments of $29.7 million to
fund construction obligations and capital expenditures over approximately the
next twelve months. Aggregate unfunded commitments under revolving credit
agreements provided to facility operators totaled $1.2 million as of September
15, 1995.
The Company recently increased its total unsecured credit facility to $124
million to include a $24 million term loan facility which was used for the sole
purpose of funding a $24 million senior note maturity on May 31, 1995. The $100
million revolving portion of the unsecured credit facility matures on December
31, 1996, and as of September 15, 1995, the Company had $48.0 million of
revolving borrowings. The term loan portion of the unsecured credit facility
matures on September 15, 1997, and as of September 15, 1995, the Company had $24
million of term borrowings. As of September 15, 1995, the Company had $279.3
million of total indebtedness. The Company will utilize its revolving credit
facility to fund acquisitions and future working capital needs. Although the
Company does not have any current intention to borrow beyond the Company's
revolving credit line, the Company may incur additional indebtedness or
refinance existing indebtedness if the Company determines that opportunities to
pursue such transactions would be attractive. The Company currently believes it
has sufficient capital to meet its commitments and that its cash flow and
liquidity will continue to be sufficient to fund current operations and to
provide for the payment of dividends to stockholders in compliance with the
applicable sections of the Internal Revenue Code governing real estate
investment trusts.
S-17
<PAGE> 20
INVESTMENT STRATEGY
The Company seeks to invest in vertically integrated health care delivery
systems, including hospitals, long-term care facilities, assisted living
facilities, Alzheimer's care facilities, medical office buildings and other
specialty health care facilities. The Company's growth strategy is directed
toward building long-term relationships with the operators of these systems and
becoming a valued provider not only of capital, but of expertise over the long
term. The Company intends to divide future investments approximately equally
between the acute care sector and the long-term care sector of the health care
industry. In making new investments, the Company will focus on facilities that
are managed by operators with substantial experience in managing health care
operations and where there is likely an opportunity for follow-on investments in
facilities managed by such operators.
RECENT DEVELOPMENTS
CORE GROUP DEVELOPMENTS
In August 1995, the Company entered into agreements to provide $16.6
million of financing for three 80-unit assisted living facilities to be
constructed in Walla Walla, Washington, El Paso, Texas and Odessa, Texas. The
Company is providing construction financing and will purchase the facilities
upon completion. Construction of the facilities has commenced and will take
approximately ten months to complete. In addition, in September 1995 the Company
purchased for $3.0 million an assisted living facility located in Boise, Idaho
containing 50 assisted living units. Each of these four facilities will be
leased to and operated by Emeritus (formerly Assisted Living of America)
pursuant to ten-year operating leases, each of which will contain cross-default
provisions. Emeritus is one of the national leaders in the emerging assisted
living industry. Emeritus was founded by Dan R. Baty, the former Chief Executive
Officer of The Hillhaven Corporation, one of the nation's leading publicly-held
owner/operators of long-term care facilities, and the former Chief Executive
Officer of Holiday Retirement Corp., one of the nation's largest
developer/operator of congregate care facilities. These investments further the
Company's strategy to diversify into new and existing assisted living facilities
managed by strong operators.
Also in August 1995, the Company completed a $7.6 million purchase of two
long-term care facilities containing a total of 192 skilled nursing beds and 124
living units, located in Safford and Douglas, Arizona. The Company has leased
the facilities to affiliates of Signature. Signature operates 11 nursing homes
in Colorado and Arizona, including two facilities in Denver, Colorado that are
leased from the Company. The leases for all of the four long-term care
facilities leased by Signature from the Company contain cross-default
provisions. Signature is a publicly-held operator managed by executives with
over 25 years of experience in managing multiple facility long-term care
operations. These investments are part of the Company's strategy to expand its
investment portfolio to include long-term care facilities managed by quality
operators.
PSYCHIATRIC GROUP DEVELOPMENTS
In July 1995, the Company made a distribution of one Depositary Share for
every ten shares of Common Stock held of record on July 14, 1995, each such
Depositary Share representing a one-tenth interest in one share of Psychiatric
Group Stock. By way of the issuance of the Psychiatric Group Stock, the Company
sought to separate the economic attributes of the Psychiatric Group and the Core
Group into two distinct portfolios, with two distinct classes of publicly traded
shares intended to represent those portfolios. The assets, liabilities and
expenses of the Company have been allocated between the two portfolios. In
addition to consolidated financial statements, the Company publishes separate
financial statements for each Group. Dividends and other payouts or
distributions with respect to the Common Stock and Psychiatric Group Stock are
expected to be primarily a function of the individual financial performance of
the Core Group and the Psychiatric Group, respectively. However, the change in
the capital structure of the Company effected by the issuance of the Psychiatric
Group Stock does not affect the respective legal title to assets or
responsibility for liabilities of the Company, and each holder of the Company's
Common Stock is a holder of an issue of capital stock of the entire Company and
is subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. See "Recent Developments -- Distribution of
Psychiatric Group Stock,"
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<PAGE> 21
"Management and Accounting Policies" and "Description of Common Stock and
Psychiatric Group Stock" in the accompanying Prospectus.
The Company has retained the New York based investment banking firm of
Benedetto, Gartland & Greene, Inc. for an initial one year period to provide a
broad range of financial advisory services to the Psychiatric Group investment
portfolio. Their services are expected to include supplemental monitoring of the
performance of individual assets, assistance in potential sales or
restructurings of particular investments and continuing assessments of available
strategic alternatives for the portfolio. The Company expects the services
provided by Benedetto, Gartland & Green will enable the Company's management to
focus more of its time on growing and expanding the Company's Core Group
portfolio.
The Company has recently received information from the operator of its two
psychiatric hospitals in Florida regarding wide-ranging objections by several
large insurance companies and other payors with respect to claims presented for
services rendered. There have also been a series of negative stories in the
national media and the local press in Florida on psychiatric care provided in
Florida, including criticism of admissions policies and practice patterns at
psychiatric hospitals in the State generally, and at these two facilities. There
have been legislative hearings in Florida on these issues, and the Company
believes that regulatory investigations are being conducted. At this time both
of these facilities remain current on their rent and interest obligations to the
Company, and the Company is continuing to monitor this situation closely.
OTHER DEVELOPMENTS
In September 1995, the Company's Board of Directors elected Michael J.
McGee as Treasurer of the Company, filling a vacancy created by the resignation
in August 1995 of Victor C. Streufert, who was the Chief Financial Officer of
the Company. Mr. McGee is also the Vice President, Controller and Assistant
Secretary of the Company and has been employed by the Company since November
1989. Prior to joining the Company, Mr. McGee was an accountant with Arthur
Andersen LLP for eleven years. In addition, in September 1995 Geoffrey D. Lewis
resigned as the Senior Vice President, General Counsel and Secretary of the
Company. The Company intends to fill this position as soon as practicable and in
the interim will rely on outside counsel to assist with legal matters.
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<PAGE> 22
BUSINESS AND PROPERTIES
The Company has separated its business and properties into two distinct
business units: (a) the Core Group, which includes the Company's acute care and
rehabilitation hospitals, long-term care facilities, assisted living facilities,
Alzheimer's facility and medical office building, and (b) the Psychiatric Group,
which includes all of the Company's investments in psychiatric hospitals.
THE CORE GROUP
The Company's current core portfolio of investments consists of 15 acute
care hospitals, three physical rehabilitation hospitals, four long-term care
facilities, four assisted living facilities (of which three facilities are under
construction), one Alzheimer's care facility currently under construction and
one medical office building. As of June 30, 1995, the net book value of the Core
Group's assets was $544 million. Of the Core Group's real estate assets at that
date, 90% in net book value represented the acute care segment, 6% represented
the rehabilitation segment, 2% represented the long-term care segment, including
the Alzheimer's care facility, and 2% represented the medical office building.
As of June 30, 1995, 95% in net book value of the Core Group's real estate
assets were held in fee and 5% were held as construction and/or mortgage
financing.
The Core Group's facilities are diversified geographically across 15
states, are distributed among large and small population centers, and are
operated by 11 experienced management companies. These operators include the
following companies or their subsidiaries: Columbia/HCA Healthcare Corporation,
Dynamic Health, Inc., Horizon/CMS Healthcare Corporation, HealthSouth
Corporation, Paracelsus Healthcare Corporation, Quorum Health Group, Inc.,
Signature Health Care Corporation, Emeritus Corporation and Tenet Healthcare
Corporation. Facilities operated by Tenet represented 55% of the Core Group's
revenues for the six months ended June 30, 1995.
Approximately 83% of the Core Group's property revenues for the six months
ended June 30, 1995 were secured by corporate guarantees of these operating
companies or their subsidiaries. Also, as of June 30, 1995, letters of credit
from commercial banks and cash deposits aggregating $13 million were available
to the Core Group as security for lease financings. Leases for nine of the Core
Group's facilities, representing 80% of the Core Group's property revenues for
the six months ended June 30, 1995, contain cross-default provisions.
THE CORE GROUP FACILITIES
The Company's 28 Core Group facilities consist of 14 acute care hospitals
owned by the Company (the "Acute Care Hospitals"), three rehabilitation
hospitals owned by the Company (the "Rehabilitation Hospitals"), an acute care
hospital in Austin, Texas to which the Company has made a participating mortgage
loan ("Austin Diagnostic Hospital"), four long-term care facilities (the
"Long-Term Care Facilities"), four assisted living facilities (of which three
are under construction) (the "Assisted Living Facilities"), one Alzheimer's Care
Facility, currently under construction, and one medical office building owned by
the Company (together, the "Core Group Facilities").
Acute Care Hospitals. The Acute Care Hospitals provide a wide range of
services, which may include fully-equipped operating and recovery rooms,
obstetrics, radiology, intensive care, open-heart surgery and coronary care,
neurosurgery, neonatal intensive care, magnetic resonance imaging, nursing
units, oncology, clinical laboratories, respiratory therapy, physical therapy,
nuclear medicine, rehabilitation services and outpatient services.
At June 30, 1995, the Company had funded $26.3 million of a $30 million
participation in an $86 million participating mortgage loan to Austin Diagnostic
Hospital, a 158-bed acute care hospital and medical office building in Austin,
Texas. Austin Diagnostic Hospital is owned by a joint venture comprised of
Columbia/HCA Healthcare Corporation and The Austin Diagnostic Clinic Association
("ADC"), the largest primary care and multi-specialty physician group practice
in the Austin area.
Rehabilitation Hospitals. The Rehabilitation Hospitals provide acute
rehabilitation care on a multi-disciplinary, physician-directed basis to
severely disabled patients. In addition to general medical rehabilitation
programs, the Rehabilitation Hospitals offer a number of specialty programs,
including pulmonary,
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<PAGE> 23
ventilator, neurobehavioral, brain injury and pain programs. Each of the
Rehabilitation Hospitals is operated pursuant to a joint venture between a
publicly-held, national rehabilitation hospital operator and a local health care
provider.
Long-Term Care Facilities. The Long-Term Care Facilities are skilled
nursing centers that provide a broad range of health care services, including
skilled nursing care, subacute care, rehabilitation therapy and other
specialized services to the elderly and to other patients with medically complex
needs who can be cared for outside of the acute care hospital environment and
generally cannot be efficiently and effectively cared for at home.
Assisted Living Facilities. The Assisted Living Facilities currently
provide or will provide upon completion a special combination of housing,
supportive services, personalized assistance and health care services designed
to respond to the individual needs of the elderly and other persons who require
help with activities of daily living. These services are available 24 hours a
day to meet both scheduled and unscheduled needs in a way that promotes maximum
dignity and independence for each resident.
Alzheimer's Care Facility. The Alzheimer's Care Facility is being developed
in consultation with leading medical experts in the treatment of Alzheimer's
disease and dementia. This facility will have a strong health care orientation
rather than the more common residential care orientation.
Medical Office Building. The Company owns a 60,000 square-foot medical
office building located in Murrieta, California known as Walsh Medical Arts
Center. The medical office building is located across the street from Sharp
Healthcare Murrieta, a developing medical campus that includes 49 acute care
beds and 42 skilled nursing beds operated by Sharp Healthcare system of San
Diego.
The following is a listing of the current Core Group portfolio of
investments. Unless otherwise indicated, all Core Group Facilities listed are
owned by the Company.
CORE GROUP FACILITIES
<TABLE>
<CAPTION>
INITIAL
YEAR ANNUAL TERM
ACQUIRED/ TOTAL BASE RENT/ OF LEASE/
DESCRIPTION & LOCATION OPERATOR FUNDED INVESTMENT(1) INTEREST(2) MORTGAGE(3)
- ---------------------------------------- ------------------------ -------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ACUTE CARE HOSPITALS
Austin Diagnostic Hospital(4) Columbia/HCA
Austin, Texas Healthcare Corporation 1995 $ 30,001 $ 2,775(5) 2025
Chesterfield General Hospital Dynamic Health, Inc.
Cheraw, South Carolina 1995 11,407 1,238 2005
Cleveland Regional Medical Center Dynamic Health, Inc.
Cleveland Texas 1994 8,300 812 2003
Concho Valley Regional Hospital Inc. Quorum Health Group, Inc.
San Angelo, Texas 1991 16,452 1,478 2001
Desert Valley Hospital Inc.(6) Quorum Health Group,
Victorville, California Inc.(6) 1994 24,000 2,654 2004
Elmwood Medical Center Paracelsus Healthcare
Jefferson, Louisiana Corporation 1990 42,823 5,451 2004
Frye Regional Medical Center Tenet Healthcare
Hickory, North Carolina Corporation(7) 1987 45,449 5,265 1999
Halstead Hospital Paracelsus Healthcare
Halstead, Kansas(8) Corporation 1993 14,250 1,600 2003
Irvine Medical Center Tenet Healthcare
Irvine, California Corporation(7) 1991 75,000 10,057 2004
Kendall Regional Medical Center Columbia/HCA
Miami, Florida Healthcare Corporation 1987 69,012 7,884 1999
Lucy Lee Hospital Tenet Healthcare
Poplar Bluff, Missouri Corporation(7) 1987 23,566 2,731 1999
Marlboro Park Hospital Dynamic Health, Inc.
Bennettsville, South Carolina 1995 7,793 845 2005
</TABLE>
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<PAGE> 24
<TABLE>
<CAPTION>
INITIAL
YEAR ANNUAL TERM
ACQUIRED/ TOTAL BASE RENT/ OF LEASE/
DESCRIPTION & LOCATION OPERATOR FUNDED INVESTMENT(1) INTEREST(2) MORTGAGE(3)
- --------------------------------------- ------------------------ --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
North Fulton Medical Center Tenet Healthcare
Roswell, Georgia Corporation(7) 1987 46,191 5,471 1999
Palm Beach Gardens Medical Center Tenet Healthcare
Palm Beach Gardens, Florida Corporation(7) 1987 45,648 5,283 1999
Tarzana Regional Medical Center Tenet Healthcare
Tarzana, California Corporation(7) 1987 73,700 8,308 2004
------------- ----------
Total Acute Care Hospitals $ 533,592 $ 61,852
============ ==========
REHABILITATION HOSPITALS
HCA Wesley Rehabilitation Hospital Horizon/CMS Healthcare
Wichita, Kansas Corporation(9) 1992 $ 14,597 $ 1,615 2002
MountainView Regional Rehabilitation HealthSouth Corporation(9)
Hospital
Morgantown, West Virginia 1991 11,718 1,358 2001
Northwest Arkansas Horizon/CMS Healthcare
Rehabilitation Hospital Corporation(9)
Fayetteville, Arkansas 1991 9,086 1,064 2001
------------- ----------
Total Rehabilitation Hospitals $ 35,401 $ 4,037
============ ==========
LONG-TERM CARE FACILITIES
Arkansas Manor Signature Health Care
Denver, Colorado Corporation 1995 $ 4,066 $ 406 2005
Cornerstone Care Signature Health Care
Lakewood, Colorado Corporation 1995 4,856 485 2005
Douglas Manor Signature Health Care
Douglas, Arizona Corporation 1995 2,621 254 2005
Safford Care Signature Health Care
Safford, Arizona Corporation 1995 4,934 478 2005
------------- ----------
Total Long-Term Care
Facilities $ 16,477 $ 1,623
============ ==========
ASSISTED LIVING FACILITIES
Alhambra Lodge(10) Emeritus Corporation
El Paso, Texas 1995 $ 5,504 $ 578 2005
Garrison Creek Lodge(10) Emeritus Corporation
Walla Walla, Washington 1995 5,608 589 2005
Sherwood Place(10) Emeritus Corporation
Odessa, Texas 1995 5,452 572 2005
Summer Wind Residence Emeritus Corporation
Boise, Idaho 1995 3,000 315 2005
------------- ----------
Total Assisted Living Facilities $ 19,564 $ 2,054
============ ==========
ALZHEIMER'S CARE FACILITY
Pinehaven(10) Diversified Health
Houston, Texas Services 1995 $ 3,768 $ 405 2005
MEDICAL OFFICE BUILDING
Walsh Medical Arts Center Rancho California
Murrieta, California Medical Association 1994 8,800 903 2003
------------- ----------
PORTFOLIO TOTAL $ 617,602 $ 70,874
============ ==========
</TABLE>
- ---------------
(1) Reflects gross investments less write-downs, except the facilities under
construction and Austin Diagnostic Medical Center, which reflects the
Company's total investment commitment.
(2) Reflects contract rate of annual base rent or interest.
(3) Each lease and mortgage provides the lessee or borrower with renewal
options to extend the term of the lease or mortgage beyond the primary
term.
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<PAGE> 25
(4) Investment held in the form of a participating mortgage for which National
Health Investors, Inc. is the lead agent lender.
(5) Base interest for the first two years ranges from 9.25% to 9.75%, depending
on certain circumstances. The current rate of interest received by the
Company is 9.25%. The interest rate in years three through ten will range
from 9.75% to 10.25%, depending on certain circumstances. The interest rate
will reset in years 11 and 21 to the greater of the then current loan rate
or 450 basis points over the then current ten-year Treasury rate. Beginning
in year three, monthly principal payments are required based on a thirty-
year amortization.
(6) Quorum is the operator and Desert Valley Hospital, Inc. is the lessee.
(7) These facilities are leased by subsidiaries of American Medical
International, Inc. ("AMI"), which became a wholly owned subsidiary of
Tenet Healthcare Corporation pursuant to a merger between AMI and National
Medical Enterprises.
(8) The Company's investment in Halstead Hospital was consummated on June 30,
1993 by the acquisition of ten year industrial revenue bonds secured by the
hospital, which the Company expects to exchange for ownership of the
hospital at the end of the ten year term.
(9) Such Rehabilitation Hospital is leased by a joint venture comprised of the
operator and other health care providers.
(10) Currently under construction.
See the Notes to the Consolidated Financial Statements and Schedule
III -- Real Estate and Accumulated Depreciation incorporated by reference in the
accompanying Prospectus for additional information regarding the leased Core
Group Facilities and the participating mortgage loan and for the carrying value
and accumulated depreciation of the Core Group Facilities.
THE PSYCHIATRIC GROUP
The Company's portfolio of psychiatric hospital investments consists of
three psychiatric hospitals owned by the Company and two mortgage loans secured
by psychiatric hospitals (the "Psychiatric Hospitals"). As of June 30, 1995, the
net book value of the Psychiatric Group assets was $64.9 million. Of the
Psychiatric Group's real estate assets at that date, 36% in net book value were
held in fee and 64% in net book value were held as mortgages.
The Psychiatric Hospitals provide a wide range of inpatient and outpatient
care for children, adolescents and adults, including specialized care relating
to eating disorders, substance abuse and psychiatric illness. Fundamental
changes in the psychiatric industry in recent years have reduced the
facility-specific operating cash flow at the Psychiatric Hospitals. These
changes have had and could continue to have an adverse effect on the results of
operations of the Psychiatric Hospital operators and borrowers. See
"Management's Discussion and Analysis of Psychiatric Group Combined Financial
Condition and Results of Operations -- Operating Results -- Future Operating
Results" incorporated by reference in the accompanying Prospectus.
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The following is a listing of the current Psychiatric Group portfolio of
investments. Unless otherwise indicated, all Psychiatric Hospitals listed are
owned by the Company.
PSYCHIATRIC GROUP HOSPITALS
<TABLE>
<CAPTION>
INITIAL
YEAR ANNUAL TERM
ACQUIRED/ TOTAL BASE RENT/ OF LEASE/
DESCRIPTION & LOCATION OPERATOR FUNDED INVESTMENT(1) INTEREST(2) MORTGAGE(3)
- -------------------------------------- ------------------------- -------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Four Winds Psychiatric Hospital Four Winds, Inc. 1988 $27,600 $3,600 2002
Katonah, New York(4)
Four Winds Psychiatric Hospital FW of Saratoga, Inc. 1989 18,225 2,264 1999
Saratoga Springs, New York(4)
Less: Mortgage note receivable N/A N/A (7,950) N/A N/A
impairment reserve
The Manors The Anclote Psychiatric 1990 6,523 600 2000
Tarpon Springs, Florida Hospital, Ltd.
The Retreat The Retreat Psychiatric 1990 11,934 1,100 2000
Sunrise, Florida Hospital Ltd.
Rock Creek Center DHP, L.P. 1989 6,505 1,000 1997
Lemont, Illinois
------------- ----------
Total Psychiatric Hospitals $62,837 $8,564
============= ==========
</TABLE>
- ---------------
(1) Reflects gross investments less write-downs.
(2) Reflects contract rate of annual base rent or interest.
(3) Each lease and mortgage provides the lessee or borrower with renewal options
to extend the term of the lease or mortgage beyond the primary term.
(4) Investment held in the form of a mortgage rather than owned by the Company.
See the Notes to the Consolidated Financial Statements and Schedule
III -- Real Estate and Accumulated Depreciation incorporated by reference in the
accompanying Prospectus for additional information regarding the leased
Psychiatric Hospitals and the mortgage loans and for the carrying value and
accumulated depreciation of the Psychiatric Hospitals.
LEASES AND MORTGAGE LOANS
The Company owns the 14 Acute Care Hospitals, the three Rehabilitation
Hospitals, three of the Psychiatric Hospitals, the four Long-Term Care
Facilities, the four Assisted Living Facilities (of which three facilities are
under construction), the Alzheimer's Care Facility (currently under
construction) and one medical office building, which are collectively referred
to herein as the "Leased Properties" or individually as a "Leased Property."
The leases for the Leased Properties provide for base rental rates that
generally range from 8.9% to 13.4% per annum of the acquisition price less
write-downs of the related Leased Property. Rental rates vary by lease, taking
into consideration many factors, including, but not limited to, credit of the
lessee, operating performance of the Leased Property, interest rates, and
location, type and physical condition of the Leased Property. The leases provide
for additional rents that are based upon a percentage of increased revenues over
specific base period revenues of the related Leased Properties.
The obligations under the leases are generally guaranteed by the parent
corporation of the lessee, if the lessee is a subsidiary, or has some other form
of credit enhancement such as a letter of credit or a security deposit. Certain
of the Company's leases are with subsidiaries of the operators described above
and are non-recourse to such operators. Approximately 83% of the Company's
property revenues for the six months ended June 30, 1995 were secured by
corporate guarantees. Also, as of June 30, 1995, letters of credit from
commercial banks and cash deposits aggregating $13 million were available to the
Company as security for lease and construction development obligations.
The leases are on a triple "net" basis, and the lessee is responsible
thereunder, in addition to the base and additional rents, for all additional
charges, including every fine, penalty, interest and cost that may be levied for
non-payment or late payment thereof, all taxes, assessments, levies, fees, water
and sewer rents and
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<PAGE> 27
charges, all governmental charges with respect to the Leased Property and all
utility and other charges incurred with the operation of the Leased Property.
Each lessee is required, at its expense, to maintain the Leased Property in good
order and repair. The Company is not required to repair, rebuild or maintain the
Leased Properties.
Core Group Facilities
Acute Care Hospitals. The Acute Care Hospital leases provide for a fixed
term of from ten to 17 years and one or more renewal options of from five to ten
years each. In addition to monthly base rent, all of the Acute Care Hospital
leases provide for the quarterly payment of additional rent in an amount equal
to (i) a specified percentage of the amount by which the Gross Revenues (as
defined) attributable to the Leased Property for the year exceeded the Gross
Revenues derived from such Leased Property during a specified base year ("Excess
Gross Revenues") up to a designated dollar amount (the "Transition Amount").
Should the Transition Amount be reached in any years, additional rent shall be
equal to a reduced percentage of the Excess Gross Revenues for the remainder of
such year.
Pursuant to the terms of the Acute Care Hospital leases, the Company has
the right to approve capital expenditures (only in excess of $2 million for
certain leases), the option to fund certain capital expenditures under some of
the leases and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. The base and
additional rental provisions of leases are amended when such capital
expenditures are funded to reflect the Company's increased investment.
Six of the Acute Care Hospitals are operated by subsidiaries of Tenet under
long-term leases with the Company, which comprised 50% of the Company's 1994
total revenues. AMI has guaranteed certain obligations of its subsidiaries under
such leases and each such lease is cross-defaulted with the other Tenet leases.
Five of the Tenet leases grant to Tenet the option, exercisable on not less than
six months nor more than 24 months notice, to purchase the Leased Property upon
the expiration of any term of the lease at the Fair Market Value of the Leased
Property at the expiration of said term. The expiration of the initial terms of
such leases are shown in the table above. For purposes of the second preceding
sentence, "Fair Market Value" means the price that a willing buyer not compelled
to buy would pay to a willing seller not compelled to sell for such property at
the applicable expiration less the portion of such price attributable to capital
additions paid for by Tenet. The determination of such price will take into
account (i) that the applicable lease is assumed not to be in effect on the
Leased Property and (ii) that the seller of such Leased Property must pay for
title insurance and closing costs.
The five other Acute Care Hospital leases generally provide the lessee with
an option to purchase the property at the end of the term of the lease at the
greater of fair market value or Total Investment Cost (as defined). Two of the
leases provide the lessee with a purchase option during the term of the lease at
a predetermined purchase price designed to provide the Company a favorable total
return on its investment. Two of the leases provide the lessee with a purchase
option during the term of the lease at the greater of fair market value or Total
Investment Cost (as defined).
Two of the Acute Care Hospitals are operated by subsidiaries of Paracelsus
under long-term leases with the Company, which comprised 8% of the Company's
1994 total revenues. The leases for the two Acute Care Hospitals operated by
Paracelsus contain reciprocal cross-default provisions.
As of June 30, 1995, the Company had funded $26.3 million of its $30
million participation in an $86 million participating mortgage loan for the
development of the 158-bed Austin Diagnostic Hospital. The mortgage loan is
secured by the hospital and related land and improvements. HealthTrust -- The
Hospital Company, which was recently acquired by Columbia/HCA Healthcare
Corporation, and ADC have each guaranteed 50% of the obligations under the
mortgage.
Rehabilitation Hospitals. The Rehabilitation Hospital leases provide for an
initial term of ten years and three renewal periods of five years each, except
in the case of the MountainView Regional Rehabilitation Hospital lease, which
provides for two renewal periods of ten years each and a third renewal period of
up to fifteen years. In addition to monthly base rent, the Rehabilitation
Hospital leases provide for the quarterly
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<PAGE> 28
payment of additional rent in an amount equal to a specified percentage of
Excess Gross Revenues. The Rehabilitation Hospital leases each grant to the
operator the option to purchase the Rehabilitation Hospital upon expiration of
any term of the lease at the greater of the Fair Market Value of or the
Company's cost basis in the Rehabilitation Hospital at the expiration of said
term. One of the Rehabilitation Hospital leases grants an interim purchase
option exercisable at the end of the fifth year of the lease at a purchase price
equal to the greater of the fair market value of the facility based on the
income approach or the Company's costs basis in the facility.
Long-Term Care Facilities. The Long-Term Care Facility leases provide for
an initial term of ten years and three renewal periods of ten years each. Each
of the four Long-Term Care Facilities is operated by an affiliate of Signature
and all of the facilities are cross-defaulted. Additionally, the obligations
under each lease are guaranteed by Signature and an affiliate of Signature. The
leases provide for a monthly base rent and an automatic annual increase in base
rent to an amount equal to 102 1/2% of the base rent for the preceding twelve
month period. Each of the Long-Term Care Facility leases provides the tenant
with an option to purchase the property at the end of the fixed term or the end
of any extended term at the greater of fair market value or the Total Investment
Cost (as defined), provided that the option to purchase the property is
simultaneously exercised on each of the four Long-Term Care Facilities. The
leases also provide the tenant with a right of first refusal to purchase the
property on the same terms and conditions as received by and acceptable to the
Company.
Assisted Living Facilities. The Assisted Living Facility leases provide for
a ten year initial term with six renewal periods of five years each. The Company
is currently providing construction financing for three of the Assisted Living
Facilities and will enter into ten-year operating leases with Emeritus for each
of the facilities upon completion. All of the properties leased to Emeritus are
cross-defaulted. The Assisted Living Facility leases provide for monthly base
rent plus additional rent payable quarterly in an amount equal to a specified
percentage of the base rent for the first year and for the second and each
subsequent year, an amount equal to (i) the additional rent for the immediately
preceding year plus (ii) an amount equal to a specified percentage of the sum of
base rent and additional rent payable for the immediately preceding year. The
leases provide the tenant with the option to purchase the property at the end of
the fixed term or at the end of any extended term at the greater of (i) fair
market value minus the tenant's share of the Appreciation Amount (as defined)
less the fair market value of any improvements funded by the tenant or (ii) the
Company's Total Investment (as defined).
Alzheimer's Care Facility. The Company is providing construction financing
for a 96 bed Alzheimer's care facility being constructed in Houston, Texas,
which is scheduled for completion in 1996. Upon completion, the Company will
purchase the facility and enter into a 10 year operating lease with the
developer.
Medical Office Building. The medical office building is master-leased for a
nine-year remaining term to a partnership consisting of 22 physicians who are
the primary tenants of the building.
Psychiatric Group Facilities
Psychiatric Hospitals. The leases for two of the owned Psychiatric
Hospitals provide for an initial term expiring in 2000 with three renewal
periods for ten years each. The lease for the third owned Psychiatric Hospital
has an initial term expiring in 1997 with one renewal period for five years and
two renewal periods for ten years each. In addition to monthly base rent, the
leases provide for the quarterly payment of additional rent in an amount equal
to a specified percentage of Excess Gross Revenues.
The Company has made mortgage loans to two of the Psychiatric Hospitals.
The two mortgage loans are secured by first mortgages and security interests in
the two separate Psychiatric Hospitals. The two mortgage loans have an initial
term of ten years with two optional ten-year extension terms. Pursuant to the
terms of the mortgage loans, the Company may receive additional interest each
year in an amount equal to a specified percentage of Excess Gross Revenues. See
also "Management's Discussion and Analysis of Psychiatric Group Combined
Financial Condition and Results of Operations -- Operating Results -- Future
Operating Results" and Notes to the Consolidated Financial Statements
incorporated by reference in the accompanying Prospectus.
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<PAGE> 29
COMPETITION
The Company competes with health care providers, real estate partnerships,
other real estate investment trusts and other investors, including insurance
companies and banks, generally in the acquisition, leasing and financing of
health care facilities.
Management of the Company believes that the Facilities in which it has
invested are providers of high quality health care services in their respective
markets. The operators of the Facilities compete on a local and regional basis
with other operators of comparable facilities. They compete with independent
operators as well as managers of multiple facilities, some of which are
substantially larger and have greater resources than the operators of the
Facilities. Some of these competing facilities are operated for profit while
others are owned by governmental agencies or tax-exempt, not-for-profit
organizations. The Company believes that the Facilities compete favorably with
other hospitals based upon many factors, including the services and specialties
offered, quality of management, ease of access, reputation and the ability to
attract competent physicians and maintain strong physician relationships.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. In connection with its ownership and operation of the
Facilities, the Company may be potentially liable for such costs.
All of the Facilities have been subject to Phase I environmental
assessments, which are intended to discover information regarding, and to
evaluate the environmental condition of, the surveyed properties and surrounding
properties. The Phase I assessments included a historical review, a public
records review, a preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos, polychlorinated biphenyls
and underground storage tanks and the preparation and issuance of a written
report, but do not include soil sampling or subsurface investigations. In each
case where Phase I assessments resulted in specific recommendations for remedial
actions, the Company's management has taken the recommended action.
The Phase I assessments have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any such
liability. Nevertheless, it is possible that these assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Moreover, no assurances can be given that (i)
future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Facilities will not be affected by tenants and occupants of the Facilities, by
the condition of properties in the vicinity of the Facilities (such as the
presence of underground storage tanks) or by third parties unrelated to the
Company.
The Company believes that the Facilities are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. The Company has not been notified by any
governmental authority, or is otherwise aware, of any material noncompliance,
liability or claim relating to hazardous or toxic substances in connection with
any of its present or former properties.
GOVERNMENT REGULATIONS AND PAYOR ARRANGEMENTS
Each of the Facilities is a health care related facility and the amount of
additional rent or additional interest, if any, which is based on the lessee's
or mortgagee's gross revenue, is in most cases subject to changes in the
reimbursement and licensing policies of federal, state and local governments. In
addition, the acquisition of health care facilities is generally subject to
state and local regulatory approval.
S-27
<PAGE> 30
The operators of the Company's facilities derive a substantial percentage
of their total revenues from federal and state health care programs such as
Medicare and Medicaid and from other third party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators are also subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third party payors or
an operator's failure to maintain its certification under the Medicare or
Medicaid programs could adversely affect revenues to the Company's facilities.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Among the proposals under consideration are cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses and the requirement that all businesses offer
health insurance to their employees. In addition, Congress is considering
several proposals relating to the Medicare and Medicaid programs, including a
proposal to abandon the current Medicaid funding system in favor of federal
block grants to states. The proposals under consideration by Congress would
likely reduce federal government spending on the Medicare and Medicaid programs.
Accordingly, these proposed legislative changes could adversely affect revenues
to the Company's facilities.
Acute Care Hospitals. Acute care hospitals are subject to extensive
federal, state and local legislation and regulation. Acute care hospitals
undergo periodic inspections regarding standards of medical care, equipment and
hygiene as a condition of licensure. Various licenses and permits also are
required for narcotics, laboratories, pharmacies, radioactive materials and
certain equipment. Each facility eligible for accreditation is accredited by the
Joint Commission on Accreditation of Health Care Organizations. Accreditation is
required for participation in government-sponsored provider programs, such as
Medicare and Medicaid.
Acute care hospitals are subject to and comply with various forms of
utilization review. In addition, under the Medicare program, each state must
have a Professional Review Organization to carry out a federally-mandated system
of review of Medicare patient admission, treatment and discharge. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each acute care hospital, and are reviewed by each acute care
hospital's local governing board and quality-assurance personnel. New
regulations governing the control of disposal of hazardous wastes may increase
the costs of operating acute care facilities.
The lessees and mortgagees of the Facilities, which provide acute care
hospital services, receive payments for patient care from federal Medicare
programs for elderly and disabled patients, Medicaid and other state programs
for medically indigent patients, private insurance carriers, employers, Blue
Cross plans, health maintenance organizations, preferred provider organizations
and directly from patients.
Medicare payments for most inpatient hospital services provided by acute
care general hospitals are made under a "prospective payment system" ("PPS")
under which a hospital is paid a prospectively determined rate per discharge.
The PPS payment rate includes reimbursement for capital related costs. These
rates vary according to a patient classification system that is based on
clinical, diagnostic and other factors. Acute care hospitals are reimbursed for
cost reimbursable items at a tentative rate with final settlement determined
after submission of annual cost reports and audits thereof by the Medicare
fiscal intermediary. In general, payments made by Medicare are less than
established charges for such services. Medicare payments may be delayed due to
federal government regulations.
Medicaid payments for acute care hospitals will vary between states. These
payments may be based on a percentage of reasonable cost, a fixed rate per
discharge, a capitated payment, or other payment arrangements. If a state
selects a cost based reimbursement methodology, acute care hospitals are
reimbursed at a tentative rate with final settlement determined after submission
of annual cost reports and audits thereof by medicaid. In general, payments made
by Medicaid are less than established charges for such services. Additionally,
Medicaid payments may be delayed due to State budget deficits.
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<PAGE> 31
Blue Cross payments in different states and areas are based on cost, a per
diem, or other negotiated rates and may also be subject to payment delay.
Payments from health maintenance organizations and preferred provider
organizations generally are negotiated, either at a discount from charges or on
a per capita, shared-risk basis with stop-loss provisions for high severity
cases. In more developed markets such as California and Florida, the Company's
hospitals are now entering into risk sharing, or capitated, arrangements. These
arrangements reimburse the hospital based on a fixed fee per participant in a
managed care plan with the hospital assuming the costs of services provided,
regardless of the level of utilization. If utilization is higher than
anticipated and/or costs are not effectively controlled, such arrangements could
produce low or negative operating margins.
Rehabilitation Hospitals. Rehabilitation hospitals are also subject to
extensive federal, state and local legislation and regulation. Rehabilitation
hospitals are subject to periodic inspections and licensure requirements.
Outpatient rehabilitation services and free-standing inpatient rehabilitation
facilities are generally reimbursed under the same payment arrangement as acute
care hospitals, except as noted below. Medicare payments for inpatient
rehabilitative services are made based on reasonable operating cost, subject to
a per discharge limitation. If a facility operates below the cost per discharge
limitation, it will qualify for a bonus payment. If a facility operates above
the cost per discharge limitation, it will be reimbursed solely to the extent of
the limitation. Defined capital costs and outpatient services related to
Medicare beneficiaries are reimbursed based on reasonable cost. All Medicare
inpatient and outpatient services are reimbursed at a tentative rate with final
settlement determined after submission of annual cost reports and audits thereof
by the Medicare fiscal intermediary. In general, payments made by Medicare are
less than established charges for such services. Additionally, Medicare payments
may be delayed due to federal government regulations.
Long-Term Care Facilities. Long-term care facilities are also subject to
extensive federal, state and local legislation and regulation. Long-term care
facilities are subject to licensure requirements, and are surveyed on a regular
basis to determine whether such facilities are in compliance with the
requirements for participation in the Medicare and Medicaid programs. Medicare
provides coverage for beneficiaries who require skilled nursing and certain
related medical services, such as physical, occupational and speech therapy,
pharmaceuticals, medical supplies and ancillary, diagnostic and other necessary
services of the type provided by skilled nursing facilities. Medicare benefits
are not available for patients requiring intermediate and custodial levels of
care. In general, Medicare payments for skilled nursing services are based on
the lesser of actual allowable routine, ancillary and capital costs or charges.
All Medicare inpatient services are reimbursed a tentative rate with final
settlement determined after submission of annual cost reports and audits thereof
by the Medicare fiscal intermediary. Although Medicaid programs vary from state
to state, reimbursement rates are typically determined by the state from cost
reports filed annually by each facility, on a prospective or retrospective
basis. Under most state Medicaid programs, individual facilities are reimbursed
on a prospective rate system, subject to retroactive adjustment. Under a
prospective system, per diem rates are established based upon certain historical
costs of providing services during the prior year, adjusted to reflect factors
such as inflation and any additional services required to be performed.
Providers must accept reimbursement from Medicaid as payment in full for the
services rendered.
Assisted Living Facilities. Assisted living facilities are subject to state
and local legislation and regulation. Assisted living facilities are not
currently regulated by the federal government. Assisted living facilities are
subject to licensure requirements, and are surveyed on a regular basis to
determine whether such facilities are in compliance with the requirements for
participation in the Medicaid program in the states where assisted living
facilities are eligible for Medicaid reimbursement. The operator of the
Company's Assisted Living Facilities targets the private pay sector of the
assisted living services market, and does not target Medicaid patients for
admission to its facilities. Private pay patients utilize private insurance
sources for payment or use their income and savings to pay for care in assisted
living facilities.
Alzheimer's Care Facility. Alzheimer's care facilities are classified as
long-term care facilities and are reimbursed under the same payment arrangements
as long-term care facilities.
Psychiatric Hospitals. In addition to the licensing, certificate of need
and Medicare/Medicaid rules and regulations, there are a number of specific
federal and state laws affecting psychiatric hospitals, such as the regulation
of civil commitments of patients, admitting procedures, and disclosure of
information regarding patients being treated for chemical dependency. Many
states have adopted a "patient's bill of rights" which
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sets forth standards governing the treatment of patients of psychiatric
hospitals, such as using the least restrictive treatment method, allowing
patient access to telephone and mail, allowing a patient to see a lawyer, and
requiring the patient to be treated with dignity. The lessees and mortgagees of
the Psychiatric Hospitals receive payments for patient care from federal
Medicare programs for elderly and disabled patients, Medicaid and other state
programs for medically indigent patients, private insurance carriers, employers,
Blue Cross plans, health maintenance organizations, preferred provider
organizations and directly from patients.
FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of the material federal income tax matters of
general application pertaining to REITs under the Internal Revenue Code of 1986,
as amended (the "Code"). The discussion is based on current provisions of the
Code, Treasury Regulations promulgated thereunder, rulings of the Internal
Revenue Service (the "Service") and judicial decisions in effect as of the date
hereof. Future legislation, regulatory, judicial or administrative changes or
interpretations, which may be retroactive, could affect the conclusions reached
below. Legislation has been introduced in the House of Representatives that
would simplify and liberalize some of the current Code provisions applicable to
REITs. This discussion does not deal with all aspects of federal income taxation
that may be of special relevance to investors subject to special treatment under
federal income tax laws, such as investors subject to the Employee Retirement
Income Security Act of 1974, as amended, other tax exempt investors or dealers
in securities. The provisions of the Code pertaining to REITs are highly
technical and complex and sometimes involve mixed questions of fact and law, and
may be affected by matters of value. In addition, the discussion does not cover
foreign, state or local taxation. The Company has not requested and will not
request a ruling from the Internal Revenue Service (the "Service") with respect
to any of the federal income tax issues discussed below. All prospective
investors should consult, and must depend on, their own tax advisors regarding
the federal, state, local, foreign, withholding and other tax consequences of
investing in, holding and disposing of the shares of Common Stock.
TAXATION OF THE COMPANY
The Company believes that it has been organized and operated, and it
intends to continue to operate, in a manner qualifying it as a REIT under
Sections 856 through 860 of the Code, but no assurance can be given that it will
at all times so qualify. The Company's ability to qualify as a REIT under the
requirements of the Code and the regulations promulgated thereunder depends upon
actual operating results. In addition, the treatment of the Company as a REIT
for its current and future tax years will depend upon the tax treatment of the
Psychiatric Group Stock, with respect to which there exists limited authority.
To qualify as a REIT under the Code for a taxable year, the Company must
meet certain organizational and operational requirements and to avoid excessive
concentration of ownership of its shares. First, its principal activities must
be real estate related. Generally, at least 75% of the value of the total assets
of the Company at the end of each calendar quarter must consist of real estate
assets, cash, receivables or governmental securities. The Company may not own
more than 10% of the outstanding voting securities of any corporation, except
for shares of other REITs and of certain "Qualified REIT Subsidiaries." No more
than 5% in value of the assets of the Company may be invested in securities of
any one Issuer except for securities that qualify as real estate assets. A REIT
may, however, own without limit shares of other qualifying REITs and of
"Qualified REIT Subsidiaries." The Company holds some of its assets through
wholly-owned subsidiary corporations that it believes qualify as Qualified REIT
Subsidiaries. A Qualified REIT Subsidiary will not be separately taxable under
the Code; rather, all of the assets, liabilities and income tax items of each
Qualified REIT Subsidiary will be treated as assets, liabilities and income tax
items of the Company. Additionally, less than 30% of the gross income of a REIT
in each taxable year may consist of gross income from the sale or other
disposition of stock and securities held for less than one year and of real
property, including mortgages on real property, held for less than four years.
For each taxable year, at least 75% of a REIT's gross income must be derived
from specific real estate sources and the qualified temporary investment of new
capital and 95% must be derived from such real estate sources plus certain other
permitted sources. Real estate income for purposes of those requirements include
gains from the sale of real property not held primarily for sale to customers in
the ordinary course of business, dividends on REIT shares, interest on loans to
the extent secured by mortgages on real property, certain rents from real
property and income from foreclosure property. For rents to qualify, they may
not be based on the income or profits of any person, except that they may be
based
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on a percentage or percentages of gross sales or receipts, and, subject to
certain limited exceptions, the REIT may not manage the property or furnish
services to tenants except through an independent contractor that is paid an
arm's-length fee and from which the REIT derives no income.
The Company must satisfy certain ownership restrictions that limit (i)
concentration of ownership of its shares by a few individuals and certain
organizations and (ii) ownership by the Company of its tenants. The shares of
the Company must be held by at least 100 shareholders. No more than 50% in value
of the outstanding shares of the Company, including in some circumstances shares
into which outstanding securities might be converted, may be owned actually or
constructively by five or fewer individuals or certain other entities at any
time during the last half of the Company's taxable year. The Company must seek
information from certain of its shareholders to verify compliance with this
provision. Accordingly, the Company's Certificate of Incorporation restricts the
transfer of the Company's shares and outstanding securities convertible into
shares when necessary to maintain the Company's qualification as a REIT under
the Code, and also sets forth certain other provisions designed to avoid
violations of the REIT ownership requirements. However, no assurances can be
given that the restrictions of the Certificate of Incorporation will be
effective in maintaining the Company's REIT status.
So long as the Company qualifies for taxation as a REIT and distributes at
least 95% of its real estate investment trust taxable income (computed without
regard to net capital gains or the dividends paid deduction) for its taxable
year to its shareholders annually (the 95% distribution requirement), the
Company itself will not be subject to federal income tax on that portion of such
income distributed to shareholders. The required dividend distributions must be
made either in the taxable year to which they relate or, subject to certain
limitations, in the following year. The Company will be taxed at regular
corporate rates on all income not distributed to shareholders. If the Company is
not treated as having distributed a designated portion of its income and gains
within a taxable year, it will be subject to a special tax. The Company intends
to make sufficient distributions each year so as to qualify as a REIT. REITs may
also incur taxes, including certain nondeductible excise taxes, for certain
other activities or to the extent distributions do not satisfy certain other
requirements.
The Company might fail to meet the 95% distribution requirement in the
current year or in future years if dividends paid on either the Psychiatric
Group Stock or on the Common Stock are treated as "preferential" with respect to
the other class of stock under Section 562(c) of the Code. The IRS might attempt
to treat dividends on either class of stock as preferential to the extent that
they are not the same on a per share basis as dividends paid on the other class
of stock. The Company believes that dividends on the Psychiatric Group Stock and
on the Common Stock should not be treated as preferential as long as the payment
of such dividends does not violate any rights of shareholders. This
interpretation is not free from doubt, however, in the absence of authority
directly on point. If any dividends paid by the Company were treated as
preferential under Code Section 562(c), the Company could not deduct such
dividends in computing its taxable income, and such dividends would not count
toward the 95% distribution requirement. If the Company were to fail the 95%
distribution requirement for a taxable year, it would be taxable on its net
taxable income for such year with no deduction for dividends paid.
In addition, the Company's ability to qualify as a REIT depends in part
upon the status of the Psychiatric Group Stock as stock of the Company for
federal income tax purposes. The Company believes that the Psychiatric Group
Stock should qualify as stock of the Company for tax purposes. It should be
noted, however, that there are no Treasury Regulations, court decisions or
published Service rulings bearing directly on the tax treatment of the
Psychiatric Group Stock. In addition, the Service announced in 1987 that it is
studying the federal income tax consequences of similar stock (i.e., stock whose
dividend rights are determined by reference to the earnings from a certain
portion of the issuing corporation's assets), and would not issue any advance
rulings regarding such stock. It is possible, therefore, that the Service could
assert that the Psychiatric Group Stock represents property other than stock of
the Company. Depending on the characterization of the Psychiatric Group Stock
and the Psychiatric Group assets for tax purposes, the Company's qualification
as a REIT might be affected.
Failure of the Company to qualify during any taxable year as a REIT could,
unless certain relief provisions were available, have a material adverse effect
upon investors. If disqualified for taxation as a REIT for a taxable year, the
Company would also be disqualified for taxation as a REIT for the next four
taxable
S-31
<PAGE> 34
years, unless the failure was due to reasonable cause and not willful neglect,
and would not be able to requalify unless it were to distribute as a dividend
all current and accumulated earnings and profits. The Company would be subject
to federal income tax at corporate rates on all of its taxable income and would
not be able to deduct the dividends paid, which could result in a
discontinuation of or substantial reduction in dividends to shareholders.
Dividends would also be subject to the regular tax rules applicable to dividends
received by the shareholders of a corporation. Should the failure to qualify be
determined to have occurred in an earlier tax year of the Company, the
imposition of a substantial federal income tax liability on the Company
attributable to such nonqualifying tax years might adversely affect the
Company's ability to pay dividends. If the Company fails to meet certain income
tests of the tax law, it may, generally, retain its qualification as a REIT if
it pays a 100% tax on the amount by which it failed to meet the income tests,
reduced by a pro-rata share of deductions, so long as its failure was due to
reasonable cause and not willful neglect. Any such taxes would adversely affect
the Company's ability to pay dividends.
TAXATION OF THE SHAREHOLDERS OF A REIT
The following discussion assumes that the Company will at all times qualify
as a REIT. Dividends paid to its shareholders out of current or accumulated
earnings and profits of the Company will generally be taxed to them as ordinary
income in the year of payment, or, with respect to distributions declared in the
last quarter of any year payable to shareholders of record in such quarter and
paid by January 31 of the following year, in the year of declaration. REIT
dividends are not eligible for the dividends-received deduction for
corporations. A dividend in excess of current and accumulated earnings and
profits will constitute a nontaxable return of capital to the extent of the
shareholder's basis in his shares and is applied to reduce such basis. To the
extent such a dividend is greater than such basis, it will be treated as capital
gain to those shareholders holding their shares as capital assets.
Generally, assuming the Company does not have outstanding any stock with a
preference as to dividends, distributions as to either the Common Stock or the
Psychiatric Group Stock will be considered to be out of the Company's current
earnings and profits in an amount equal to the proportion that distributions on
that class of stock bears to total distributions by the Company for the taxable
year multiplied by the Company's earnings and profits for the taxable year.
Thus, the treatment as dividends of distributions with respect to the Common
Stock may depend in part upon the economic performance of the Psychiatric Group
assets.
A distribution of net capital gains by the Company will generally be
treated as a long-term capital gain to shareholders to the extent properly
designated by the Company as a capital gain dividend and regardless of the
length of time a shareholder has held his shares. It may be uncertain how any
capital gains of the Company would be allocated between distributions paid on
the Common Stock and distributions paid on the Psychiatric Group Stock. If the
reasoning of Rev. Rul. 89-81, 1989-1 C.B. 226, dealing with regulated investment
companies, were to apply, dividends paid on either class of stock would consist
of that class's share of any capital gains of the Company in proportion to that
class's share of total dividends paid by the Company in the taxable year. Thus,
some portion of any capital gains realized on the Core assets may be allocable
to distributions paid on the Psychiatric Group Stock. Any loss on a sale of
shares of a REIT that were held for six months or less and with respect to which
a capital gain dividend was received will be treated as a long-term capital
loss, up to the amount of the capital gain dividend received with respect to
such shares. Under Section 291 of the Code, corporate shareholders may be
required to treat up to 20% of any such capital gain as ordinary income. Section
291 of the Code provides, in general, that if a corporation sells or disposes of
depreciable real property in a taxable transaction, it must, to the extent of
gain, include as ordinary income up to 20% of the depreciation previously taken
on such property. Corporate shareholders of a REIT are required to treat the
portion of a capital gain dividend attributable to the gain from the REIT's sale
or exchange of depreciable real property as subject to the 20% ordinary income
rules. Capital gains distributions are not eligible for the dividends-received
deduction for corporations. The Company will notify its shareholder as to the
portions of each dividend, that, in its judgment, constitute ordinary income or
capital gain dividends. Should the Company incur an ordinary or capital net
loss, shareholders will not be entitled to include such losses in their own
income tax returns. The income realized by shareholders as a result of
distributions will constitute portfolio income to shareholders for purposes of
the passive loss rules. Generally, a shareholder may not use losses from passive
activities to offset such portfolio income.
S-32
<PAGE> 35
Taxpayers are subject to the alternative minimum tax to the extent that it
exceeds the regular tax. In the case of shareholders of the Company, items of
tax preference and other items that are treated differently for regular tax and
alternative minimum tax purposes are determined at the Company level. The Tax
Reform Act of 1986 directs the Secretary of the Treasury to promulgate
regulations determining how such items are to be allocated between the
shareholders and the Company for purposes of the alternative minimum tax.
FOREIGN SHAREHOLDERS
A holder of Common Stock who is a nonresident alien individual, foreign
corporation, foreign trust or foreign estate (collectively, a "Foreign
Shareholder") will be subject to special tax treatment. Under the Foreign
Investment in Real Property Tax Act ("FIRPTA"), a Foreign Shareholder will be
taxable at normal capital gain rates on capital gain distributions attributable
to U.S. real property interests, and up to 35% thereof may be withheld. In
addition, a foreign corporation may be subject to the "branch profits tax" on
the after-tax amount of a capital gains distribution at the rate of 30% (or
lower treaty rate applicable to the branch profits tax). If, after the end of a
year, the Company designates a distribution during the year as a capital gain
distribution, FIRPTA withholding will not apply to the designated distribution,
but will apply instead to subsequent distributions in the same amount (subject
also to any other required withholding).
A Foreign Shareholder subject to tax on capital gain distributions must
file a tax return that reports the distribution as effectively connected income,
and may claim any tax withheld as a credit against the tax. If the actual tax
owed differs from the amount withheld, the difference will be payable with the
return or refunded to the taxpayer as appropriate. Generally, other dividend
distributions to a Foreign Shareholder will be subject to withholding tax at a
rate of 30% (or lower treaty rate). The United States has announced its
intention to renegotiate treaties to revise treaty reductions of the withholding
tax on REIT dividends.
Gain on the sale of Common Stock by a Foreign Shareholder will not be
subject to federal income taxation unless (a) the Company fails to qualify as a
"domestically-controlled REIT" (i.e., as a REIT less than 50% of the stock of
which has been owned directly or indirectly by foreign persons throughout the
prior five years) and, if the Common Stock continues to be regularly traded on
an established securities market, the Foreign Shareholder has owned (at any time
during the five-year period ending on the date of the sale), actually or
constructively, more than 5% of the Company's outstanding Common Stock, or (b)
the selling Foreign Shareholder is a nonresident alien individual present in the
United States for more than 182 days in the taxable year of the sale and the
Foreign Shareholder's "tax home" is in the United States or the gain is
attributable to a U.S. office.
In general, a Foreign Shareholder's dividends and gains with respect to
Common Shares which are considered effectively connected with a U.S. trade or
business will be taxed in the same manner as income and gain of U.S.
stockholders instead of as described above, and, in the case of a corporation,
the after-tax amount thereof may also be subject to the "branch profits tax" at
a rate of 30% (or lower treaty rate applicable to the branch profits tax). A
Foreign Shareholder may claim exemption from dividend withholding (but not
FIRPTA withholding) under the effectively connected exception by filing an IRS
Form 4224 with the Company or its paying agent.
Common Stock owned by individuals will be subject to U.S. estate taxes
unless exempted by treaty.
BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and the Service the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the shareholder's income tax liability. In addition, the Company may be required
to withhold a portion of dividends and capital gain distributions to any
shareholders who do not certify under penalties of perjury their nonforeign
status to the Company.
S-33
<PAGE> 36
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters has severally agreed to purchase from the Company, the
respective number of shares set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------------------------------------------------------------------- ------------
<S> <C>
Dean Witter Reynolds Inc...............................................
Alex. Brown & Sons Incorporated........................................
Goldman, Sachs & Co....................................................
NatWest Securities Limited.............................................
Total........................................................
---------
2,500,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 375,000
additional shares of Common Stock to cover over-allotments, if any; except that
if the closing of the shares of Common Stock offered hereby is on or prior to
the record date for the payment of the Company's third quarter cash distribution
to stockholders, and the closing of the sale of the shares of Common Stock
subject to such over-allotment option is after such record date, the price per
share to be paid for such additional shares shall be reduced by the amount of
such cash distribution per share and the amount of such cash distribution shall
be credited to the purchasers of such additional shares from the Underwriters.
If the Underwriters exercise their overallotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 2,500,000 shares of Common
Stock offered.
The Underwriters propose to offer the shares of Common stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriters may be required to make in respect
thereof.
The Company and its officers and directors have agreed that, for a period
of 90 days after the date of this Prospectus Supplement, they will not offer,
sell, contract to sell or otherwise dispose of any securities of the Company
(other than pursuant to employee stock incentive plans, or on the conversion of
exchange of convertible or exchangeable securities) that are substantially
similar to the Common Stock, or which are convertible to exchangeable into
securities which are substantially similar to the Common Stock, without the
prior written consent of the Underwriters.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United States,
its territories or possessions, or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit sale of the Common
Stock offered hereby outside of the United States.
S-34
<PAGE> 37
NatWest Securities Limited has represented and agreed that (i) it has not
offered or sold and will not offer or sell any shares of Common Stock 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 purpose of their businesses or otherwise in circumstances that
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Act 1995 or the
Financial Services Act 1986 (the "Financial Services Act"), (ii) it has complied
and will comply with all applicable provisions of the Financial Services Act
with respect to anything done by it in relation to the shares of Common Stock
in, from or otherwise involving the United Kingdom, and (iii) it has only issued
or passed on, and will only issue or pass on, in the United Kingdom any document
that consists of or any part of listing particulars, supplementary listing
particulars, or any other document required or permitted to be published by
listing rules under Part IV of the Financial Services Act, to a person who is of
a kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.
Each of the Underwriters has from time to time performed various investment
banking services for the Company.
S-35
<PAGE> 38
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1995
PROSPECTUS
LOGO
COMMON STOCK
DEBT SECURITIES
PREFERRED STOCK, DEPOSITARY SHARES
WARRANTS
------------------------
American Health Properties, Inc. (the "Company", which term refers to the
Company and its subsidiaries unless the context otherwise requires) may offer
from time to time (i) shares of Common Stock, par value $.01 per share ("Common
Stock") of the Company, (ii) debt securities ("Debt Securities"), which may be
either senior debt securities ("Senior Securities") or subordinated debt
securities ("Subordinated Securities"), consisting of debentures, notes, bonds
and/or other unsecured evidences of indebtedness in one or more series, which
Debt Securities may (or may not) be convertible into Common Stock, other Debt
Securities, or Preferred Stock, par value $.01 per share ("Preferred Stock") of
the Company or (iii) shares of Preferred Stock in one or more series, which may
(or may not) be convertible into Common Stock, and depositary shares
("Depositary Shares") representing a fractional interest in a share of Preferred
Stock; or (iv) warrants ("Warrants") to purchase Common Stock, Debt Securities,
Preferred Stock or Depositary Shares. The foregoing securities are collectively
referred to as the "Securities." The Securities will be offered at an aggregate
initial offering price not to exceed U.S. $275,000,000, at prices and on terms
to be determined at the time of sale.
The accompanying Prospectus Supplement sets forth with regard to the
particular Securities in respect of which this Prospectus is being delivered (i)
in the case of Common Stock, the number of shares of Common Stock and the terms
of the offering thereof; (ii) in the case of Debt Securities, the title,
aggregate principal amount, whether such Debt Securities are senior or
subordinate, denominations (which may be in United States dollars or in any
other currency, currencies or currency unit), maturity, premium (if any),
interest rate (which may be fixed or variable) or method of calculation thereof,
and time of payment of any interest, place or places where principal of (and
premium, if any) and interest on such Debt Securities will be payable, the
currency or currency unit in which principal, premium (if any) or interest is
payable, any terms for redemption at the option of the Company or the holder of
such Debt Securities, any terms for sinking fund payments, any conversion or
exchange rights, any listing on a securities exchange and the initial public
offering price and any other terms in connection with the offering and sale of
such Debt Securities; (iii) in the case of Preferred Stock and Depositary
Shares, the designation, number of shares, stated value and liquidation
preference per share, initial public offering price, dividend rate (or method of
calculation), dates on which dividends will be payable and dates from which
dividends will accrue, voting rights, any redemption or sinking fund provisions,
any conversion or exchange rights, whether the Company has elected to offer the
Preferred Stock in the form of Depositary Shares, any listing of the Preferred
Stock on a securities exchange, and any other terms in connection with the
offering and sale of such Preferred Stock; and (iv) in the case of Warrants, the
number and terms thereof, the designation and the number of Securities issuable
upon their exercise, the exercise price, any listing of the Warrants or the
underlying Securities on a securities exchange and any other terms in connection
with the offering, sale and exercise of the Warrants. The Prospectus Supplement
will also contain information, as applicable, about material United States
Federal income tax, accounting and other considerations relating to the
Securities in respect of which this Prospectus is being delivered.
The Senior Securities will rank equally with all other unsubordinated and
unsecured indebtedness of the Company. The Subordinated Securities will be
subordinated to all existing and future Senior Indebtedness (as defined herein)
of the Company. If so specified in the accompanying Prospectus Supplement, all
or a portion of any Debt Securities may be issued in permanent global form.
The Company's Common Stock is listed on The New York Stock Exchange, Inc.
(Symbol: "AHE") and its Psychiatric Group Preferred Stock is quoted on the
National Association of Securities Dealers Automated Quotations National Market
(Symbol: "AHEPZ"). Any Common Stock offered hereby or into which the other
Securities offered hereby are convertible will be listed, subject to notice of
issuance, on The New York Stock Exchange, Inc. See "Price Range of Common Stock
and Dividends."
The Company may sell Securities to or through underwriters, and also may
sell Securities directly to other purchasers or through agents. The accompanying
Prospectus Supplement sets forth the names of any underwriters or agents
involved in the sale of the Securities in respect of which this Prospectus is
being delivered, the principal amounts, if any, to be purchased by underwriters
and the compensation, if any, of such underwriters or agents. See "Plan of
Distribution" herein. This Prospectus may not be used to consummate sales of
Securities unless accompanied by a Prospectus Supplement.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL
------------------------
The date of this Prospectus is September , 1995
<PAGE> 39
No person is authorized to give any information or to make any
representations not contained or incorporated by reference in this Prospectus or
in the accompanying Prospectus Supplement, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any underwriter, agent or dealer. This Prospectus and the
accompanying Prospectus Supplement do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities in
respect of which this Prospectus and the accompanying Prospectus Supplement is
delivered or an offer of any securities in any jurisdiction to any person when
such an offer would be unlawful.
The delivery of this Prospectus together with a Prospectus Supplement
relating to particular Securities shall not constitute an offer in any
jurisdiction of any of the other Securities covered by this Prospectus.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Offices located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can be obtained at prescribed notes from the Public
Reference Section of the Commission, 450 Fifth Street, N.W. Plaza, Washington,
D.C. 20549. Such reports and proxy statements can also be inspected at the
offices of The New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005 and at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006. In addition, the Company
electronically files its reports, proxy statements and other information with
the Commission utilizing the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system, and copies of such material can be obtained electronically
through EDGAR and numerous commercial sources.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and
reference is hereby made to the Registration Statement and the exhibits thereto
for further information with respect to the Company and the Securities.
Statements contained in this Prospectus as to the contents of certain documents
are not necessarily complete, and, with respect to each such document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission,
reference is made to the copy of the document so filed. Each statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1994.
2. Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1995.
3. Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1995.
4. Current Report on Form 8-K, dated August 14, 1995.
5. Current Report on Form 8-K, dated September 22, 1995.
6. All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the offering of
the Securities shall be deemed to be incorporated herein by reference
and to be a part of this Prospectus from the date of filing of each such
document.
2
<PAGE> 40
Any statement contained herein or in a document all or a portion of which
is incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document that
also is or is deemed to be incorporated by reference herein or in the Prospectus
Supplement modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will furnish without charge to each person, including any
beneficial owner of Securities, to whom this Prospectus is delivered, upon the
request of such person, a copy of any of the documents incorporated by reference
herein, except for the exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
directed to 6400 South Fiddler's Green Circle, Suite 1800, Englewood, Colorado
80111 (telephone (303) 796-9793), Attention: Secretary.
3
<PAGE> 41
The following information is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
incorporated herein by reference. Certain capitalized terms used herein are
defined in the Glossary.
THE COMPANY
American Health Properties, Inc. (together with its subsidiaries, the
"Company") is a self-administered real estate investment trust ("REIT") that
commenced operations in 1987. The Company has investments in health care
facilities that are operated by qualified third party health care providers, as
well as one medical office building.
As of June 30, 1995, the Company's core portfolio of investments (the "Core
Group") consisted of 15 acute care hospitals, three physical rehabilitation
hospitals, two long-term care facilities, one Alzheimer's care facility
currently under construction and one medical office building. At that date, the
net book value of the Core Group's assets was $544 million. Of the Core Group's
real estate assets at that date, 90% in net book value represented the acute
care segment, 6% represented the rehabilitation segment, 2% represented the
long-term care segment, including the Alzheimer's care facility, and 2%
represented the medical office building. As of June 30, 1995, 95% in net book
value of the Core Group's real estate assets were held in fee and 5% were held
as construction and/or mortgage financing.
As of June 30, 1995, the Core Group's facilities were diversified
geographically across 12 states, were distributed among large and small
population centers, and were operated by ten experienced management companies.
These operators included Columbia/HCA Healthcare Corporation, Dynamic Health,
Inc., Horizon/CMS Healthcare Corporation (formerly Continental Medical Systems,
Inc.), HealthSouth Corporation, Paracelsus Healthcare Corporation, Quorum Health
Group, Inc., Signature Health Care Corporation and Tenet Healthcare Corporation
("Tenet", formerly American Medical International, Inc.). Facilities operated by
Tenet represented 55% of the Core Group's revenues for the six months ended June
30, 1995.
Approximately 83% of the Core Group's property revenues for the six months
ended June 30, 1995 were secured by corporate guarantees of these operating
companies or their subsidiaries. Also, as of June 30, 1995, letters of credit
from commercial banks and cash deposits aggregating $13 million were available
to the Core Group as security for lease financings. Leases for nine of the Core
Group's facilities, representing 80% of the Core Group's property revenues for
the six months ended June 30, 1995, contain cross-default provisions. All of the
Company's leases are on a triple "net" basis, and the lessees are responsible
thereunder, in addition to the base and additional rents, for all additional
charges with respect to the leased properties.
The Company's portfolio of psychiatric hospital investments (the
"Psychiatric Group") consists of three psychiatric hospitals owned by the
Company and two mortgage loans secured by psychiatric hospitals. As of June 30,
1995, the net book value of the Psychiatric Group assets was $64.9 million. Of
the Psychiatric Group's real estate assets at that date, 36% in net book value
were held in fee and 64% in net book value were held as mortgages.
The operators of the Company's facilities derive a substantial percentage
of their total revenues from federal and state health care programs such as
Medicare and Medicaid and from other third party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators are also subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third party payors or
an operator's failure to maintain its certification under the Medicare or
Medicaid programs could adversely affect revenues to the Company's facilities.
The Company's principal executive office is located at 6400 South Fiddler's
Green Circle, Suite 1800, Englewood, Colorado 80111, and its telephone number at
such address is (303) 796-9793.
4
<PAGE> 42
RECENT DEVELOPMENTS
CORE GROUP
Additional Investments. In August 1995, the Company entered into agreements
to provide $16.6 million of financing for three 80-unit assisted living
facilities to be constructed in Walla Walla, Washington, El Paso, Texas and
Odessa, Texas. The Company is providing construction financing and will purchase
the facilities upon completion. Construction of the facilities has commenced and
will take approximately ten months to complete. In addition, in September 1995
the Company purchased for $3.0 million an assisted living facility located in
Boise, Idaho containing 50 assisted living units. Each of these four facilities
will be leased to and operated by Emeritus Corporation (formerly Assisted Living
of America) of Seattle, Washington ("Emeritus") pursuant to ten-year operating
leases, each of which will contain cross-default provisions. Emeritus is one of
the national leaders in the emerging assisted living facility industry and is
managed by executives with substantial experience in managing multiple facility
long-term care operations.
Also in August 1995, the Company completed a $7.6 million purchase of two
long-term care facilities containing a total of 192 skilled nursing beds and 124
living units, located in Safford and Douglas, Arizona. The Company has leased
the facilities to affiliates of Signature Health Care Corporation ("Signature")
of Denver, Colorado. Signature operates 11 nursing homes in Colorado and
Arizona, including two facilities in Denver, Colorado that are leased from the
Company. The leases for all of the four long-term care facilities leased by
Signature from the Company contain cross-default provisions.
PSYCHIATRIC GROUP
Distribution of Psychiatric Group Stock
In July, 1995 the Company created a new series of preferred stock
designated as Psychiatric Group Preferred Stock ("Psychiatric Group Stock") and
made a distribution (the "Distribution") of one Depositary Share for every ten
shares of Common Stock held of record on July 14, 1995, each such Depositary
Share representing a one-tenth interest in one share of Psychiatric Group Stock.
By way of the issuance of the Psychiatric Group Stock, the Company sought to
separate the economic attributes of the Psychiatric Group and the Core Group
into two distinct portfolios, with two distinct classes of publicly traded
shares intended to represent those portfolios. The assets, liabilities and
expenses of the Company have been allocated between the two portfolios. In
addition to consolidated financial statements, the Company publishes separate
financial statements for each Group. Dividends and other payouts or
distributions with respect to the Common Stock and Psychiatric Group Stock are
expected to be a function of the individual financial performance of the Core
Group and the Psychiatric Group, respectively. See "Management and Accounting
Policies" and "Description of Common Stock and Psychiatric Group Stock."
The Securities offered through delivery of this Prospectus and the
accompanying Prospectus Supplement do not include Psychiatric Group Stock. The
Company does not intend to issue additional Psychiatric Group Stock except upon
exercise of options granted in connection with the initial issuance of
Psychiatric Group Stock.
Consolidated Capital Structure. The outstanding Common Stock and
Psychiatric Group Stock are part of the consolidated capital structure of the
Company. Notwithstanding the allocation of assets and liabilities (including
contingent liabilities), stockholders' equity and items of income, expense and
cash flow between the Core Group and the Psychiatric Group for purposes of
preparing their respective financial statements, the change in the capital
structure of the Company effected by the issuance of the Psychiatric Group Stock
does not affect the respective legal title to assets or responsibility for
liabilities of the Company or any of its subsidiaries. The issuance of
Psychiatric Group Stock does not affect the rights of creditors of the Company
or any subsidiary, including rights under financing covenants. Each holder of
the Company's Common Stock is a holder of an issue of capital stock of the
entire Company and is subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. For example, if the
cash flow and proceeds of any sales of assets of the Psychiatric Group should be
insufficient to service inter-Group loans or other debt owed by the Psychiatric
Group, the Core Group would be adversely affected.
5
<PAGE> 43
Financial effects arising from the Psychiatric Group that affect the
Company's consolidated results of operations, financial condition or borrowing
costs could adversely affect the results of operations, financial condition or
borrowing costs of the Core Group or the market price of the Common Stock. In
addition, net losses of the Psychiatric Group, as well as dividends and
distributions on, and repurchases of, Psychiatric Group Stock will reduce the
funds of the Company legally available for dividends on the Common Stock.
Potential Conflicts of Interest. The issuance of Psychiatric Group Stock
could give rise to occasions when the interests of the holders of Common Stock
and the holders of Psychiatric Group Stock might diverge or appear to diverge.
Examples include determinations by the Company's Board of Directors (the
"Board") and, in certain circumstances, the management of the Company to (i) pay
or omit the payment of dividends on Common Stock or Psychiatric Group Stock,
(ii) allocate consideration to be received in connection with a merger or
consolidation involving the Company among holders of Common Stock and
Psychiatric Group Stock, (iii) advance or repay inter-Group loans, (iv) redeem
Psychiatric Group Stock or exchange it for Common Stock, (v) approve
dispositions of assets of either of the Groups and (vi) make other operational
and financial decisions with respect to one Group that could be considered to be
detrimental to the other Group. When making decisions with regard to matters
that create potential conflicts of interest, the Board will act in accordance
with the terms of the Company's Certificate of Incorporation, management and
accounting policies as described in "Management and Accounting Policies" and its
fiduciary duties under Delaware law. The Company's management is responsible for
both the Core Group and the Psychiatric Group and consequently could make
management decisions with respect to one Group that could be considered
detrimental to the other.
Inter-Group Loans. If the Psychiatric Group is unable to repay any
inter-Group loans owed to the Core Group, the Core Group would be adversely
impacted. For this and other reasons, the Board has established policies
relating to the amount of inter-Group loans and required repayments thereof. See
"Management and Accounting Policies."
Stockholder Voting Rights. Subject to certain limited exceptions, eligible
holders of Common Stock, Psychiatric Group Stock and any other series of
Preferred Stock outstanding vote as one class on all matters coming before any
meeting of stockholders. Holders of Common Stock and Psychiatric Group Stock do
not have any right to vote on matters as a separate class (except pursuant to
certain limited class voting rights provided under Delaware law and, in limited
circumstances, in connection with a merger or consolidation of the Company with
or into another company). Similarly, separate meetings for the holders of Common
Stock or Psychiatric Group Stock are not held.
Certain matters as to which the holders of Common Stock and Psychiatric
Group Stock are entitled to vote may involve a divergence or the appearance of a
divergence of the interests of holders of Common Stock and Psychiatric Group
Stock. See "-- Potential Conflicts of Interest" and "Description of Common Stock
and Psychiatric Group Stock -- Voting Rights."
Management and Accounting Policies Subject to Change. The Board has
adopted certain management and accounting policies described herein with respect
to inter-Group loans, cash management, corporate expenses, allocation of assets
and liabilities (including contingent liabilities) and inter-Group transactions,
any and all of which could be modified or rescinded in the sole discretion of
the Board without the approval of stockholders, although there is no present
intention to do so. The Board could also adopt additional policies depending
upon the circumstances. Any determination by the Board to modify or rescind such
policies, or to adopt additional policies, including any such decision that
could have disparate effects upon holders of Common Stock and Psychiatric Group
Stock, will be made by the Board in good faith and in the honest belief that
such decision is in the best interests of the Company's stockholders, including
holders of Common Stock and Psychiatric Group Stock. In addition, generally
accepted accounting principles would require that changes in accounting
principles must be preferable (in accordance with generally accepted accounting
principles) to the principles previously in place. See "Management and
Accounting Policies."
Financial Covenants. Financial covenants in the Company's various debt
agreements require the Company to maintain on a consolidated basis certain
financial ratios, including (i) a minimum tangible net worth of $260 million
plus 75% of certain equity proceeds and (ii) a fixed charge coverage ratio (the
"Coverage Ratio") of at least 1.85 to 1. For the purposes of such debt
agreements, the Coverage Ratio is
6
<PAGE> 44
defined as the ratio of (a) net income before income taxes, less cash tax
expense, extraordinary income and gains from asset dispositions, plus
depreciation and amortization, interest expense, extraordinary losses and losses
from asset dispositions, to (b) interest expense and scheduled payments of debt.
Such debt agreements also limit the amount of outstanding indebtedness, and
certain other financings, including the issuance of Preferred Stock, of the
Company, and require that specified ratios of liabilities to tangible net worth
and asset values be maintained on a consolidated basis. Such debt covenants
further limit the payment of dividends and other distributions to stockholders,
including making funds available to stockholders through the purchase,
redemption or retirement of capital stock. This restriction on dividends and
other distributions applies to both the Common Stock and the Psychiatric Group
Stock and, in general, limits such payments to 95% of consolidated cash flow
available for debt service, less interest expense, plus gains on asset
dispositions and plus certain proceeds ("PG Excess Proceeds") from the
disposition of Psychiatric Group assets after the repayment of Psychiatric Group
indebtedness. Dividends or other distributions paid out of PG Excess Proceeds
are available only for the Psychiatric Group Stock and are limited to $30
million in the aggregate and $15 million in any calendar year. These covenants
in various debt agreements may limit the financial flexibility of the Company as
well as its ability to pay dividends, or otherwise make funds available to
stockholders (for example through redemptions or repurchases of stock), in the
future. However, dividends or other distributions that are payable in the form
of stock are generally not restricted. In addition, if the Company borrows
additional funds in the future, or refinances existing debt obligations, it is
expected that the Company will agree to financial covenants that could be more
or less restrictive than those referred to above. For additional information on
the Company's debt and the provisions of its debt agreements, see the notes to
the Company's consolidated financial statements, as well as the corresponding
notes to the financial statements of the Core Group and the Psychiatric Group,
incorporated herein by reference.
Retention of Financial Advisor
The Company has retained the New York based investment banking firm of
Benedetto, Gartland & Greene, Inc. for an initial one year period to provide a
broad range of financial advisory services to the Psychiatric Group investment
portfolio. Their services are expected to include supplemental monitoring of the
performance of individual assets, assistance in potential sales or
restructurings of particular investments and continuing assessments of available
strategic alternatives for the portfolio. The Company expects the services
provided by Benedetto, Gartland & Green will enable the Company's management to
focus more of its time on growing and expanding the Company's Core Group
portfolio.
Recent Inquiries
The Company has recently received information from the operator of its two
psychiatric hospitals in Florida regarding wide-ranging objections by several
large insurance companies and other payors with respect to claims presented for
services rendered. There have also been a series of negative stories in the
national media and the local press in Florida on psychiatric care provided in
Florida, including criticism of admissions policies and practice patterns at
psychiatric hospitals in the State generally, and at these two facilities. There
have been legislative hearings in Florida on these issues, and the Company
believes that regulatory investigations are being conducted. At this time both
of these facilities remain current on their rent and interest obligations to the
Company, and the Company is continuing to monitor this situation closely.
OTHER DEVELOPMENTS
In September 1995, the Company's Board of Directors elected Michael J.
McGee as Treasurer of the Company, filling a vacancy created by the resignation
in August 1995 of Victor C. Streufert, who was the Chief Financial Officer of
the Company. Mr. McGee is also the Vice President, Controller and Assistant
Secretary of the Company and has been employed by the Company since November
1989. Prior to joining the Company, Mr. McGee was an accountant with Arthur
Andersen LLP for eleven years. In addition, in September 1995 Geoffrey D. Lewis
resigned as the Senior Vice President, General Counsel and Secretary of the
Company. The Company intends to fill this position as soon as practicable and in
the interim will rely on outside counsel to assist with legal matters.
7
<PAGE> 45
MANAGEMENT AND ACCOUNTING POLICIES
The Company prepares financial statements in accordance with generally
accepted accounting principles, consistently applied, for both of the Groups,
and these financial statements, taken together, comprise all of the accounts
included in the corresponding consolidated financial statements of the Company.
The financial statements of each Group principally reflect the investments
included therein. Such Group financial statements also include allocated
portions of the Company's corporate assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow
that are not separately identified with the operations of the other Group.
Notwithstanding such allocations for the purpose of preparing Group financial
statements, each holder of Common Stock or Psychiatric Group Stock is a holder
of an issue of capital stock of the entire Company and is subject to risks
associated with an investment in the entire Company and all of its businesses,
assets and liabilities. See "Recent Developments -- Distribution of Psychiatric
Group Stock -- Consolidated Capital Structure."
Cash management and allocation of principal corporate activities between
the Psychiatric Group and the Core Group are based upon methods that management
believes to be reasonable and are reflected in their respective Group financial
statements. The following is a summary of certain policies adopted by the Board
and relating to these matters, as in effect as of the date of this Prospectus.
(i) Cash needs of the Psychiatric Group in excess of cash held by the
Psychiatric Group may, at the option of the Board, be funded by advances
from the Core Group to the Psychiatric Group constituting additional
revolving inter-Group loans, but the aggregate revolving inter-Group loans
owed by the Psychiatric Group to the Core Group are limited to a maximum of
$8,750,000 at any one time outstanding, subject to reduction of such limit
commensurate with any permanent repayment in the future of working capital
loans extended to certain psychiatric hospital operators, but in no event
will such limit be reduced below $5,000,000.
(ii) Except as permitted by (i) above, no additional fixed rate or
other inter-Group loans will be advanced by the Core Group to the
Psychiatric Group.
(iii) All third party debt incurred by the Company and its
subsidiaries is specifically attributed to and reflected on the financial
statements of the Core Group except for debt that is non-recourse to the
assets of the Core Group.
(iv) All Common Stock and any other class or series of stock of the
Company other than the Psychiatric Group Stock, as well as the net proceeds
of any future issuances thereof, are specifically attributed to and
reflected on the financial statements of the Core Group.
(v) If the Psychiatric Group sells any assets out of the ordinary
course ("Psychiatric Group Asset Sales"), the Net Proceeds from Psychiatric
Group Asset Sales will be applied, first, to repay revolving inter-Group
loans owed by the Psychiatric Group to the Core Group to the extent of the
psychiatric hospital operator working capital loans associated with the
asset or assets sold, second, to repay fixed rate inter-Group loans owed by
the Psychiatric Group to the Core Group (until repaid in full), and third,
to repay other revolving inter-Group loans owed by the Psychiatric Group to
the Core Group (until repaid in full), before any remaining Net Proceeds
from Psychiatric Group Asset Sales may be used to make distributions to
holders of Psychiatric Group Stock as described under "Price Range of
Common Stock and Dividends."
(vi) Excess cash held by the Psychiatric Group (other than Net
Proceeds from Psychiatric Group Asset Sales, which is treated as described
in (v) above) is applied to reduce revolving inter-Group loans owed by the
Psychiatric Group to the Core Group (until repaid in full), subject to the
ability of the Psychiatric Group, at the option of the Board, to re-borrow
cash from the Core Group up to the limitations described in (i) above to
cover future cash needs of the Psychiatric Group (including, without
limitation, to fund dividends in a manner consistent with the dividend
policy then applicable to the Psychiatric Group Stock).
8
<PAGE> 46
(vii) Fixed rate inter-Group loans owed by the Psychiatric Group to
the Core Group (a) bear interest at a fixed rate of approximately 13% per
annum (which is equal to the weighted average interest rate on the
Company's fixed rate senior debt at December 31, 1994, plus 2%) and (b) are
prepayable without premium at any time, at the option of the Board. The
higher interest rate charged to the Psychiatric Group reflects management's
belief that the consolidated Company is a stronger credit than the
Psychiatric Group on a stand alone basis.
(viii) Revolving inter-Group loans owed by the Psychiatric Group to
the Core Group (a) bear interest at a floating rate equal from time to time
to the prevailing prime rate (as determined by the Board, whose
determination shall be conclusive) plus 2% and (b) are prepayable without
premium at any time, at the option of the Board. The higher interest rate
charged to the Psychiatric Group reflects management's belief that the
consolidated Company is a stronger credit than the Psychiatric Group on a
stand alone basis.
(ix) Cash held by the Psychiatric Group in excess of inter-Group loans
owed by the Psychiatric Group required to be repaid as set forth in (v) and
(vi) above may, at the option of the Board, be advanced to the Core Group
as revolving inter-Group loans (to the extent such cash can be beneficially
put to use by the Core Group) or otherwise invested on behalf of the
Psychiatric Group.
(x) Revolving inter-Group loans owed by the Core Group to the
Psychiatric Group (a) bear interest at a floating rate equal from time to
time to the weighted average interest rate borne by the Company's revolving
debt (or, for periods in which there is no such revolving debt outstanding,
the interest rate at which the Company could borrow on a revolving basis,
as determined by the Board, whose determination shall be conclusive) and
(b) are prepayable without premium at any time, at the option of the Board.
The interest rate charged to the Core Group reflects management's belief
that the consolidated Company and the Core Group, on a stand alone basis,
are comparable credits.
(xi) As a result of the foregoing, the balance sheet of the Core Group
reflects its net revolving and net fixed rate inter-Group loans to or
borrowings from the Psychiatric Group, and the balance sheet of the
Psychiatric Group reflects its net revolving and net fixed rate inter-Group
loans to or borrowings from the Core Group. Similarly, the respective
income statements of the Core Group and the Psychiatric Group reflect
interest income or expense, as the case may be, associated with such loans
or borrowings and the respective statements of cash flows of the Core Group
and the Psychiatric Group reflect changes in the amounts thereof deemed
outstanding.
(xii) Corporate, general and administrative costs that cannot be
directly allocated to either Group are allocated between the Core Group and
the Psychiatric Group on the basis of their respective contributions to
revenue, provided that at no time will such expenses allocated to either
Group be less than $250,000 per annum.
Nothing in the foregoing policies obligates the Board to cause the Core
Group to provide funds to the Psychiatric Group if the Board determines it is in
the best interests of the Company not to do so. The foregoing policies may be
modified or rescinded in the sole discretion of the Board without the approval
of stockholders, although there is no present intention to do so. The Board
could also adopt additional policies depending upon the circumstances. Any
determination by the Board to modify or rescind such policies, or to adopt
additional policies, including any such decision that could have disparate
effects upon holders of Common Stock and Psychiatric Group Stock, would be made
by the Board in the good faith belief that such decision is in the best
interests of the Company and its stockholders, including the holders of Common
Stock and Psychiatric Group Stock. In addition, generally accepted accounting
principles would require that changes in accounting principles must be
preferable (in accordance with generally accepted accounting principles) to the
principles previously in place.
9
<PAGE> 47
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is listed on The New York Stock Exchange, Inc.
(the "NYSE") under the symbol "AHE." The following table sets forth, for the
periods shown, the range of high and low sales prices of the Common Stock on the
NYSE and the cash dividends declared on the Common Stock.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
--- --- ------
<S> <C> <C> <C>
1993
First quarter....................................... $25 5/8 $18 7/8 $.5550
Second quarter...................................... 26 3/4 23 .5600
Third quarter....................................... 28 3/4 24 3/8 .5650
Fourth quarter...................................... 29 24 1/2 .5700
1994
First quarter....................................... $27 1/4 $24 5/8 $.5750
Second quarter...................................... 27 24 .5750
Third quarter....................................... 24 5/8 22 .5750
Fourth quarter...................................... 23 3/8 18 1/2 .5750
1995
First quarter....................................... $22 1/8 $19 3/8 $.5750
Second quarter (1).................................. 22 1/8 19 5/8 .4950
Third quarter (through September 25, 1995) (2)...... 22 3/8 20 1/2
</TABLE>
- ---------------
(1) On July 25, 1995, the Company made a distribution of one Depositary Share
for every ten shares of Common Stock held of record on July 14, 1995, each
such Depositary Share representing a one-tenth interest in one share of
Psychiatric Group Stock. On July 11, 1995, the Company declared dividends
totalling $.5750 for the second quarter of 1995, comprised of a dividend of
$.4950 to be paid on the Common Stock and a dividend of $.08 to be paid on
each one-hundredth of a share of Psychiatric Group Stock, which is
equivalent to $.80 per Depositary Share.
(2) The high and low sales prices of the Common Stock for the periods subsequent
to July 25, 1995 reflect the value of the Common Stock after the
Distribution.
If shares of Common Stock, or Securities convertible or exercisable for
Common Stock, are being offered, a recent last sale price of the Common Stock
will be set forth on the cover page of the accompanying Prospectus Supplement.
The Company expects to declare quarterly dividends on the Common Stock and
the Psychiatric Group Stock in the future based primarily upon the Funds From
Operations attributable to the Core Group and the Psychiatric Group,
respectively. Specifically, the Company expects to maintain the Common Stock
dividend payout ratio at less than 90% of annual Funds From Operations
attributable to the Core Group and the Psychiatric Group Stock dividend payout
ratio (excluding distributions out of asset sale proceeds) at less than 95% of
annual Funds From Operations attributable to the Psychiatric Group.
In addition, the Company expects to use the Net Proceeds from Psychiatric
Group Asset Sales initially to repay then outstanding inter-Group loans or other
debt owed by the Psychiatric Group and then to distribute all remaining net
proceeds, if any, to holders of Psychiatric Group Stock by dividend, tender
offer, open market or privately negotiated repurchases or otherwise (in cash, or
in Common Stock valued at a ten Trading Day average Market Value prior to the
time of the distribution).
The payment of dividends on the Common Stock and Psychiatric Group Stock
will also be dependent in part upon the financial condition of the Company as a
whole.
The Company expects the aggregate annual dividends paid on the Common Stock
and the Psychiatric Group Stock to be at least sufficient to cause the Company
to maintain its status as a REIT. In order to permit the Company to qualify as a
REIT, the Company must distribute to stockholders at least 95% of its
10
<PAGE> 48
annual REIT taxable income (which essentially is its net ordinary income,
excluding capital gains). Generally, as a result of non-cash items, primarily
depreciation, cash dividends have exceeded and may continue to exceed the
Company's REIT taxable income and to that extent represent a return of capital.
Dividends on the Common Stock and Psychiatric Group Stock will be limited
to the Available Dividend Amount attributable to the Core Group and the
Psychiatric Group, respectively. The Available Dividend Amount is similar to the
amount that would be legally available under Delaware law for the payment of
dividends by the Core Group or the Psychiatric Group, as the case may be, if
such Group were a separate Delaware corporation. There can be no assurance that
there will be an Available Dividend Amount with respect to either Group. As of
June 30, 1995, the Available Dividend Amount attributable to the Core Group and
the Psychiatric Group as of that date was at least $254.7 million and $48.0
million, respectively. All dividends on Common Stock will be deemed to be out of
the Core Group's funds and all dividends on Psychiatric Group Stock will be
deemed to be out of the Psychiatric Group's funds.
Dividends on the Common Stock and the Psychiatric Group Stock will be
further limited to the amount of funds of the Company legally available under
Delaware law for the payment of dividends by the Company on its capital stock.
As of June 30, 1995, the funds of the Company legally available for the payment
of dividends would have been at least $302.7 million. Payments of dividends on
either the Common Stock or the Psychiatric Group Stock will decrease the amount
of funds legally available for the payment of dividends on both the Common Stock
and the Psychiatric Group Stock.
USE OF PROCEEDS
Except as otherwise described in the accompanying Prospectus Supplement,
the net proceeds from the sale of Securities will be used for general corporate
purposes, which may include working capital, acquisitions, investments,
refinancings of indebtedness, capital expenditures, and repurchases and
redemptions of securities.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of
the Company for the periods indicated. For purposes of calculating such ratio,
"earnings" includes income before income taxes and fixed charges. "Fixed
charges" consists of interest on all indebtedness and that portion of rental
expense that management believes to be representative of interest. The Company
did not have any Preferred Stock outstanding for any period presented.
Accordingly, the ratio of earnings to combined fixed charges and preferred stock
dividends is identical to the ratio of earnings to fixed charges for the periods
presented. Because dividends payable on the Psychiatric Group Stock are not
fixed, dividends paid on the Psychiatric Group Stock will not be included in any
future presentations of the ratio of earnings to combined fixed charges and
preferred stock dividends.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -------------------------------------------
JUNE 30, 1995 1994 1993 1992 1991 1990
---------------- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated ratio of earnings to
fixed charges (unaudited)......... 2.39 1.33(a) 2.81 (b) 2.09 2.31
</TABLE>
- ---------------
(a) Decrease in ratio was primarily due to a $30 million write-down of
Psychiatric Group real estate investments.
(b) Earnings did not cover fixed charges by $7.2 million primarily due to a $45
million write-down of Psychiatric Group real estate investments.
The Coverage Ratios as defined in the Company's debt agreements for the six
months ended June 30, 1995 and the years ended 1994, 1993, 1992, 1991 and 1990
were 2.96, 3.09, 2.58, 2.29, 2.48 and 2.73, respectively. See "Recent
Developments -- Distribution of Psychiatric Group Stock -- Financial Covenants."
11
<PAGE> 49
DESCRIPTION OF COMMON STOCK AND PSYCHIATRIC GROUP STOCK
The following description is intended as a summary of the principal
provisions of, and is qualified in all respects by reference to, (a) the
Company's Certificate of Incorporation and Bylaws previously filed with the
Securities and Exchange Commission and (b) the Certificate of Designations
specifying the terms of the Psychiatric Group Stock, filed as Exhibit 4.1 to the
Current Report on Form 8-K, dated August 14, 1995, incorporated by reference
herein.
GENERAL
The Certificate of Incorporation of the Company provides that the Company
is authorized to issue 100,000,000 shares of Common Stock, par value $0.01 per
share, and 1,000,000 shares of Preferred Stock, par value $0.01 per share,
issuable in series by the Board. As of July 31, 1995, the Company had issued and
outstanding 20,865,539 shares of Common Stock. As of July 31, 1995, the Company
had outstanding approximately 209,000 shares of Psychiatric Group Stock, which
constitute a separate series of Preferred Stock, issued and outstanding. Such
shares are the only shares of Psychiatric Group Stock authorized by the Board to
be issued, except shares of Psychiatric Group Stock issuable upon exercise of
options granted in connection with the Distribution. In addition, the Company
has authorized the issuance of approximately 232,000 Series A Preferred Shares.
See " -- Preferred Stock Purchase Rights Plan."
The authorized but unissued shares of Common Stock of the Company will be
available for issuance from time to time by the Company at the sole discretion
of the Board for any proper corporate purpose, which could include raising
capital, providing compensation or benefits to employees, paying stock dividends
or acquiring companies or businesses. Under applicable Delaware law, such future
issuances of Common Stock would not require further approval of stockholders,
and the Company would not seek approval of stockholders unless such approval
would be required by stock exchange regulations, would be in conjunction with a
further amendment to the Certificate of Incorporation or would otherwise be
deemed advisable by the Board.
Each holder of Common Stock will be a holder of an issue of capital stock
of the entire Company and will be subject to the risks associated with an
investment in the Company and all of its businesses, assets and liabilities. For
example, if the cash flow and proceeds of any sales of assets of the Psychiatric
Group should be insufficient to service inter-Group loans or other debt owed by
the Psychiatric Group, the Core Group would be adversely affected.
The Common Stock trades on The New York Stock Exchange, Inc. under the
symbol "AHE" and the Psychiatric Group Stock is quoted on the National
Association of Securities Dealers Automated Quotations National Market under the
symbol "AHEPZ."
DIVIDENDS
Subject to the rights, if any, of holders of any other Preferred Stock
dividends may be paid on the Common Stock and/or the Psychiatric Group Stock in
equal or unequal amounts, when, as and if declared by the Board. Dividends on
the Common Stock and Psychiatric Group Stock will be limited to the Available
Dividend Amount attributable to the Core Group and the Psychiatric Group,
respectively. As of June 30, 1995, the Available Dividend Amount attributable to
the Core Group and the Psychiatric Group as of that date was at least $254.7
million and $48.0 million, respectively. The Available Dividend Amount is
similar to the amount that would be legally available under Delaware law for the
payment of dividends by the Core Group or Psychiatric Group, as the case may be,
if such Group were a separate Delaware corporation. There can be no assurance
that there will be an Available Dividend Amount with respect to either Group.
Dividends on the Common Stock and the Psychiatric Group Stock will be
further limited to the amount of funds of the Company legally available under
Delaware law for the payment of dividends by the Company on its capital stock.
As of June 30, 1995, the funds of the Company legally available for the payment
of dividends would have been at least $302.7 million. Payments of dividends on
either the Common Stock or the Psychiatric Group Stock will decrease the amount
of funds legally available for the payment of dividends on both the Common Stock
and the Psychiatric Group Stock.
See "Recent Developments -- Distribution of Psychiatric Group
Stock -- Financial Covenants."
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EXCHANGE AND REDEMPTION
Common Stock. The Certificate of Incorporation does not provide for either
mandatory or optional conversion, exchange or redemption rights relating to
outstanding shares of Common Stock.
Psychiatric Group Stock. The Company may, at any time commencing one year
after the date of the Distribution and in its sole discretion, redeem all
outstanding shares of Psychiatric Group Stock for cash in an amount, or in
exchange for newly issued shares of Common Stock having an aggregate value
(based on the average Market Value for the ten consecutive Trading Days ending
on the last Trading Day prior to the date on which notice of such exchange is
mailed to holders of Psychiatric Group Stock), equal to 115% of the average
Market Value during such ten Trading Day period of the shares of Psychiatric
Group Stock being redeemed; provided, however, that in connection with the sale
of all or substantially all of the assets of the Psychiatric Group the Company
may at any time after the date of the Distribution redeem all outstanding shares
of Psychiatric Group Stock for cash or in exchange for newly issued shares of
Common Stock having an aggregate value (based on the average Market Value for
the ten consecutive Trading Days ending on the last Trading Day prior to the
date on which notice of such exchange is mailed to holders of Psychiatric Group
Stock), equal to 105% of the average Market Value during such ten Trading Day
period of the shares of Psychiatric Group Stock being redeemed.
If at any time commencing one year after the date of the Distribution, the
Fair Market Value of the assets (other than cash, deposits and readily
marketable securities) of the Psychiatric Group (as determined by the Board,
whose determination shall be conclusive) is less than $10,000,000, the Company
may, in its sole discretion, redeem all outstanding shares of Psychiatric Group
Stock for cash in an amount, or in exchange for newly issued shares of Common
Stock having an aggregate value (based on the average Market Value for the ten
consecutive Trading Days ending on the last Trading Day prior to the date on
which notice of such exchange is mailed to holders of Psychiatric Group Stock),
equal to 105% of the Net Fair Market Value of the Psychiatric Group (as
determined by the Board, whose determination shall be conclusive).
VOTING RIGHTS
Holders of Common Stock are entitled to one vote per share and vote as one
class with the holders of Psychiatric Group Stock (together with any other
series of Preferred Stock outstanding at the time of such vote and so entitled
to vote) on all matters submitted to stockholders, other than matters which
would be required by law or the Company's Certificate of Incorporation to be
submitted to a separate class vote.
Holders of Psychiatric Group Stock are entitled to a variable number of
votes per share equal to the ratio (calculated to the nearest three decimal
places) of the average Market Value of one share of Psychiatric Group Stock to
one share of Common Stock for the ten consecutive Trading Days ending on the
last Trading Day prior to the applicable record date, and could have more than,
less than or exactly one vote per share. This formula is intended to equate the
proportionate voting rights of the Common Stock and Psychiatric Group Stock to
their respective Market Values at the time of any vote. Holders of Psychiatric
Group Stock vote as one class with holders of Common Stock (together with any
other series of Preferred Stock outstanding at the time of such vote and so
entitled to vote) on all matters submitted to stockholders, other than matters
which would be required by law or the Company's Certificate of Incorporation to
be submitted to a separate class vote. Each holder of Depositary Shares
representing interests in Psychiatric Group Stock is, through the depositary
share arrangements relating thereto, entitled to a number of votes per
Depositary Share equal to one-tenth the number of votes to which a holder of one
share of Psychiatric Group Stock is entitled.
No class vote of holders of Psychiatric Group Stock is required upon a
merger or consolidation if (a) the Psychiatric Group Stock remains outstanding
and unchanged as a result of the merger or consolidation, (b) the type and
amount of consideration for such merger or consolidation is divided between
holders of Psychiatric Group Stock and holders of Common Stock in a manner
determined to be fair by the Board (whose determination shall be conclusive) or
(c) the Psychiatric Group Stock is converted into capital stock of the surviving
company to the merger or consolidation having terms substantially similar to the
terms of the Psychiatric Group Stock. A class vote of the holders of a majority
of the outstanding shares of Psychiatric Group Stock is required for any other
merger or consolidation.
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<PAGE> 51
Provisions of the Company's Certificate of Incorporation require that any
action permitted or required to be taken by the stockholders must be effected at
a duly called annual or special meeting; stockholders cannot take any action by
written consent of the stockholders. Special meetings of the stockholders may be
called only by a majority of the Board, by the Chairman of the Board or by the
President and may not be called by the stockholders.
Neither the holders of Common Stock nor the holders of Psychiatric Group
Stock have any cumulative voting rights or any preemptive rights to subscribe
for or purchase additional shares of capital stock or any other obligations
convertible into or exercisable for shares of capital stock that may hereafter
be issued by the Company.
LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Company, holders of Common Stock and Psychiatric Group Stock
are entitled to receive their respective proportionate interests in the net
assets of the Company, if any, remaining for distribution to holders of stock
(after payment or provision for all liabilities, including contingent
liabilities, of the Company and payment of the liquidation preference payable to
holders of any other series of Preferred Stock ranking senior to the Psychiatric
Group Stock as to distributions upon liquidation) pro rata based upon the
average Market Value of the Common Stock as compared to the average Market Value
of the Psychiatric Group Stock, in each case for the ten consecutive Trading
Days ending on the Trading Day prior to the date of the first public
announcement of (i) a voluntary liquidation, dissolution or winding-up of the
Company or (ii) the institution of any proceeding for the involuntary
liquidation, dissolution or winding-up of the Company; provided that if the
foregoing would result in a liquidation payment valued at less than $1.00 per
share of the Psychiatric Group Stock, the holders of Psychiatric Group Stock are
not entitled to a proportionate interest in such net assets but instead are
entitled to receive a liquidation preference of $1.00 per share (and no more)
before any payment may be made to holders of Common Stock.
Neither the merger nor consolidation of the Company into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with the Company, nor a sale, transfer or lease of all or any part of the assets
of the Company, would be deemed a liquidation, dissolution or winding-up for
these purposes.
DETERMINATIONS BY THE BOARD
The Company's Certificate of Incorporation provides that a Director will
not be liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) pursuant to specific provisions of Delaware law
or (iv) for any transaction from which the Director derived any improper
personal benefit. The liability of Directors will be further eliminated or
limited to the fullest extent permitted by future changes in Delaware law. In
addition, the Certificate of Designations relating to the Psychiatric Group
Stock provides that any determinations made in good faith by the Board under
such Certificate of Designations, and any determinations with respect to either
Group or the rights of holders of shares of Common Stock or Psychiatric Group
Stock made pursuant to or in furtherance of such Certificate of Designations,
will be final and binding on all stockholders of the Company, subject to the
rights of stockholders under Delaware law and under the federal securities laws.
PREFERRED STOCK PURCHASE RIGHTS PLAN
On April 20, 1990, the Company distributed to its holders of Common Stock
one preferred stock purchase right (each, a "Right") for each outstanding share
of Common Stock. Under certain conditions, each Right may be exercised to
purchase one one-hundredth of a share of preferred stock, Series A, par value
$.01 per share (the "Series A Preferred Shares"), of the Company at a price of
$45. The total number of Rights currently issued or issuable, including Rights
issuable in connection with Common Stock which may be
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<PAGE> 52
issued under the Company's stock incentive plans and upon the conversion of the
Company's outstanding Swiss franc convertible bonds, is approximately
23,200,000. Approximately 232,000 Series A Preferred Shares could be purchased
upon the exercise of all Rights currently issued or issuable. The number of
Rights outstanding and Series A Preferred Shares issuable upon exercise, as well
as the Series A Preferred Share purchase price, are subject to customary
antidilution adjustments.
The Rights are evidenced by the certificates for shares of Common Stock,
and in general are not transferable apart from the Common Stock or exercisable
until after a party has acquired beneficial ownership of or made a tender offer
for 10% or more of the outstanding Common Stock of the Company (an "Acquiring
Person"), or the occurrence of other events as specified in the Rights Plan.
Under certain conditions as specified in the Rights Plan, including but not
limited to the acquisition by a party of 15% or more of the outstanding Common
Stock of the Company or the acquisition of the Company in a merger or other
business combination, each holder of a Right (other than an Acquiring Person,
whose Rights will be void) will receive upon exercise thereof and payment of the
exercise price that number of shares of Common Stock of the Company or of the
other party, as applicable, having a market value of two times the exercise
price of the Right.
The Rights expire on April 20, 2000, and until exercised, the holder
thereof, as such, will have no rights as a shareholder of the Company. At the
Company's option, the Rights may be redeemed in whole at a price of $.01 per
Right at any time prior to becoming exercisable. In general, the Company may
also exchange the Rights at a ratio of one share of Common Stock per Right after
becoming exercisable but prior to the acquisition of 50% or more of the
outstanding shares of Common Stock by any party.
Series A Preferred Shares issuable upon exercise of the Rights will not be
redeemable. Each Series A Preferred Share will have 100 votes and will be
entitled to (a) dividends in an amount equal to the greater of $1.00 or 100
times the amount of the dividends per share paid on the Common Stock, (b) a
liquidation preference in an amount equal to the greater of $100 or 100 times
the amount per share paid on the Common Stock and (c) a payment in connection
with a business combination (in which shares of Common Stock are exchanged)
equal to 100 times the amount per share paid on the Common Stock.
The Psychiatric Group Stock will not include, or entitle the holders
thereof to receive, the Rights, which will be applicable only to the Common
Stock.
LIMITS ON STOCK OWNERSHIP
The Company's Certificate of Incorporation provides that as a condition to
the transfer and/or registration of transfer of any shares of capital stock of
the Company which would result in any stockholder owning, directly or
indirectly, shares in excess of 9% of the issued and outstanding capital stock
of the Company, the proposed transferee must file with the Company an affidavit
setting forth the number of shares owned, directly or indirectly, by such
transferee. Any acquisition of shares, transfer of shares or any options,
warrants or other securities convertible into shares that would result in the
disqualification of the Company as a REIT will be deemed void to the fullest
extent permitted under applicable law and the intended transferee shall be
deemed never to have had an interest therein. If more than 9.8% of the capital
stock of the Company has become concentrated in the hands of one beneficial
owner, (i) such beneficial owner and its affiliates and associates will be
deemed to have offered to sell to the Company or its designee on the date
specified in the Company's notice of acceptance of such offer to sell such
number of shares sufficient, in the opinion of the Board, to maintain or bring
the direct or indirect ownership of the capital stock of the Company held by
such beneficial owner to a level of no more than 9.8% of the issued and
outstanding capital stock of the Company, and (ii) the Board also will refuse to
transfer or issue shares of capital stock to any person whose acquisition of
such shares would result in the direct or indirect ownership by that person of
more than 9.8% of the issued and outstanding capital stock of the Company. The
purchase price for any shares of capital stock of the Company so redeemed will
be equal to the fair market value of the shares reflected in the closing sales
price for the shares, if then listed on a national securities exchange, or the
average of the closing sales prices for the shares if then listed on more than
one national securities exchange, or if the shares are not then listed on a
national securities exchange, the latest bid quotation for the shares if then
traded over-the-counter, on the last business
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<PAGE> 53
day immediately preceding the day on which notice of acceptance of the offer of
sale is sent by the Company, or, if no such closing sales prices or quotations
are available, then the purchase price will be equal to the net asset value of
such shares as determined in good faith by the Board. The purchase price of any
such shares acquired by the Company, or its designee, will be paid, at the
option of the Company, in cash or in the form of an unsecured, subordinated
promissory note of the Company, or its designee, bearing interest and having a
term to maturity (to be not less than 5 nor more than 20 years) as determined by
the Board. From and after the tender by the Company of the purchase price
therefor, the holder of any shares of capital stock of the Company so called for
purchase will cease to be entitled to any rights as a holder of such shares,
except the right to payment of the purchase price therefor.
BUSINESS COMBINATION PROVISIONS
The Certificate of Incorporation requires that Business Combinations (as
defined in the Certificate of Incorporation) between the Company and a
Beneficial Owner (as defined in the Certificate of Incorporation) of 10% or more
of the Company's outstanding shares of Voting Stock (as defined in the
Certificate of Incorporation) (a "Related Person"), and any Affiliate (as
defined in the Certificate of Incorporation) or Associate (as defined in the
Certificate of Incorporation) of such person, be approved by (i) the affirmative
vote of the holders of not less than 80% of the outstanding shares of Voting
Stock and (ii) the holders of a majority of the outstanding shares of Voting
Stock other than such Related Person and such person's Associates and
Affiliates, unless a majority of the Continuing Directors (as defined in the
Certificate of Incorporation) shall have approved the Business Combination or
shall have approved the acquisition of outstanding shares of Voting Stock which
caused the Related Person to become a Related Person. In general, Voting Stock
means the capital stock of the Company entitled to vote generally in the
election of directors, including the Psychiatric Group Stock, and each share is
allocated for this purpose the number of votes granted to it generally in the
election of directors.
A "Business Combination" is defined in the Certificate of Incorporation as
(a) any merger or consolidation of the Company or any subsidiary (other than
pursuant to Section 253 of the Delaware General Corporation Law with or into any
corporation which owns at least 90% of the outstanding shares of each class of
stock of the Company or its subsidiary, as applicable) with a Related Person or
any other corporation (whether or not itself a Related Person) which is, or
after such merger or consolidation would be, an Affiliate or Associate of a
Related Person, (b) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) to or with a
Related Person or such person's Affiliates or Associates of any assets of the
Company (including the securities of a subsidiary) or a subsidiary having a fair
market value of $20 million or more, (c) the issuance or transfer of any
securities of the Company or a subsidiary by the Company or such subsidiary to
any Related Person having an aggregate fair market value of $20 million or more,
other than by any distribution pro rata to, or exchange offer made to, all
holders of a publicly held class or series of stock of the Company or any of its
subsidiaries, or upon the exercise, conversion or exchange of securities of the
Company or any of its subsidiaries which are exercisable, convertible or
exchangeable into or for securities of the Company or any of its subsidiaries,
(d) the adoption of any plan or proposal for the liquidation or dissolution of
the Company by or on behalf of a Related Person or any of such person's
Affiliates or Associates or (e) any reclassification of securities or
recapitalization of the Company (including any reverse stock split), or any
merger or consolidation of the Company with any of its subsidiaries or any other
transaction involving the Company or any of its subsidiaries (whether or not
with or into or otherwise involving a Related Person) which has the effect,
directly or indirectly, of increasing the proportionate share of the outstanding
shares of any class of voting stock of the Company or of any of its subsidiaries
directly or indirectly owned by any Related Person or such person's Associates
or Affiliates.
The Company is also subject to the provisions of Section 203 of the
Delaware General Corporation Law, which relate to business combinations.
STAGGERED BOARD; REMOVAL OF DIRECTORS
The Board is divided into three classes, each class consisting, as nearly
as may be possible, of one-third of the total number of Directors. Directors are
elected for a three-year term and the term of one class expires
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each year. A Director holds office until the annual meeting for the year in
which his or her term expires. If the number of Directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of Directors in each class as nearly equal as possible, but in no
case will a decrease in the number of Directors shorten the term of any
incumbent Director. Under Delaware law, because the Board is divided into
classes, no Director may be removed from office before expiration of his or her
term except for cause.
VOTE REQUIRED TO CHANGE CERTAIN PROVISIONS
The provisions described under "Limits on Stock Ownership" and "Business
Combination Provisions" above may not be amended without the affirmative vote of
stockholders holding at least 80% of the Voting Stock of the Company and, with
respect to the provisions under "Business Combination Provisions" only, a
majority vote of the stockholders of Voting Stock who are Disinterested
Stockholders (as defined in the Certificate of Incorporation). The provisions
described under "Staggered Board" above may not be amended without the
affirmative vote of stockholders holding at least 66 2/3% of the outstanding
shares of capital stock of the Company entitled to vote generally in the
election of Directors.
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions described under "-- Preferred Stock Purchase Rights Plan,"
"-- Limits on Stock Ownership," "-- Business Combination Provisions" and
"-- Staggered Board" above may have the effect of discouraging unilateral tender
offers or other takeover proposals which certain stockholders might deem in
their interests or in which they might receive a substantial premium over market
price for their shares. The Board's authority to issue and establish the terms
of currently authorized Preferred Stock without stockholder approval may also
have the effect of discouraging takeover attempts. The provisions could also
have the effect of insulating current management against the possibility of
removal and could, by possibly reducing temporary fluctuations in market price
caused by accumulations of Common Stock, deprive stockholders of opportunities
to sell at a temporarily higher market price. However, the Board believes that
the Preferred Stock Purchase Rights Plan and inclusion of the Business
Combination and Staggered Board provisions may help assure fair treatment of
stockholders and continuity of management and that the Limits on Stock Ownership
provision is reasonably necessary to safeguard the Company's REIT status.
STOCK REGISTRAR AND TRANSFER AGENT
Chemical Mellon Shareholder Services is the registrar and transfer agent
for the Common Stock and the Psychiatric Group Stock. Chemical Mellon
Shareholder Services is also depositary for the depositary shares with respect
to the Psychiatric Group Stock.
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DESCRIPTION OF DEBT SECURITIES
The Debt Securities constitute either Senior Securities or Subordinated
Securities as specified in the accompanying Prospectus Supplement. The Senior
Securities will be issued under an Indenture (the "Senior Indenture") to be
entered into by the Company prior to the issuance of any such Senior Securities,
the form of which is filed as an exhibit to the Registration Statement. The
Subordinated Securities will be issued under an Indenture (the "Subordinated
Indenture") to be entered by the Company prior to the issuance of any such
Subordinated Securities, the form of which is also filed as an exhibit to the
Registration Statement. Both the Senior Indenture and the Subordinated Indenture
are subject to and governed by the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). Information regarding the trustee under the Senior
Indenture (the "Senior Trustee") or the trustee under the Subordinated Indenture
(the "Subordinated Trustee"), as the case may be, will be included in any
Prospectus Supplement relating to such Senior Securities or Subordinated
Securities. The Senior Indenture and the Subordinated Indenture are sometimes
collectively referred to herein as the "Indentures;" the Senior Trustee and the
Subordinated Trustee are sometimes collectively referred to herein as the
"Trustees" and individually as a "Trustee." The following discussion includes a
summary description of all material terms of the Indentures, other than terms
that are specific to a particular series of Debt Securities, which will be
described in the Prospectus Supplement relating to such series. Accordingly, for
a description of the terms of a particular issue of Debt Securities reference
must be made to both the accompanying Prospectus Supplement and the following
description. The following summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the Indentures, including the definitions therein of certain
capitalized terms in this Prospectus. The following summary is also qualified in
its entirety by reference to the terms made a part of the Indenture by the Trust
Indenture Act. Wherever particular Sections or Articles or defined terms of the
Indentures are referred to herein or in a Prospectus Supplement, such Sections,
Articles or defined terms are incorporated herein or therein by reference.
The Debt Securities may be issued from time to time in one or more series.
The particular terms of each series of Debt Securities offered by any Prospectus
Supplement or Prospectus Supplements will be described in such Prospectus
Supplement or Prospectus Supplements relating to such series.
Other than as set forth under "Certain Covenants of the Company," and only
to the extent applicable to the Debt Securities of a particular series, as
indicated in the applicable Prospectus Supplement, there are no provisions of
the Indentures that afford holders of the Debt Securities protection in the
event of a highly leveraged transaction involving the Company.
GENERAL
The Indentures do not limit the aggregate amount of Debt Securities which
may be issued thereunder, and Debt Securities may be issued thereunder from time
to time in separate series up to the aggregate amount from time to time
authorized by the Company for each series. The Senior Securities will be
unsecured and unsubordinated obligations of the Company and will rank equally
and ratably with other unsecured and unsubordinated indebtedness of the Company.
The Subordinated Securities will be subordinated in right of payment to the
prior payment in full of the Senior Indebtedness (as defined) of the Company, as
described below under "Subordination of Subordinated Securities" and in a
Prospectus Supplement applicable to an offering of Subordinated Securities.
The applicable Prospectus Supplement or Prospectus Supplements will
describe the following terms of the series of Debt Securities in respect of
which this Prospectus is being delivered: (1) the title of such Debt Securities;
(2) any limit on the aggregate principal amount of such Debt Securities; (3)
whether any of such Debt Securities are to be issuable in permanent global form
("Global Security") and, if so, the terms and conditions, if any, upon which
interests in such Securities in global form may be exchanged, in whole or in
part, for the individual Debt Securities represented thereby; (4) the person to
whom any interest on any Debt Security of the series shall be payable if other
than the person in whose name the Debt Security is registered on the Regular
Record Date; (5) the date or dates on which such Debt Securities will mature;
(6) the rate or rates of interest, if any, or the method of calculation thereof,
which such Debt Securities will bear; (7) the
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date or dates from which any such interest will accrue, the Interest Payment
Dates on which any such interest on such Debt Securities will be payable and the
Regular Record Date for any interest payable on any Interest Payment Date; (8)
the place or places where the principal of, premium (if any) and interest on
such Debt Securities will be payable; (9) the period or periods within which,
the events upon the occurrence of which, and the price or prices at which, such
Debt Securities may, pursuant to any optional provisions, be redeemed or
purchased, in whole or in part, and any terms and conditions relevant thereto
and the period or periods within which and the price or prices at which the Debt
Securities will be redeemed or purchased, in whole or in part, and any terms and
conditions relevant thereto; (10) the obligation of the Company, if any, to
redeem or repurchase such Debt Securities pursuant to any sinking fund or
analogous provisions or at the option of the Holders; (11) the denominations in
which any such Debt Securities will be issuable, if other than denominations of
$1,000 and any integral multiple thereof; (12) the currency, currencies or
currency unit or units of payment of principal of and any premium and interest
on such Debt Securities if other than U.S. dollars; (13) any index or formula
used to determine the amount of payments of principal of and any premium and
interest on such Debt Securities; (14) if the principal of or any premium or
interest on such Debt Securities is to be payable, at the election of the
Company or a Holder thereof, in one or more currencies or currency units other
than that or those in which such Debt Securities are stated to be payable, the
currency, currencies or currency units in which payment of the principal of and
any premium and interest on Debt Securities of such series as to which such
election is made shall be payable, and the periods within which and the terms
and conditions upon which such election is to be made; (15) if other than the
principal amount thereof, the portion of the principal amount of such Debt
Securities of the series which will be payable upon declaration of the
acceleration of the Maturity thereof; (16) the applicability of any provisions
described under "Certain Covenants of the Company"; (17) the applicability of
any provisions described under "Defeasance"; (18) the terms and conditions, if
any, pursuant to which such Debt Securities are convertible or exchangeable into
Common Stock or other securities of the Company or another issuer and (19) any
other terms of such Debt Securities not inconsistent with the provisions of the
applicable Indentures. (Section 301)
Debt Securities may be issued at a discount from their principal amount.
All material United States Federal income tax, accounting and other special
considerations applicable to any such Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is denominated in a
foreign currency or currencies or a foreign currency unit or units or if the
principal of and any premium and interest on any series of Debt Securities is
payable in a foreign currency or currencies or a foreign currency unit or units,
the restrictions, elections, general tax considerations, specific terms and
other information with respect to such issue of Debt Securities and such foreign
currency or currencies or foreign currency unit or units will be set forth in
the applicable Prospectus Supplement.
SUBORDINATION OF SUBORDINATED SECURITIES
The indebtedness evidenced by the Subordinated Securities will be
subordinated and junior in right of payment to the extent set forth in the
Subordinated Indenture to the prior payment in full of amounts then due on all
Senior Indebtedness (as defined below). No payment shall be made by the Company
on account of principal of (or premium, if any) or interest on the Subordinated
Securities or on account of the purchase or other acquisition of Subordinated
Securities, if the maturity of any of the Subordinated Securities shall have
been accelerated, until all amounts due have been paid on all outstanding Senior
Indebtedness, or if (i) there shall have occurred and be continuing a default in
the payment of principal (or premium, if any) or interest on any Senior
Indebtedness beyond any applicable grace period with respect thereto, or any
event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity of such Senior Indebtedness, unless and until such
default or event of default shall have been cured or waived or shall have ceased
to exist and such acceleration shall have been rescinded or annulled or (ii) any
such default in payment or event of default shall be the subject of a judicial
proceeding. By reason of these provisions in the event of default of any Senior
Indebtedness, whether now outstanding or hereafter issued, payments of principal
of (and premium, if any) and interest on the Subordinated Securities may not be
permitted to be made until such default is cured or such Senior Indebtedness is
paid in full.
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Upon any distribution of assets of the Company upon any receivership,
dissolution, winding-up, liquidation, reorganization or similar proceeding of
the Company, whether voluntary or involuntary, or in bankruptcy or insolvency,
all principal of (and premium, if any) and interest due upon all Senior
Indebtedness must be paid in full before the Holders of the Subordinated
Securities or the Trustee is entitled to receive or retain any assets so
distributed in respect of the Subordinated Securities. By reason of this
provision, in the event of insolvency Holders of the Subordinated Securities may
recover less than other creditors of the Company, including holders of Senior
Indebtedness.
"Senior Indebtedness" means the principal of (and premium, if any) and
interest on (a) all indebtedness of the Company (including indebtedness of
others guaranteed by the Company) other than the Subordinated Securities which
is (i) for money borrowed or (ii) evidenced by a note or similar instrument
given in connection with the acquisition of any business, properties or assets
of any kind, (b) obligations of the Company as lessee under leases required to
be capitalized on the balance sheet of the lessee under generally accepted
accounting principles, and (c) amendments, renewals, extensions, modifications
and refunding of any such indebtedness or obligation, in any such case whether
outstanding on the date of the Subordinated Indenture or thereafter created,
incurred or assumed, unless in any case in the instrument creating or evidencing
any such indebtedness or obligation or pursuant to which the same is outstanding
it is provided that such indebtedness or obligation is not superior in right of
payment to the Subordinated Securities or it is provided that such obligation is
subordinated to senior indebtedness to substantially the same extent as the
Subordinated Securities are subordinated to Senior Indebtedness. As of June 30,
1995, the amount of Senior Indebtedness was approximately $263 million. The
Subordinated Indenture does not prohibit or limit the incurrence of additional
Senior Indebtedness.
FORM, EXCHANGE, REGISTRATION, CONVERSION, TRANSFER AND PAYMENT
Unless otherwise indicated in the applicable Prospectus Supplement, the
Debt Securities will be issued only in fully registered form in denominations of
$1,000 or integral multiples thereof. (Section 302) Unless otherwise indicated
in the applicable Prospectus Supplement, payment of principal, premium (if any)
and interest on the Debt Securities will be payable, and the exchange,
conversion and transfer of Debt Securities will be registerable, at the office
or agency of the Company maintained for such purposes and at any other office or
agency maintained for such purpose. (Sections 301, 305 and 1002) No service
charge will be made for any registration of transfer or exchange of the Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental change imposed in connection therewith. (Section 305)
All moneys paid by the Company to a Paying Agent for the payment of
principal of and any premium or interest on any Debt Security which remain
unclaimed for two years after such principal, premium or interest has become due
and payable may be repaid to the Company and thereafter the Holder of such Debt
Security may look only to the Company for payment thereof. (Section 1003)
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a Depositary ("Depositary") or its nominee identified in the applicable
Prospectus Supplement. In such a case, one or more Global Securities will be
issued in a denomination or aggregate denominations equal to the portion of the
aggregate principal amount of Outstanding Debt Securities of the series to be
represented by such Global Security or Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in registered form, a Global
Security may not be registered for transfer or exchange except as a whole by the
Depositary for such Global Security to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any nominee to a successor Depositary or a
nominee of such successor Depositary and except in the circumstances described
in the applicable Prospectus Supplement. (Sections 204 and 305)
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The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the applicable Prospectus Supplement. The Company expects
that the following provisions will apply to depositary arrangements.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities which are to be represented by a Global Security to be deposited with
or on behalf of a Depositary will be represented by a Global Security registered
in the name of such Depositary or its nominee. Upon the issuance of such Global
Security, and the deposit of such Global Security with or on behalf of the
Depositary for such Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with such Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters or agents of such Debt Securities or by the Company, if such Debt
Securities are offered and sold directly by the Company. Ownership of beneficial
interest in such Global Security will be limited to participants or Persons that
may hold interests through participants. Ownership of beneficial interests by
participants in such Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by the
Depositary or its nominee for such Global Security. Ownership of beneficial
interests in such Global Security by Persons that hold through participants will
be shown on, and the transfer of that ownership interest within such participant
will be effected only through, records maintained by such participant. The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. The foregoing
limitations and such laws may impair the ability to transfer beneficial
interests in such Global Securities.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or Holder of the Securities
represented by such Global Security for all purposes under the applicable
Indenture. Unless otherwise specified in the applicable Prospectus Supplement,
owners of beneficial interests in such Global Security will not be entitled to
have Debt Securities of the series represented by such Global Security
registered in their names, will not receive or be entitled to receive physical
delivery of Debt Securities of such series in certificated form and will not be
considered the Holders thereof for any purposes under the applicable Indenture.
(Sections 204 and 305) Accordingly, each Person owning a beneficial interest in
such Global Security must rely on the procedures of the 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
applicable Indenture. The Company understands that under existing industry
practices, if the Company requests any action of Holders or an owner of a
beneficial interest in such Global Security desires to give any notice or take
any action a Holder is entitled to give or take under an Indenture, the
Depositary would authorize the participants to give such notice or take such
action, and participants would authorize beneficial owners owning through such
participants to give such notice or take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Principal of and any premium and interest on a Global Security will be
payable in the manner described in the applicable Prospectus Supplement.
CERTAIN COVENANTS OF THE COMPANY
If so indicated in the applicable Prospectus Supplement with respect to a
particular series of Debt Securities, the Company will be subject to either or
both of the following covenants.
The Debt Securities will not be secured by mortgage, pledge or other lien.
The Company will covenant in the Indenture not to pledge or otherwise subject to
any lien, any property or assets of the Company or its subsidiaries unless the
Debt Securities of such series are secured by such pledge or lien equally and
ratably with all other obligations secured thereby so long as such obligations
shall be so secured; provided, however, that such covenant will not apply to
liens securing obligations which do not in the aggregate at any one time
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outstanding exceed 10% of Consolidated Net Tangible Assets (as defined below) of
the Company and its consolidated subsidiaries and in addition will not apply to:
(1) Any lien or charge on any property, tangible or intangible, real
or personal, existing at the time of acquisition or construction of such
property (including acquisition through merger or consolidation) or given
to secure the payment of all or any part of the purchase or construction
price thereof or to secure any indebtedness incurred prior to, at the time
of, or within one year after, the acquisition or completion of construction
thereof for the purpose of financing all or any part of the purchase or
construction price thereof;
(2) Any liens securing the performance of any contract or undertaking
of the Company not directly or indirectly in connection with the borrowing
of money, obtaining of advances or credit or the securing of debts, if made
and continuing in the ordinary course of business;
(3) Any lien in favor of the United States or any state thereof or the
District of Columbia, or any agency, department or other instrumentality
thereof, to secure progress, advance, or other payments pursuant to any
contract or provision of any statute;
(4) Mechanics, materialmen's, carriers', or other like liens arising
in the ordinary course of business (including construction of facilities)
in respect of obligations which are not due or which are being contested in
good faith;
(5) Any lien arising by reason of deposits with, or the giving of any
form of security to, any governmental agency or any body created or
approved by law or governmental regulations, which is required by law or
governmental regulation as a condition to the transaction of any business,
or the exercise of any privilege, franchise or license;
(6) Any liens for taxes, assessments or governmental charges or levies
not yet delinquent, or liens for taxes, assessments or governmental charges
or levies already delinquent but the validity of which is being contested
in good faith;
(7) Liens (including judgment liens) arising in connection with legal
proceedings so long as such proceedings are being contested in good faith
and in the case of judgment liens, execution thereof is stayed;
(8) Liens relating to secured indebtedness of the Company outstanding
as of June 30, 1995; and
(9) Any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, of any lien referred to
in the foregoing clauses (1) to (8) inclusive; provided, however, that the
amount of any and all obligations and indebtedness secured thereby shall
not exceed the amount thereof so secured immediately prior to the time of
such extension, renewal or replacement and that such extension, renewal or
replacement shall be limited to all or a part of the property which secured
the charge or lien so extended, renewed or replaced (plus improvements on
such property).
"Consolidated Net Tangible Assets" means the aggregate amount of assets
(less applicable reserves and other properly deductible items) less (i) all
current liabilities and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expenses and other like intangibles of the Company
and its consolidated subsidiaries, all as set forth on the most recent balance
sheet of the Company and its consolidated subsidiaries prepared in accordance
with generally accepted accounting principles. (Section 1008)
The Company will also covenant in the Indenture that it will not create,
assume, incur, or otherwise become liable in respect of, any
(a) Senior Debt (as defined below) unless the aggregate outstanding
principal amount of Senior Debt of the Company will not, at the time of
such creation, assumption or incurrence and after giving effect thereto and
to any concurrent transactions, exceed the greater of (i) 150% of Capital
Base (as defined below), or (ii) 225% of Tangible Net Worth (as defined
below); and
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(b) Non-Recourse Debt (as defined below) unless the aggregate
outstanding principal amount of Senior Debt and Non-Recourse Debt of the
Company will not, at the time of such creation, assumption or incurrence
and after giving effect thereto and to any concurrent transactions, exceed
225% of Capital Base.
For the purposes of this limitation as to borrowing money, "Senior Debt"
means all Debt other than Non-Recourse Debt and Subordinated Debt; "Debt", with
respect to any Person, means (i) its indebtedness, secured or unsecured, for
borrowed money; (ii) Liabilities secured by any existing lien on property owned
by such Person; (iii) Capital Lease Obligations, and the present value of all
payments due under any arrangement for retention of title (discounted at a rate
per annum equal to the average interest borne by all outstanding Debt Securities
determined on a weighted average basis and compounded semi-annually) if such
arrangement is in substance an installment purchase or an arrangement for the
retention of title for security purposes; and (iv) guarantees of obligations of
the character specified in the foregoing clauses (i), (ii) and (iii), to the
full extent of the liability of the guarantor (discounted to present value, as
provided in the foregoing clause (iii), in the case of guarantees of title
retention arrangements); "Capital Lease" means at any time any lease of
property, real or personal, which, in accordance with generally accepted
accounting principles, would at such time be required to be capitalized on a
balance sheet of the lessee; "Capital Lease Obligation" means at any time the
amount of the liability in respect of a Capital Lease which, in accordance with
generally accepted accounting principles, would at such time be required to be
capitalized on a balance sheet of the lessee; "Person" means an individual,
partnership, corporation, joint venture, association, joint stock company,
trust, limited liability company, unincorporated organization, or a government
or agency or political subdivision thereof; "Non-Recourse Debt" with respect to
any Person, means any Debt secured by, and only by, property on or with respect
to which such Debt is incurred where the rights and remedies of the holder of
such Debt in the event of default do not extend to assets other than the
property constituting security therefor; "Subordinated Debt" means any unsecured
Debt of the Company which is issued or assumed pursuant to, or evidenced by, an
indenture or other instrument which contains provisions for the subordination of
such other Debt (to which appropriate reference shall be made in the instruments
evidencing such other Debt if not contained therein) to the Debt Securities
(and, at the option of the Company, if so provided, to other Debt of the
Company, either generally or as specifically designated); "Capital Base" means,
at any date, the sum of Tangible Net Worth and Subordinated Debt; "Tangible Net
Worth" means, at any date, the net book value (after deducting related
depreciation, obsolescence, amortization, valuation, and other proper reserves)
of the tangible assets of the Company at such date, minus the amount of its
Liabilities at such date; and "Liabilities" means, at any date, the items shown
as liabilities on the balance sheet of the Company, except any item of deferred
income, including capital gains. (Section 1009)
EVENTS OF DEFAULT
The following are Events of Default under the Indentures with respect to
Debt Securities of any series: (a) failure to pay principal of or premium, if
any, on any Debt Security of that series when due; (b) failure to pay any
interest on any Debt Security of that series when due, continued for 30 days;
(c) failure to make any sinking fund payment, when due, in respect of any Debt
Security of that series; (d) failure to perform any other covenant of the
Company in the applicable Indenture (other than a covenant included in such
Indenture solely for the benefit of a series of Debt Securities other than that
series), continued for 60 days after written notice as provided in the
respective Indentures; (e) failure to pay at the final maturity thereof the
principal of, or acceleration of, any indebtedness for money borrowed by the
Company in excess of $5 million, if such indebtedness is not discharged, or such
acceleration is not annulled, as provided in the respective Indentures; (f)
certain events of bankruptcy, insolvency or reorganization; and (g) any other
Event of Default provided with respect to Debt Securities of that series.
(Section 501)
If an Event of Default (other than an Event of Default described in clause
(f) above) with respect to Outstanding Debt Securities of any series shall occur
and be continuing, either the Trustee or the Holders of at least 25% in
principal amount of the Outstanding Debt Securities of that series by notice as
provided in the respective Indentures may declare the principal amount (or, if
the Debt Securities of that series are Original Issue Discount Securities, such
portion of the principal amount as may be specified in the terms of that series)
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of all Debt Securities of that series to be due and payable immediately. If an
Event of Default described in clause (f) above with respect to the Debt
Securities of any series at the time Outstanding shall occur, the principal
amount of all the Debt Securities of that series (or, in the case of any such
Original Issue Discount Security or other Debt Security, such specified amount)
will automatically, and without any action by the Trustee or any Holder, become
immediately due and payable. However, at any time after a declaration of
acceleration with respect to Debt Securities of any series has been made, but
before a judgment or decree based on such acceleration his been obtained, the
Holders of a majority in principal amount of the Outstanding Debt Securities of
that series may, under certain circumstances, rescind and annul such
acceleration. (Section 502) For information as to waiver or defaults, see
"Modification and Waiver" below.
The Indentures provide that, subject to the duty of the respective Trustees
thereunder during an Event of Default to act with the required standard of care,
such Trustee will be under no obligation to exercise any of its rights or powers
under the respective Indentures at the request or direction of any of the
Holders, unless such Holders shall have offered to such Trustee reasonable
security or indemnity. (Sections 601 and 603) Subject to certain provisions,
including those requiring security or indemnification of the Trustees, the
Holders of a majority in principal amount of the Outstanding Debt Securities of
any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee, or
exercising any trust or power conferred on such Trustee, with respect to the
Debt Securities of that series. (Section 512)
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the applicable Indenture or for any remedy
thereunder, unless such Holder shall have previously given to the applicable
Trustee written notice of a continuing Event of Default (as defined) and unless
the Holders of at least 25 percent in aggregate principal amount of the
outstanding Debt Securities of the same series shall have made written request,
and offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of a majority
in aggregate principal amount of the outstanding Debt Securities of the same
series a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. (Section 507) However, such
limitations do not apply to a suit instituted by a Holder of a Debt Security for
enforcement of payment of the principal of and interest on such Debt Security on
or after the respective due dates expressed in such Debt Security. (Section 508)
The Company will be required to furnish to the Trustees annually a
statement as to the performance by the Company of its obligations under the
respective Indentures and as to any default in such performance. (Section 1004)
MODIFICATION AND WAIVER
Modifications and amendments of the respective Indentures may be made by
the Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the Outstanding Debt Securities of
each series affected thereby; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Debt
Security affected thereby: (a) change the Stated Maturity of the principal of,
or any installment of principal of, or interest on, any Debt Security; (b)
reduce the principal amount of, the rate of interest on, or the premium, if any,
payable upon the redemption of, any Debt Security; (c) reduce the amount of
principal of an Original Issue Discount Security payable upon acceleration of
the Maturity thereof, (d) change the place or currency of payment of principal
of, or premium, if any, or interest on any Debt Security; (e) impair the right
to institute suit for the enforcement of any payment on or with respect to any
Debt Security on or after the Stated Maturity or Redemption Date thereof; (f) in
the case of Subordinated Securities, modify the provisions of the Subordinated
Indenture with respect to subordination or conversion of such Subordinated
Securities in a manner adverse to the Holders, or (g) reduce the percentage in
principal amount of Outstanding Debt Securities of any series, the consent of
the Holders of which is required for modification or amendment of the applicable
Indenture or for waiver of compliance with certain provisions of the applicable
Indenture or for waiver of certain defaults. (Section 902)
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The Holders of at least a majority in aggregate principal amount of the
Outstanding Debt Securities of any series may on behalf of the Holders of all
Debt Securities of that series waive, insofar as that series is concerned,
compliance by the Company with certain covenants of the applicable Indenture.
(Section 1010) The Holders of not less than a majority in principal amount of
the Outstanding Debt Securities of any series may, on behalf of the Holders of
all Debt Securities of that series, waive any past default under the applicable
Indenture with respect to that series, except a default in the payment of the
principal of, or premium, if any, or interest on, any Debt Security of that
series or in respect of a provision which under the applicable Indenture cannot
be modified or amended without the consent of the Holder of each Outstanding
Debt Security of that series affected. (Section 513)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of any Holders of Outstanding Debt
Securities, may consolidate with or merge into, or transfer or lease its assets
substantially as an entirety to, any Person, and any other Person may
consolidate with or merge into, or transfer or lease its assets substantially as
an entirety to, the Company, provided (a) that the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or
which acquires or leases the assets of the Company substantially as an entirety
is a Person organized and existing under the laws of any United States
jurisdiction and assumes the Company's obligations on the Debt Securities and
under the respective Indentures, (b) that after giving effect to such
transaction no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have happened and be
continuing, and (c) that certain other conditions are met. (Article Eight)
DEFEASANCE AND COVENANT DEFEASANCE
If so indicated in the applicable Prospectus Supplement with respect to the
Debt Securities of a series, the Company, at its option, (i) will be discharged
from any and all obligations in respect of the Debt Securities of such series
(except for certain obligations to register the transfer or exchange of Debt
Securities of such series, to replace destroyed, stolen, lost or mutilated Debt
Securities of such series, and to maintain an office or agency in respect of the
Debt Securities and hold moneys for payment in trust) or (ii) will be released
from its obligations to comply with the Covenants that are specified under
"Certain Covenants of the Company" above with respect to the Debt Securities of
such series, and the occurrence of an event described in clause (d) under
"Events of Default" above with respect to any defeased covenant and clauses (e)
and (g) of the "Events of Default" above shall no longer be an Event of Default
if, in either case, the Company irrevocably deposits with the Trustee, in trust,
money or U.S. Government Obligations that through the payment of interest
thereon and principal thereof in accordance with their terms will provide money
in an amount sufficient to pay all of the principal of (and premium, if any) and
any interest on the Debt Securities of such series on the dates such payments
are due (which may include one or more redemption dates designated by the
Company) in accordance with the terms of such Debt Securities. Such a trust may
only be established if, among other things, (a) no Event of Default or event
which with the giving of notice or lapse of time, or both, would become an Event
of Default under the applicable Indenture shall have occurred and be continuing
on the date of such deposit, (b) no Event of Default described under clause (f)
under "Events of Default" above or event which with the giving of notice or
lapse of time, or both, would become an Event of Default described under such
clause (f) shall have occurred and be continuing at any time on or prior to the
90th day following such date of deposit, (c) the Company shall have delivered an
Opinion of Counsel to the effect that the Holders of the Debt Securities of such
series will not recognize gain or loss for United States Federal income tax
purposes as a result of such deposit or defeasance and will be subject to United
States Federal income tax in the same manner as if such defeasance had not
occurred. In the event the Company omits to comply with its remaining
obligations under the applicable Indenture after a defeasance of such Indenture
with respect to the Debt Securities of any series as described under clause (ii)
above and the Debt Securities of such series are declared due and payable
because of the occurrence of any undefeased Event of Default, the amount of
money and U.S. Government Obligations on deposit with the Trustee may be
insufficient to pay amounts due on the Debt Securities of such series at the
time of the acceleration resulting
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from such Event of Default. However, the Company will remain liable in respect
of such payments. (Article Thirteen)
Notwithstanding the description set forth under "Subordination of
Subordinated Securities" above, in the event that the Company deposits money or
U.S. Government Obligations in compliance with the Subordinated Indenture in
order to defease all or certain of its obligations with respect to any
Subordinated Securities, the moneys or U.S. Government Obligations so deposited
will not be subject to the subordination provisions of the Subordinated
Indenture and the indebtedness evidenced by such Subordinated Securities will
not be subordinated in right of payment to the holders of Senior Indebtedness to
the extent of the moneys or U.S. Government Obligations so deposited.
GOVERNING LAW
The Indentures and the Debt Securities will be governed by, and construed
in accordance with, the laws of the State of New York. (Section 112)
REGARDING THE TRUSTEE
The Indentures contain certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. (Section 613) The Trustee
will be permitted to engage in certain other transactions; however, if it
acquires any potential conflicting interest and there is a default under the
Debt Securities, it must eliminate such conflict or resign. (Section 608)
DESCRIPTION OF PREFERRED STOCK
The following is a description of certain general terms and provisions of
the Preferred Stock. The particular terms of any series of Preferred Stock will
be described in the applicable Prospectus Supplement. If so indicated in a
Prospectus Supplement, the terms of any such series may differ from the terms
set forth below.
The summary of terms of the Company's preferred stock (including the
Preferred Stock) contained in this Prospectus does not purport to be complete
and is subject to, and qualified in its entirety by, the provisions of the
Company's Certificate of Incorporation and the certificate of designations
relating to each series of the Preferred Stock (the "Certificate of
Designations"), which will be filed as an exhibit to or incorporated by
reference in the Registration Statement of which this Prospectus is a part at or
prior to the time of issuance of such series of the Preferred Stock.
The Certificate of Incorporation of the Company provides that the Company
is authorized to issue 1,000,000 shares of Preferred Stock, par value $0.01 per
share, issuable in series by the Board. As of July 31, 1995, the Company had
outstanding approximately 209,000 shares of Psychiatric Group Stock, which
constitute a separate series of Preferred Stock, issued and outstanding. Such
shares are the only shares of Psychiatric Group Stock authorized by the Board to
be issued, except shares of Psychiatric Group Stock issuable upon exercise of
options granted in connection with the initial issuance of shares of Psychiatric
Group Stock. In addition, the Company has authorized the issuance of
approximately 232,000 Series A Preferred Shares. See "Description of Common
Stock and Psychiatric Group Stock -- Preferred Stock Purchase Rights Plan."
The authorized but unissued shares of Preferred Stock of the Company will
be available for issuance from time to time by the Company at the sole
discretion of the Board for any proper corporate purpose, which could include
raising capital, providing compensation or benefits to employees, paying stock
dividends or acquiring companies or businesses. The Preferred Stock may be
issued in such series and with such voting powers, and such preferences or other
special rights, qualifications, limitations or restrictions, as may be stated
and expressed in the resolutions authorizing its issuance as may be adopted by
the Board from time to time. Under applicable Delaware law, such future
issuances would not require further approval of stockholders, and the Company
would not seek approval of stockholders unless such approval would be required
by stock exchange
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regulations, would be in conjunction with a further amendment to the Certificate
of Incorporation or would otherwise be deemed advisable by the Board. Thus, the
Board of Directors, without stockholder approval, could authorize the issuance
of preferred stock with voting, conversion and other rights that could adversely
affect the voting power and other rights of holders of Common Stock or other
series of preferred stock or that could have the effect of delaying, deferring
or preventing a change in control of the Company. See "Description of Common
Stock and Psychiatric Group Stock -- Preferred Stock Purchase Rights Plan."
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. The
applicable Prospectus Supplement will describe the following terms of the series
of Preferred Stock in respect of which this Prospectus is being delivered: (1)
the designation and stated value per share of such Preferred Stock and the
number of shares offered; (2) the amount of liquidation preference per share;
(3) the initial public offering price at which such Preferred Stock will be
issued; (4) the dividend rate (or method of calculation), the dates on which
dividends shall be payable and the dates from which dividends shall commence to
cumulate, if any; (5) any redemption or sinking fund provisions; (6) any
conversion or exchange rights; (7) whether the Company has elected to offer
Depositary Shares as described below under "Description of Depositary Shares";
and (8) any additional voting, dividend, liquidation, redemption, sinking fund
and other rights, preferences, privileges, limitations and restrictions.
GENERAL
The Preferred Stock will be issued in one or more series. The holders of
Preferred Stock will have no preemptive rights. Preferred Stock, upon issuance
against full payment of the purchase price therefor, will be fully paid and
nonassessable. Neither the par value nor the liquidation preference is
indicative of the price at which the Preferred Stock will actually trade on or
after the date of issuance. The applicable Prospectus Supplement will contain a
description of material United States Federal income tax, accounting and other
considerations relating to the purchase and ownership of the series of Preferred
Stock offered by such Prospectus Supplement.
As described under "Description of Depositary Shares," the Company may, at
its option, elect to offer depositary shares ("Depositary Shares") evidenced by
depositary receipts ("Depositary Receipts"), each representing a fractional
interest (to be specified in the Prospectus Supplement relating to the
particular series of the Preferred Stock) in a share of the particular series of
the Preferred Stock issued and deposited with a Depositary (as defined below).
RANK
The Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution of the Company, rank prior to the
Company's Common Stock and Psychiatric Group Stock and to all other classes and
series of equity securities of the Company now or hereafter authorized, issued
or outstanding (the Common Stock and such other classes and series of equity
securities collectively may be referred to herein as the "Junior Stock"), other
than any classes or series of equity securities of the Company ranking on a
parity with (the "Parity Stock") or senior to (the "Senior Stock") the Preferred
Stock as to dividend rights and rights upon liquidation, winding up or
dissolution of the Company. The Preferred Stock shall be junior to all
outstanding debt of the Company. The Preferred Stock shall be subject to
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
expressly prohibited by the Company's Certificate of Incorporation.
DIVIDENDS
Holders of shares of Preferred Stock shall be entitled to receive, when, as
and if declared by the Board of Directors out of funds of the Company legally
available for payment, cash dividends, payable at such dates and at such rates
per share per annum as set forth in the applicable Prospectus Supplement. Such
rates may be fixed or variable or both. Each declared dividend shall be payable
to holders of record as they appear at the close of business on the stock books
of the Company (or, if applicable, on the records of the Depositary (as
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hereinafter defined) referred to below under "Description of Depositary Shares")
on such record dates, not more than 60 calendar days preceding the payment dates
therefor, as are determined by the Board of Directors (each of such dates, a
"Record Date").
Such dividends may be cumulative or noncumulative, as provided in the
Prospectus Supplement. If dividends on a series of Preferred Stock are
noncumulative and if the Board of Directors fails to declare a dividend in
respect of a dividend period with respect to such series, then holders of such
Preferred Stock will have no right to receive a dividend in respect of such
dividend period, and the Company will have no obligation to pay the dividend for
such period, whether or not dividends are declared payable on any future
Dividend Payment Dates. Dividends on the shares of each series of Preferred
Stock for which dividends are cumulative will accrue from the date on which the
Company initially issues shares of such series.
No full dividends shall be declared or paid or set apart for payment on
preferred stock of the Company of any series ranking, as to dividends, on a
parity with or junior to the series of Preferred Stock offered by the Prospectus
Supplement attached hereto for any period unless full dividends for the
immediately preceding dividend period on such Preferred Stock (including any
accumulation in respect of unpaid dividends for prior dividend periods, if
dividends on such Preferred Stock are cumulative) have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for such payment. When dividends are not so paid in full (or a sum
sufficient for such full payment is not so set apart) upon such Preferred Stock
and any other preferred stock of the Company ranking on a parity as to dividends
with the Preferred Stock, dividends upon shares of such Preferred Stock and
dividends on such other preferred stock shall be declared pro rata so that the
amount of dividends declared per share on such Preferred Stock and such other
preferred stock shall in all cases bear to each other the same ratio that
accrued dividends for the then-current dividend period per share on the shares
of such Preferred Stock (including any accumulation in respect of unpaid
dividends for prior dividend periods, if dividends on such Preferred Stock are
cumulative) and accrued dividends, including required or permitted
accumulations, if any, on shares of such other preferred stock, bear to each
other. Unless full dividends on the series of Preferred Stock offered by the
Prospectus Supplement attached hereto have been declared and paid or set apart
for payment for the immediately preceding dividend period (including any
accumulation in respect of unpaid dividends for prior dividend periods, if
dividends on such Preferred Stock are cumulative) (a) no cash dividend or
distribution (other than in shares of Junior Stock) may be declared, set aside
or paid on the Junior Stock, (b) the Company may not repurchase, redeem or
otherwise acquire any shares of its Junior Stock (except by conversion into or
exchange for Junior Stock) and (c) the Company may not, directly or indirectly,
repurchase, redeem or otherwise acquire any shares of Preferred Stock or Parity
Stock otherwise than pursuant to certain pro rata offers to purchase or a
concurrent redemption of all, or a pro rata portion, of the outstanding shares
of such Preferred Stock and Parity Stock (except by conversion into or exchange
for Junior Stock). The Company does not currently have outstanding any Parity
Stock.
CONVERTIBILITY
The terms, if any, on which shares of Preferred Stock of any series may be
exchanged for or converted (mandatorily or otherwise) into shares of Common
Stock of the Company or another series of Preferred Stock or other securities of
the Company or another issuer will be set forth in the Prospectus Supplement
relating thereto. See "Description of Common Stock and Psychiatric Group Stock."
REDEMPTION
The terms, if any, on which shares of Preferred Stock of any series may be
redeemed will be set forth in the related Prospectus Supplement.
LIQUIDATION
Unless otherwise specified in the applicable Prospectus Supplement, in the
event of a voluntary or involuntary liquidation, dissolution or winding-up of
the affairs of the Company, the holders of a series of Preferred Stock will be
entitled, subject to the rights of creditors, but before any distribution or
payment to the
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holders of Common Stock or any other security ranking junior to the Preferred
Stock on liquidation, dissolution or winding up of the Company, to receive an
amount per share as set forth in the related Prospectus Supplement plus accrued
and unpaid dividends for the then-current dividend period (including any
accumulation in respect of unpaid dividends for prior dividend periods, if
dividends on such series of Preferred Stock are cumulative). If the amounts
available for distribution with respect to the Preferred Stock and all other
outstanding stock of the Company ranking on a parity with the Preferred Stock
upon liquidation are not sufficient to satisfy the full liquidation rights of
all the outstanding Preferred Stock and stock ranking on a parity therewith,
then the holders of each series of such stock will share ratably in any such
distribution of assets in proportion to the full respective preferential amount
(which in the case of preferred stock may include accumulated dividends) to
which they are entitled. After payment of the full amount of the liquidation
preference, the holders of shares of Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Company.
VOTING
The Preferred Stock of a series will not be entitled to vote, except as
provided below or in the applicable Prospectus Supplement and as required by
applicable law. Unless otherwise specified in the related Prospectus Supplement,
at any time dividends in an amount equal to six quarterly dividend payments on
the Preferred Stock shall have accrued and be unpaid, holders of the Preferred
Stock shall have the right to a separate class vote (together with the holders
of shares of any Parity Stock upon which like voting rights have been conferred
and are exercisable, "Voting Parity Stock") to elect two members of the Board of
Directors at the next annual meeting of stockholders and thereafter until
dividends on the Preferred Stock have been paid in full for four consecutive
dividend periods, including the last preceding dividend period. Additionally,
without the affirmative vote of the holders of two-thirds of the shares of
Preferred Stock then outstanding (voting separately as a class together with any
Voting Parity Stock), the Company may not, either directly or indirectly or
through merger or consolidation with any other corporation, (i) approve the
authorization, creation or issuance, or an increase in the authorized or issued
amount, of any class or series of stock ranking prior to the shares of Preferred
Stock in rights and preferences or (ii) amend, alter or repeal its Certificate
of Incorporation or the Certificate of Designations so as to materially and
adversely change the specific terms of the Preferred Stock. An amendment which
increases the number of authorized shares of or authorizes the creation or
issuance of other classes or series of preferred stock ranking junior to or on a
parity with the Preferred Stock with respect to the payment of dividends or
distribution of assets upon liquidation, dissolution or winding up, or
substitutes the surviving entity in a merger, consolidation, reorganization or
other business combination for the Company, shall not be considered to be such
an adverse change.
As more fully described under "Description of Depositary Shares" below, if
the Company elects to issue Depositary Shares, each representing a fraction of a
share of a series of the Preferred Stock, each such Depositary Share will, in
effect, be entitled to such fraction of a vote per Depositary Share.
NO OTHER RIGHTS
The shares of a series of Preferred Stock will not have any preferences,
voting powers or relative, participating, optional or other special rights
except as set forth above or in the related Prospectus Supplement, the
Certificate of Incorporation and in the certificate of designations or as
otherwise required by law.
DESCRIPTION OF DEPOSITARY SHARES
The description set forth below and in any Prospectus Supplement of certain
provisions of the Deposit Agreement (as defined below) and of the Depositary
Shares and Depositary Receipts does not purport to be complete and is subject to
and qualified in its entirety by reference to the forms of Deposit Agreement and
Depositary Receipts relating to each series of the Preferred Stock which have
been or will be filed with the Commission at or prior to the time of the
offering of such series of the Preferred Stock.
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GENERAL
The Company may, at its option, elect to offer fractional interests in
shares of Preferred Stock, rather than shares of Preferred Stock. In the event
such option is exercised, the Company will provide for the issuance by a
Depositary to the public of receipts for Depositary Shares, each of which will
represent a fractional interest (to be set forth in the Prospectus Supplement
relating to a particular series of the Preferred Stock which will be filed with
the Commission at or prior to the time of the offering of such series of the
Preferred Stock as described below).
The shares of any series of the Preferred Stock underlying the Depositary
Shares will be deposited under a separate Deposit Agreement (the "Deposit
Agreement") between the Company and a bank or trust company selected by the
Company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000 (the "Depositary"). The Prospectus
Supplement relating to a series of Depositary Shares will set forth the name and
address of the Depositary. Subject to the terms of the Deposit Agreement, each
owner of a Depositary Share will be entitled, in proportion to the applicable
fractional interest in a share of Preferred Stock underlying such Depositary
Shares, to all the rights and preferences of the Preferred Stock underlying such
Depositary Share (including dividend, voting, redemption, conversion and
liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the Deposit Agreement.
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will be
exchangeable for definitive Depositary Receipts at the Company's expense.
Upon surrender of Depositary Receipts at the office of the Depositary and
upon payment of the charges provided in the Deposit Agreement and subject to the
terms thereof, a holder of Depositary Shares is entitled to have the Depositary
deliver to such holder the whole shares of Preferred Stock underlying the
Depositary Shares evidenced by the surrendered Depositary Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all the dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares relating to such Preferred Stock in proportion to the
numbers of such Depositary Shares owned by such holders on the relevant record
date. Fractions will be rounded down to the nearest whole cent.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the manner
in which any subscription or similar rights offered by the Company to holders of
the Preferred Stock shall be made available to holders of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
If a series of the Preferred Stock underlying the Depositary Shares is
subject to redemption, the Depositary Shares will be redeemed from the proceeds
received by the Depositary resulting from the redemption, in whole or in part,
of such series of the Preferred Stock held by the Depositary. The Depositary
shall mail notice of redemption not less than 30 and not more than 60 days prior
to the date fixed for redemption to the record holders of the Depositary Shares
to be so redeemed at their respective addresses appearing in the Depositary's
books. The redemption price per Depositary Share will be equal to the
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applicable fraction of the redemption price per share payable with respect to
such series of the Preferred Stock. Whenever the Company redeems shares of
Preferred Stock held by the Depositary, the Depositary will redeem as of the
same redemption date the number of Depositary Shares relating to shares of
Preferred Stock so redeemed. If less than all of the Depositary Shares are to be
redeemed, the Depositary Shares to be redeemed will be selected by lot or pro
rata as may be determined by the Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the Depositary Shares will cease, except the right to receive the
moneys payable upon such redemption and any money or other property to which the
holders of such Depositary Shares were entitled upon such redemption upon
surrender to the Depositary of the Depositary Receipts evidencing such
Depositary Shares.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of the voting rights pertaining to the number of shares of Preferred Stock
underlying such holder's Depositary Shares. The Depositary will endeavor,
insofar as practicable, to vote the number of shares of Preferred Stock
underlying such Depositary Shares in accordance with such instructions, and the
Company will agree to take all action which may be deemed necessary by the
Depositary in order to enable the Depositary to do so. The Depositary will
refrain from voting shares of Preferred Stock to the extent it does not receive
specific instructions from the holders of Depositary Shares relating to such
Preferred Stock.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment which materially
and adversely alters the rights of the existing holders of Depositary Shares
will not be effective unless such amendment has been approved by the record
holders of at least a majority of the Depositary Shares then outstanding. A
Deposit Agreement may be terminated by the Company or the Depositary only if (i)
all outstanding Depositary Shares relating thereto have been redeemed or (ii)
there has been a final distribution in respect of the Preferred Stock of the
relevant series in connection with any liquidation, dissolution or winding up of
the Company and such distribution has been distributed to the holders of the
related Depositary Shares.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Preferred Stock and any redemption of the Preferred Stock. Holders of Depositary
Shares will pay other transfer and other taxes and government charges and such
other charges as are expressly provided in the Deposit Agreement for the
accounts.
MISCELLANEOUS
The Depositary will forward to the holders of Depositary Shares all reports
and communications from the Company which are delivered to the Depositary and
which the Company is required to furnish to the holders of the Preferred Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. Neither the Company nor the Depositary
will be subject to any liability under the Deposit Agreement to any holder of a
Depositary Share, other than for their gross negligence or willful misconduct,
and they will not be obligated to prosecute or defend any legal proceeding in
respect of any Depositary Shares or Preferred Stock unless
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<PAGE> 69
satisfactory indemnity is furnished. They may rely upon written advice of
counsel or accountants, or information provided by persons presenting Preferred
Stock for deposit, holders of Depositary Shares or other persons believed to be
competent and on documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal and must be a bank or trust company having its principal
office in the United States and having a combined capital and surplus of at
least $50,000,000.
DESCRIPTION OF WARRANTS
The Company may issue, together with any other series of Securities offered
or separately, Warrants entitling the holder to purchase from or sell to the
Company, or to receive from the Company the cash value of the right to purchase
or sell, Debt Securities, shares of Preferred Stock, Depositary Shares, Common
Stock or other securities. The Warrants are to be issued under Warrant
Agreements (each a "Warrant Agreement") to be entered into between the Company
and a bank or trust company, as warrant agent (the "Warrant Agent"), all as set
forth in the applicable Prospectus Supplement relating to the particular issue
of Warrants. Copies of the forms of Warrant Agreement, including the forms of
Warrant Certificates representing the Warrants (the "Warrant Certificates"), are
filed as exhibits to the Registration Statement of which this Prospectus forms a
part.
In the case of each series of Warrants, the applicable Prospectus
Supplement will describe the terms of the Warrants being offered thereby,
including the following, if applicable: (i) the offering price; (ii) the
currencies in which such Warrants are being offered; (iii) the number of
Warrants offered; (iv) the securities underlying the Warrants; (v) the exercise
price, the procedures for exercise of the Warrants and the circumstances, if
any, that will cause the Warrants to be deemed to be automatically exercised;
(vi) the date on which the right to exercise the Warrants shall commence and the
date on which such right shall expire; (vii) U.S. federal income tax
consequences; and (viii) other terms of the Warrants.
Warrants may be exercised at the appropriate office of the Warrant Agent or
any other office indicated in the applicable Prospectus Supplement. Prior to the
exercise of Warrants entitling the holder to purchase any securities, holders of
such Warrants will not have any of the rights of holders of the securities
purchasable upon such exercise and will not be entitled to payments made to
holders of such securities.
The Warrant Agreements may be amended or supplemented without the consent
of the holders of the Warrants issued thereunder to effect changes that are not
inconsistent with the provisions of the Warrants and that do not adversely
affect the interests of the holders of the Warrants.
PLAN OF DISTRIBUTION
The Company may offer Securities to or through underwriters, through agents
or directly to other purchasers. The accompanying Prospectus Supplement sets
forth the names of any underwriters or agents involved in the sale of the
Securities in respect of which this Prospectus is being delivered.
The distribution of Securities may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, at market
prices prevailing at the time of sale, at prices related to such market prices
or at negotiated prices.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or from purchasers in the form of
discounts, concessions or commissions. The accompanying Prospectus Supplement
sets forth the terms of the offering of the Securities in respect of which this
Prospectus is being delivered, including any underwriting discounts and other
items constituting compensation of the
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<PAGE> 70
underwriters and agents. Underwriters, agents and dealers participating in the
distribution of the Securities may be deemed to be underwriters within the
meaning of the Securities Act.
Pursuant to agreements that may be entered into between the Company and any
underwriters or agents named in the Prospectus Supplement, such underwriters or
agents may be entitled to indemnification by the Company against certain
liabilities, including liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other persons acting as agents for the Company to solicit offers
by certain institutional investors to purchase Debt Securities or Preferred
Stock from the Company pursuant to contracts providing for payment and delivery
on a future date. Institutions with which such contracts may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but shall in all
cases be subject to the approval of the Company. The obligations of the
purchaser under any such contract will not be subject to any conditions except
(i) the investment in the Debt Securities or Preferred Stock by the institution
shall not at the time of delivery be prohibited by the laws of any jurisdiction
in the United States to which such institution is subject, and (ii) if a portion
of the Debt Securities or Preferred Stock is being sold to underwriters, the
Company shall have sold to such underwriters the Debt Securities or Preferred
Stock not sold for delayed delivery. Underwriters and such other persons will
not have any responsibility in respect of the validity or performance of such
contracts.
All Debt Securities, Preferred Stock and Warrants offered will be a new
issue of securities with no established trading market. Any underwriters to whom
such Debt Securities, Preferred Stock and Warrants are sold by the Company for
public offering and sale may make a market in such Debt Securities, Preferred
Stock and Warrants, but such underwriters will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of or the trading markets for any Debt Securities,
Preferred Stock or Warrants.
Certain of the underwriters or agents and their associates may be customers
of, engage in transactions with and perform services for the Company in the
ordinary course of business.
The specific terms and manner of sale of the Securities in respect of which
this Prospectus is being delivered are set forth or summarized in the Prospectus
Supplement.
VALIDITY OF SECURITIES
The validity of the Securities offered will be passed upon for the Company
by Davis, Graham & Stubbs, L.L.C., Denver, Colorado, and for the Underwriters or
agents, if any, by Sullivan & Cromwell, Los Angeles, California, or such other
counsel as may be named in the accompanying Prospectus Supplement.
EXPERTS
The consolidated balance sheets of American Health Properties, Inc. and
subsidiaries as of December 31, 1994 and December 31, 1993 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1994; the combined
balance sheets of the Core Group (a business unit of American Health Properties,
Inc.) as of December 31, 1994 and December 31, 1993 and the related combined
statements of operations, total attributed equity and cash flows for each of the
three years in the period ended December 31, 1994; and the combined balance
sheets of the Psychiatric Group (a business unit of American Health Properties,
Inc.) as of December 31, 1994 and December 31, 1993 and the related combined
statements of operations, total attributed equity and cash flows for each of the
three years in the period ended December 31, 1994, incorporated by reference in
this Prospectus and elsewhere in the Registration Statement have been audited
by, Arthur Andersen LLP, independent public accountants, as stated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
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GLOSSARY
"Available Dividend Amount," on any date (the "calculation date") with
respect to the Common Stock or the Psychiatric Group Stock (the "subject group
stock") issued with reference to either Group (the "subject group"), means
either:
(i) the excess of (x) an amount equal to the total assets of the
subject group less its total liabilities as of such calculation date,
determined in accordance with Delaware law applied as if the subject group
were a Delaware corporation, over (y) the sum of the aggregate par value of
all outstanding subject group stock and all other capital stock of the
Company attributed to the subject group; or
(ii) in case there shall be no such excess, an amount equal to the net
profits, if any, of the subject group for the fiscal year in which the
dividend is declared and/or the preceding fiscal year, determined in
accordance with Delaware law applied as if the subject group were a
Delaware corporation.
"Board" means the Board of Directors of the Company.
"Core Group" means all assets and liabilities of, and all activities
engaged in by, the Company and its subsidiaries, other than assets, liabilities
and activities which comprise part of the Psychiatric Group. Future issuances of
Common Stock or any other capital stock of the Company (other than Psychiatric
Group Stock) will be deemed to be for the account of, and net proceeds from such
issuances will be deemed to be assets of, the Core Group. All dividends or other
distributions on or repurchases of the Common Stock or any other capital stock
of the Company (other than Psychiatric Group Stock), and all costs attributed by
the Board to the Core Group, will be deemed to be funded out of assets of the
Core Group. In the case of an issuance of shares of Common Stock as a dividend
or other distribution on Psychiatric Group Stock, the Psychiatric Group will be
deemed to have purchased such shares for an amount equal to the average Market
Value of such shares for the ten consecutive Trading Days ending on the last
Trading Day prior to the record date for determining holders of Psychiatric
Group Stock entitled to receive such dividend or distribution, and an amount
equal to such purchase price shall be deemed to have been transferred from the
Psychiatric Group to the Core Group.
"Fair Market Value" for any assets means the price that a willing buyer
adequately informed and not compelled to buy would pay for such assets to a
willing seller adequately informed and not compelled to sell, as determined by
the Board (whose determination shall be conclusive).
"Funds From Operations" as used herein means net income (loss) computed in
accordance with GAAP, excluding gains (losses) from sales of property, adjusted
for write-downs of mortgage notes and investments in real estate and certain
other non-cash items, primarily depreciation and amortization. Funds From
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered an alternative to net income
as an indicator of the Company's operating performance or an alternative to cash
flow as a measure of liquidity.
"GAAP" means generally accepted accounting principles.
"Group" means the Core Group or the Psychiatric Group.
"Market Value" of any stock on any Trading Day means the average of the
high and low reported sales prices regular way of a share of such stock on such
Trading Day or in case no such reported sale takes place on such Trading Day the
average of the reported closing bid and asked prices regular way of a share of
such stock on such Trading Day, in either case on the New York Stock Exchange
Composite Tape or other national securities exchange, or if the shares of such
stock are not listed or admitted to trading on any national securities exchange
on such Trading Day, on the NASDAQ/NM, or if the shares of such stock are not
listed or admitted to trading on any national securities exchange or quoted on
such National Market on such Trading Day, the average of the closing bid and
asked prices of a share of such stock in the over-the-counter market on such
Trading Day as furnished by any New York Stock Exchange member firm selected
from time to time by the Company, or if such closing bid and asked prices are
not made available by any such New York Stock Exchange member firm on such
Trading Day, the market value of a share of such stock (as determined by the
Board, whose determination shall be conclusive); provided that, for purposes of
determining the ratios which
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compare the Market Values of Common Stock and Psychiatric Group Stock, as
calculated over any period, (i) the "Market Value" of any share of Common Stock
and/or Psychiatric Group Stock on any day prior to the "ex" date or any similar
date occurring during such period for any dividend or distribution paid or to be
paid with respect to such stock shall be reduced by the fair market value of the
per share amount of such dividend or distribution (as determined by the Board,
whose determination shall be conclusive) and (ii) the "Market Value" of any
share of Common Stock and/or Psychiatric Group Stock on any day prior to (A) the
effective date of any subdivision (by stock split or otherwise) or combination
occurring during such period or (B) the "ex" date or any similar date occurring
during such period for any dividend or distribution with respect to such stock
in shares of such stock shall be appropriately adjusted to reflect such
subdivision, combination, dividend or distribution. For purposes of the
foregoing, the Market Value of the Psychiatric Group Stock on any day will be
deemed to equal ten times (or such other ratio as reflects the number or
fraction of shares of Psychiatric Group Stock that a Depositary Share
represents, if such number or fraction is changed) the Market Value of the
Depositary Shares on such day.
"NASDAQ/NM" means the National Association of Securities Dealers Automated
Quotations National Market.
"Net Fair Market Value" of the Psychiatric Group or Core Group, as the case
may be, means the hypothetical Fair Market Value of 100% of the stock of a
corporation, assuming the corporation had all of the assets and liabilities of
such Group and no other assets or liabilities, as determined by the Board (whose
determination shall be conclusive).
"Net Proceeds from Psychiatric Group Asset Sales" means the net proceeds of
any sales of Psychiatric Group investments (after transaction costs and reserves
for contingencies).
"Psychiatric Group" means (a) the interests of the Company and its
subsidiaries in their respective investments in psychiatric hospitals, (b) all
activities engaged in by the Company and its subsidiaries in connection with
such investments and (c) all assets and liabilities of the Company or any of its
subsidiaries relating to or arising out of, or otherwise attributed by the Board
to, such investments or activities. Future issuances of Psychiatric Group Stock
will be deemed to be for the account of, and net proceeds from such issuances
will be deemed to be assets of, the Psychiatric Group. All dividends or other
distributions on or repurchases of the Psychiatric Group Stock, and all costs
attributed by the Board to the Psychiatric Group, will be deemed to be funded
out of assets of the Psychiatric Group. In the case of an issuance of shares of
Common Stock as a dividend or other distribution on Psychiatric Group Stock, the
Psychiatric Group will be deemed to have purchased such shares for an amount
equal to the average Market Value of such shares for the ten consecutive Trading
Days ending on the last Trading Day prior to the record date for determining
holders of Psychiatric Group Stock entitled to receive such dividend or
distribution, and an amount equal to such purchase price shall be deemed to have
been transferred from the Psychiatric Group to the Core Group.
"REIT" means a real estate investment trust.
"Trading Day" means each weekday other than any day on which the Common
Stock or Depositary Shares, as the case may be, is not traded on any national
securities exchange or the NASDAQ/NM or in the over-the-counter market.
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LOGO
2,500,000 SHARES
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
PROSPECTUS SUPPLEMENT
DEAN WITTER REYNOLDS INC.
ALEX. BROWN & SONS
INCORPORATED
GOLDMAN, SACHS & CO.
NATWEST SECURITIES LIMITED
October , 1995
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of the
Securities being registered are as follows:
<TABLE>
<S> <C>
SEC registration fee..................................................... $ 94,828
Blue Sky fees and expenses (including legal fees)........................ 25,000
Legal fees and expenses.................................................. 200,000
Accounting fees and expenses............................................. 100,000
Printing and engraving expenses.......................................... 300,000
Rating agency fees....................................................... 75,000
Trustees' fees and expenses.............................................. 30,000
Miscellaneous............................................................ 75,182
--------
Total.......................................................... $900,000*
========
</TABLE>
- ---------------
* All amounts listed above, except for the registration fee, are estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law grants to the Company
the power to indemnify its directors, employees and agents against liability
arising out of their respective capacities as directors, officers employees or
agents. Article V of the Company's Certificate of Incorporation provides for the
limitation of personal liability of the directors of the Company as follows:
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING AND
REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE DIRECTORS
AND STOCKHOLDERS
Section 4. A Director of this Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a Director, except for liability (i) for any
breach of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section
174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the Director derived any improper personal benefit. If the
Delaware General Corporation Law is amended after the date hereof to permit
the further elimination or limitation of the personal liability of
directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Article V of the Company's Bylaws provides for indemnification of officers,
directors and employees of the Company as follows:
Section 13. Indemnification. Each officer, director and employee of
the Corporation shall be indemnified by the Corporation as provided in the
Certificate of Incorporation.
The Company has entered into indemnification agreements with its
directors that would require the Company, subject to any limitations on the
maximum permissible indemnification that may exist at law, to indemnify a
director for claims that arise because of his capacity as a director. The
Company also
II-1
<PAGE> 75
provides its directors and officers with coverage pursuant to a policy of
directors' and officers' liability insurance.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement for Preferred Stock, Depositary Shares, Common Stock
and Common Stock Warrants++
1.2 Form of Underwriting Agreement for Debt Securities++
4.1 Restated Certificate of Incorporation*
4.2 Certificate of Designations of Psychiatric Group Preferred Stock, incorporated by
reference from Exhibit 4.1 to the Current Report on Form 8-K dated August 14, 1995*
4.3 Amended and Restated By-laws, as amended to date, incorporated by reference from
Exhibit 3.2 to the Annual Report on Form 10-K for the period ended December 31,
1992 (Commission File No. 1-9381)*
4.4 Rights Agreement dated as of April 10, 1990, incorporated by reference from Exhibit
2 to the Company's Registration Statement on Form 8-A dated April 10, 1990
(Commission File No. 1-9381)*
4.5 Form of Senior Indenture, including form of Senior Debt Security*
4.6 Form of Subordinated Indenture, including form of Subordinated Security*
4.7 Form of Certificate of Designations of Preferred Stock*
4.8 Form of Deposit Agreement, including form of Depositary Receipt for Depositary
Shares*
4.9 Specimen Stock Certificate with respect to Preferred Stock*
4.10 Specimen Stock Certificate with respect to Common Stock*
4.11 Form of Preferred Stock Warrant Agreement (including form of Preferred Stock
Warrant Certificate)*
4.12 Form of Common Stock Warrant Agreement (including form of Common Stock Warrant
Certificate)*
4.13 Form of Debt Warrant Agreement (including form of Debt Warrant Certificate)*
5.1 Opinion of Davis, Graham & Stubbs, L.L.C.*
8.1 Opinion of Davis, Graham & Stubbs, L.L.C. regarding certain tax matters
12.1 Statement regarding computations of ratio of earnings to fixed charges*
23.1 Consent of Arthur Andersen LLP, independent public accountants
23.2 Consent of Davis, Graham & Stubbs, L.L.C. (included in Exhibit 5.1)*
24.1 Powers of Attorney (included in signature page at page II-4)*
25.1 Statement of Eligibility on Form T-1 with respect to the Securities+
</TABLE>
- ---------------
* Previously filed
+ To be filed by post-effective amendment
++ To be filed in a Current Report on Form 8-K
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<PAGE> 76
ITEM 17. UNDERTAKINGS
(A) The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 77
(D) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(E) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the Senior Trustee or the
Subordinated Trustee to act under subsection (a) of Section 310 of the Trust
Indenture Act in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the Trust Indenture Act.
(F) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
II-4
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in Denver,
Colorado on the 26th day of September, 1995.
AMERICAN HEALTH PROPERTIES, INC.
By: /s/ Joseph P. Sullivan*
------------------------------------
Joseph P. Sullivan
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the foregoing persons in the capacities and on the
dates indicated.
<TABLE>
<C> <S> <C>
/s/ Joseph P. Sullivan* Director, President and Chief September 26, 1995
- ------------------------------------- Executive Officer
Joseph P. Sullivan
/s/ Michael J. McGee Vice President, Treasurer, September 26, 1995
- ------------------------------------- Controller (Principal Financial
Michael J. McGee and Accounting Officer) and
Assistant Secretary
/s/ Walter J. McNerny* Chairman of the Board of Directors September 26, 1995
- -------------------------------------
Walter J. McNerny
/s/ Norman Barker, Jr.* Director September 26, 1995
- -------------------------------------
Norman Barker, Jr.
/s/ Royce Diener* Director September 26, 1995
- -------------------------------------
Royce Diener
/s/ James L. Fishel* Director September 26, 1995
- -------------------------------------
James L. Fishel
Director
- -------------------------------------
Charles M. Haar
/s/ Sheldon S. King* Director September 26, 1995
- -------------------------------------
Sheldon S. King
/s/ Louis T. Rosso* Director September 26, 1995
- -------------------------------------
Louis T. Rosso
*By: /s/ Michael J.
McGee
Michael J. McGee
Attorney-in-Fact
</TABLE>
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<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DOCUMENT NUMBER
------- -------- ------
<S> <C> <C>
8.1 Opinion of Davis, Graham & Stubbs, L.L.C. relating to certain tax
matters
23.1 Consent of Arthur Andersen LLP, independent public accountants
</TABLE>
<PAGE> 1
EXHIBIT 8.1
September 25, 1995
American Health Properties, Inc.
6400 South Fiddler's Green Circle, Suite 1800
Englewood, Colorado 80111
Re: Registration Statement on Form S-3 Relating
to $275,000,000 Aggregate Principal Amount
of Equity Securities and Debt Securities
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-3 (the
"Registration Statement"), Registration No. 33-61895, filed by American Health
Properties, Inc. (the "Company"), with the Securities and Exchange Commission
relating to the registration by the Company under the Securities Act of 1933,
as amended, of up to $275,000,000 aggregate principal amount of equity
securities and debt securities, you have requested our opinion regarding the
correctness of the summaries of the federal income tax law set forth in the
section of the Registration Statement entitled "Federal Income Tax
Considerations."
Our opinion is based on our interpretation of the relevant statutes,
regulations, and administrative and judicial decisions and interpretations in
effect on the date hereof, and we can offer no assurance that such statutes,
regulations, decisions and interpretations will not be amended, revoked or
modified in a manner that would affect our opinion. In rendering this opinion,
we have reviewed and have relied upon the statements as to matters of fact set
forth in the Registration Statement. In rendering this opinion we have also
made such other examinations of matters of fact and of law as we considered
appropriate or advisable for purposes hereof.
Based upon and subject to the foregoing, we are of the opinion that
the statements in the Registration Statement under the caption "Federal Income
Tax Considerations," insofar as such statements constitute statements of
federal income tax law, are correct in all material respects.
We consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement, and to the references to us under the captions "Federal
Income Tax Considerations" and "Validity of Securities" in the Prospectus and
Prospectus Supplement comprising a part of the Registration Statement.
Very truly yours,
/s/ DAVIS, GRAHAM & STUBBS, L.L.C.
Davis, Graham & Stubbs, L.L.C.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement, as amended, of our reports dated
March 6, 1995 included in American Health Properties, Inc.'s Form 10-K for the
year ended December 31, 1994 and Form 8-K, dated August 14, 1995, and to all
references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
September 20, 1995
