<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-2444
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained in this prospectus supplement is subject to completion
pursuant to Rule 424 under the Securities Act of 1933. A registration statement
relating to these securities has been declared effective by the Securities and
Exchange Commission pursuant to Rule 415 under the Securities Act of 1933. A
final prospectus supplement and prospectus will be delivered to purchasers of
these securities. This prospectus supplement and the 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
PRELIMINARY PROSPECTUS SUPPLEMENT DATED FEBRUARY 20, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 4, 1996)
1,000,000 SHARES
LTC PROPERTIES, INC.
% SERIES A CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
___________________________________
Dividends on the % Series A Cumulative Preferred Stock, par value $.01
per share (the "Series A Preferred Stock"), of LTC Properties, Inc. (the
"Company") are cumulative from the date of original issue and are payable
monthly, commencing on April 15, 1997, to shareholders of record on the first
day of each month at the rate of % per annum of the $25 liquidation
preference (the "Liquidation Preference") per share (equivalent to a fixed
annual amount of $ per share). See "Description of Series A Preferred Stock --
Dividends."
Except in certain circumstances relating to preservation of the Company's
qualification as a real estate investment trust (a "REIT"), the Series A
Preferred Stock is not redeemable prior to April 1, 2001. On and after such
date, the Series A Preferred Stock may be redeemed for cash at the option of the
Company in whole or in part, at a redemption price of $25 per share, plus
accrued and unpaid dividends thereon, if any, up to the redemption date. The
Series A Preferred Stock has no stated maturity and will not be subject to any
sinking fund or mandatory redemption and will not be convertible into any other
security of the Company. See "Description of Series A Preferred Stock --
Maturity" and "--Redemption."
In order to ensure that the Company continues to meet the requirements for
qualification as a REIT under the Internal Revenue Code of 1986, as amended,
(the "Code"), shares of Series A Preferred Stock shall be deemed "Excess Shares"
pursuant to the Company's Amended and Restated Articles of Incorporation if a
holder owns more than 9.8% in value of the Company's outstanding capital stock,
and the Company will have the right to purchase Excess Shares from the holder.
See "Description of Series A Preferred Stock -- Restrictions on Ownership."
The Company has applied to list the Series A Preferred Stock on the New
York Stock Exchange ("NYSE") under the symbol "LTC PrA." If approved, trading of
the Series A Preferred Stock on the NYSE is expected to commence within a
thirty-day period after the initial delivery of the Series A Preferred Stock.
See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE S-11 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A PREFERRED STOCK
OFFERED HEREBY.
__________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REP-
RESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS (1) COMPANY (2)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
Total (3) $ $ $
=================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 150,000 Shares of Series A Preferred Stock on the same
terms set forth above solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and $ ,
respectively.
_________
The shares of Series A Preferred Stock are offered by the several
Underwriters named herein, subject to prior sale, when, as and if accepted by
them, subject to certain conditions. It is expected that the shares of Series A
Preferred Stock will be ready for delivery in book-entry form through the
facilities of The Depository Trust Company, New York, New York, on or about ,
1997 against payment therefor in immediately available funds.
MORGAN KEEGAN & COMPANY, INC. J.C. BRADFORD & CO. CROWELL, WEEDON & CO.
The date of this Prospectus Supplement is , 1997.
<PAGE>
LTC PROPERTIES, INC.
--------------------
PORTFOLIO BY STATE
[Black and white map of the United States of America showing state lines. The
map is shaded to reflect where the properties contained in the Company's
investment portfolio are located.]
AVAILABLE INFORMATION
Electronic filings made through the Electronic Data Gathering, Analysis and
Retrieval System are publicly available through the Commission's web site
(http://www.sec.gov).
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WITH A VIEW TO STABILIZING OR MAINTAINING THE MARKET PRICE
OF THE SERIES A PREFERRED 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, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more
detailed information included elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein and therein by reference. As
used herein, the term "Company" includes LTC Properties, Inc. and those entities
owned or controlled thereby (the "Subsidiaries"). All information contained in
this Prospectus Supplement, unless otherwise indicated, assumes that the
Underwriters' overallotment option is not exercised.
THE COMPANY
LTC Properties, Inc. is a self-administered health care real estate
investment trust ("REIT") that invests primarily in long-term care facilities
located throughout the United States. The Company's investment portfolio is
comprised of skilled nursing and assisted living facilities leased to
experienced operators, mortgage loans secured by such facilities and mortgage-
backed securities collateralized by Company-originated mortgage loans on skilled
nursing facilities. The Company's management has extensive experience in the
health care industry, including the operation, acquisition, development and
financing of long-term care facilities.
The Company commenced operations on August 25, 1992, the closing date
of the Company's $150,000,000 initial public offering of common stock and
convertible debentures (the "Initial Offering"). Immediately following the
Initial Offering, the Company made mortgage loans totaling approximately
$75,000,000 to 15 partnerships. This transaction included 40 skilled nursing
facilities, located in nine states. In March 1994, the Company completed a
follow-on public offering of 4,800,000 shares of common stock for gross proceeds
of $63,600,000. Between 1994 and 1996, the Company completed five offerings of
convertible subordinated debentures totaling $151,500,000. In January 1997, the
Company completed another offering of 1,000,000 shares of common stock for gross
proceeds of $17,750,000.
At December 31, 1996, the Company had total investments of
approximately $481,745,000. Of this amount, approximately 44.0% were
investments in long-term care facilities owned by the Company and leased to
operators, approximately 36.8% were net investments in mortgage loans and
approximately 19.2% were investments in mortgage-backed securities that are
backed by pools of mortgage loans originated by the Company. At December 31,
1996, the Company's portfolio consisted of 248 skilled nursing facilities with a
total of 28,628 beds and 35 assisted living facilities with a total of 1,456
units in 32 states.
Owned Properties. At December 31, 1996, the Company owned and leased to
health care operators 49 skilled nursing facilities with a total of 6,520 beds
and 24 assisted living facilities with a total of 868 units in 17 states
representing a total net investment of approximately $211,938,000.
Approximately 60.4% of the revenue from leased facilities is derived from
facilities operated by publicly traded corporations. These long-term care
facilities are leased pursuant to non-cancelable triple net leases, generally
with an initial term of ten to twelve years. Many of the leases contain renewal
options and some contain options that permit the lessee to purchase the
facilities. Most of the leases provide for annual fixed rent increases or
increases based on increases in consumer price indices over the term of the
lease. In addition, certain of the leases provide for additional rent through
participation in incremental revenue growth.
Mortgage Loans. At December 31, 1996, the Company had investments of
approximately $177,262,000 in 67 mortgage loan receivables secured by first
mortgages on 73 skilled nursing facilities with a total of 8,672 beds and 11
assisted living residences with a total of 588 units located in 23 states. The
mortgage loans, which individually range from $302,500 to $11,240,000 in
principal amount, have current interest rates ranging from 9.16% to 13.20%. The
mortgage loans generally have 25-year amortization schedules with balloon
payments due from 1997 to 2017 and provide for certain facility fees. Most of
the mortgage loans have prepayment fees and provide for specified increases in
the initial interest rate. In general, the Company's mortgage loans may not be
prepaid except in the event of a sale of the facility to a third party that is
not affiliated with the borrower.
S-3
<PAGE>
Mortgage-backed Securities. At December 31, 1996, the Company had
investments of approximately $92,545,000 in subordinated mortgage-backed pass-
through certificates collateralized by 85 first mortgage loans on 148 skilled
nursing facilities with a total of 16,064 beds in 24 states. The mortgage loans,
all of which were originated by the Company, have individual principal balances
ranging from approximately $297,000 to $13,760,000, have a weighted-average
interest rate of approximately 11.21% and generally have 25-year amortization
schedules with balloon payments due from 1999 to 2015.
INDUSTRY
The long-term care industry provides sub-acute medical and custodial
care to the senior population of the United States. The demand for long-term
care comes principally from those individuals over 85 years of age. According
to data from the U.S. Census Bureau, there are currently 3.6 million Americans
over the age of 85, comprising just over 1% of the total population. By the year
2030, it is expected that approximately 8.8 million Americans will be age 85 or
older, representing almost 3% of the total population. Currently, approximately
25% of people over 85 reside in nursing homes; of those not residing in such
homes, approximately 50% require some assistance in performing their daily
activities.
According to the Health Care Financing Administration, total spending
on long-term care was approximately $72.3 billion in 1994. Of this amount,
approximately 48% was funded by Medicaid, approximately 44% by private sources
and approximately 8% by Medicare. The Health Care Financing Administration
expects spending for long-term care to grow to approximately $310 billion by
2010. HCIA, Inc., a health care information company, estimates that the nursing
home industry has an average occupancy rate of 92%. Existing regulations in
many states place substantial restrictions on the construction of new skilled
nursing facilities, thereby helping to maintain the industry's high average
occupancy rate.
INVESTMENT STRATEGY
In evaluating potential investments, the Company considers such
factors as (i) the type of property, (ii) the location, construction quality,
condition and design of the property, (iii) the property's current and
anticipated cash flow and its adequacy to meet operational needs and lease or
debt service obligations, (iv) the quality, financial stability and reputation
of the property's operator, (v) the growth, tax and regulatory environments of
the communities in which the properties are located, (vi) the occupancy of and
demand for similar long-term care facilities in the area surrounding the
property and (vii) the Medicaid reimbursement policies of the state in which the
property is located.
The Company places primary emphasis on investing in long-term care
facilities that have low investment per bed ratios and whose operators do not
have to rely upon a high percentage of private pay patients or ancillary
services to cover debt service or lease obligations. The Company seeks to
invest in facilities that are located in suburban and rural areas of states with
improving Medicaid reimbursement climates. The Company prefers to invest in
facilities that have a significant market presence in their respective
communities and where state licensing procedures limit the entry of competing
facilities. Prior to every investment, the Company conducts a facility site
review to assess the general physical condition of the facility, the potential
of additional sub-acute services and the quality of care the operator provides.
In addition, the Company reviews the environmental reports, state survey and
financial statements of the facility before the investment is made.
To date, a majority of the Company's investments have been made in the form
of mortgage loans secured by skilled nursing facilities. Due to management's
belief that assisted living facilities are an increasingly important sector of
the long-term care market, a larger portion of the Company's future investments
are expected to be made in the form of direct ownership of assisted living
facilities. Management believes that assisted living facilities represent a
lower cost long-term care alternative for senior adults than skilled nursing
facilities. The Company invests in assisted living facilities that attract the
moderate-income private pay patients in smaller communities, preferably in
states that have adopted Medicaid waiver programs or are in the process of
adopting or reviewing their policies and reimbursement program to provide
funding for assisted living residences. The Company believes that locating
residences in states with a favorable regulatory reimbursement climate should
provide a stable source of residents eligible for Medicaid reimbursement to the
extent private-pay residents are not available, and should provide alternative
sources of income for residents when their private funds are depleted and they
become Medicaid eligible.
S-4
<PAGE>
RECENT DEVELOPMENTS
Completed Investments
During January 1997, the Company provided mortgage loans totaling
approximately $18,530,000 and acquired one skilled nursing facility for
$2,556,000. Included in the mortgage loans are approximately $17,330,000 of
mortgage loans on assisted living facilities which will be paid off once the
Company completes a sale-leaseback transaction for the same amount on assisted
living facilities that are being constructed.
Commitments
As of February 1, 1997, the Company had outstanding investment commitments
totaling $82,790,000, consisting of approximately $22,650,000 in commitments to
make mortgage loans and commitments for the acquisition of one skilled nursing
and 25 assisted living facilities for an aggregate purchase price of
approximately $60,140,000. The Company expects to fund substantially all of
these commitments by the end of 1997. There can be no assurance that any or all
of the foregoing commitments will be consummated.
Conversion of Convertible Subordinated Debentures
During January 1997, an additional $26,358,000 in principal amount of
debentures converted into 1,614,153 shares of the Company's common stock.
Issuance of Common Stock
On January 15, 1997, the Company sold, through a public offering, 1,000,000
shares of common stock at $17.75 per share. Of the total net proceeds,
$17,300,000 was used to pay down borrowings outstanding under the Company's
unsecured line of credit.
Proposed Mergers
On February 18, 1997, Sun Healthcare Group, Inc. ("Sun") announced an
agreement to acquire by merger Retirement Care Associates ("RCA") and
HealthSouth Corp. ("HSC") announced an agreement to acquire Horizon Healthcare
Corporation ("HHC") by merger. Both of these proposed mergers are subject to
the satisfaction of customary conditions, including receipt of shareholder,
regulatory and lender approvals. As of December 31, 1996, Sun and RCA operated
26 and 34 facilities, respectively, representing approximately 9.03% ($56.6
million) and 14.33% ($89.8 million), respectively, of the Company's adjusted
gross real estate investment portfolio (adjusted to include the mortgage loans
to third parties underlying the $92,545,000 investment in mortgage-backed
securities). If completed, the Sun/RCA merger will result in Sun operating
facilities representing approximately 23.36% ($146.4 million) of the Company's
adjusted gross real estate investment portfolio. As of December 31, 1996, HHC
operated/managed 36 facilities representing approximately 13.76% ($86.2 million)
of the Company's adjusted gross real estate investment portfolio. Sun, RCA, HSC,
and HHC are publicly-traded companies, and other information regarding these
operators is on file with the Securities and Exchange Commission. See "Risk
Factors - Reliance on Major Operators of Healthcare Facilities."
S-5
<PAGE>
INVESTMENT PORTFOLIO
The following is a summary of the Company's investments as of December 31,
1996.
OWNED PROPERTIES
<TABLE>
<CAPTION>
Number of Number of Current Annual
Location Facilities Beds/Units Purchase Price Rent Payments
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama 9 912 $ 29,287,996 $ 3,274,779
Arizona 3 587 18,486,509 2,335,600
California 3 473 7,378,468 896,172
Florida 9 1,116 39,064,291 4,061,847
Georgia 1 100 2,500,000 248,750
Idaho 1 39 2,550,000 266,220
Illinois 1 148 6,627,159 746,640
Iowa 6 448 9,401,943 1,073,564
Kansas 4 134 6,700,000 633,820
Montana 1 278 3,830,608 420,365
New Mexico 2 236 6,898,696 785,951
Oklahoma 1 37 1,750,000 168,525
Oregon 2 71 4,550,000 463,410
Tennessee 2 224 5,550,000 552,225
Texas 16 1685 45,630,908 4,980,779
Virginia 3 443 11,012,655 1,211,748
Washington 9 457 22,358,630 2,185,380
- -----------------------------------------------------------------------------------------------------------------
TOTAL 73 7,388 $223,577,863 $24,305,775
=================================================================================================================
</TABLE>
MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Number of Face Amount of Current Amount of Current Annual
Location Facilities Beds/Units Mortgage Loans Mortgage Loans Debt Service (1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama 1 142 $ 4,100,000 $ 4,060,562 $ 489,706
Arizona 3 479 10,650,000 10,599,851 1,238,740
Arkansas 2 274 3,400,000 3,361,692 396,918
California 11 1,587 22,805,000 23,501,020 2,888,344
Colorado 4 373 6,330,000 5,284,620 615,460
Florida 9 1,106 30,944,862 31,726,985 3,644,254
Georgia 3 287 8,050,000 8,030,186 929,512
Illinois 2 322 6,200,000 6,185,008 643,244
Iowa 3 214 4,000,000 3,940,365 493,338
Kansas 4 233 4,320,000 3,995,045 474,810
Louisiana 1 127 1,600,000 1,600,000 196,745
Mississippi 3 400 11,250,000 11,240,003 1,216,767
Missouri 1 174 2,801,000 2,872,520 375,658
Nebraska 5 266 5,348,980 5,434,382 601,749
Nevada 1 100 1,200,000 1,173,996 142,523
North Carolina 2 201 3,770,000 3,728,490 449,556
Ohio 1 150 5,200,000 5,173,773 575,408
Oklahoma 1 161 1,300,000 1,292,252 159,961
Oregon 4 261 8,160,000 8,157,238 810,999
South Carolina 5 509 11,250,000 11,229,957 1,357,532
Tennessee 3 201 5,861,000 4,826,639 561,609
Texas 11 1383 16,650,000 16,364,741 1,998,690
Washington 4 310 4,500,000 4,482,365 551,282
- ------------------------------------------------------------------------------------------------------------------------
TOTAL 84 9,260 $179,690,842 $178,261,690 $20,812,805
========================================================================================================================
</TABLE>
(1) Includes principal and interest
S-6
<PAGE>
MORTGAGE-BACKED SECURITIES
The following is a summary of the three pools of mortgage loans underlying
the Company's $92,545,000 investment in subordinated mortgage-backed securities
as of December 31, 1996. The Company's securities are subordinated to
$192,210,000 of senior mortgage-backed securities held by third parties.
<TABLE>
<CAPTION>
Face Amount of
Number of Number of Existing Mortgage Current Amount of Current Annual
Location Facilities Beds Loans Mortgage Loans Debt Service(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama 8 1,069 $ 18,425,800 $ 18,074,641 $ 2,253,561
Arizona 5 955 26,018,000 25,708,985 2,863,918
California 16 1,705 27,404,786 25,753,046 3,588,009
Connecticut 4 499 10,656,000 10,478,251 1,297,858
Florida 3 330 13,160,000 12,875,952 1,533,085
Georgia 10 1,078 20,822,000 20,566,473 2,498,370
Illinois 6 679 12,426,000 12,150,073 1,495,306
Iowa 10 750 13,531,000 13,782,238 1,493,545
Kansas 1 66 1,200,000 1,191,133 140,033
Kentucky 1 67 726,000 711,348 88,862
Michigan 3 444 6,800,000 6,698,413 828,043
Mississippi 1 120 2,800,000 2,773,733 332,810
Missouri 5 545 9,489,000 9,297,497 1,161,454
Montana 5 658 14,278,000 14,073,620 1,536,239
Nebraska 4 378 6,614,000 6,545,787 770,105
New Mexico 5 350 9,007,000 8,757,245 1,127,306
North Carolina 2 256 5,350,000 5,217,532 649,726
Ohio 3 243 7,000,000 6,732,363 815,867
Oklahoma 1 112 1,300,000 1,262,522 167,409
S. Dakota 1 50 585,000 574,982 64,189
Tennessee 4 297 6,952,000 6,884,490 822,951
Texas 45 5,020 64,280,000 62,341,306 7,773,876
Washington 4 289 4,583,000 4,502,040 544,601
Wisconsin 1 104 2,075,000 1,927,543 264,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 148 16,064 $285,482,586 $278,881,213 $34,111,123
=====================================================================================================================
</TABLE>
(1) Includes principal and interest
Included in the balances of the mortgages underlying the mortgage-backed
securities are $54,205,000 of non-recourse mortgages payable by the Company.
These mortgages are secured by 22 skilled nursing facilities containing a total
of 2,634 beds which are owned by the Company and included in "Owned Properties."
S-7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........... 1,000,000 shares of % Series A Cumulative
Preferred Stock (1,150,000 shares if the
Underwriters' overallotment option is exercised
in full). The Company has applied to list the
Series A Preferred Stock on the NYSE under the
symbol "LTC PrA." See "Underwriting."
Maturity..................... The Series A Preferred Stock has no stated
maturity and will not be subject to any sinking
fund or mandatory redemption. See "Description
of Series A Preferred Stock -- Maturity."
Use of Proceeds.............. Of the net proceeds from the sale of the Series
A Preferred Stock, approximately $ million,
will be used to reduce the outstanding
indebtedness owed under the Company's lines of
credit. Amounts paid to reduce outstanding
indebtedness under the lines of credit
subsequently may be reborrowed (subject to the
terms and limits of the lines of credit) to
finance investments in additional properties and
for other corporate purposes. See "Use of
Proceeds."
Ranking...................... With respect to the payment of dividends and
amounts upon liquidation, the Series A Preferred
Stock will rank senior to the Common Stock,
which is the only capital stock of the Company
currently outstanding. See "Description of
Series A Preferred Stock -- Rank," "--
Dividends" and "-- Liquidation Preference."
Dividends.................... Dividends on the Series A Preferred Stock are
cumulative from the date of original issue and
are payable monthly on or before the 15th day of
each month commencing on April 15, 1997 to
shareholders of record on the first day of such
month, at the rate of % per annum of the
Liquidation Preference. See "Description of
Series A Preferred Stock -- Dividends."
Liquidation Preference....... The Liquidation Preference is equal to $25 per
share of Series A Preferred Stock, plus accrued
and unpaid dividends (whether or not declared).
See "Description of Series A Preferred Stock --
Liquidation Preference."
Redemption................... Except in certain circumstances relating to
preservation of the Company's status as a REIT,
the Series A Preferred Stock is not redeemable
prior to April 1, 2001. On and after such date,
the Series A Preferred Stock will be redeemable
for cash at the option of the Company, in whole
or in part, at a redemption price of $25 per
share, plus dividends accrued and unpaid to the
redemption date (whether or not declared)
without interest. See "Description of Series A
Preferred Stock -- Redemption" and --
Restrictions on Ownership."
Voting Rights................ Holders of Series A Preferred Stock generally
will have no voting rights. However, whenever
dividends on any shares of Series A Preferred
Stock shall be in arrears for eighteen or more
months, the holders of such shares (voting
separately as a class with all other series of
parity preferred stock upon which like voting
rights have been conferred and are exercisable)
will be entitled to vote for the election of two
additional directors of the Company until all
dividends accumulated on such shares of Series A
Preferred Stock have been fully paid or declared
and a sum sufficient for the payment thereof set
aside for payment. In addition, certain changes
to the terms of the Series A Preferred Stock
that would be materially adverse to the rights
of holders of the Series A Preferred Stock
cannot be made without the affirmative vote of
holders of at least two-thirds of the
outstanding Series A Preferred Stock. See
"Description of Series A Preferred Stock --
Voting Rights."
Conversion................... The Series A Preferred Stock is not convertible
into or exchangeable for any other property or
securities of the Company.
</TABLE>
S-8
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary financial and operating information
on an historical basis for the Company. The following information should be read
in conjunction with all of the financial statements and notes thereto included
in the Annual Report on Form 10-K for the year ended December 31, 1996, which is
incorporated by reference into this Prospectus Supplement. The unaudited pro
forma data reflects the completion of the Offering as if it had happened on
January 1, 1996, with the net proceeds being utilized to pay down borrowings
under the Company's credit lines bearing an interest rate of 7.7%. The pro forma
other data is not necessarily indicative of what the actual data would have been
as of the date or for the period indicated; nor does it purport to represent or
project the data for future periods. This data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992 (1)
----------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income............................................. $ 20,529 $ 9,935 $ 5,643 $ 2,415 $ 60
Interest income from mortgage loans....................... 17,498 13,116 12,836 8,786 3,254
Interest income from mortgage-backed securities........... 14,383 10,903 7,923 3,580 -
Interest and other income................................. 2,520 1,615 1,239 1,066 698
-------- -------- -------- -------- --------
Total revenues.................................... 54,930 35,569 27,641 15,847 4,012
Expenses:
Interest expense.......................................... 20,604 9,407 6,563 6,400 2,597
Depreciation and amortization............................. 6,298 3,072 1,781 799 41
Amortization of Founders' stock........................... 114 221 372 481 281
Provision for loan losses................................. - - 550 372 75
Minority interest......................................... 898 57 - - -
Operating and other expenses (2).......................... 4,479 2,772 3,037 948 255
-------- -------- -------- -------- --------
Total expenses.................................... 32,393 15,529 12,303 9,000 3,249
-------- -------- -------- -------- --------
Net income.................................................. $ 22,537 $ 20,040 $ 15,338 $ 6,847 $ 763
======== ======== ======== ======== ========
Net income per share........................................ $ 1.17 $ 1.10 $ 0.99 $ 0.75 $ 0.10
Weighted average shares outstanding......................... 19,257 18,257 15,443 9,169 7,962
BALANCE SHEET DATA:
Land, buildings and improvements, net....................... $211,938 $111,782 $ 70,628 $ 27,792 $ 6,818
Mortgage loans receivable, net.............................. 177,262 161,059 61,785 78,053 87,984
Mortgage-backed securities, net............................. 92,545 67,384 87,612 41,424 -
-------- -------- -------- -------- --------
Total investments........................................... 481,745 340,225 220,025 147,269 94,802
Total assets................................................ 494,149 357,162 239,369 154,303 148,562
Total debt.................................................. 283,472 174,083 55,835 61,804 73,192
Total liabilities........................................... 299,207 185,458 66,148 69,156 78,250
Minority interest........................................... 10,528 1,098 - - -
Total stockholders' equity.................................. 184,414 170,606 173,221 85,147 70,312
OTHER DATA:
Funds from operations (3)................................... $ 28,793 $ 23,944 $ 17,078 $ 7,605 $ 791
Weighted average shares outsta.nding........................ 19,257 18,257 15,443 9,169 7,962
Distributions declared per share............................ $ 1.335 $ 1.21 $ 1.10 $ 1.02 $ 0.35
Ratio of earnings to fixed charges (4)...................... 2.05x 3.12x 3.34x 2.07x 1.29x
Pro forma ratio of earnings to fixed charges and
preferred dividends (4).................................... 2.00x - - - -
Ratio of funds from operations to fixed charges (5)......... 2.34x 3.53x 3.60x 2.19x 1.30x
Pro forma ratio of funds from operations to
fixed charges and preferred dividends (5).................. 2.28x - - - -
Ratio of total debt to total capitalization (6)............. 44.0% 38.8% 19.3% 33.0% 47.8%
Number of facilities in portfolio........................... 283 229 177 117 53
Number of skilled nursing beds in portfolio................. 28,622 25,002 20,474 13,890 6,124
Number of assisted living units in portfolio................ 1,456 525 - - -
</TABLE>
(Notes on following page)
S-9
<PAGE>
(1) From August 25, 1992 (commencement of operations) to December 31, 1992.
(2) Represents corporate expenses.
(3) Funds from Operations ("FFO") represents net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation of real property, less preferred stock
dividends and after adjustments for unconsolidated entities in which a REIT
holds an interest. FFO is computed in accordance with the definition
adopted by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO should not be considered as an alternative to net income or
any other GAAP measurement of performance as an indicator of operating
performance or as an alternative to cash flows from operations, investing,
and financing activities as a measure of liquidity. The Company believes
that FFO is helpful in evaluating a real estate investment portfolio's
overall performance considering the fact that historical cost accounting
implicitly assumes that the value of real estate assets diminishes
predictably over time. FFO provides an alternative measurement criteria,
exclusive of certain non-cash charges included in GAAP net income, by which
to evaluate the performance of such investments. In March 1995, NAREIT
modified the definition of FFO to eliminate amortization of deferred
financing costs and depreciation of non-real estate assets as items added
back to net income when computing FFO. The Company implemented the new
method of calculating FFO effective as of the NAREIT-suggested adoption
date of January 1, 1996. FFO has been restated for the new method for all
periods.
(4) For purposes of these computations, earnings consist of net income plus
fixed charges. Fixed charges principally consist of interest expense,
capitalized interest, amortization of deferred financing costs and
preferred distributions to limited partners. The historical earnings do not
include preferred stock dividends as no shares of preferred stock were
outstanding for the periods presented.
(5) For purposes of these computations, funds from operations consists of FFO
as defined in (3) above plus fixed charges. Fixed charges principally
consist of interest expense, capitalized interest, amortization of deferred
financing costs and preferred distributions to limited partners. The
historical earnings do not include preferred stock dividends as no shares
of preferred stock were outstanding for the periods presented.
(6) Total capitalization as of the dates presented is total debt plus the
aggregate market value of the Company's common stock.
S-10
<PAGE>
RISK FACTORS
An investment in the Series A Preferred Stock involves various risks,
including those described below and in the accompanying Prospectus under the
caption "Risk Factors." Investors should carefully consider these risk factors
together with all of the information set forth or incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus in determining
whether to purchase shares of Series A Preferred Stock. Information contained
or incorporated by reference in this Prospectus Supplement or in the
accompanying Prospectus may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," or "continue" or the negative
thereof or other comparable terminology. The following matters and certain
other factors noted throughout this Prospectus Supplement and the accompanying
Prospectus, and any documents incorporated by reference herein or therein and
exhibits hereto and thereto, constitute cautionary statements identifying
important factors with respect to any such forward-looking statements, including
certain risks and uncertainties, that could cause the Company's actual results
to differ materially from those contained in any such forward-looking
statements.
RISKS ASSOCIATED WITH DEBT FINANCING
The Company currently uses and intends to continue to use debt financing
for new investments. Such debt financing may include the Credit Agreement, the
Repurchase Agreement or permanent secured or unsecured long-term debt. The
Company's use of debt financing presents the risk to holders of the Series A
Preferred Stock that payments of principal and interest on borrowings will leave
the Company with insufficient cash resources to pay dividends required by the
terms of the Series A Preferred Stock or distributions in respect of capital
stock required to be paid in order for the Company to maintain its qualification
as a REIT.
RISKS RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation do not limit
the issuance of additional series of preferred stock ranking in parity with the
Series A Preferred Stock. The issuance of additional preferred stock in parity
with the Series A Preferred Stock could have the effect of diluting the
interests of holders of the Series A Preferred Stock.
HEALTH CARE REFORM
Federal health care legislation ultimately enacted in 1996 focused on
assuring portability of employee health care benefits and increasing enforcement
powers of federal agencies that investigate and prosecute fraud and abuse in
federally funded health care programs. Renewed efforts in 1997 to balance the
federal budget will continue to place priority on the need to slow the growth
rate in federal health care expenditures. President Clinton's current budget
proposal, for example, seeks $138 billion in reductions in Medicare expenditures
needed to address the short term solvency of the federal program, including
significant limitations on growth in provider reimbursement. It is anticipated
that further debate on overall structural reform of federal health care programs
will affect additional legislative action on cost-containment. See also "Risk
Factors - Government Regulation" in the accompanying Prospectus.
RELIANCE ON MAJOR OPERATORS OF HEALTHCARE FACILITIES
As of December 31, 1996, three companies operated/managed 96 facilities
representing 37.12% ($232.6 million) of the Company's adjusted gross real
estate investment portfolio. See "Recent Developments -- Proposed Mergers." The
financial position of the Company and its ability to make distributions may be
adversely affected by financial difficulties experienced by any of such
operators, or any other major operator of the Company, including a bankruptcy,
insolvency or general downturn in the business of any such operator, or in the
event any such operator does not renew and/or extend its relationship with the
Company or its borrowers as it expires.
S-11
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of the Series A
Preferred Stock after payment of all underwriting discounts and expenses of the
Offering (estimated to be $ ) will be approximately $ ($ if the
Underwriters exercise their over-allotment option in full). The Company intends
to use such net proceeds to pay down borrowings outstanding under two lines of
credit as described below.
The Company has a $45,000,000 unsecured revolving credit agreement (the
"Credit Agreement") with certain banks to provide the Company with short-term
borrowings which are used to make real estate investments. Borrowings under the
Credit Agreement bear interest at LIBOR plus 1.5% and the Credit Agreement
expires on May 31, 1998. As of February 1, 1997, the Company had $38,700,000
outstanding under the Credit Agreement bearing an average interest rate of
approximately 7.2%.
The Company has an $84,000,000 repurchase agreement (the "Repurchase
Agreement") with an institution to provide the Company with short-term
borrowings in an amount based on the Company's existing mortgages loans with no
additional commitment or unused fees. Borrowings under the Repurchase Agreement
are also used to make real estate investments and are secured by substantially
all of the outstanding mortgage loans of the Company and mature on or before
November 15, 1997; however, the Company has historically been able to renew the
Repurchase Agreement. Borrowings under the Repurchase Agreement bear interest
at LIBOR plus 2.0%. As of February 1, 1997, the Company had $50,000,000
outstanding under the Repurchase Agreement bearing an interest rate of
approximately 7.7%.
Although portions of the borrowings under the Company's lines of credit
will be paid down with proceeds from the Offering, the Company expects to incur
additional indebtedness under both the Repurchase Agreement and the Credit
Agreement to finance future investments.
S-12
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company (i) as of December 31, 1996, (ii) pro forma to give effect through
January 31, 1997 to the borrowings and repayments under the Company's lines of
credit, the issuance of 1,000,000 shares of common stock as discussed in
"Summary Recent Developments" and conversions of $26,358,000 of the Company's
outstanding convertible subordinated debentures into 1,614,153 shares of common
stock and (iii) pro forma as adjusted to give effect to the sale of the
1,000,000 shares of Series A Preferred Stock offered hereby (assuming the
Underwriters' over-allotment option is not exercised) and the application of the
net proceeds therefrom as described in "Use of Proceeds." The capitalization
table should be read in conjunction with the Company's consolidated financial
statements and related notes thereto incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus.
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- ---------- ------------
(in thousands)
<S> <C> <C> <C>
DEBT:
Convertible subordinated debentures due
1999 - 2004......................................... $135,828 $109,470 $ 109,470
Borrowings under lines of credit..................... 79,400 88,700 64,800
Mortgage loans payable............................... 54,205 54,205 54,205
Bonds payable and capital lease obligations.......... 14,039 14,039 14,039
-------- -------- ---------
Total debt........................................... 283,472 266,414 242,514
MINORITY INTEREST......................................... 10,528 10,528 10,528
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value: 10,000,000 shares
authorized, none outstanding; 1,000,000 shares
pro forma as adjusted.............................. - - 10
Common Stock, $.01 par value:
40,000,000 shares authorized, 19,484,208 shares
outstanding; 22,098,361 shares pro forma and
pro forma as adjusted............................ 195 221 221
Capital in excess of par value....................... 195,297 238,205 262,095
Cumulative net income................................ 65,525 65,525 65,525
Cumulative cash distributions........................ (76,603) (76,603) ( 76,603)
-------- -------- ---------
Total shareholders' equity........................ 184,414 227,348 251,248
-------- -------- ---------
TOTAL CAPITALIZATION.............................. $478,414 $504,290 $504,290
======== ======== =========
</TABLE>
S-13
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating
information on an historical basis for the Company. The following information
should be read in conjunction with all of the financial statements and notes
thereto included in the Annual Report on Form 10-K for the year ended December
31, 1996, which is incorporated by reference into this Prospectus Supplement.
The unaudited pro forma data reflects the completion of the Offering as if it
had happened on January 1, 1996, with the net proceeds being utilized to pay
down borrowings under the Company's credit lines bearing an interest rate of
7.7%. The pro forma other data is not necessarily indicative of what the actual
data would have been as of the date or for the period indicated; nor does it
purport to represent or project the data for future periods. This data should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus
Supplement.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992 (1)
-------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income............................................. $ 20,529 $ 9,935 $ 5,643 $ 2,415 $ 60
Interest income from mortgage loans....................... 17,498 13,116 12,836 8,786 3,254
Interest income from mortgage-backed securities........... 14,383 10,903 7,923 3,580 -
Interest and other income................................. 2,520 1,615 1,239 1,066 698
-------- -------- -------- -------- --------
Total revenues.................................... 54,930 35,569 27,641 15,847 4,012
Expenses:
Interest expense.......................................... 20,604 9,407 6,563 6,400 2,597
Depreciation and amortization............................. 6,298 3,072 1,781 799 41
Amortization of Founders' stock........................... 114 221 372 481 281
Provision for loan losses................................. - - 550 372 75
Minority interest......................................... 898 57 - - -
Operating and other expenses (2).......................... 4,479 2,772 3,037 948 255
-------- -------- -------- -------- --------
Total expenses.................................... 32,393 15,529 12,303 9,000 3,249
-------- -------- -------- -------- --------
Net income.................................................. $ 22,537 $ 20,040 $ 15,338 $ 6,847 $ 763
======== ======== ======== ======== ========
Net income per share........................................ $ 1.17 $ 1.10 $ 0.99 $ 0.75 $ 0.10
Weighted average shares outstanding......................... 19,257 18,257 15,443 9,169 7,962
BALANCE SHEET DATA:
Land, buildings and improvements, net....................... $211,938 $111,782 $ 70,628 $ 27,792 $ 6,818
Mortgage loans receivable, net.............................. 177,262 161,059 61,785 78,053 87,984
Mortgage-backed securities, net............................. 92,545 67,384 87,612 41,424 -
-------- -------- -------- -------- --------
Total investments........................................... 481,745 340,225 220,025 147,269 94,802
Total assets................................................ 494,149 357,162 239,369 154,303 148,562
Total debt.................................................. 283,472 174,083 55,835 61,804 73,192
Total liabilities........................................... 299,207 185,458 66,148 69,156 78,250
Minority interest........................................... 10,528 1,098 - - -
Total stockholders' equity.................................. 184,414 170,606 173,221 85,147 70,312
OTHER DATA:
Funds from operations (3)................................... $ 28,793 $ 23,944 $ 17,078 $ 7,605 $ 791
Weighted average shares outstanding......................... 19,257 18,257 15,443 9,169 7,962
Distributions declared per share............................ $ 1.335 $ 1.21 $ 1.10 $ 1.02 $ 0.35
Ratio of earnings to fixed charges (4)...................... 2.05x 3.12x 3.34x 2.07x 1.29x
Pro forma ratio of earnings to fixed charges and preferred
dividends (4).............................................. 2.00x - - - -
Ratio of funds from operations to fixed charges (5)......... 2.34x 3.53x 3.60x 2.19x 1.30x
Pro forma ratio of funds from operations to fixed
charges and preferred dividends (5)........................ 2.28x - - - -
Ratio of total debt to total capitalization (6)............. 44.0% 38.8% 19.3% 33.0% 47.8%
Number of facilities in portfolio........................... 283 229 177 117 53
Number of skilled nursing beds in portfolio................. 28,622 25,002 20,474 13,890 6,124
Number of assisted living units in portfolio................ 1,456 525 - - -
</TABLE>
(Notes on following page)
S-14
<PAGE>
(1) From August 25, 1992 (commencement of operations) to December 31, 1992.
(2) Represents corporate expenses.
(3) Funds from Operations ("FFO") represents net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation of real property, less preferred stock
dividends and after adjustments for unconsolidated entities in which a REIT
holds an interest. FFO is computed in accordance with the definition
adopted by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO should not be considered as an alternative to net income
or any other GAAP measurement of performance as an indicator of operating
performance or as an alternative to cash flows from operations, investing,
and financing activities as a measure of liquidity. The Company believes
that FFO is helpful in evaluating a real estate investment portfolio's
overall performance considering the fact that historical cost accounting
implicitly assumes that the value of real estate assets diminishes
predictably over time. FFO provides an alternative measurement criteria,
exclusive of certain non-cash charges included in GAAP net income, by which
to evaluate the performance of such investments. In March 1995, NAREIT
modified the definition of FFO to eliminate amortization of deferred
financing costs and depreciation of non-real estate assets as items added
back to net income when computing FFO. The Company implemented the new
method of calculating FFO effective as of the NAREIT-suggested adoption
date of January 1, 1996. FFO has been restated for the new method for all
periods.
(4) For purposes of these computations, earnings consist of net income plus
fixed charges. Fixed charges principally consist of interest expense,
capitalized interest, amortization of deferred financing costs and
preferred distributions to limited partners. The historical earnings do
not include preferred stock dividends as no shares of preferred stock were
outstanding for the periods presented.
(5) For purposes of these computations, funds from operations consists of FFO
as defined in (3) above plus fixed charges. Fixed charges principally
consist of interest expense, capitalized interest, amortization of deferred
financing costs and preferred distributions to limited partners. The
historical earnings do not include preferred stock dividends as no shares
of preferred stock were outstanding for the periods presented.
(6) Total capitalization as of the dates presented is total debt plus the
aggregate market value of the Company's common stock.
S-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the years ended December 31, 1996, 1995
and 1994. This discussion should be read in conjunction with all of the
financial statements incorporated by reference into this Prospectus Supplement
and the accompanying Prospectus.
The Company derives revenue from investments in income producing long-term
care facilities. The Company's investments include the ownership of long-term
care facilities leased to experienced operators, mortgage loans secured by such
facilities, and mortgage-backed securities collateralized by Company originated
mortgage loans on long-term care facilities. The Company's leases are triple
net and obligate the lessee to pay all charges incurred in the operation of the
facilities including maintenance, repair and replacement costs, governmental
charges and taxes, assessments, levies, utility charges, fees, water and sewer
rents and charges, in addition to the lease payment. The mortgage loans
originated by the Company are typically for 10 years and bear a fixed interest
rate with specified annual increases.
Due to the nature of the Company's investments, the operating expenses of
the Company are primarily related to the general and administrative functions of
the Company.
FUNDS FROM OPERATIONS
Funds from Operations ("FFO") is computed in accordance with the definition
adopted by NAREIT. FFO represents net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation of real property, less preferred stock dividends and after
adjustments for unconsolidated entities in which a REIT holds an interest. FFO
should not be considered as an alternative to net income or any other GAAP
measurement of performance as an indicator of operating performance or as an
alternative to cash flows from operating, investing, and financing activities as
a measure of liquidity. However, the Company believes that FFO is helpful in
evaluating a real estate investment portfolio's overall performance considering
the fact that historical cost accounting implicitly assumes that the value of
real estate assets diminishes predictably over time. FFO provides an
alternative measurement criteria, exclusive of certain non-cash charges included
in GAAP income, by which to evaluate the performance of such investments.
In March 1995, NAREIT modified the definition of FFO to eliminate
amortization of deferred financing costs and depreciation of non-real estate
assets as items added back to net income when computing FFO. The Company
implemented the new method of calculating FFO effective as of the NAREIT-
suggested adoption date of January 1, 1996.
For the twelve months ended December 31, 1996, FFO increased by $4,849,000,
or 20%, when compared to the same period a year earlier (adjusted for the new
NAREIT FFO definition). The increase was primarily attributable to a
$19,361,000 increase in revenues attributable to net investments of
approximately $205,000,000 in long-term care facilities the Company made in 1996
and the full year impact of investments made in 1995, which was offset by
increases in expenses associated with the Company's debt financing and
administrative costs.
OPERATING RESULTS
Year ended December 31, 1996 compared to the year ended December 31, 1995
Total revenues for the twelve months ended December 31, 1996 increased by
$19,361,000 or 54% to $54,930,000 from $35,569,000. The increase was primarily
due to increased rental income of $10,594,000, increased mortgage interest
income of $4,382,000 and increased interest income from mortgage-backed
securities of $3,480,000. Rental income increased primarily as a result of
$113,858,000 of gross investments in new properties during 1996 and the full
year impact of investments made in 1995. The increase in mortgage interest
income related to the higher overall mortgage investment base that impacted 1996
earnings as compared to the investment base that impacted 1995 earnings.
Interest from mortgage-backed securities increased as a result of the third
securitization transaction which closed in March 1996. During 1996, the Company
completed over $205,000,000 of net investments. The remaining increase in
income of $905,000 was primarily due to fees the Company received in 1996 from
prepayments of one mortgage loan and eight loans underlying the mortgage-backed
securities.
Total expenses for the twelve months ended December 31, 1996 increased by
$16,864,000 or 109% to $32,393,000 from $15,529,000 a year ago. The increase
resulted primarily from increases in interest expense of $11,197,000,
depreciation
S-16
<PAGE>
and amortization expense of $3,119,000, and from operating and other expense of
$1,707,000. Interest expense increased primarily due to a higher borrowing base
in 1996. In 1996, the Company issued two convertible debt securities totaling
$60,000,000 offset by a decrease of $18,813,000 due to conversions of
debentures. Net bank borrowings increased by $30,930,000 while net mortgage
financing increased by $37,498,000 from new acquisitions in 1996. During 1996,
the Company acquired 22 assisted living facilities and 20 skilled nursing
facilities resulting in an increase in depreciation and amortization expense.
Operating and other expenses increased by $1,707,000 or 62%; however, as a
percentage of revenues, such expenses increased only 5%, due to approximately
$1,445,000 in additional salaries and bonuses in 1996. The remaining portion of
the increase in operating expense was due to higher administrative costs.
Minority interest expense increased $841,000 due to the addition of six new
partnership transactions in 1996.
As a result of the foregoing, net income for the twelve months ended
December 31, 1996 increased $2,497,000 over the same period a year earlier.
Year ended December 31, 1995 compared to the year ended December 31, 1994
Total revenues increased $7,928,000 primarily as a result of increased
rental income of $4,292,000 and increased interest income on mortgage loans and
mortgage-backed securities of $3,260,000. These increases were primarily
attributable to investments of approximately $145,724,000 in long-term care
facilities the Company made during 1995 and the full year impact of investments
made in 1994. Revenue also increased as a result of increases in rents and
interest at those facilities that are required to pay such rents and interest.
The remaining increase of $376,000 was primarily due to an increase of $158,000
in prepayment fees received by the Company in 1995 and increases in facility
fees and other income of $218,000.
Total expenses for the twelve months ended December 31, 1995 were
$15,529,000 versus $12,303,000 for the same period in 1994. The increase was due
in large part to an increase in interest expense of approximately $3,581,000 due
to the issuance of $30,000,000 of convertible debentures in September 1994 and
$61,500,000 of convertible debentures in September 1995. Interest expense also
increased by approximately $899,000 due to increased levels of bank borrowings
and by approximately $954,000 due to the assumption of non-recourse mortgages.
These increases were offset by a decrease of $2,590,000 in interest expense in
connection with the conversion of a portion of the Company's 9.75% convertible
debentures in 1995. Increased expenses were also attributable to increased
depreciation and amortization totaling $1,140,000 as a result of acquisitions in
1995 and 1994. During 1995, the Company acquired 11 skilled nursing facilities
and six assisted living residences. Reduction in operating and other expenses
resulted primarily from a decrease in bonus expense of $764,000 offset by
increased staffing and administrative costs.
As a result of the foregoing, net income for the twelve months ended
December 31, 1995 increased $4,702,000 over the same period a year earlier.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had investments in 248 skilled nursing
facilities with a total of 28,628 beds and 35 assisted living facilities with a
total of 1,456 units in 32 states. The Company's real estate investment
portfolio consisted of approximately $178,262,000 invested in mortgage loans
(before allowance for doubtful accounts of $1,000,000), approximately
$92,545,000 invested in mortgage-backed securities, and approximately
$223,578,000 (before accumulated depreciation of $11,640,000) invested in long-
term care facilities owned by the Company and leased to operators.
During 1996, the Company completed investments totaling over $205,000,000
which consisted of purchases of 42 long-term care facilities for approximately
$113,858,000 and mortgage loans of $99,440,000 net of the sale of four
properties in Texas for $7,589,000. The Company financed its investments through
the sale of $60,000,000 aggregate principal amount of convertible debentures in
February and August 1996, the sale of $90,552,000 of mortgage-backed securities
in March 1996, the assumption of non-recourse mortgage loans totaling
$9,641,000, the issuance of $8,932,000 in limited partnership interests, short-
term borrowings and cash on hand. During 1996, the Company repurchased and
retired 120,000 shares of common stock for an aggregate price of approximately
$1,831,000. The Company also paid off one of its outstanding mortgage loans
totaling $3,331,000.
Under the Credit Agreement, the Company has an unsecured line of credit in
the amount of $45,000,000 which expires on May 31, 1998. Borrowings under the
credit line bear interest at LIBOR plus 1.5% and are subject to standard
affirmative and negative covenants. As of February 1, 1997, the Company had
$38,700,000 in borrowings outstanding under the Credit Agreement bearing a
weighted average interest rate of approximately 7.2%. In addition, the Company
has entered into the Repurchase Agreement with a financial institution under
which it can borrow up to $84,000,000. The scheduled maturity of the Repurchase
Agreement is November 15, 1997; however, the Company has historically been able
to renew the
S-17
<PAGE>
Repurchase Agreement. Borrowings under the Repurchase Agreement bear interest at
LIBOR plus 2% and are secured by a pledge of certain mortgage loans. At February
1, 1997, $50,000,000 was outstanding under the Company's Repurchase Agreement
bearing an average interest rate of approximately 7.7%.
The credit and repurchase agreements (collectively "lines of credit") limit
the amount of borrowings available to between 50% and 60% of the Company's
borrowing base. Under the Credit Agreement, the Company's borrowing base is
comprised of certain owned properties and mortgage loans. At December 31, 1996,
the borrowing base under the Credit Agreement is limited to 50% of the cost of
the total applicable value of the properties and 60% of the total applicable
value of eligible mortgage loans in the borrowing base or approximately
$45,000,000. Under the Repurchase Agreement, the borrowing base consists of
various loans which have been assigned to the financial institution. The Company
can borrow up to 60% of the loans which have been assigned. Based on the current
level of collateral and borrowings at February 1, 1997, there was approximately
$28,451,000 available under the Company's Repurchase Agreement which the Company
anticipates will be increased to $34,000,000 when additional collateral is
accepted. In addition, the Company had registered in a shelf registration but
had not issued up to $77,250,000 of additional securities for future issuance
from time to time.
In July 1996, in connection with obtaining a $50,180,000 commitment to
enter into a sale leaseback transaction with Assisted Living Concepts, Inc.
("ALC"), the Company agreed to sell four assisted living facilities ("ALFs") it
acquired during 1996 in Texas to ALC for approximately $7,589,000. There was no
gain or loss recognized on the sale; however, the Company received an
administration fee of approximately $214,000 in conjunction with the sale of the
four ALFs. In connection with the commitment, the Company entered into a one-
year forward ten-year interest rate swap agreement (the "November 1996
Agreement"). Under the November 1996 Agreement, the Company will be credited
interest at a three-month LIBOR and will incur interest at a fixed rate of
6.835% on a $40,000,000 notional amount beginning on November 7, 1997. The
November 1996 Agreement will be terminated on or before November 7, 1998 which
is the latest date by which the Company anticipates having long-term financing
in place on these ALFs. At December 31, 1996, the Company had an unrealized
gain of $251,000 under the November 1996 Agreement.
The Company also anticipates completing a securitization transaction within
the next year, the proceeds of which will be used to repay borrowings
outstanding under its Repurchase Agreement and its Credit Agreement. In
connection with such securitization, the Company, in September 1995, entered
into a seven-year forward interest rate swap agreement (the "September 1995
Agreement"), which effectively locked-in the net interest margin on $60,000,000
principal amount of senior certificates that the Company anticipates will be
sold. The September 1995 Agreement has a stated termination date of the earlier
of (i) the completion of the securitization or (ii) November 17, 1997 and has
been accounted for as a hedging transaction. As of December 31, 1996, the
Company had an unrealized loss of $253,000 under the September 1995 Agreement.
In June 1996, the Financial Accounting Standards Board issued Statement No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Pursuant to the Statement, the Company will be
required to reclassify to "available-for-sale" status its investments in
mortgage-backed securities that can contractually be prepaid and measure them
like investments in debt securities consistent with Statement 115. Adoption of
Statement No. 125 is not required until January 1, 1997. Management does not
believe that the result of this reclassification will have a material effect on
the financial position of the Company.
The Company has the option to redeem, without penalty, its currently
outstanding $843,000 aggregate principal amount of 9.75% Convertible
Subordinated Debentures at any time. Since such debentures are convertible into
common stock of the Company at a conversion price of $10.00 per share, the
Company anticipates that substantially all of such debentures will be converted
if it elects to redeem the debentures.
During January 1997, the Company provided mortgage loans totaling
approximately $18,530,000 and acquired one skilled nursing facility for
$2,556,000. Included in the mortgage loans are approximately $17,330,000 of
mortgage loans on assisted living facilities which will be paid off once the
Company completes a sale leaseback transaction for the same amount on assisted
living facilities that are being constructed. As of February 1, 1997, the
Company had outstanding investment commitments totaling $82,790,000, consisting
of approximately $22,650,000 in commitments to make mortgage loans and
commitments for the acquisition of one nursing and 25 assisted living facilities
for an aggregate purchase price of approximately $60,140,000, including the
remaining $35,330,000 commitment to Assisted Living Concepts, Inc. discussed
previously. The Company expects to fund substantially all of these commitments
by the end of 1997. In addition, in January 1997, the Company sold 1,000,000
shares of common stock at $17.75 per share through a public offering. Of the
net proceeds, $17,300,000 was used to pay borrowings under the unsecured line of
credit.
S-18
<PAGE>
The Company expects its future income and ability to make distributions
from cash flows from operations to depend on the collectibility of its mortgage
loans receivable, mortgage-backed securities and rents. The collection of these
loans, certificates and rents will be dependent, in large part, upon the
successful operation by the operators of the skilled nursing and assisted living
facilities owned by or pledged to the Company. The operating results of the
facilities will depend on various factors over which the operators/owners may
have no control. Those factors include, without limitation, the status of the
economy, changes in supply of or demand for competing long-term care facilities,
ability to control rising operating costs, and the potential for significant
reforms in the long-term care industry. In addition, the Company's future
growth in net income and cash flow may be adversely impacted by various
proposals for changes in the governmental regulations and financing of the long-
term care industry. The Company cannot presently predict what impact these
proposals may have, if any. The Company believes that an adequate provision has
been made for the possibility of loans proving uncollectible but will
continually evaluate the status of the operations of the skilled nursing and
assisted living facilities, the Company's borrowers and the underlying
collateral for mortgage loans and make future revisions to the provision, if
considered necessary.
The Company's investments, principally its investments in mortgage loans,
mortgage-backed securities, and owned properties, are subject to the possibility
of loss of their carrying values as a result of changes in market prices,
interest rates and inflationary expectations. The effects on interest rates may
affect the Company's costs of financing its operations and the fair market value
of its financial assets. The Company generally makes loans which have
predetermined increases in interest rates and leases which have agreed upon
annual increases. Inasmuch as the Company initially funds its investments with
its revolving bank line and repurchase agreement, the Company is at risk of net
interest margin deterioration if medium and long-term rates were to increase
between the time the Company originates the investment and the time it
securitizes the loans or replaces the short-term variable rate borrowings with a
fixed rate financing. To help reduce the negative impact of changes in interest
rates, the Company partially hedges, or locks in, its net interest rate spread
on its investments with interest rate swaps, as previously described.
The Company believes that its current cash flow from operations available
for distribution or reinvestment, its remaining borrowing capacity under its
lines of credit and anticipated securitization transaction are sufficient to
provide for payment of its operating costs, fund investments and provide funds
for distribution to its stockholders. In addition to its borrowing capacity, the
Company is considering various other proposals for additional long-term
financing to meet the needs of the Company.
The information above is forward-looking and is based on current
expectations and invokes certain risks and uncertainties which are discussed in
Risk Factors in this Prospectus Supplement. These statements include the plans
and objectives of management for future operations, including plans and
objectives relating to future long-term care investments. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Prospectus
Supplement and the accompanying Prospectus will prove to be accurate. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
INDUSTRY
The demand for long-term care is expected to increase with the growth in
the number of senior Americans. This demand will be met by several types of
care providers, including skilled nursing facilities and assisted living
facilities. The level of care required by the individual will be a significant
determinant of the type of facility that the individual chooses as those
individuals that do not require regular medical attention have the option of
living in an assisted living facility. Assisted living facilities provide a
greater degree of independence for seniors at a lower cost than skilled nursing
facilities. As more of the demand for long-term care is met by assisted living
facilities, skilled nursing facilities will look to other sources of revenue.
One of the most promising sources of growth for skilled nursing facilities is
sub-acute care. Cost containment pressures have encouraged acute-care hospitals
to shorten patient stays; many patients, senior adults in particular, require
post-discharge sub-acute care. Skilled nursing facilities represent a more
cost-efficient source of sub-acute care than hospitals. Skilled nursing
facilities will likely remain the primary long-term care option for seniors who
require regular medical care.
Most states regulate the supply of skilled nursing facility beds through
health planning legislation. The most common method of control which exists in
38 states and the District of Columbia, is the requirement that a state
authority first makes a determination of need, evidenced by its issuance of a
Certificate of Need ("CON"), before a long-term care provider can establish a
new facility, add beds to an existing facility or, in some states, take certain
other actions such as acquire major medical equipment, make major capital
expenditures, add services, refinance long-term debt, or transfer ownership of
the facility. States also control the supply of skilled nursing beds through
their Medicaid reimbursement
S-19
<PAGE>
policies. As a result of cost containment efforts, the growth in the number of
long-term care facilities has not matched the growth of the senior population;
thus, skilled nursing facilities, in general, enjoy high occupancy rates. Some
states have repealed their CON programs in response to the need for more beds;
in those states, increased competition is likely to occur.
A typical skilled nursing facility receives most of its revenue from its
residents' own resources (including Social Security) and Medicaid reimbursement,
which together account for over 90% of the industry's revenue. The largest
remaining source is Medicare. Medicaid is a state-administered program,
financed by state funds and matching federal funds, that pays for certain long-
term care and related medical services to the indigent and certain other
eligible persons. States have considerable flexibility in establishing their
Medicaid reimbursement rates; most states use cost-based reimbursement systems.
Budgetary pressures have forced many states to impose stringent cost-containment
measures upon their Medicaid programs, limiting reimbursement rates. Medicare,
funded and administered by the federal government, is a health insurance program
available primarily to the disabled and to individuals who are age 65 and older
and entitled to Social Security benefits. Medicare generally provides not more
than 100 days of inpatient skilled nursing care per spell of illness that
requires hospitalization. Medicare does not cover long-term care for basic day-
to-day activities and, for this reason, accounts for only a limited portion of
the long-term care industry's revenues.
Skilled nursing facilities are subject to extensive federal and state
regulation. In particular, operators are required to be licensed, generally on
an annual basis, by the health care agency for the state in which the facility
is located. The facilities must meet various state licensure requirements that
relate to, among other things, the qualifications of their personnel, the
quality of care delivered and the adequacy of their buildings, equipment and
supplies. In order to participate in the Medicare and Medicaid programs, a
skilled nursing facility must meet additional federal certification standards
governing, among other things, quality of care, qualifications of nursing and
other staff, provision of rehabilitative, dietary and pharmaceutical services,
provision for social services and residents' rights. Failure to comply with
regulatory guidelines can lead to fines and penalties, such as a ban on
admission of new residents, decertification as a Medicaid or Medicare provider
or closure.
Some or all of the national health care reform proposals now under
consideration contain new regulations that would effect the long-term care
industry. However, because it is difficult to predict the outcome of the
various pending reform proposals on the long-term care industry, the Company's
management cannot predict the ultimate competitiveness of the long-term care
industry to alternative similar care providers.
S-20
<PAGE>
PROPERTIES
As of December 31, 1996, the Company had investments in 248 skilled nursing
facilities with a total of 28,628 beds and 35 assisted living facilities with a
total of 1,456 units in 32 states. The Company's real estate investment
portfolio consisted of approximately $223,578,000 (before accumulated
depreciation of $11,640,000) invested in long-term care facilities owned by the
Company and leased to operators, approximately $178,262,000 invested in mortgage
loans (before allowance for doubtful accounts of $1,000,000), and approximately
$92,545,000 invested in mortgage-backed securities.
OWNED PROPERTIES
At December 31, 1996, the Company owned and leased to health care operators
49 skilled nursing facilities with a total of 6,520 beds and 24 assisted living
facilities with a total of 868 units in 17 states, representing a total net
investment of approximately $211,938,000. These long-term care facilities are
leased pursuant to non-cancelable leases generally with an initial term of ten
to twelve years. Many of the leases contain renewal options and some contain
options that permit the operators to purchase the facilities.
The following table sets forth certain information regarding the Company's
investments in long-term care properties as of December 31, 1996:
<TABLE>
<CAPTION>
Number of Number of Current Annual Rent
Location Facilities Beds/Units Purchase Price Payments
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alabama 9 912 $ 29,287,996 $ 3,274,779
Arizona 3 587 18,486,509 2,335,600
California 3 473 7,378,468 896,172
Florida 9 1,116 39,064,291 4,061,847
Georgia 1 100 2,500,000 248,750
Idaho 1 39 2,550,000 266,220
Illinois 1 148 6,627,159 746,640
Iowa 6 448 9,401,943 1,073,564
Kansas 4 134 6,700,000 633,820
Montana 1 278 3,830,608 420,365
New Mexico 2 236 6,898,696 785,951
Oklahoma 1 37 1,750,000 168,525
Oregon 2 71 4,550,000 463,410
Tennessee 2 224 5,550,000 552,225
Texas 16 1685 45,630,908 4,980,779
Virginia 3 443 11,012,655 1,211,748
Washington 9 457 22,358,630 2,185,380
- ----------------------------------------------------------------------------
TOTAL 73 7,388 $223,577,863 $24,305,775
============================================================================
</TABLE>
The leases provide for a fixed minimum base rent during the initial and
renewal periods. Most of the leases provide for annual fixed rent increases or
increases based on consumer price indices over the term of the lease. In
addition, certain of the Company's leases provide for additional rent through
revenue participation (as defined in the lease agreement) in incremental
revenues generated by the facilities, over a defined base period, effective at
various times during the term of the lease. Each lease is a triple net lease
which requires the lessee to pay additional charges including all taxes,
insurance, assessments, maintenance and repair (capital and non-capital
expenditures), and other costs necessary in the operation of the facility.
S-21
<PAGE>
MORTGAGE LOANS
At December 31, 1996, the Company had 67 mortgage loans secured by first
mortgages on 73 skilled nursing facilities with a total of 8,672 beds and 11
assisted living residences with 588 units located in 23 states. The mortgage
loans, which individually range from $302,500 to $11,240,000 in principal
amount, have current interest rates ranging from 9.16% to 13.2%, generally have
25-year amortization schedules, have balloon payments due from 1997 to 2017 and
provide for certain facility fees. Almost all of the mortgage loans provide for
annual increases in the interest rate based upon a specified increase of 10 to
12.5 basis points. Approximately $9,825,000 of the loans due in 1997 will be
paid off once the Company completes a sale leaseback transaction for the same
amount on assisted living facilities that are being constructed.
The following table sets forth certain information regarding the Company's
mortgage loans as of December 31, 1996:
<TABLE>
<CAPTION>
Number of Number. of Face Amount of Current Amount of Current Annual
Location Facilities Beds/Units Mortgage Loans Mortgage Loans Debt Service (1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama 1 142 $ 4,100,000 $ 4,060,562 $ 489,706
Arizona 3 479 10,650,000 10,599,851 1,238,740
Arkansas 2 274 3,400,000 3,361,692 396,918
California 11 1,587 22,805,000 23,501,020 2,888,344
Colorado 4 373 6,330,000 5,284,620 615,460
Florida 9 1,106 30,944,862 31,726,985 3,644,254
Georgia 3 287 8,050,000 8,030,186 929,512
Illinois 2 322 6,200,000 6,185,008 643,244
Iowa 3 214 4,000,000 3,940,365 493,338
Kansas 4 233 4,320,000 3,995,045 474,810
Louisiana 1 127 1,600,000 1,600,000 196,745
Mississippi 3 400 11,250,000 11,240,003 1,216,767
Missouri 1 174 2,801,000 2,872,520 375,658
Nebraska 5 266 5,348,980 5,434,382 601,749
Nevada 1 100 1,200,000 1,173,996 142,523
North Carolina 2 201 3,770,000 3,728,490 449,556
Ohio 1 150 5,200,000 5,173,773 575,408
Oklahoma 1 161 1,300,000 1,292,252 159,961
Oregon 4 261 8,160,000 8,157,238 810,999
South Carolina 5 509 11,250,000 11,229,957 1,357,532
Tennessee 3 201 5,861,000 4,826,639 561,609
Texas 11 1383 16,650,000 16,364,741 1,998,690
Washington 4 310 4,500,000 4,482,365 551,282
- ----------------------------------------------------------------------------------------------------------------------
TOTAL 84 9,260 $179,690,842 $178,261,690 $20,812,805
======================================================================================================================
</TABLE>
(1) Includes principal and interest payments.
In general, the Company's mortgage loans may not be prepaid except in the
event of the sale of the facility to a third party that is not affiliated with
the borrower. The Company's mortgage loans impose a penalty upon prepayment of
the loans depending upon the period in which the prepayment occurs, whether such
prepayment was permitted or required, and certain other conditions such as upon
the sale of the facility under pre-existing purchase option, destruction or
condemnation, or other circumstances as approved by the Company. Such prepayment
amount is based upon a percentage of the then outstanding balance declining
ratably each year. In addition to a lien on the mortgaged property, the loans
are generally secured by certain non-real estate assets of the facilities and
contain certain other security provisions in the form of letters of credit,
pledged collateral accounts, security deposits, cross-default and cross-
collateralization features and certain guarantees. During 1996, the Company
received a $941,000 payment with respect to the prepayment of one loan.
S-22
<PAGE>
MORTGAGE-BACKED SECURITIES
At December 31, 1996, the Company had investments of $92,545,000 in
subordinated mortgage-backed pass through certificates ("Certificates")
collateralized by three pools consisting of 85 first mortgage loans secured by
148 skilled nursing facilities in 24 states. Each mortgage loan, all of which
were originated by the Company, is evidenced by a promissory note and secured by
a mortgage, deed of trust, or other similar instrument that creates a first
mortgage lien on a fee simple estate in real property (a "Mortgaged Property").
The $278,881,000 current principal amount of mortgage loans represented by the
Certificates have individual principal balances ranging from approximately
$297,000 to $13,760,000, have a weighted average interest rate of approximately
11.21%, and have remaining terms to scheduled maturities ranging from 28 months
to 220 months.
The following table sets forth certain information regarding the three
pools of mortgage loans securing the Certificates as of December 31, 1996:
<TABLE>
<CAPTION>
Original Principal Current Principal
Number of Number Amount of Remaining Amount of Remaining Current Annual
Location Number of of Beds Remaining Mortgage Loans Remaining Mortgage Loans (1) Debt Service(2)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama 8 1,069 $ 18,425,800 $ 18,074,641 $ 2,253,561
Arizona 5 955 26,018,000 25,708,985 2,863,918
California 16 1,705 27,404,786 25,753,046 3,588,009
Connecticut 4 499 10,656,000 10,478,251 1,297,858
Florida 3 330 13,160,000 12,875,952 1,533,085
Georgia 10 1,078 20,822,000 20,566,473 2,498,370
Illinois 6 679 12,426,000 12,150,073 1,495,306
Iowa 10 750 13,531,000 13,782,238 1,493,545
Kansas 1 66 1,200,000 1,191,133 140,033
Kentucky 1 67 726,000 711,348 88,862
Michigan 3 444 6,800,000 6,698,413 828,043
Mississippi 1 120 2,800,000 2,773,733 332,810
Missouri 5 545 9,489,000 9,297,497 1,161,454
Montana 5 658 14,278,000 14,073,620 1,536,239
Nebraska 4 378 6,614,000 6,545,787 770,105
New Mexico 5 350 9,007,000 8,757,245 1,127,306
North Carolina 2 256 5,350,000 5,217,532 649,726
Ohio 3 243 7,000,000 6,732,363 815,867
Oklahoma 1 112 1,300,000 1,262,522 167,409
S. Dakota 1 50 585,000 574,982 64,189
Tennessee 4 297 6,952,000 6,884,490 822,951
Texas 45 5,020 64,280,000 62,341,306 7,773,876
Washington 4 289 4,583,000 4,502,040 544,601
Wisconsin 1 104 2,075,000 1,927,543 264,000
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL 148 16,064 $285,482,586 $278,881,213 $34,111,123
==============================================================================================================================
</TABLE>
(1) Included in the balances of the mortgages underlying the mortgage-backed
securities are $54,205,000 of non-recourse mortgages payable by the
Company. These mortgages are secured by 22 skilled nursing facilities
containing a total of 2,634 beds that are owned by the Company and included
in the "Owned Properties" described previously.
(2) Includes principal and interest.
Such mortgage loans generally have 25-year amortization schedules with
balloon payments due from 1999 to 2015, unless prepaid prior thereto.
Contractual principal and interest distributions with respect to the $92,545,000
Certificates retained by the Company are subordinated to distributions of
interest and principal with respect to the $192,210,000 of Certificates held by
third parties. Thus, based on the terms of the underlying mortgages and assuming
no unscheduled prepayments occur, contractual principal reductions on the
Certificates retained by the Company will commence in August 2004 with final
maturity in April 2015. Distributions on any of the Certificates will depend, in
large part, on the amount and timing of payments, collections, delinquencies and
defaults with respect to the mortgage loans represented by the Certificates,
including the exercise of certain purchase options under existing facility
leases or the sale of the Mortgaged Properties. Each of the mortgage loans
securing the Certificates contain similar prepayment and certain security
provisions with respect to the Company's mortgage loans.
S-23
<PAGE>
As part of the securitization transactions discussed above, the Company
serves as the sub-servicer and, in such capacity, is responsible for performing
substantially all of the servicing duties relating to the mortgage loans
represented by the Certificates. The Company receives monthly fees equal to a
fixed percentage of the then outstanding mortgage loans in the securitization
transaction which, in management's opinion, represent currently prevailing terms
for similar transactions. In addition, the Company will act as the special
servicer to restructure any mortgage loans in the securitization transaction
that become in default.
At December 31, 1996, the mortgage-backed securities held by the Company
have an effective interest rate of approximately 15.84% based on the expected
future cash flows with no unscheduled prepayments.
CERTAIN TRANSACTIONS WITH ASSISTED LIVING AFFILIATES
In 1996, the Company's Board of Directors authorized an increase in the
Company's investment in assisted living facilities ("ALFs") from 10% to 20% of
its adjusted gross real estate investment portfolio (adjusted to include the
mortgage loans to third parties underlying the $92,545,000 investment in
mortgage-backed securities). In addition, the Board of Directors also
authorized an increase in the Company's investment in properties operated by
Assisted Living Concepts, Inc. ("ALC"), an owner, operator and developer of ALFs
whose securities are listed on the American Stock Exchange, from 5% to 10% of
its adjusted gross real estate investment portfolio (which was approximately
$626,516,000 as of December 31, 1996). Currently, two of the Company's
executive officers serve as members of the Board of Directors of ALC. As of
December 31, 1996, three executive officers of the Company owned approximately
5.5% of ALC's common stock. The Company has discussed with its Board of
Directors and anticipates increasing the percentage of its adjusted gross real
estate investment portfolio that can be invested in ALFs and properties operated
by ALC to 30% and 15%, respectively, during 1997. At December 31, 1996, the
Company had investments in ALFs and properties operated by ALC of approximately
10.64% and 6.48%, respectively of the Company's total adjusted gross real estate
investment portfolio. For the year ended December 31, 1996, the Company
received approximately $2,011,000 and $42,300, respectively, in rental and
interest income from ALC. Also during such period, the Company purchased 16
ALFs from ALC for an aggregate purchase price of $30,830,000, which facilities,
except as indicated below, were leased back to ALC. Generally, the purchase
price for such facilities approximated ALC's total development cost. During
1996, the Company also provided mortgage loan financing to ALC totaling
$6,550,000 secured by three ALFs. These mortgage loans will be repaid once the
Company completes a sale leaseback transaction included in the $50,180,000
commitment below.
In July 1996, in connection with obtaining a $50,180,000 commitment to
enter into a sale leaseback transaction with ALC, the Company agreed to sell
back four ALFs it acquired during 1996 in Texas to ALC for approximately
$7,589,000. There was no gain or loss recognized on the sale, however, the
Company received an administration fee of approximately $214,000 in conjunction
with the sale of the four ALFs. In connection with the commitment, the Company
entered into a one-year forward ten-year interest rate swap agreement (the
"Agreement"). Under the Agreement, the Company will be credited interest at the
three-month LIBOR rate and will incur interest at a fixed rate of 6.835% on a
$40,000,000 notional amount beginning on November 7, 1997. The Agreement will
be terminated on or before November 7, 1998 which is the latest date by which
the Company anticipates having long-term financing in place on these facilities.
In September 1996, the Company received a 9.9% interest in Carriage House
Assisted Living, Inc. ("Carriage"), a privately-held corporation that develops,
sells, leases and operates assisted living facilities ("ALFs") in Nebraska and
Iowa. LTC received its 9.9% interest in Carriage in return for its commitment
to provide construction financing for the first five facilities developed by
Carriage in Nebraska, and LTC's further commitment to provide permanent
financing on the first ten facilities developed by Carriage through the
completion of sale/leaseback transactions. The sale/leaseback transactions will
be consummated only when construction of each facility has been completed and a
certificate of occupancy (or equivalent permit) has been issued. Both the
construction loans and the sale/leaseback transactions with Carriage are subject
to the Company's underwriting standards and other requirements. The construction
loans made by LTC to Carriage are guaranteed by Consulting, Management and
Education, Inc. ("CME"), a privately held multi-state operator of long-term care
facilities which provides a broad range of services in the long-term care
industry. CME operates six of the Company's owned skilled nursing facilities.
In addition, ALC, in return for an option to purchase all of the outstanding
stock or assets of Carriage, has committed to LTC that, upon any uncured default
under any one or more of Carriage's leases, ALC will assume all of Carriage's
obligations and liabilities under the defaulted lease and take over operation of
the related facility. Currently, two of the Company's executive officers and
directors serve as directors of Carriage. In addition, three executive officers
of the Company own approximately 25.1% of Carriage. At December 31, 1996, the
Company had entered into four construction loans with Carriage in the total
combined maximum amount of $8,800,000 and had disbursed $3,275,000 in respect of
those four loans. Amounts outstanding under such loans bear interest at the
prime rate plus 2%. As of February 1, 1997, the Company had an outstanding
commitment to provide one additional construction loan to Carriage in the
maximum amount
S-24
<PAGE>
of $2,200,000. All of LTC's commitments to provide permanent financing remain
outstanding as of February 1, 1997. LTC expects that the first four
sale/leaseback transactions will occur in the second quarter of 1997.
MANAGEMENT
The following table sets forth the directors and executive officers of the
Company. Each executive officer of the Company is elected by the directors,
serves at the pleasure of the Board of Directors and holds office until a
successor is elected or until resignation or removal. The information
concerning the directors and executive officers of the Company is given as of
February 15, 1997.
With the exception of Mr. McBride, Mr. Pieczynski and Ms. Simpson, who were
elected to the positions shown in July 1992, May 1994 and November 1995,
respectively, all directors and officers have served in the capacities indicated
since the Company's incorporation in May 1992.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Andre C. Dimitriadis 56 Chairman, Chief Executive Officer and
Director
William McBride III 36 President, Chief Operating Officer and
Director
James J. Pieczynski 34 Senior Vice President and Chief Financial
Officer
Neal M. Elliott 56 Director
Edmund C. King 61 Director
Wendy L. Simpson 47 Director
Sam Yellen 66 Director
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
ANDRE C. DIMITRIADIS co-founded the company and was employed by Beverly
Enterprises, Inc., an owner/operator of long-term care facilities, retirement
living facilities and pharmacies, from October 1989 to May 1992, where he served
as Executive Vice President and Chief Financial Officer. Prior to that, he was
employed by American Medical International, Inc., an owner/operator of
hospitals, from 1985 to 1989, where he served as Executive Vice President -
Finance, Chief Financial Officer and director. Mr. Dimitriadis serves as the
Chairman of Health Management, Inc., and is a member of the board of directors
for Assisted Living Concepts, Inc. and Magellan Health Services.
WILLIAM MCBRIDE III co-founded the Company and was employed by Beverly
Enterprises, Inc., an owner/operator of long-term care facilities, retirement
living facilities and pharmacies, from April 1988 to July 1992, where he served
as Vice President, Controller and Chief Accounting Officer. Mr. McBride serves
as the chairman of the board of Assisted Living Concepts, Inc. and a member of
the board of directors of Malan Realty Investors, Inc.
JAMES J. PIECZYNSKI has served as Senior Vice President and Chief Financial
Officer of the Company since May 1994. He joined the Company in December 1993
as Vice President and Treasurer. Prior to that, he was employed by American
Medical International, Inc., an owner/operator of hospitals, from May 1990 to
December 1993, where he served as Assistant Controller and Director of
Development.
NEAL M. ELLIOTT has been Chairman, President, Chief Executive Officer and a
director of Horizon/CMS Healthcare Corporation, an operator of long-term care
facilities, since 1986. From 1984 to 1986, Mr. Elliott was President of
National Medical Enterprises' long-term care subsidiary, Hillhaven Corporation.
Mr. Elliott serves as a member of the board of directors of Frontier Natural Gas
Corporation, and Horizon/CMS Health Care Corporation.
EDMUND C. KING is a general partner of Trouver Capital Partners, an
investment banking firm located in Los Angeles, California. Prior to joining
Trouver as of January 1, 1992, Mr. King was a partner in Ernst & Young LLP, an
international accounting and consulting firm, from 1973 through September 30,
1991. While at Ernst & Young, Mr. King was its Southern California senior
health care partner and prior to that directed the Southern California health
care practice for Arthur Young & Company, one of the predecessors of Ernst &
Young.
WENDY L. SIMPSON has served as Executive Vice President, Chief Financial
Officer and director of Transitional Hospitals Corporation, formerly Community
Psychiatric Centers (CPC), a healthcare organization, since December 1994. Prior
to that, Ms. Simpson served as Senior Vice President and Chief Financial Officer
from July 1994 to December 1994 of Transitional Hospitals Corporation, which
was a wholly-owned subsidiary of CPC. From 1992 to July 1994, Ms. Simpson served
as Chief Financial Officer of Weisman Taylor Simpson & Sabatino, a management
consulting firm. Prior to her association with Weisman
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Taylor Simpson & Sabatino, Ms. Simpson was affiliated with American Medical
International, Inc. from 1984 to 1991.
SAM YELLEN has been self-employed as a consultant since his retirement
from KPMG Peat Marwick LLP, an international accounting firm, in December 1990.
He served KPMG Peat Marwick LLP and its predecessors as a partner since 1968.
Currently, he serves as a member of the board of directors of Beverly Funding
Corporation, Del Webb Corporation, Downey Savings and Loan Association, and
Wedbush Corporation.
OTHER KEY PERSONNEL
The following sets forth certain information regarding other key personnel
of the Company who manage the day-to-day affairs and operations of the Company
and provide administrative services appropriate for such management.
C. SAM ALLMOND has served as Vice President, Corporate Development of the
Company since September 1994. Prior to that, he was employed by Sensitive
Care, Inc., a private owner/operator of long-term care facilities, where he
served as Controller from July 1992 to September 1994. From March 1991 to July
1992, he was employed by Sun Health Group where he served as Director of
Reimbursement. Mr. Allmond served as Director of Finance for Beverly
Enterprises, Inc. from March 1983 to March 1991.
ALEX J. CHAVEZ has served as Director of Finance of the Company since June
1996. Prior to that he was employed by Ernst & Young LLP, an international
accounting firm, from 1991 to 1996 where he served as an audit manager since
1995. While at Ernst & Young, he specialized in the healthcare and real estate
industries and served as LTC Properties' auditor since its inception in 1992.
CHRISTOPHER T. ISHIKAWA has served as Vice President and Treasurer of the
Company since April 1995. Prior to that, he was employed by MetroBank from
December 1991 to March 1995, where he served as First Vice President and
Controller. From December 1989 to November 1991, he was employed by Mercantile
National Bank where he served as Assistant Treasurer.
EVELYN B. YALUNG has served as Vice President and Controller of the Company
since November 1992. Prior to that, she was employed by Beverly Enterprises,
Inc. from December 1980 to November 1992, where she served as Director of
Financial Reporting since 1989.
PAMELA J. PRIVETT, A Professional Law Corporation, has served as General
Counsel to the Company since 1994. Prior to that, Pamela J. Privett, was a
partner in the Santa Monica, California law firm Stern, Neubauer, Greenwald &
Pauly. Ms. Privett began her legal career in 1985 at the Washington, D.C. office
of Casson, Calligaro & Mutryn, a health care law boutique and she remained with
the Casson firm until joining Stern, Neubauer, Greenwald & Pauly in 1990.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of December 31, 1996 by (i) each director, (ii) each executive officer, and
(iii) all directors and executive officers a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)(2)(3) PERCENT OF CLASS(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Andre C. Dimitriadis 393,100 2.0
William McBride III 213,500 1.1
James J. Pieczynski 59,541 *
Neal M. Elliott 45,500 *
Edmund C. King 43,400(4) *
Wendy L. Simpson 13,040(5) *
Sam Yellen 42,500 *
All Directors and Executive Officers
as a group (7 persons) 810,581 4.1
</TABLE>
- ------------------
* Less than 1%
(1) Except as otherwise noted below, all Shares are owned beneficially by the
individual or entity listed with sole voting and/or investment power.
(2) Includes options to acquire shares of Common Stock exercisable at December
31, 1996, or exercisable within 60 days of December 31, 1996, as follows:
Mr. Dimitriadis - 118,500; Mr. Elliott - 37,500; Mr. King - 37,500; Mr.
McBride - 78,500; Mr. Pieczynski - 39,000 and Mr. Yellen - 37,500; all
directors and executive officers as a group (7 persons) - 348,500.
(3) For purposes of computing the percentages, the number of shares outstanding
includes shares purchasable by such individual within 60 days upon exercise
of outstanding stock options.
(4) Includes 900 shares held by spouse in an individual retirement account.
(5) Includes 2,000 shares owned jointly with spouse and 1,290 shares held by
spouse.
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DESCRIPTION OF SERIES A PREFERRED STOCK
The description of the particular terms of the Series A Preferred Stock
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Preferred Stock set forth in the
accompanying Prospectus, to which description reference is hereby made.
GENERAL
Pursuant to the Company's amended and restated Articles of Incorporation
(the "Charter"), the Company is authorized to issue up to 10,000,000 shares of
preferred stock ("Preferred Stock") in one or more series, with such
designations, powers, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, in each case, if any, as are permitted by
Maryland law and as the Board of Directors may determine by adoption of an
amendment to the Charter without any further vote or action by the Company's
shareholders. As of the date of this Prospectus Supplement, no shares of
Preferred Stock were outstanding.
The following summary of the terms and provisions of the Series A Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections in the Articles Supplementary creating the
Series A Preferred Stock, (the "Articles Supplementary") which is available from
the Company.
MATURITY
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Series A Preferred Stock will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, rank (i)
senior to all classes or series of Common Stock of the Company, and to all
equity securities ranking junior to the Series A Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company; (ii) on a parity with all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank on a parity
with the Series A Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company, and (iii) junior to all
existing and future indebtedness of the Company. The term "equity securities"
does not include convertible debt securities, which will rank senior to the
Series A Preferred Stock prior to conversion.
DIVIDENDS
Holders of shares of the Series A Preferred Stock are entitled to receive,
when and as declared by the Board of Directors (or a duly authorized committee
thereof), out of funds legally available for the payment of dividends,
preferential cumulative cash dividends at the rate of % per annum of the
Liquidation Preference per share (equivalent to a fixed annual amount of $ per
share).
Dividends on the Series A Preferred Stock shall be cumulative from the date
of original issue and shall be payable monthly in arrears on or before the 15th
day of each month, or, if not a business day, the next succeeding business day
(each, a "Dividend Payment Date"). The first dividend, which will be paid on
April 15, 1997, will be for less than a full month. Such dividend and any
dividend payable on the Series A Preferred Stock for any partial dividend period
will be computed on the basis of a 360-day year consisting of twelve 30-day
months. Dividends will be payable to holders of record as they appear in the
stock records of the Company at the close of business on the applicable record
date, which shall be the first day of the calendar month in which the applicable
Dividend Payment Date falls or on such other date designated by the Board of
Directors of the Company for the payment of dividends that is not more than 30
nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend
Record Date").
No dividends on shares of Series A Preferred Stock shall be declared by the
Board of Directors or paid or set apart for payment by the Company at such time
as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, or
if such declaration or payment shall be restricted or prohibited by law.
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Notwithstanding the foregoing, dividends on the Series A Preferred Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series A
Preferred Stock will not bear interest and holders of the Series A Preferred
Stock will not be entitled to any distributions in excess of full cumulative
distributions described above. Except as set forth in the next sentence, no
dividends will be declared or paid or set apart for payment on any capital stock
of the Company or any other series of Preferred Stock ranking, as to dividends,
on a parity with or junior to the Series A Preferred Stock (other than a
dividend in shares of the Company's Common Stock or in shares of any other class
of stock ranking junior to the Series A Preferred Stock as to dividends and upon
liquidation) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Series A Preferred Stock
for all past dividend periods and the then current dividend period. When
dividends are not paid in full (or a sum sufficient for such full payment is not
so set apart) upon the Series A Preferred Stock and the shares of any other
series of Preferred Stock ranking on a parity as to dividends with the Series A
Preferred Stock, all dividends declared upon the Series A Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends with
the Series A Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share of Series A Preferred Stock and such other series
of Preferred Stock, shall in all cases bear to each other the same ratio that
accrued dividends per share on the Series A Preferred Stock and such other
series of Preferred Stock (which shall not include any accrual in respect of
unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend) bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of Common Stock
or other shares of capital stock ranking junior to the Series A Preferred Stock
as to dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock, or any other capital stock of the Company ranking junior to or on a
parity with the Series A Preferred Stock as to dividends or upon liquidation,
nor shall any shares of Common Stock, or any other shares of capital stock of
the Company ranking junior to or on a parity with the Series A Preferred Stock
as to dividends or upon liquidation be redeemed, purchased or otherwise acquired
for any consideration (or any moneys be paid to or made available for a sinking
fund for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation or redemptions for
the purpose of preserving the Company's qualification as a REIT). Holders of
shares of the Series A Preferred Stock shall not be entitled to any dividend,
whether payable in cash, property or stock, in excess of full cumulative
dividends on the Series A Preferred Stock as provided above. Any dividend
payment made on shares of the Series A Preferred Stock shall first be credited
against the earliest accrued but unpaid dividend due with respect to such shares
which remains payable.
LIQUIDATION PREFERENCES
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series A Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its shareholders a liquidation preference of $25 per share, plus
an amount equal to any accrued and unpaid dividends to the date of payment, but
without interest, before any distribution of assets is made to holders of Common
Stock or any other class or series of capital stock of the Company that ranks
junior to the series A Preferred Stock as to liquidation rights. Holders of
Series A Preferred Stock will be entitled to written notice of any event
triggering the right to receive such Liquidation Preference. After payment of
the full amount of the Liquidation Preference, plus any accrued and unpaid
dividends to which they are entitled, the holders of Series A Preferred Stock
will have no right or claim to any of the remaining assets of the Company. The
consolidation or merger of the Company with or into any other corporation, trust
or entity or of any other corporation with or into the Company, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of shares
of stock of the Company or otherwise is permitted under the Maryland General
Corporation Law (the "MGCL") no effect shall be given to amounts that would be
needed, if the Company were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon distribution of holders of shares of stock
of the Company whose preferential rights upon distribution are superior to those
receiving the distribution.
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<PAGE>
REDEMPTION
The Series A Preferred Stock is not redeemable prior to April 1, 2001.
However, in order to ensure that the Company will continue to meet the
requirements for qualification as a REIT, the Series A Preferred Stock will be
subject to provisions in the Charter pursuant to which capital stock of the
Company owned by a shareholder in excess of the ownership limit (the "Ownership
Limit") will be Excess Shares, and the Company will have the right to purchase
such Excess Shares from the holder. See "--Restrictions on Ownership." On and
after April 1, 2001, the Company, at its option, upon not less than 30 nor more
than 60 days' written notice, may redeem shares of the Series A Preferred Stock,
in whole or in part, at any time or from time to time, for cash at a redemption
price of $25 per share, plus all accrued and unpaid dividends thereon to the
date fixed for redemption (except with respect to Excess Shares. See "--
Restrictions on Ownership."), without interest. Holders of Series A Preferred
Stock to be redeemed shall surrender such Series A Preferred Stock at the place
designated in such notice and shall be entitled to the redemption price and any
accrued and unpaid dividends payable upon such redemption following such
surrender. If notice of redemption of any shares of Series A Preferred Stock
has been given and if the funds necessary for such redemption have been set
aside by the Company in trust for the benefit of the holders of any shares of
Series A Preferred Stock so called for redemption, then from and after the
redemption date dividends will cease to accrue on such shares of Series A
Preferred Stock, such shares of Series A Preferred Stock shall no longer be
deemed outstanding and all rights of the holders of such shares will terminate,
except the right to receive the redemption price. If less than all of the
outstanding Series A Preferred Stock is to be redeemed, the Series A Preferred
Stock to be redeemed shall be selected pro rata (as nearly as may be practicable
without creating fractional shares) or by any other equitable method determined
by the Company.
Unless full cumulative dividends on all shares of Series A Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series A Preferred
Stock shall be redeemed unless all outstanding shares of Series A Preferred
Stock are simultaneously redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Series A Preferred Stock
(except by exchange for capital stock of the Company ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the purchase by the Company of
Excess Shares in order to ensure that the Company continues to meet the
requirements for qualification as a REIT, or the purchase or acquisition of
shares of Series A Preferred Stock pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding shares of Series A Preferred
Stock. So long as no dividends are in arrears, the Company shall be entitled at
any time and from time to time to repurchase shares of Series A Preferred Stock
in open-market transactions duly authorized by the Board of Directors and
effected in compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series A Preferred Stock to
be redeemed at their respective addresses as they appear on the stock transfer
records of the Company. No failure to give such notice or any defect therein or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Series A Preferred Stock except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of
Series A Preferred Stock to be redeemed; (iv) the place or places where the
Series A Preferred Stock is to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date. If less than all of the Series A Preferred Stock held
by any holder is to be redeemed, the notice mailed to such holder shall also
specify the number of shares of Series A Preferred Stock held by such holder to
be redeemed.
Immediately prior to any redemption of Series A Preferred Stock, the
Company shall pay, in cash, any accumulated and unpaid dividends through the
redemption date, unless a redemption date falls after a Dividend Record Date and
prior to the corresponding Dividend Payment Date, in which case each holder of
Series A Preferred Stock at the close of business on such Dividend Record Date
shall be entitled to the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the redemption of such shares before such
Dividend Payment Date.
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company continues to meet the requirements for qualification as a REIT,
Series A Preferred Stock acquired by a shareholder in excess of the Ownership
Limit will automatically become Excess Shares, and the Company will have the
right to purchase such Excess Shares from the holder. In addition, Excess
Shares may be redeemed, in whole or in part, at any time when outstanding shares
of Series A Preferred Stock are being redeemed, for cash at a redemption price
of $25 per share, but excluding accrued and unpaid dividends on such Excess
Shares, without
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<PAGE>
interest. Such Excess Shares shall be redeemed in such proportion and in
accordance with such procedures as shares of Series A Preferred Stock are being
redeemed.
VOTING RIGHTS
Holders of the Series A Preferred Stock will not have any voting rights,
except as set forth below.
Whenever dividends on any shares of Series A Preferred Stock shall be in
arrears for eighteen or more months (a "Preferred Dividend Default"), the number
of directors then constituting the Board of Directors shall be increased by two
(if not already increased by reason of a similar arrearage respect to any Parity
Preferred (as hereinafter defined), the holders of such shares of Series A
Preferred Stock (voting separately as a class with all other series of Preferred
Stock ranking on a parity with the Series A Preferred Stock as to dividends or
upon liquidation ("Parity Preferred") upon which like voting rights have been
conferred and are exercisable) will be entitled to vote separately as a class,
in order to fill the vacancies thereby created, for the election of a total of
two additional directors of the Company (the "Preferred Stock Directors") at a
special meeting called by the holders of record of at least 20% of the Series A
Preferred Stock or the holders of record of at least 20% of any series of Parity
Preferred so in arrears (unless such request is received less than 90 days
before the date fixed for the next annual or special meeting of shareholders) or
at the next annual meeting of shareholders, and at each subsequent annual
meeting until all dividends accumulated on such shares of Series A Preferred
Stock for the past dividend periods and the dividend for the then current
dividend period shall have been fully paid or declared and a sum sufficient for
the payment thereof set aside for payment. In the event the directors of the
Company are divided into classes, each such vacancy shall be apportioned among
the classes of directors to prevent stacking in any one class and to insure that
the number of directors in each of the classes of directors, are as equal as
possible. Each Preferred Stock Director, as a qualification for election as
such (and regardless of how elected) shall submit to the Board of Directors of
the Company a duly executed, valid, binding and enforceable letter of
resignation from the Board of Directors, to be effective upon the date upon
which all dividends accumulated on such shares of Series A Preferred Stock and
Parity Preferred for the past dividend periods and the dividend for the then
current dividend period shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment, whereupon the terms of
office of all persons elected as Preferred Stock Directors by the holders of the
Series A Preferred Stock and any Parity Preferred shall, upon the effectiveness
of their respective letters of resignation, forthwith terminate, and the number
of directors then constituting the Board of Directors shall be reduced
accordingly. A quorum for any such meeting shall exist if at least a majority
of the outstanding shares of Series A Preferred Stock and shares of Parity
Preferred upon which like voting rights have been conferred and are exercisable
are represented in person or by proxy at such meetings. Such Preferred Stock
Directors shall be elected upon the affirmative vote of a plurality of the
shares of Series A Preferred Stock and such Parity Preferred present and voting
in person or by proxy at a duly called and held meeting at which a quorum is
present. If and when all accumulated dividends and the dividend for the then
current dividend period on the Series A Preferred Stock shall have been paid in
full or set aside for payment in full, the holders thereof shall be divested of
the foregoing voting rights (subject to revesting in the event of each and every
Preferred Dividend Default) and, if all accumulated dividends and the dividend
for the then current dividend period have been paid in full or declared and set
aside for payment in full on all series of Parity Preferred upon which like
voting rights have been conferred and are exercisable, the term of office of
each Preferred Stock Director so elected shall terminate. Any Preferred Stock
Director may be removed at any time with or without cause by, and shall not be
removed otherwise than by the vote of, the holders of record of a majority of
the outstanding shares of the Series A Preferred Stock when they have the voting
rights described above (voting separately as a class with all series of Parity
Preferred upon which like voting rights have been conferred and are
exercisable). So long as a Preferred Dividend Default shall continue, any
vacancy in the office of a Preferred Stock Director may be filled by written
consent of the Preferred Stock Director remaining in office, or if none remains
in office, by a vote of the holders of record of a majority of the outstanding
shares of Series A Preferred Stock when they have the voting rights described
above (voting separately as a class with all series of Parity Preferred upon
which like voting rights have been conferred and are exercisable). The Preferred
Stock Directors shall each be entitled to one vote per director on any matter.
So long as any shares of Series A Preferred Stock remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the Series A Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class), amend, alter or repeal the provisions of the Charter or
the Articles Supplementary, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of the Series A Preferred Stock or the holders
thereof; provided, however, that with respect to the occurrence of any Event set
forth above, so long as the Series A Preferred Stock (or any equivalent class or
series of stock issued by the surviving corporation in any merger or
consolidation to which the Company became a party) remains outstanding with the
terms thereof materially unchanged, the occurrence of any such Event shall not
be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of the Series A Preferred Stock and
provided, further that (i) any increase in the amount of the authorized
Preferred
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Stock or the creation or issuance of any other series of Preferred Stock, or
(ii) any increase in the amount of authorized shares of such series, in each
case ranking on a parity with or junior to the Series A Preferred Stock with
respect to payment of dividends or the distribution of assets upon liquidation
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series A Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
Except as expressly stated in the Articles Supplementary, the Series A
Preferred Stock will not have any relative, participating, optional or other
special voting rights and powers, and the consent of the holders thereof shall
not be required of the taking of any corporate action, including but not limited
to, any merger or consolidation involving the Company or a sale of all or
substantially all of the assets of the Company, irrespective of the effect that
such merger, consolidation or sale may have upon the rights, preferences or
voting power of the holders of the Series A Preferred Stock.
CONVERSION
The Series A Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
actually or constructively, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year. In addition, if the Company, or an actual or constructive
owner of 10% or more of the Company, actually or constructively, owns 10% or
more of a tenant of the Company (or a tenant of any partnership in which the
Company is a partner, including through one of its wholly owned subsidiaries),
the rent received by the Company (either directly or through any such
partnership or Subsidiary) from such tenant will not be qualifying income for
purposes of the REIT gross income tests of the Code. To ensure that the Company
continues to meet the requirements for qualification as a REIT, the Amended and
Restated Articles of Incorporation, subject to certain exceptions, provides that
no holder may own, or be deemed to own by virtue of the attribution provisions
of the Code, shares of the Company's capital stock in excess of the Ownership
Limit. The Board of Directors may waive the Ownership Limit with respect to a
shareholder if evidence satisfactory to the Board of Directors and the Company's
tax counsel is presented that the changes in ownership will not then or in the
future jeopardize the Company's status as a REIT. Any transfer of capital stock
or any security convertible into capital stock that would result in actual or
constructive ownership of capital stock by a shareholder in excess of the
Ownership Limit or that would result in the failure of the Company to meet the
requirements for qualification as a REIT, including any transfer that results in
the capital stock being owned by fewer than 100 persons or results in the
Company being "closely held" within the meaning of section 856(h) of the Code,
shall, not withstanding any provisions of the Charter of the Company to the
contrary, be null and void, and the intended transferee will acquire no rights
to the capital stock. The foregoing restrictions on transferability and
ownership will not apply if the Board of Directors determines that it is no
longer in the best interest of the Company to attempt to qualify, or to continue
to qualify, as a REIT.
Any shares of capital stock of the Company held by a shareholder in excess
of the Ownership Limit become Excess Shares. Upon shares of any class or series
of capital stock becoming Excess Shares, such shares shall be deemed
automatically to have been converted into a class separate and distinct from
their original class and from any other class of Excess Shares. Upon any
outstanding Excess Shares ceasing to be Excess Shares, such shares shall be
automatically reconverted back into shares of their original class or series of
capital stock.
The holder of Excess Shares will not be entitled to vote the Excess Shares
nor will such Excess Shares be considered issued and outstanding for purposes of
any shareholder vote or the determination of a quorum for such vote. The Board
of Directors, in its sole discretion, may choose to accumulate all distributions
and dividends payable upon the Excess Shares of any particular holder in a non-
interest bearing escrow account payable to the holder of the Excess Shares upon
such Excess ceasing to be Excess Shares.
In addition, the Company will have the right to redeem all or any portion
of the Excess Shares from the holder at the redemption price, which shall be the
average market price (as determined in the manner set forth in the Charter of
the capital
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stock for the prior 30 days from the date the Company gives notice of its intent
to redeem such Excess Shares, or as determined by the Board of Directors in good
faith. The redemption price shall only be payable upon the liquidation of the
Company and shall not exceed the sum of the per share distributions designated
as liquidating distributions declared subsequent to the redemption date with
respect to unredeemed shares of record of the class of the Company from which
such Excess Shares were converted. The Company shall rescind the redemption of
the Excess Shares in the event that within 30 days of the redemption date, due
to a sale of shares by the holder, such holder would not be the holder of Excess
Shares, unless such rescission would jeopardize the tax status of the Company as
a REIT or would be unlawful in any regard.
Each shareholder shall upon demand be required to disclose to the Company
in writing any information with respect to the actual and constructive ownership
of beneficial interests in the Company as the Board of Directors deems necessary
to comply with the provisions of the Code applicable to REITs, to comply with
the requirements of any taxing authority or governmental agency or to determine
any such compliance.
The Ownership Limit may have the effect of precluding the acquisition of
control of the Company unless the Board of Directors determines that maintenance
of REIT status is no longer in the best interests of the Company.
TRANSFER AND DIVIDEND PAYING AGENT
Harris Trust & Savings Bank will act as the transfer and dividend payment
agent in respect of the Series A Preferred Stock.
BOOK ENTRY, DELIVERY AND FORM
The depository will be The Depository Trust Company ("DTC") and its nominee
will be Cede & Co. ("Cede"). Accordingly, Cede is expected to be the initial
registered holder of the Series A Preferred Stock which will be represented by
one or more global certificates issued in the name of Cede (the "Global
Preferred Security"). No person that acquires an interest in such Series A
Preferred Stock will be entitled to receive a certificate representing such
person's interest in such Series A Preferred Stock except as set forth herein.
Unless and until definitive Series A Preferred Stock is issued under the limited
circumstances described herein, all references to actions by holders of Series A
Preferred Stock issued in global form shall refer to actions taken by DTC upon
instructions from its Participants (as defined below), and all references herein
to payments and notices to such holders shall refer to payments and notices to
DTC or Cede, as the registered holder of such Series A Preferred Stock.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act, and was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions among
Participants through electronic book-entry, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations, and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Holders that are not Participants or Indirect Participants but that desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Series A Preferred Stock may do so only through Participants and Indirect
Participants. Under a book-entry format, holders may experience some delay in
their receipt of payments, as such payments will be forwarded by the agent
designated by the Transfer Agent to Cede, as nominee for DTC. DTC will forward
such payments to its Participants, which thereafter will forward them to
Indirect Participants or holders. Holders will not be recognized by the Company
as registered holders of the Series A Preferred Stock entitled to the benefits
of the terms of the Series A Preferred Stock. Holders that are not Participants
will be permitted to exercise their rights as such only indirectly through and
subject to the procedures of Participants and, if applicable, Indirect
Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations as currently in effect (the "Rules"), DTC will be required to
make book-entry transfers of Series A Preferred Stock among Participants and to
receive and transmit payments to Participants. Participants and Indirect
Participants with which holders have accounts with respect to the Series A
Preferred Stock similarly are required by the Rules to make book-entry transfers
and receive and transmit such payments on behalf of their respective holders.
S-33
<PAGE>
Because DTC can act only on behalf of Participants, who in turn act only on
behalf of holders or Indirect Participants, and on behalf of certain banks,
trust companies and other persons approved by it, the ability of a holder to
pledge Series A Preferred Stock to persons or entities that do not participate
in the DTC system, or to otherwise act with respect to such Series A Preferred
Stock, may be limited due to the absence of physical certificates for such
Series A Preferred Stock.
DTC will take any action permitted to be taken by a registered holder of
any Series A Preferred Stock under the terms of the Series A Preferred Stock
only at the direction of one or more Participants to whose accounts with DTC
such Series A Preferred Stock are credited.
GLOBAL PREFERRED SECURITIES; CERTIFICATED SECURITIES
A Global Preferred Security will be exchangeable for the relevant
definitive Series A Preferred Stock registered in the names of persons other
than DTC or its nominee only if (i) any person having a beneficial interest in
the Global Preferred Security requests that the transfer and dividend paying
agent exchange such beneficial interest for Series A Preferred Stock in
definitive form, (ii) DTC notifies the Company that it is unwilling or unable to
continue as depository for such Global Preferred Security or if at any time DTC
ceases to be a clearing agency registered under the Exchange Act at a time when
DTC is required to be so registered in order to act as such depository and,
(iii) the Company in its sole discretion determines that the Global Preferred
Security will be so exchangeable. Any Global Preferred Security that is
exchangeable pursuant to the preceding sentence will be exchangeable for
definitive certificates registered in such names as DTC directs. If Series A
Preferred Stock is issued in definitive form, such Series A Preferred Stock will
be in denominations of $25 and integral multiples thereof and may be transferred
or exchanged at the offices described below.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC is generally required to notify all Participants of the
availability through DTC of definitive Series A Preferred Stock. Upon surrender
by DTC of the Global Preferred Security representing the Series A Preferred
Stock and delivery of instructions for re-registration, the Transfer Agent will
reissue the Series A Preferred Stock as definitive Series A Preferred Stock, and
thereafter the Company will recognize the holders of such definitive Series A
Preferred Stock as registered holders of Series A Preferred Stock entitled to
the benefits of the terms of the Series A Preferred Stock.
Except as described above, the Global Preferred Security may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or another nominee of DTC or to a successor depository appointed by the
Company. Except as described above, DTC may not sell, assign, transfer or
otherwise convey any beneficial interest in a Global Preferred Security
evidencing all or part of the Series A Preferred Stock unless such beneficial
interest is in an amount equal to an authorized denomination for the Series A
Preferred Stock.
PAYMENT AND PAYING AGENCY
Payments in respect of the Series A Preferred Stock will be made to the
depository, which will credit the relevant accounts at the depository on the
applicable Distribution Dates or, if any Series A Preferred Stock is not held by
the depository, such payments will be made by check mailed to the address of the
holder entitled thereto as such address shall appear on the securities register
relating to the Series A Preferred Stock.
Payments on Series A Preferred Stock represented by a Global Preferred
Security will be made to DTC, as the depository for the Series A Preferred
Stock. If Series A Preferred Stock is issued in definitive form, the amounts
payable in respect of the Series A Preferred Stock will be payable, the transfer
of the Series A Preferred Stock will be registrable, and Series A Preferred
Stock will be exchangeable for Series A Preferred Stock of other denominations
of a like aggregate Liquidation Amount, at the offices of any paying agent or
transfer agent appointed by the Company, provided that payment of any
Distributions may be made at the option of the Company by check mailed to the
address of the persons entitled thereto or by wire transfer.
S-34
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to
holders of Series A Preferred Stock is based on current law, is for general
information only, and is not tax advice. The tax treatment of a holder of
Series A Preferred Stock will vary depending upon such holder's particular
situation, and this discussion does not purport to deal with all aspects of
taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
subject to special treatment under the federal income tax laws, including,
without limitation, life insurance companies, certain financial institutions,
dealers in securities or currencies, stockholders holding Series A Preferred
Stock as part of a conversion transaction, as part of a hedge or hedging
transaction, or as a position in a straddle for tax purposes, tax-exempt
organizations, foreign corporations, foreign partnerships and persons who are
not citizens or residents of the United States. In addition, the summary below
does not consider the effects of any foreign, state, local or other tax laws
that may be applicable to prospective stockholders.
This discussion does not address fully the federal income tax
considerations relevant to holders of Series A Preferred Stock. A summary of
certain federal income tax considerations to holders of Series A Preferred Stock
is provided in the accompanying Prospectus under the headings "Taxation of
Stockholders-General," "Taxation of Tax-Exempt Stockholders" and "Taxation of
Non-U.S. Stockholders." Furthermore, this discussion does not address fully the
taxation of the Company or the impact on the Company of its election to be taxed
as a REIT. Such matters are discussed in the accompanying Prospectus under the
heading "Federal Income Tax Considerations."
EACH PROSPECTIVE INVESTOR IS ADVISED TO REFER TO THE PROSPECTUS FOR A
SUMMARY OF THE FEDERAL INCOME TAX CONSIDERATIONS TO (A) THE COMPANY OF ITS REIT
ELECTION AND (B) TO SUCH INVESTOR REGARDING THE ACQUISITION, OWNERSHIP AND SALE
OF SERIES A PREFERRED STOCK. EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT
WITH HIS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES TO HIM OF THE
ACQUISITION, OWNERSHIP AND SALE OF SERIES A PREFERRED STOCK, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
REDEMPTION OF SERIES A PREFERRED STOCK
Cash Redemption of Series A Preferred Stock. A cash redemption of shares
of the Series A Preferred Stock will be treated under Section 302 of the Code as
a distribution taxable as a dividend (to the extent of the Company's current and
accumulated earnings and profits) at ordinary income rates unless the redemption
satisfies one of the tests set forth in Section 302(b) of the Code and is
therefore treated as a sale or exchange of the redeemed shares. The cash
redemption will be treated as a sale or exchange if it (i) is "substantially
disproportionate" with respect to the holder, (ii) results in a "complete
termination" of the holder's stock interest in the Company, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder, all within the
meaning of Section 302(b) of the Code. In determining whether any of these
tests have been met, shares of capital stock (including Common Stock and other
equity interests in the Company) considered to be owned by the holder by reason
of certain constructive ownership rules set forth in the Code, as well as shares
of capital stock actually owned by the holder, must generally be taken into
account. Because the determination as to whether any of the alternative tests
of Section 302(b) of the Code will be satisfied with respect to any particular
holder of the Series A Preferred Stock depends upon the facts and circumstances
at the time that the determination must be made, prospective holders of the
Series A Preferred Stock are advised to consult their own tax advisors to
determine such tax treatment.
If a cash redemption of shares of the Series A Preferred Stock is not
treated as a distribution taxable as a dividend to a particular holder, it will
be treated, as to that holder, as a taxable sale or exchange. As a result, such
holder will recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market value
of any property received (less any portion thereof attributable to accumulated
and declared but unpaid dividends, which will be taxable as a dividend to the
extent of the Company's current and accumulated earnings and profits), and (ii)
the holder's adjusted basis in the shares of the Series A Preferred Stock for
tax purposes. Such gain or loss will be capital gain or loss if the shares of
the Series A Preferred Stock have been held as a capital asset, and will be
long-term gain or loss if such shares have been held for more than one year.
If a cash redemption of shares of the Series A Preferred Stock is treated
as a distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
the Series A Preferred Stock for tax purposes will be transferred to the
holder's remaining shares of capital stock in the Company, if any. If the
holder owns no other shares of
S-35
<PAGE>
capital stock in the Company, such basis may, under certain circumstances, be
transferred to a related person or it may be lost entirely.
Redemption Premium. Under Section 305(c) of the Code and applicable
Treasury Regulations, if the redemption price of the Series A Preferred Stock
exceeds its issue price the difference ("redemption premium") may be taxable as
a constructive distribution of additional Series A Preferred Stock to the holder
(treated as a dividend to the extent of the Company's current and accumulated
earnings and profits and otherwise subject to the treatment described above for
distributions) over a certain period. Because Series A Preferred Stock provides
for an optional right of redemption by the Company at a price that may exceed
the issue price, stockholders could be required to recognize such redemption
premium under a constant interest rate method similar to that for accruing
original issue discount if, based on all of the facts and circumstances, the
optional redemption is more likely than not to occur. If stock may be redeemed
at more than one time, the time and price at which such redemption is most
likely to occur must be determined based on all of the facts and circumstances.
Applicable Treasury Regulations provide a "safe harbor" under which a right to
redeem will not be treated as more likely than not to occur if (i) the issuer
and the stockholder are not related within the meaning of such regulations; (ii)
there are no plans, arrangements, or agreements that effectively require or are
intended to compel the issuer to redeem the stock (disregarding, for this
purpose, a separate mandatory redemption), and (iii) exercise of the right to
redeem would not reduce the yield of the stock, as determined under the
regulations. Regardless of whether the optional redemption is more than likely
not to occur, constructive dividend treatment will not result if the redemption
premium does not exceed a de minimis amount. The Company intends to take the
position that the existence of the Company's optional redemption right does not
result in a constructive distribution to the holders of Series A Preferred
Stock.
OTHER TAX MATTERS
The Company owns and operates a number of properties through wholly-owned
subsidiaries (the "QRSs"). The Company has owned 100% of the stock of each of
the QRSs at all times that each of the QRSs has been in existence. As a result,
the QRSs will be treated as "qualified REIT subsidiaries" under the Code. Code
Section 856(i) provides that a corporation which is a qualified REIT subsidiary
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a qualified REIT subsidiary shall be
treated as assets, liabilities and such items (as the case may be) of the REIT.
Thus, in applying the tests for REIT qualification described in the Prospectus
under the heading "---- Taxation of the Company," the QRSs will be ignored, and
all assets, liabilities and items of income, deduction, and credit of such QRSs
will be treated as assets, liabilities and items of the Company. The Company
has not, however, sought or received a ruling from the IRS that the QRSs are
qualified REIT subsidiaries.
S-36
<PAGE>
UNDERWRITING
Morgan Keegan & Company, Inc., J.C. Bradford & Co. and Crowell, Weedon &
Co., (the "Underwriters"), have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the Company
the number of shares of Series A Preferred Stock set forth opposite their
respective names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Morgan Keegan & Company, Inc....
J.C. Bradford & Co..............
Crowell, Weedon & Co............
---------
Total...................... 1,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Series A Preferred Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are purchased. The Company has been advised by the Underwriters that the
Underwriters propose to offer the Series A Preferred Stock to the public at the
offering price set forth on the cover page of this Prospectus Supplement and to
certain dealers at such price less a concession not in excess of $ per share of
Series A Preferred Stock. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share to other dealers. The public
offering price and the concessions and discount to dealers may be changed by the
Underwriters after the initial offering.
The Company has granted to the Underwriters an option, expiring on the
close of business on the thirtieth day subsequent to the date of this Prospectus
Supplement to purchase up to an additional 150,000 shares of Series A Preferred
Stock at the public offering price, less the underwriting discount, as shown on
the cover page of this Prospectus Supplement. The Underwriters may exercise
such option solely for the purpose of covering over-allotments incurred in the
sale of the Series A Preferred Stock. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to certain
conditions to purchase approximately the same percentage of such additional
shares as the number of shares of Series A Preferred Stock set forth next to
such Underwriter's name in the preceding table bears to the total offered
initially.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
The Company has applied to list the Series A Preferred Stock on the NYSE
under the symbol "LTC PrA." If approved, trading of the Series A Preferred
Stock on the NYSE is expected to commence within a thirty-day period after the
initial delivery of the Series A Preferred Stock. Prior to the Offering, there
has been no public market for the shares of Series A Preferred Stock. The
Underwriters have advised the Company that each intends to make a market in the
Series A Preferred Stock prior to the commencement of trading on the NYSE, but
is not obligated to do so and may discontinue market making at any time without
notice.
LEGAL MATTERS
The validity of the Series A Preferred Stock offered hereby will be passed
upon for the Company by Ballard, Spahr, Andrews & Ingersoll, in Baltimore,
Maryland. Certain legal matters are being passed upon for the Company by Latham
& Watkins, Los Angeles, California and for the Underwriters by Baker, Donelson,
Bearman & Caldwell, Memphis, Tennessee.
S-37
<PAGE>
PROSPECTUS
- ----------
LTC PROPERTIES, INC.
SECURITIES
LTC Properties, Inc. (the "Company") is a health care real estate investment
trust which may offer from time to time, in one or more series, its debt
securities (the "Debt Securities"), shares of its Preferred Stock, $.01 par
value per share (the "Preferred Stock"), and shares of its Common Stock, $.01
par value per share (the "Common Stock"). The Debt Securities, Preferred Stock
and Common Stock are collectively referred to herein as the "Securities." The
Securities will have an aggregate offering price of up to $125,000,000 and will
be offered on terms to be determined at the time of the offering.
In the case of Debt Securities, the specific title, the aggregate principal
amount, the ranking, the purchase price, the maturity, the rate and time of
payment of any interest, any redemption or sinking fund provisions, any
conversion provisions and any other specific term of the Debt Securities will be
set forth in an accompanying supplement to this Prospectus (the "Prospectus
Supplement"). In the case of Preferred Stock, the specific number of shares,
designation, stated value per share, liquidation preference per share, issuance
price, dividend rate (or method of calculation), dividend payment dates, any
redemption or sinking fund provisions, any conversion rights and other specific
terms of the series of Preferred Stock will be set forth in an accompanying
Prospectus Supplement. In the case of Common Stock, the specific number of
shares and issuance price per share will be set forth in an accompanying
Prospectus Supplement. The Prospectus Supplement will also disclose whether the
Securities will be listed on a national securities exchange and, if they are not
to be listed, the possible effects thereof on their marketability.
The Securities may be sold: (i) directly by the Company; (ii) through
underwriting syndicates represented by one or more managing underwriters, or
through one or more underwriters without a syndicate; and (iii) through agents
designated from time to time. The names of any underwriters or agents of the
Company involved in the sale of the Securities in respect of which this
Prospectus is being delivered and any applicable commissions or discounts will
be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." The net proceeds to the Company from such sale will be set forth
in the Prospectus Supplement.
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "LTC." On March 12, 1996, the closing sale price of
the Common Stock on the NYSE was $16.25 per share.
__________________
See "Risk Factors" commencing on page 4 for certain information that should be
considered by prospective investors.
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.
___________________
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
The date of this Prospectus is April 4, 1996.
<PAGE>
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 may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, reports, proxy material and other information concerning
the Company may be inspected at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form S-3
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby. The Prospectus and any accompanying
Prospectus Supplement do not contain all of the information included in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Securities, reference is hereby made to the
Registration Statement including the exhibits and schedules thereto. Statements
contained in this Prospectus and any accompanying Prospectus Supplement
concerning the provisions or contents of any contract, agreement or any other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matters involved, and each such statement shall be deemed qualified in its
entirety by such reference to the copy of the applicable document filed with the
Commission. The Registration Statement including the exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office at
450 Fifth Street, N.W., Washington, D.C. and copies of it or any part thereof
may be obtained from such office, upon payment of the fees prescribed by the
Commission.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated herein by reference:
(1) The Annual Report of the Company on Form 10-K for its fiscal year ended
December 31, 1995 (the "1995 Form 10-K"); and
(2) 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
hereof and prior to the termination of the offering of the Securities offered
hereby shall be deemed to be incorporated by reference in this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein, or in any other
subsequently filed document that also is, or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents which have been incorporated by reference herein,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference therein). Requests for such copies should be directed
to the Company's principal executive offices, Attention: James J. Pieczynski,
Senior Vice President and Chief Financial Officer, LTC Properties, Inc., 300
Esplanade Drive, Suite 1860, Oxnard, California 93030, telephone number (805)
981-8655.
2
<PAGE>
THE COMPANY
The Company is a health care real estate investment trust (a "REIT") which
invests in long-term care and other health care related facilities through
mortgage loans, facility lease transactions and other investments. The primary
objective of the Company is to provide current income for distribution to
stockholders through real estate investments primarily in skilled nursing
facilities managed by experienced operators providing quality care. To meet
this objective, the Company attempts to invest in transactions that provide the
opportunity for additional returns to its stockholders and diversify its
investment portfolio by geographic location, operator and form of investment.
The Company's operations commenced on August 25, 1992, the closing date for
the Company's initial public offering. On such date, the Company raised net
cash proceeds of approximately $142,000,000. Immediately following the initial
offering, the Company completed the placement of its initial loans totaling
approximately $75,000,000 to 15 different partnerships. The transaction
included 40 nursing homes, located in nine states.
At December 31, 1995, the Company had investments in 221 skilled nursing
facilities with a total of 24,882 beds and eight assisted living facilities with
a total of 645 units in 27 states. On such date, the Company's real estate
investment portfolio consisted of approximately $161,059,000 of net investments
in mortgage loans, approximately $67,384,000 in mortgage-backed securities and
approximately $111,782,000 of net investments in long-term care facilities owned
by the Company and leased to operators.
At December 31, 1995, the Company had 65 mortgage loans receivable secured by
first mortgages on 87 skilled nursing facilities with a total of 9,217 beds and
two assisted living residences with a total of 255 units located in 21 states.
The mortgage loans, which individually range from $587,700 to $9,334,000 in
principal amount, have current stated interest rates ranging from 9.83% to
13.10%. The mortgage loans generally have 25-year amortization schedules with
balloon payments due from 1998 to 2015 and provide for certain facility fees.
Almost all of the mortgage loans have prepayment fees and provide for specified
increases in the initial interest rate.
At December 31, 1995, the Company had investments in mortgage-backed pass-
through certificates which consist of two pools containing a total of 57
mortgage loans, all of which were originated by the Company, secured by 112
skilled nursing facilities. The mortgage loans represented by the mortgage-
backed securities have individual principal balances ranging from approximately
$715,000 to $13,848,000, have a weighted average interest rate of approximately
11.43%, have remaining terms to scheduled maturities ranging from 27 months to
190 months and generally have 25-year amortization schedules with balloon
payments due from 1998 to 2011.
At December 31, 1995, the Company owned and leased to health care operators 29
skilled nursing facilities with a total of 3,668 beds and six assisted-living
facilities with a total of 390 units in 11 states. These long-term care
facilities are leased pursuant to non-cancelable leases generally with an
initial term of ten years. Many of the leases contain renewal options and some
contain options to purchase the facilities. Most of the leases provide for
annual fixed rent increases over the term of the lease. In addition, some of
the leases provide for additional rent through revenue participation in
incremental revenues (as defined in the lease agreements), over a defined base
period, effective at various times during the term of the lease. In some cases,
rent increases are based on increases in consumer price indices.
The Company was incorporated in Maryland in May 1992. The principal executive
offices of the Company are located at 300 Esplanade Drive, Suite 1860, Oxnard,
California 93030; telephone number (805) 981-8655. Unless the context indicates
otherwise, references herein to the Company include the Company's subsidiary.
3
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to those discussed elsewhere in this Prospectus and in an accompanying
Prospectus Supplement:
Government Regulation
Health Care Reform. The health care industry is facing various challenges,
including increased government and private payor pressure on health care
providers to control costs, the migration of patients from acute care facilities
into extended care and home care settings and the vertical and horizontal
consolidation of health care providers. The pressure to control health care
costs intensified during 1993 and 1994 as a result of the national health care
reform debate and has continued into 1996 as Congress attempts to slow the rate
of growth of federal health care expenditures as part of its effort to balance
the federal budget. For example, bills have been passed by the House and the
Senate in the context of the federal budget reconciliation process which call
for reduced future reimbursement to hospitals under the existing Medicare
system, the establishment of a prospective payment system for Medicare
reimbursement of long-term care, reduced growth in future Medicaid reimbursement
and the establishment of a "block grant" program that would give states greater
discretion in designing and administering their Medicaid programs that presently
afforded under federal law.
The Company believes that government and private efforts to contain and reduce
health care costs will continue. These trends are likely to lead to reduced or
slower growth in reimbursement for certain services provided by some of the
Company's borrowers and lessees. The Company believes that the vast nature of
the health care industry, the financial strength and operating flexibility of
its operators and the diversity of its portfolio will mitigate against the
impact of any such diminution in reimbursement. However, the Company cannot
predict whether any of the above proposals or any other proposals will be
adopted, and if adopted, no assurance can be given that the implementation of
such reforms will not have a material adverse effect on the Company's financial
condition or results of operations.
Potential Operator Loss of Licensure or Certification. The health care
industry is highly regulated by federal, state and local law, and is directly
affected by state and local licensure, fines, and loss of certification to
participate in the Medicare and Medicaid programs, as well as potential criminal
penalties. The failure of any borrower or lessee to comply with such laws,
requirements and regulations could affect its ability to operate the facility or
facilities and could adversely affect such borrower's or lessee's ability to
make debt or lease payments to the Company.
In the past several years, due to rising health care costs, there has been an
increased emphasis on detecting and eliminating fraud and abuse in the Medicare
and Medicaid programs. Payment of any consideration in exchange for referral of
Medicare and Medicaid patients is generally prohibited by federal statute, which
subjects violators to severe penalties, including exclusion from the Medicare
and Medicaid programs, fines, and even prison sentences. In recent years, both
federal and state governments have significantly increased investigation and
enforcement activity to detect and punish wrongdoers. In addition, legislation
has been adopted at both state and federal levels that severely restricts the
ability of physicians to refer patients to entities in which they have a
financial interest.
It is anticipated that the trend toward increased investigation and informant
activity in the area of fraud and abuse, as well as self-referral, will continue
in future years. In the event that any borrower or lessee were to be found in
violation of laws regarding fraud, abuse or self-referral, that borrower's or
lessee's ability to operate a health care facility could be jeopardized, which
could adversely affect the borrower's or lessee's ability to make debt or lease
payments to the Company and, thereby, adversely affect the Company.
Reliance on Government Reimbursement. A significant portion of the revenue of
the Company's borrowers and lessees is derived from governmentally-funded
reimbursement programs, such as Medicare and Medicaid. These programs are
highly regulated and subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations, and administrative and judicial
interpretations of existing law.
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In recent years, there have been fundamental changes in the Medicare program
which have resulted in reduced levels of payment for a substantial portion of
health care services. Moreover, health care facilities have experienced
increasing pressures from private payers attempting to control health care
costs, and reimbursement from private payers has in many cases effectively been
reduced to levels approaching those of government payers.
In many instances, revenues from Medicaid programs are already insufficient to
cover the actual costs incurred in providing care to those patients.
Governmental and popular concern regarding health care costs may result in
significant reductions in payment to health care facilities, and there can be no
assurance that future payment rates for either governmental or private health
care plans will be sufficient to cover cost increases in providing services to
patients. Any changes in reimbursement policies which reduce reimbursement to
levels that are insufficient to cover the cost of providing patient care could
adversely affect revenues of the Company's borrowers and lessees and thereby
adversely affect those borrowers' and lessees' abilities to make their debt or
lease payments to the Company. Failure of the borrowers or lessees to make
their debt or lease payments would have a direct and material adverse impact on
the Company.
Competition
The Company competes with other REITs, real estate partnerships, health care
providers and other investors, including but not limited to banks and insurance
companies, many of which will have greater financial resources than the Company,
in the acquisition, leasing and financing of health care facilities. There can
be no assurance that suitable investments will be identified or that investments
can be consummated on commercially reasonable terms.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property or a secured lender (such as the Company)
may be liable in certain circumstances for the costs of removal or remediation
of certain hazardous or toxic substances at, under or disposed of in connection
with such property, as well as certain other potential costs relating to
hazardous or toxic substances (including government fines and damages for
injuries to persons and adjacent property). Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence or disposal of such substances and may be imposed on the owner in
connection with the activities of an operator of the property. The cost of any
required remediation, removal, fines or personal or property damages and the
owner's liability therefore could exceed the value of the property, and/or the
assets of the owner. In addition, the presence of such substances, or the
failure to properly dispose of or remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral which, in turn, would reduce the Company's revenues.
Although the Company's mortgage loans and leases require the borrower and the
lessee to indemnify the Company for certain environmental liabilities, the scope
of such obligations may be limited and there can be no assurance that any such
borrower or lessee would be able to fulfill its indemnification obligations.
Health Care Real Estate Investment Risks
The Company's investments in health care facilities are subject to various
real estate related risks.
Volatility of Value of Real Estate. Real property investments in the health
care industry are subject to varying degrees of risk. The economic performance
and values of health care real estate can be affected by many factors including
governmental regulation, economic conditions, and demand for health care
services. There can be no assurance that the value of any property acquired by
the Company will appreciate or that the value of property securing any of the
Company's mortgage loans or any property acquired by the Company will not
depreciate.
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Volatility of Income and Returns. The possibility that the health care
facilities will not generate income sufficient to meet operating expenses, will
generate income and capital appreciation, if any, at rates lower than those
anticipated or will yield returns lower than those available through investments
in comparable real estate or other investments are additional risks of investing
in health care related real estate. Income from properties and yields from
investments in such properties may be affected by many factors, including
changes in governmental regulation (such as zoning laws), general or local
economic conditions (such as fluctuations in interest rates and employment
conditions), the available local supply of and demand for improved real estate,
a reduction in rental income as the result of an inability to maintain occupancy
levels, natural disasters (such as earthquakes and floods) or similar factors.
Illiquidity of Real Estate Investments. Real estate investments are
relatively illiquid and, therefore, tend to limit the ability of the Company to
vary its portfolio promptly in response to changes in economic or other
conditions. All of the Company's properties are "special purpose" properties
that could not be readily converted to general residential, retail or office
use. Transfers of operations of nursing homes and other health care-related
facilities are subject to regulatory approvals not required for transfers of
other types of commercial operations and other types of real estate. Thus, if
the operation of any of the Company's properties becomes unprofitable due to
competition, age of improvements or other factors such that the borrower or
lessee becomes unable to meet its obligations on the debt or lease, the
liquidation value of the property may be substantially less -- relative to the
amount owing on the mortgage loan -- than would be the case if the property were
readily adaptable to other uses. The receipt of liquidation proceeds could be
delayed by the approval process of any state agency necessary for the transfer
of the property. In addition, certain significant expenditures associated with
real estate investment (such as real estate taxes and maintenance costs) are
generally not reduced when circumstances cause a reduction in income from the
investment. Should such events occur, the Company's income and funds available
for distribution would be adversely affected.
Uninsured Loss. The Company currently requires, and it is the intention of
the Company to continue to require, all borrowers and lessees to secure adequate
comprehensive property and liability insurance that covers the Company as well
as the borrower and/or lessee. Certain risks may, however, be uninsurable or
not economically insurable and there can be no assurance the Company or a lessee
will have adequate funds to cover all contingencies itself. Should such an
uninsured loss occur, the Company could lose its invested capital.
Dependence on Lease Income and Mortgage Payments from Real Property. Since a
substantial portion of the Company's income is derived from mortgage payments
and lease income from real property, the Company's income would be adversely
affected if a significant number of the Company's borrowers were unable to meet
their obligations to the Company or if the Company were unable to lease its
properties or make mortgage loans on economically favorable terms. There can be
no assurance that any lessee will exercise its option to renew its lease upon
the expiration of the initial term or that if such failure to renew were to
occur, the Company could lease the property to others on favorable terms.
Tax Risks Regarding Taxation of the Company and its Stockholders
The Company was organized and believes that it has conducted and intends to
conduct its operations so as to qualify for taxation as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code").
See "Federal Income Tax Considerations." The Company has not sought, nor will
it seek, a ruling from the Internal Revenue Service ("IRS") with respect to its
qualification as a REIT. Qualification as a REIT involves the satisfaction of
numerous requirements (some on an annual and quarterly basis) established under
highly technical and complex Code provisions for which there are only limited
judicial and administrative interpretations and involve the determination of
various factual matters and circumstances not entirely within the Company's
control. No assurances can be given that the Company will at all times satisfy
these rules and tests. Under certain circumstances, the failure of the Company
to meet the qualifications for REIT status could cause the Company to be taxed
as a regular corporation in which case dividends paid to the stockholders would
not be deductible by the Company in computing its taxable income. Furthermore,
the Company would not be eligible to elect to be taxed as a REIT for five
taxable years (including the year of disqualification). Under certain other
circumstances, if the Company failed to meet the
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qualifications for REIT status, the Company would continue to qualify as a REIT,
but the Company could be required to pay interest, taxes and/or certain
nondeductible penalties. The payment of any tax, interest or penalties by the
Company would reduce the funds available for distribution to stockholders or for
investment, and could necessitate that the Company borrow additional funds or
liquidate certain of its investments.
In order to minimize the chances that the Company will violate certain stock
ownership rules (see "Federal Income Tax Considerations - Requirements for
Qualification"), the Directors of the Company are given the power to redeem or
prohibit the transfer of any class of capital stock if such transfer would cause
the Company to violate any stock ownership rule. Stockholders are cautioned,
however, that because broad attribution rules are used in determining stock
ownership and a large percentage of capital stock may be held by nominees in
"street name," the Company may be unaware of a violation of these stock
ownership rules and therefore the qualification of the Company as a REIT may be
inadvertently lost.
Restrictions on Transfer and Limitation on Ownership of Stock; Business
Combinations
For the Company to continue to qualify as a REIT in any taxable year, no more
than 50% in value of its outstanding Common Stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the second half of the Company's taxable
year. Furthermore, if the Company, or an owner of 10% or more of the Company,
actually or constructively, owns 10% or more of a tenant of the Company (or a
tenant of any partnership in which the Company is a partner), the rent received
by the Company (either directly or through any such partnership) from such
tenant will not be qualifying income for purposes of the REIT gross income tests
of the Code. See "Federal Income Tax Considerations - Taxation of the Company."
In addition, the Common Stock must be owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a proportionate part
of a short taxable year.
In order to protect the Company against the risk of losing REIT status due to
a concentration of ownership among its stockholders, certain provisions of the
Amended and Restated Articles of Incorporation of the Company (the "Charter")
authorize the Company (i) to refuse to permit the transfer of Common Stock to
any person if such transfer could jeopardize the qualification of the Company as
a REIT and (ii) to redeem any shares of Common Stock in excess of 9.8% of the
outstanding Common Stock of the Company beneficially owned by any person
("Excess Shares"). Such provisions may inhibit market activity and the
resulting opportunity for stockholders to realize a premium for their Common
Stock that might otherwise exist if an individual were attempting to assemble a
block of Common Stock in excess of 9.8% of the outstanding Common Stock. Also,
there can be no assurance that such provisions will in fact prevent the Company
from failing to meet such ownership requirements.
Such provisions would also make the Securities an unsuitable investment for
any person seeking to obtain ownership of more than 9.8% of the outstanding
Common Stock of the Company. Although the Company does not anticipate that it
will redeem or otherwise reduce the number of shares of outstanding Common
Stock, except for Excess Shares, if the number of shares of outstanding Common
Stock were reduced, the 9.8% limitation might be exceeded by a stockholder
without any action on the part of the stockholder.
In addition, certain provisions of Maryland law regarding Business
Combinations (as defined) require approval of the holders of 80% of the
outstanding voting shares of the Company. See "Description of the Company's
Capital Stock."
Failure of a Partnership in Which the Company is a Partner to Qualify as a
Partnership for Federal Income Tax Purposes
The Company holds a number of properties, or proportionate interests in
properties, through certain partnerships (the "Partnerships"). If the IRS were
to successfully challenge the tax status of any of the Partnerships as
partnerships for federal income tax purposes, such Partnerships would be treated
as associations taxable as corporations. In such event, the character of the
Company's assets and income would change, which would preclude the Company from
satisfying the asset tests and possibly the income tests (as
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imposed by the Code) and, in turn, would prevent the Company from continuing to
qualify as a REIT. The imposition of a corporate tax on such Partnerships would
also reduce the amount of funds available for distribution to the Company and
its stockholders. See "Federal Income Tax Considerations - Tax Aspects of the
Partnerships."
RATIO OF EARNINGS TO FIXED CHARGES
Set forth below is the ratio of earnings to fixed charges for the Company for
the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED DECEMBER 31,
------------------
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges ............ 1.29x (1) 2.07x 3.34x 3.12x
</TABLE>
(1) From August 25, 1992 (commencement of operations) through December 31,
1992.
USE OF PROCEEDS
Unless otherwise specified in the Prospectus Supplement which accompanies this
Prospectus, the net proceeds from the sale of the Securities offered from time
to time hereby will be used for repayment of outstanding amounts under the
Company's lines of credit, for funding outstanding commitments as described
below and for funding of additional mortgage loans and acquisitions of
additional health care facilities.
In January 1995, the Company entered into a $25,000,000 unsecured revolving
credit agreement (the "Credit Agreement") with certain banks to provide the
Company with short-term borrowings. Borrowings under the Credit Agreement are
used to make real estate investments and mature on December 31, 1996. In
October 1995, the terms of the Credit Agreement were amended to increase the
amount of the line of credit from $25,000,000 to $35,000,000 and to reduce
interest rate from LIBOR plus 1.75% to LIBOR plus 1.5%. As of March 1, 1996,
the Company had no borrowings outstanding under the Credit Agreement.
In May, 1994, the Company entered into an agreement with an institution to
provide the Company with short-term borrowings in an amount based upon the
Company's exsisting outstanding mortgage loans, bearing interest at LIBOR plus
2.5% with no commitment fees (the "Repurchase Agreement"). Borrowings under the
Repurchase Agreement are used to make mortgage loans and are secured by
substantially all of the outstanding mortgage loans of the Company. All
borrowings under the Repurchase Agreement mature on or before April 12, 1996.
However, the Company has historically been able to renew the Repurchase
Agreement. In October 1995, the terms of the Repurchase Agreement were also
amended to increase the amount of the line of credit from $70,000,000 to
$84,000,000 and to reduce the interest rate from LIBOR plus 2.5% to LIBOR plus
2.0%. As of March 1, 1996, the Company had approximately $82,490,000
outstanding under the Repurchase Agreement bearing an average interest rate of
approximately 7.3125%.
As of March 1, 1996, the Company had outstanding commitments to provide
mortgage loans of approximately $40,450,000. The closings of such transactions
will be subject to certain conditions. Pending such uses, the net proceeds of
the offering will be invested in short-term, interest-bearing accounts.
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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The summary of the terms of the capital stock of the Company set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to the Charter and bylaws of the Company, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. See "Available Information."
General
The Company's authorized capital stock consists of 40,000,000 shares of Common
Stock, par value $.01 per share, and 10,000,000 shares of Preferred Stock, par
value $.01 per share.
Common Stock
Of the 40,000,000 authorized shares of Common Stock, 18,422,054 shares were
issued and outstanding on March 1, 1996. Holders of the Common Stock are
entitled to receive, equally, dividends declared by the Board of Directors out
of funds legally available therefor. In the event of any liquidation or
dissolution of the Company, holders of Common Stock are entitled to share
equally in the net assets available for distribution to common stockholders.
There are no preference, exchange, preemptive or conversion rights with respect
to the Common Stock.
Each share of Common Stock is entitled to one vote on each matter submitted to
a vote of stockholders. There is no right of cumulative voting in connection
with the election of directors. Any shares of Common Stock issued and sold
hereunder will be, when issued, fully paid and nonassessable.
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "LTC."
Preferred Stock
No shares of Preferred Stock are presently outstanding. Preferred Stock may
be issued from time to time by the Board of Directors of the Company, without
stockholder approval, in such series and with such preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications or other provisions, as may be fixed by the Board of Directors
when designating any such series.
The Preferred Stock and the variety of characteristics available for it offers
the Company flexibility in financing and acquisition transactions. An issuance
of Preferred Stock could dilute the book value or adversely affect the relative
voting power of the Common Stock. The issuance of such shares could be used to
enable the holder to block such a transaction. Although the Board of Directors
is required when issuing such stock to act based on its judgment as to the best
interests of the stockholders of the Company, the Board could act in a manner
which would discourage or prevent a transaction some stockholders might believe
is in the Company's best interests or in which stockholders could or would
receive a premium for their shares of Common Stock over the market price.
The Company's Board of Directors has authority to classify or reclassify
authorized but unissued shares of Preferred Stock by setting or changing the
preferences, conversion and other rights, voting powers, restrictions and
limitations as to dividends, qualifications and terms and conditions of
redemption of stock.
Redemption and Ownership Limitation Provisions
The Company's Charter contains certain limitations on the number of shares of
the Company's Common Stock and Preferred Stock (collectively, the "Stock") that
any one stockholder may own, which limitations are designed to ensure that the
Company maintains its status as a REIT.
Upon demand of the Company's Board of Directors, each stockholder must
disclose to the Company such information with respect to actual or constructive
ownership of Stock owned (or deemed to be owned
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after applying the attribution rules applicable to REITs under the Code) as the
Board of Directors deems reasonably necessary in order that the Company may
fully comply with the REIT provisions of the Code. Proposed transferees of Stock
must also satisfy the Board, upon demand, that such transferees will not cause
the Company to fall out of compliance with such provisions.
The Code prevents a company from qualifying as a REIT if more than 50% in
value of its stock is owned (or deemed to be owned after applying the
attribution rules applicable to REITs under the Code) by five or fewer
individuals (as defined in the Code to include certain entities) (the "Closely-
held Rule"). The Charter prohibits a stockholder from owning more than 9.8% of
the total number of outstanding shares of the Company's Common Stock or any
class or series of Stock other than Common Stock. Stock that may be acquired by
an investor upon conversion of any securities convertible into Stock is deemed
to be outstanding for purposes of determining the percentage of ownership of
Stock by that investor. Any shares in excess of such limit are deemed to be
"Excess Shares." Excess Shares shall be deemed automatically to have been
converted into a class separate and distinct from the class from which converted
and from any other class of Excess Shares, each such class being designated
"Excess Shares of [stockholder's name]." No Excess Shares may be voted, nor
considered outstanding for the purpose of determining a quorum at any meeting of
stockholders. Any dividends or other distributions payable upon the Excess
Shares may, in the discretion of the Company, be paid into a non-interest
bearing account and released to the stockholder only at such time as he or she
ceases to be the holder of Excess Shares. The Company, upon authorization of
the Board of Directors, by notice to the holder thereof, may redeem any or all
Excess Shares, and from the date of the giving of notice of redemption such
shares shall cease to be outstanding and the stockholder shall cease to be
entitled to dividends, voting rights and other benefits with respect to such
shares. Subject to certain exceptions, the redemption price will be based on
the trading prices of the class of Stock from which the Excess Shares being
redeemed were converted and is payable, without interest, only upon the
liquidation of the Company. However, the Charter contains provisions under
which the holder of Excess Shares may cause the Company to rescind such
redemption by selling (and notifying the Company of such sale), within 30 days
after notice of the redemption, a number of the shares of Stock held by such
holder equal to the number of Excess Shares. In addition, Excess Shares held by
any holder may be converted back into shares of Stock if the holder sells such
shares prior to their being called for redemption.
Business Combinations
Under the Maryland General Corporation Law, certain "business combinations"
(including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance of equity securities) between a
Maryland corporation and any person who beneficially owns 10% or more of the
corporation's stock (an "Interested Stockholder") must be: (a) recommended by
the corporation's board of directors; and (b) approved by the affirmative vote
of at least (i) 80% of the corporation's outstanding shares entitled to vote and
(ii) two-thirds of the outstanding shares entitled to vote which are not held by
the Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's common stockholders receive a
minimum price (as defined in the statute) for their shares and the consideration
is received in cash or in the same form as previously paid by the Interested
Stockholder for his shares. In addition, an Interested Stockholder or any
affiliate thereof may not engage in a "business combination" with the
corporation for a period of five years following the date he becomes an
Interested Stockholder. These provisions of Maryland law do not apply, however,
to business combinations that are approved or exempted by the board of
directors of a Maryland corporation prior to a person's becoming an Interested
Stockholder.
Control Share Acquisitions
The Maryland General Corporation Law provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" may not be voted
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast by stockholders excluding shares owned by the acquirer, officers and
directors who are employees of the corporation. "Control shares" are shares
which, if aggregated with all other shares previously acquired which the person
is entitled to vote, would entitle the acquirer to vote (i) 20% or more but
less than one-third, (ii) one-third or more but less than a majority, or (iii) a
majority of the outstanding shares. Control shares do not include shares the
acquiring person is entitled to vote because
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stockholder approval has previously been obtained. A "control share acquisition"
means the acquisition of control shares subject to certain exceptions.
A person who has made or proposes to make a control share acquisition and who
has obtained a definitive financing agreement with a responsible financial
institution providing for any amount of financing not to be provided by the
acquiring person may compel the corporation's board of directors to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders meeting.
Subject to certain conditions and limitations, the corporation may redeem any
or all of the control shares, except those for which voting rights have
previously been approved, for fair value determined, without regard to voting
rights, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquirer is entitled to vote a majority of the shares entitled
to vote, all other stockholders may exercise appraisal rights. The fair value
of the shares as determined for purposes of such appraisal rights may not be
less than the highest price per share in the control share acquisition, and
certain limitations and restrictions otherwise applicable to the exercise of
dissenter's rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or excepted by the charter or bylaws of
the corporation prior to a control share acquisition.
The limitation on ownership of Common Stock set forth in the Charter, as well
as the provisions of the Maryland Business Combination and Control Share
Acquisition statutes, could have the effect of discouraging offers to acquire
the Company and increasing the difficulty of consummating any such acquisition.
Transfer Agent and Registrar
Harris Trust and Savings Bank in Chicago acts as transfer agent and registrar
for the Common Stock.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an indenture (the "Indenture") to
be executed by the Company and Harris Trust and Savings Bank, as trustee (the
"Trustee"), a form of which has been previously filed as an exhibit to the
Registration Statement. The following summaries of certain provisions of the
Indenture and the Debt Securities do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
if the Indenture to which reference is hereby made for a full description of
such provisions, including the definitions therein of certain terms and for
other information regarding the Debt Securities. Whenever particular sections
or defined terms of the Indenture are referred to, it is intended that such
sections or defined terms shall be incorporated herein by reference. Copies of
the form of the Indenture are available for inspections during normal business
hours at the principal executive offices of the Company, 300 Esplanade Drive,
Suite 1860, Oxnard, CA 93030.
The following is a summary of certain provisions of the Indenture and does not
purport to be complete and is qualified in its entirety by reference to the
detailed provisions of the Indenture, including the definitions of certain terms
therein to which reference is hereby made, for a complete statement of such
provisions. Wherever particular provisions or sections of the Indenture or
terms defined therein are referred to herein, such provisions or definitions are
incorporated herein by reference.
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General
The Indenture does not limit the aggregate principal amount of Debt Securities
that may be issued thereunder and provides that Debt Securities may be issued
from time to time in one or more series. The Prospectus Supplement will
describe certain terms of any Debt Securities offered thereby, including (i) the
title of such Debt Securities; (ii) any limit on the aggregate principal amount
of such Debt Securities and their purchase price; (iii) the date or dates on
which such Debt Securities will mature; (iv) the rate or rates per annum (or
manner in which interest is to be determined) at which such Debt Securities will
bear interest, if any, and the date from which such interest, if any, will
accrue; (v) the dates on which such interest, if any, on such Debt Securities
will be payable and the regular record dates for such interest payment dates;
(vi) any mandatory or optional sinking fund or analogous provisions; (vii)
additional provisions, if any, for the defeasance of such Debt Securities;
(viii) the date, if any, after which and the price or prices at which such Debt
Securities may, pursuant to any optional or mandatory redemption or repayment
provisions, be redeemed and the other detailed terms and provisions of any such
optional or mandatory redemption or repayment provisions; (ix) whether such Debt
Securities are to be issued in whole or in part in registered form represented
by one or more registered global securities (a "Registered Global Security")
and, if so, the identity of the depository for such Registered Global Security
or Debt Securities; (x) certain applicable United States federal income tax
consequences; (xi) any provisions relating to security for payments due under
such Debt Securities; (xii) any provisions relating to the conversion or
exchange of such Debt Securities into or for shares of Common Stock or Debt
Securities of another series; (xiii) any provisions relating to the ranking of
such Debt Securities in right of payment as compared to other obligations of the
Company; (xiv) the denominations in which such Debt Securities are authorized to
be issued; (xv) the place or places where principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable; and (xvi) any
other specific term of such Debt Securities, including any additional events of
default or covenants provided for with respect to such Debt Securities, and any
terms that may be required by or advisable under applicable laws or regulations.
Conversion Rights
The terms, if any, on which Debt Securities of any series may be exchanged for
or converted into shares of Common Stock or Debt Securities of another series
will be set forth in the Prospectus Supplement relating thereto. To protect the
Company's status as a REIT, a holder of the Debt Securities of any series (the
"Holder") may not convert any Debt Security, and such Debt Security shall not be
convertible by any Holder, to the extent that as a result of such conversion,
any Person would then own or be deemed to beneficially own, directly or
indirectly, 9.8% or more of the then outstanding shares of Common Stock.
The conversion price will be subject to adjustment under certain conditions,
including (i) the payment of dividends (and other distributions) in shares of
Common Stock on any class of capital stock of the Company; (ii) subdivisions,
combinations and reclassifications of the Common Stock; (iii) the issuance to
all or substantially all holders of Common Stock of rights or warrants entitling
them to subscribe for or purchase shares of Common Stock at a price per share
(or having a conversion price per share) less than the then current market
price; and (iv) distributions to all or substantially all holders of shares of
Common Stock of evidences of indebtedness or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to above
and dividends and distributions not prohibited under the terms of the Indenture)
of the Company, subject to the limitation that all adjustments by reason of any
of the foregoing would not be made until they result in a cumulative change in
the conversion price of at least 1%. No adjustments in the conversion price of
the Debt Securities will be made for regular quarterly or other periodic or
recurring cash dividends or distributions. In the event the Company shall
effect any capital reorganization or reclassification of its shares of Common
Stock or shall consolidate or merge with or into any trust or corporation (other
than a consolidation or merger in which the Company is the surviving entity) or
shall sell or transfer substantially all of its assets to any other trust or
corporation, the holders of the Debt Securities of any series shall, if entitled
to convert such Debt Securities at any time after such transaction, receive upon
conversion thereof, in lieu of each share of Common Stock into which the Debt
Securities of such series would have been convertible prior to such transaction,
the same kind and amount of stock and other securities, cash or property as
shall have been issuable or distributable in connection with such transaction
with respect to each share of Common Stock.
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A conversion price adjustment made according to the provisions of the Debt
Securities of any series (or the absence of provisions for such an adjustment)
might result in a constructive distribution to the holders of Debt Securities of
such series or holders of shares of Common Stock that would be subject to
taxation as a dividend. The Company may, at its option, make such reductions in
the conversion price, in addition to those set forth above, as the Board of
Directors of the Company deems advisable to avoid or diminish any income tax to
holders of shares of Common Stock resulting from any dividend or distribution of
shares of Common Stock (or rights to acquire shares of Common Stock) or from any
event treated as such for income tax purposes or for any other reason. The
Board of Directors will also have the power to resolve any ambiguity or correct
any error in the adjustments made pursuant to these provisions and its actions
in so doing shall be final and conclusive.
Fractional shares of Common Stock will not be issued upon conversion but, in
lieu thereof, the Company will pay a cash adjustment based upon market price.
The Holders of Debt Securities of any series at the close of business on an
interest payment record date shall be entitled to receive the interest payable
on such Debt Securities on the corresponding interest payment date
notwithstanding the conversion thereof. However, Debt Securities surrendered
for conversion during the period from the close of business on any record date
for the payment of interest to the opening of business on the corresponding
interest payment date must be accompanied by payment of an amount equal to the
interest payable on such interest payment date. Holders of Debt Securities of
any series who convert Debt Securities of such series on an interest payment
date will receive the interest payable by the Company on such date and need not
include payment in the amount of such interest upon surrender of such Debt
Securities for conversion. Except as aforesaid, no payment or adjustment is to
be made on conversion for interest accrued on the Debt Securities of any series
or for dividends on shares of Common Stock.
Subordination
The indebtedness evidenced by the Debt Securities of any series may be
subordinated and junior in right of payment to the extent set forth in the
Indenture to the prior payment in full of amounts then due or thereafter created
on all Senior Indebtedness (as defined). The terms, if any, on which the Debt
Securities of any series may be subordinated and junior in right of payment to
the prior payment in full of amounts then due or thereafter created on all
Senior Indebtedness will be set forth in the Prospectus Supplement relating
thereto. No payment shall be made by the Company on account of principal of (or
premium, if any) or interest on the Debt Securities of any series or on account
of the purchase or other acquisition of Debt Securities of any series, if there
shall have occurred and be continuing a default with respect to any Senior
Indebtedness permitting the holders to accelerate the maturity thereof or with
respect to the payment of any Senior Indebtedness, and such default shall be the
subject of a judicial proceeding or the Company shall have received notice of
such default from any holder of Senior Indebtedness, unless and until such
default or event of default shall have been cured or waived or shall have ceased
to exist. By reason of these provisions, in the event of default on any Senior
Indebtedness, whether now outstanding or hereafter issued, payment of principal
of (and premium, if any) and interest on the Debt Securities of any series may
not be permitted to be made until such Senior Indebtedness is paid in full, or
the event of default on such Senior Indebtedness is cured or waived.
Upon any acceleration of the principal of the Debt Securities or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debt Securities of any series or the Trustee are entitled to
receive or retain any assets so distributed in respect of the Debt Securities.
By reason of this provision, in the event of insolvency, holders of the Debt
Securities of any series may recover less, ratably, than holders of Senior
Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post-filing interest is allowed in such proceedings), fees,
charges,
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expenses, reimbursement and indemnification obligations, and all other amounts
payable under or in respect of Indebtedness (as defined) of the Company for
money borrowed, whether any such Indebtedness exists as of the date of the
Indenture or is created, incurred, assumed or guaranteed after such date. There
is no limit on the amount of Senior Indebtedness that the Company may incur.
"Indebtedness" with respect to any Person is defined to mean:
(i) all indebtedness for money borrowed whether or not evidenced by a
promissory note, draft or similar instrument;
(ii) that portion of obligations with respect to leases that is properly
classified as a liability on a balance sheet in accordance with generally
accepted accounting principles;
(iii) notes payable and drafts accepted representing extensions of credit;
(iv) any balance owed for all or any part of the deferred purchase price or
services which purchase price is due more than six months from the date of
incurrence of the obligation in respect thereof (except any such balance that
constitutes (a) a trade payable or an accrued liability arising in the
ordinary course of business or (b) a trade draft or note payable issued in the
ordinary course of business in connection with the purchase of goods or
services), if and to the extent such debt would appear as a liability upon a
balance sheet of such person prepared in accordance with generally accepted
accounting principles; and
(v) any deferral, amendment, renewal, extension, supplement or refunding of
any liability of the kind described in any of the preceding clauses (i)
through (iv);
provided, however, that, in computing the "Indebtedness" of any Person, there
shall be excluded any particular indebtedness if, upon or prior to the maturity
thereof, there shall have been deposited with a depositary in trust money (or
evidence of indebtedness if permitted by the instrument creating such
indebtedness) in the necessary amount to pay, redeem or satisfy such
indebtedness as it becomes due, and the amount so deposited shall not be
included in any computation of the assets of such Person.
Optional Redemption
The Debt Securities of any series will be subject to redemption, in whole or
from time to time in part, at any time for certain reasons intended to maintain
the Company's status as a REIT at the option of the Company and on at least 30
days' prior notice by mail at a redemption price equal to the lesser of (i) the
price paid by the holder of the Debt Securities of any series in the transaction
that caused such Debt Securities to exceed the amount necessary for the Company
to continue to qualify as a REIT, (ii) the last sale price of the Debt
Securities of any series reported on the NYSE on the trading day immediately
preceding the date the Company mails the notice of redemption or (iii) 100% of
the principal amount thereof, in each case together with accrued interest.
Except as otherwise set forth in the accompanying Prospectus Supplement, the
Company may exercise its redemption powers solely with respect to the securities
of the security holder or holders which pose a threat to the Company's REIT
status and only to the extent deemed necessary by the Company's Board of
Directors to preserve such status. The Indenture does not contain any provision
requiring the Company to repurchase the Debt Securities of any series at the
option of the Holders thereof in the event of a leveraged buyout,
recapitalization or similar restructuring of the Company, even though the
Company's creditworthiness and the market value of the Debt Securities may
decline significantly as a result of such transaction. The Indenture does not
protect Holders of the Debt Securities of any series against any decline in
credit quality, whether resulting from any such transaction or from any other
cause. The Company may at any time buy Debt Securities of any series on the
open market at prices which may be greater or less than the optional redemption
price listed above.
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Dividends, Distributions and Acquisitions of Common Stock
The Company will not (i) declare or pay any dividend, or make any distribution
on its Common Stock to its shareholders (other than dividends or distributions
payable in Common Stock of the Company) or (ii) purchase, redeem, or otherwise
acquire or retire for value any of its Common Stock, or any warrants, rights, or
options to purchase or acquire any Stock of its Common Stock (other than the
Debt Securities of any series or any other convertible indebtedness of the
Company that is neither secured nor subordinated to the Debt Securities of any
series and other than purchases, redemptions or acquisitions or retirements as
the Company determines necessary to protect its status as a REIT), if at the
time of such action an Event of Default has occurred and is continuing or would
exist immediately after such action. The foregoing, however, will not prevent
(i) the payment of any dividend or distribution necessary to maintain the
Company's status as a REIT; (ii) the payment of any dividend within 60 days
after the date of declaration when the payment would have complied with the
foregoing provision on the date of declaration; (iii) the Company's retirement
of any of its Common Stock by exchange for, or out of the proceeds of the
substantially concurrent sale of, other Common Stock; or (iv) the Company's
ability to call for purchase shares of its capital stock so as to prevent
concentration of ownership potentially disqualifying the Company as a REIT or
potentially disqualifying income as rents from real property.
Additional Covenants
Any additional covenants of the Company with respect to a series of the Debt
Securities will be set forth in the Prospectus Supplement relating thereto.
Modification of the Indenture
Under the Indenture, with certain exceptions, the rights and obligations of
the Company with respect to any series of Debt Securities and the rights of
Holders of such series may only be modified by the Company and the Trustee with
the consent of the Holders of at least a majority in principal amount of the
outstanding Debt Securities of such series. However, without the consent of
each Holder of any Debt Securities affected, an amendment, waiver or supplement
may not (i) reduce the principal of, or rate of interest on, any Debt
Securities; (ii) change the stated maturity date of the principal of, or any
installment of interest on, any Debt Securities; (iii) waive a default in the
payment of the principal amount of, or the interest on, or any premium payable
on redemption of, any Debt Securities; (iv) change the currency for payment of
the principal of, or premium or interest on, any Debt Securities; (v) impair the
right to institute suit for the enforcement of any such payment when due; (vi)
adversely affect any right to convert any Debt Securities; (vii) reduce the
amount of outstanding Debt Securities necessary to consent to an amendment,
supplement or waiver provided for in the Indenture; or (viii) modify any
provisions of the Indenture relating to the modification and amendment of the
Indenture or waivers of past defaults, except as otherwise specified.
Events of Default, Notice and Waiver
Except as otherwise set forth in the accompanying Prospectus Supplement, the
following is a summary of certain provisions of the Indenture relating to events
of default, notice and waiver.
The following are Events of Default under the Indenture with respect to any
series of Debt Securities: (i) default in the payment of interest on the Debt
Securities of such series when due and payable, which continues for 30 days;
(ii) default in the payment of principal of (and premium, if any) on the Debt
Securities when due and payable, at maturity, upon redemption or otherwise,
which continues for five Business Days; (iii) failure to perform any other
covenant of the Company contained in the Indenture or the Debt Securities of
such series which continues for 60 days after written notice as provided in the
Indenture; (iv) default under any bond, debenture or other Indebtedness (as
defined in the Indenture) of the Company or any subsidiary if (a) either (x)
such event of default results from the failure to pay any such Indebtedness at
maturity or (y) as a result of such event of default, the maturity of such
Indebtedness has been accelerated prior to its expressed maturity and such
acceleration shall not be rescinded or annulled or the accelerated amount paid
within 10 days after notice to the Company of such acceleration, or such
Indebtedness having been discharged, and (b)
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the principal amount of such Indebtedness, together with the principal amount of
any other such Indebtedness in default for failure to pay principal or interest
thereon, or the maturity of which has been so accelerated, aggregates $5,000,000
or more; and (v) certain events of bankruptcy, insolvency or reorganization
relating to the Company.
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, either the Trustee or the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series may
declare the Debt Securities due and payable immediately.
The Company will not declare or pay any dividends or make any distribution to
holders of its capital stock (other than dividends or distributions payable in
capital stock of the Company) if at the time any of the aforementioned Events of
Default has occurred and is continuing or would exist immediately after giving
effect to such action, except for (i) the payment of any dividend within 60 days
after the date of declaration when the payment would have complied with the
foregoing provisions on the date of declaration; (ii) the retirement of any
share of the Company's capital stock by exchange for, or out of the proceeds of
the substantially concurrent sale (other than to a subsidiary) of, other shares
of its capital stock; or the payment of a dividend or distribution in such
amount as may be necessary to maintain the Company's status as a REIT.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of any Default or Event of Default with respect to the Debt
Securities of any series, give to the Holders of Debt Securities notice of all
uncured Defaults and Events of Default known to it, but the Trustee will be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of such Holders, except in the
case of a default in the payment of the principal of (or premium, if any) or
interest on any of the Debt Securities of such series.
The Indenture provides that the Holders of a majority in aggregate principal
amount of the Debt Securities of any series then outstanding may direct the
time, method and place of conducting any proceedings for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee with
respect to the Debt Securities of such series. The right of a Holder to
institute a proceeding with respect to the Indenture is subject to certain
conditions precedent including notice and indemnity to the Trustee, but the
Holder has an absolute right to receipt of principal of (and premium, if any)
and interest on such Holder's Debt Securities on or after the respective due
dates expressed in the Debt Securities, and to institute suit for the
enforcement of any such payments.
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series then outstanding may on behalf of the Holders of all
Debt Securities of such series waive certain past defaults, except a default in
payment of the principal of (or premium, if any) or interest on any Debt
Securities of such series or in respect of certain provisions of the Indenture
which cannot be modified or amended without the consent of the Holder of each
outstanding Debt Security of such series affected thereby.
The Company will be required to furnish to the Trustee annually a statement of
certain officers of the Company stating whether or not they know of any Default
or Events of Default (as defined in the Indenture) and, if they have knowledge
of a Default or Event of Default, a description of the efforts to remedy the
same.
Consolidation, Merger, Sale or Conveyance
The Indenture provides that the Company may merge or consolidate with, or sell
or convey all, or substantially all, of its assets to any other trust or
corporation, provided that (i) either the Company shall be the continuing
entity, or the successor entity (if other than the Company) shall be any entity
organized and existing under the laws of the United States or a state thereof or
the District of Columbia (although it may, in truth, be owned by a foreign
entity) and such entity shall expressly assume by supplemental indenture all of
the obligations of the Company under the Debt Securities of any series and the
Indenture; (ii) immediately after giving effect to such transactions, no Default
or Event of Default shall have occurred and be continuing, and
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(iii) the Company shall have delivered to the Trustee an Officers' Certificate
and opinion of counsel, stating that the transaction and supplemental indenture
comply with the Indenture.
Global Securities
The Debt Securities may be issued in whole or in part in global form (the
"Global Securities"). The Global Securities will be deposited with a depository
(the "Depository"), or with a nominee for a Depository, identified in the
Prospectus Supplement. In such 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 to be represented by
such Global Security or Securities. Unless and until it is exchanged in whole
or in part for Debt Securities in definitive form, a Global Security may not be
transferred except as a whole by the Depository for such Global Security to a
nominee of such Depository or by a nominee of such Depository to such Depository
or another nominee of such Depository or by such Depository or any such nominee
to a successor for such Depository or a nominee of such successor.
The specific material terms of the depository arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the Prospectus Supplement. The Company anticipates that
the following provisions will apply to all depository arrangements.
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depository or such nominee as the
case may be, will be considered the sole owner or Holder of the Debt Securities
represented by such Global Security for all purposes under the Indenture;
provided, however, that for purposes of obtaining any consents or directions
required to be given by the Holders of the Debt Securities, the Company, the
Trustee and its agents will treat a person as the holder of such principal
amount of Debt Securities as specified in a written statement of the Depository.
Principal, premium, if any, and interest payments, if any on Debt Securities
represented by a Global Security registered in the name of a Depository or its
nominee will be made directly to the owners of beneficial interests of such
Global Security, except as may be limited by the terms of the resolution of the
board of directors of the Company that authorizes such series of Debt
Securities.
The Company expects that the depository for any Debt Securities represented by
a Global Security, upon receipt of any payment of principal, premium, if any, or
interest will immediately credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Security as shown on the records of such Depository. The Company
also expects that payments by participants will be governed by standing
instructions and customary practices, as is now the case with the securities
held for the accounts of customers registered in "street names," and will be the
responsibility of such participants.
If the Depository for any Debt Securities represented by a Global Security is
at any time unwilling or unable to continue as Depository and a successor
Depository is not appointed by the Company within 90 days, the Company will
issue each Debt Security in definitive form to the beneficial owners thereof in
exchange for such Global Security. In addition, the Company may at any time and
in its sole discretion determine not to have any of the Debt Securities of a
series represented by one or more Global Securities and, in such event, will
issue Debt Securities of such series in definitive form in exchange for all of
the Global Security or Securities representing such Debt Securities.
Governing Law
The Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York.
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DESCRIPTION OF PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Charter and the Board of Directors' resolution or articles supplementary (the
"Articles Supplementary") relating to each series of the Preferred Stock which
will be filed with the Commission and incorporated by reference to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Preferred Stock.
General
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred
Stock, $.01 par value per share. See "Description of the Company's Capital
Stock."
Under the Charter, the Board of Directors of the Company is authorized without
further stockholder action to establish and issue, from time to time, up to
10,000,000 shares of Preferred Stock, in one or more series, with such
designations, preferences, powers and relative participating, optional or other
special rights, and the qualifications, limitations or restrictions thereon,
including, but not limited to, dividend rights, dividend rate or rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preference as shall be stated in the resolution providing for the issue of a
series of such stock, adopted, at any time or from time to time, by the Board of
Directors of the Company.
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. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
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; (v) any redemption or sinking fund provisions; (vi) any conversion rights;
and (vii) any additional voting, dividend, liquidation, redemption, sinking fund
and other rights, preferences, privileges, limitations and restrictions.
The Preferred Stock will, when issued, be fully paid and nonassessable and
will have no preemptive rights. Unless otherwise stated in a Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and distributions
of assets with each other series of the Preferred Stock. The rights of the
holders of each series of the Preferred Stock will be subordinate to those of
the Company's general creditors.
Certain Provisions of the Charter
See "Description of the Company's Capital Stock" for a description of certain
provisions of the Charter, including provisions which may have certain anti-
takeover effects.
Dividend Rights
Holders of shares of the Preferred Stock of each series will be entitled to
receive, when, as and if declared by the Board of Directors of the Company, out
of funds of the Company legally available therefor, cash dividends on such dates
and at such rates as will be set forth in, or as are determined by the method
described in the Prospectus Supplement relating to such series of the Preferred
Stock. Such rate may be fixed
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or variable or both. Each such dividend will be payable to the holders of record
as they appear on the stock books of the Company on such record dates, fixed by
the Board of Directors of the Company, as specified in the Prospectus Supplement
relating to such series of Preferred Stock.
Such dividends may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating to such series of Preferred Stock. If the Board
of Directors of the Company fails to declare a dividend payable on a dividend
payment date on any series of Preferred Stock for which dividends are
noncumulative, then the holders of such series of Preferred Stock will have no
right to receive a dividend in respect of the dividend period ending on such
dividend payment date, and the Company shall have no obligation to pay the
dividend accrued for such period, whether or not dividends on such series 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.
So long as the shares of any series of the Preferred Stock shall be
outstanding, unless (i) full dividends (including if such Preferred Stock is
cumulative, dividends for prior dividend periods) shall have been paid or
declared and set apart for payment on all outstanding shares of the Preferred
Stock of such series and all other classes and series of Preferred Stock (other
than Junior Stock, as defined below) and (ii) the Company is not in default or
in arrears with respect to the mandatory or optional redemption or mandatory
repurchase or other mandatory retirement of, or with respect to any sinking or
other analogous fund for, any shares of Preferred Stock of such series or any
shares of any other Preferred Stock of any class or series (other than Junior
Stock), the Company may not declare any dividends on any shares of Common Stock
or any other stock of the Company ranking as to dividends or distributions of
assets junior to such series of Preferred Stock (the Common Stock and any such
other stock being herein referred to as "Junior Stock"), or make any payment on
account of, or set apart money for, the purchase, redemption or other retirement
of, or for a sinking or other analogous fund for, any shares of Junior Stock or
make any distribution in respect thereof, whether in cash or property or in
obligations or stock of the Company, other than Junior Stock which is neither
convertible into, nor exchangeable or exercisable for, any securities of the
Company other than Junior Stock.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
voluntary or involuntary, the holders of each series of the Preferred Stock will
be entitled to receive out of the assets of the Company available for
distribution to stockholders, before any distribution of assets or payment is
made to the holders of Common Stock or any other shares of stock of the Company
ranking junior as to such distribution or payment to such series of Preferred
Stock, the amount set forth in the Prospectus Supplement relating to such series
of the Preferred Stock. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the Preferred Stock of such series and
such other shares of Preferred Stock will share ratably in any such distribution
of assets of the Company in proportion to the full respective preferential
amounts to which they are entitled. After payment to the holders of the
Preferred Stock of each series of the full preferential amounts of the
liquidating distribution to which they are entitled, the holders of each such
series of the Preferred Stock will be entitled to no further participation in
any distribution of assets by the Company.
If such payment shall have been made in full to all holders of shares of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes of stock ranking junior to the Preferred Stock
upon liquidation, dissolution or winding up, according to their respective
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of the Company with or
into any other corporation, or the sale, lease or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution or winding up of the Company.
Redemption
A series of the Preferred Stock may be redeemable, in whole or from time to
time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon terms, at
the times and at the redemption prices set forth in the Prospectus Supplement
relating to
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such series. Shares of the Preferred Stock redeemed by the Company will be
restored to the status of authorized but unissued shares of preferred stock of
the Company.
In the event that fewer than all of the outstanding shares of a series of the
Preferred Stock are to be redeemed, whether by mandatory or optional redemption,
the number of shares to be redeemed will be determined by lot or pro rata
(subject to rounding to avoid fractional shares) as may be determined by the
Company or by any other method as may be determined by the Company in its sole
discretion to be equitable. From and after the redemption date (unless the
Company defaults in the payment of the redemption price plus accumulated and
unpaid dividends, if any), dividends shall cease to accumulate on the shares of
the Preferred Stock called for redemption and all rights of the holders thereof
(except the right to receive the redemption price plus accumulated and unpaid
dividends, if any) shall cease.
So long as any dividends on shares of any series of the Preferred Stock or any
other series of preferred stock of the Company ranking on a parity as to
dividends and distributions of assets with such series of the Preferred Stock
are in arrears, no shares of any such series of the Preferred Stock or such
other series of preferred stock of the Company will be redeemed (whether by
mandatory or optional redemption) unless all such shares are simultaneously
redeemed, and the Company will not purchase or otherwise acquire any such
shares; provided, however, that the foregoing will not prevent the purchase or
acquisition of such shares of Preferred Stock of such series or of shares of
such other series of preferred stock pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Preferred Stock
of such series and, unless the full cumulative dividends on all outstanding
shares of any cumulative Preferred Stock of such series and any other stock of
the Company ranking on a parity with such series as to dividends and upon
liquidation shall have been paid or contemporaneously are declared and paid for
all past dividend periods, the Company shall not purchase or otherwise acquire
directly or indirectly any shares of Preferred Stock of such series (except by
conversion into or exchange for stock of the Company ranking junior to the
Preferred Stock of such series as to dividends and upon liquidation).
Notice of redemption will be mailed at least 30 days but not more than 60 days
before the redemption date to each holder of record of shares of Preferred Stock
to be redeemed at the address shown on the stock transfer books of the Company.
After the redemption date, dividends will cease to accrue on the shares of
Preferred Stock called for redemption and all rights of the holders of such
shares will terminate, except the right to receive the redemption price without
interest.
Conversion Rights
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 or another series of Preferred Stock will be set forth in the Prospectus
Supplement relating thereto.
Voting Rights
Except as indicated below or in a Prospectus Supplement relating to a
particular series of the Preferred Stock, or except as required by applicable
law, the holders of the Preferred Stock will not be entitled to vote for any
purpose.
So long as any shares of Preferred Stock remain outstanding, the Company shall
not, without the consent or the affirmative vote of the holders of a majority of
the shares of each series of Preferred Stock outstanding at the time given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class) (i) authorize, create or issue, or increase the
authorized or issued amount of, any class or series of stock ranking prior to
such series of Preferred Stock with respect to payment of dividends, or the
distribution of assets on liquidation, dissolution or winding up or
reclassifying any authorized stock of the Company into any such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner which materially and adversely affects the powers,
preferences, voting power or other rights or privileges of such series of the
Preferred Stock
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or the holders thereof; provided, however, that any increase in the amount of
the authorized Preferred Stock or the creation or issuance of other series of
Preferred Stock, or any increase in the amount of authorized shares of such
series or of any other series of Preferred Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series, shall not be deemed
to materially and adversely affect such rights, preferences, privileges or
voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of the Preferred Stock shall have been
redeemed or called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
Transfer Agent and Registrar
The transfer agent, dividend and redemption price disbursement agent and
registrar for shares of each series of the Preferred Stock will be set forth in
the Prospectus Supplement relating thereto.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the material federal income tax
consequences regarding the Company, is based on current law, is for general
information only and is not tax advice. This summary does not address all
aspects of federal income taxation that may be relevant to a purchaser in light
of such purchaser's particular circumstances or to certain types of purchasers
subject to special treatment under the federal income tax laws (such as certain
financial institutions, tax-exempt organizations, life insurance companies,
dealers in securities or currencies, or purchasers holding stock as part of a
conversion transaction, as part of a hedging transaction, or as a position in a
straddle for tax purposes). In addition, the summary below does not consider
the effect of any foreign, state, local or other tax laws that may be applicable
to purchasers. This summary is based upon the provisions of the Code, Treasury
Regulations, IRS rulings and judicial decisions, all in effect as of the date
hereof and all of which are subject to change (possibly with retroactive effect)
by subsequent legislative, judicial or administrative action.
EACH PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE SPECIFIC FEDERAL
INCOME TAX CONSEQUENCES TO SUCH PURCHASER OF THE PURCHASE, OWNERSHIP AND SALE OF
SECURITIES AND THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND OF ANY POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS AFTER THE
DATE HEREOF.
Taxation of the Company
General. The Company made an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ended December 31,
1992. The Company believes that, commencing with its taxable year ended
December 31, 1992, it has been organized and has operated in such a manner as to
qualify for taxation as a REIT under the Code, and the Company intends to
continue to operate in such a manner. However, no assurance can be given that
the Company has operated or will be able to continue to operate in a manner to
so qualify or remain qualified.
In the opinion of Latham & Watkins, whose opinion has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part, the Company is
organized in conformity with the requirements for qualification as a REIT and
its proposed method of operation will permit it to meet the requirements for
qualification and taxation as a REIT. It must be emphasized that this opinion
is based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters. In addition, this opinion is based
upon the factual representations made by the Company concerning its business and
properties as set forth in this Prospectus. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet, through actual
annual operating results, distribution levels and diversity of stock
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ownership, the various qualification tests imposed under the Code discussed
below, the results of which have not and will not be reviewed by Latham &
Watkins. Accordingly, no assurance can be given that the actual results of the
Company's operation for any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described in this
Prospectus may be changed, perhaps retroactively, by legislative, administrative
or judicial action at any time. See "Failure to Qualify."
These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the sections that govern the federal income
tax treatment of a REIT and its stockholders. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, even if the Company
continues to qualify as a REIT, the Company will be subject to federal income
tax as follows. First, the Company will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains; provided, however, that if the Company has a net capital gain, it will be
taxed at regular corporate rates on its undistributed REIT taxable income,
computed without regard to net capital gain and the deduction for capital gains
dividends, plus a 35% tax on undistributed net capital gain, if its tax as thus
computed is less than the tax computed in the regular manner. Second, under
certain circumstances, the Company may be subject to the "alternative minimum
tax" on its items of tax preference. Third, if the Company has (i) net income
from the sale or other disposition of "foreclosure property" which is held
primarily for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest regular corporate rate on such income. Fourth, if the Company has net
income from "prohibited transactions" (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business by the Company, (i.e.,
when the Company is acting as a dealer)), such income will be subject to a 100%
tax. Fifth, if the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless maintained
its qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% test, multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to distribute by the end of
each year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company acquires any asset (a "Built-In
Gain Asset") from a C corporation (i.e. generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the Built-In Gain
Asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the 10-year period (the
"Recognition Period") beginning on the date on which such asset was acquired by
the Company, then, to the extent of the Built-In Gain (i.e., the excess of (a)
the fair market value of such asset on the date such asset was acquired by the
Company over (b) the Company's adjusted basis in such asset on such date), such
gain will be subject to tax at the highest regular corporate rate pursuant to
Treasury Regulations that have not yet been promulgated. The results described
above with respect to the recognition of Built-In Gain assume the Company will
make an election pursuant to IRS Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the
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nature of its income and assets. The Code provides that conditions (i) to (iv),
inclusive, must be met during the entire taxable year and that condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. For purposes of
conditions (v) and (vi), pension funds and certain other tax-exempt entities are
treated as individuals, subject to a "look-through" exception in the case of
condition (vi).
The Company believes that it has issued sufficient shares of Common Stock with
sufficient diversity of ownership to allow it to satisfy conditions (v) and
(vi). In addition, the Company's Charter provides for restrictions regarding
the transfer and ownership of Common Stock, which restrictions are intended to
assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such ownership and transfer restrictions are
described in "Risk Factors - Restrictions on Transfer and Limitations on
Ownership of Stock; Business Combinations" and "Description of the Company's
Capital Stock - Redemption and Ownership Limitation Provisions." These
restrictions may not ensure that the Company will, in all cases, be able to
satisfy the share ownership requirements described above. If the Company fails
to satisfy such share ownership requirements, the Company's status as a REIT
will terminate. See "Failure to Qualify."
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company has a calendar taxable year.
Ownership of a Partnership Interest. In the case of a REIT which is a partner
in a partnership, Treasury Regulations provide that the REIT will be deemed to
own its proportionate share of the assets of the partnership and will be deemed
to be entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership will
retain the same character in the hands of the REIT for purposes of Section 856
of the Code, including satisfying the gross income tests and the asset tests.
Thus, the Company's proportionate share of the assets and items of income of the
Partnerships will be treated as assets and items of income of the Company for
purposes of applying the requirements described herein. A summary of the rules
governing the federal income taxation of partnerships and their partners is
provided below in "-- Tax Aspects of the Partnerships." The Company has direct
control of the Partnerships and intends to operate them consistent with the
requirements for qualification as a REIT.
Income Tests. In order to maintain its qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions
for each taxable year must be derived directly or indirectly from: (i) rents
from real property; (ii) interest on obligations secured by mortgages on real
property or interests in real property; (iii) gain from the sale or other
disposition of real property (including interests in real property and interests
in mortgages on real property) not held primarily for sale to customers in the
ordinary course of business; (iv) dividends or other distributions on, and gain
(other than gain from prohibited transactions) from the sale or other
disposition of, transferable shares in other real estate investment trusts; (v)
abatements and refunds of taxes on real property; (vi) income and gain derived
from foreclosure property (as defined in the Code); (vii) amounts (other than
amounts the determination of which depend in whole or in part on the income or
profits of any person) received or accrued as consideration for entering into
agreements (a) to make loans secured by mortgages on real property or on
interests in real property or (b) to purchase or lease real property (including
interests in real property and interests in mortgages on real property); (viii)
gain from the sale or other disposition of a real estate asset which is not a
prohibited transaction; and (ix) qualified temporary investment income.
Second, at least 95% of the Company's gross income (excluding gross income
from prohibited transactions for each taxable year must be derived from the
sources described above with respect to the 75% test, dividends, interest, and
gain from the sale or disposition of stock or securities (or from any
combination of the foregoing).
Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions, and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales or other disposition of foreclosure property)
must represent less than 30% of the Company's gross income (including gross
income from prohibited transactions) for each taxable year.
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Rents that may be received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent received must not
be based, in whole or in part, on the income or profits of any person. However,
an amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed percentage
or percentages of gross receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or an owner of 10% or more of the
REIT, actually or constructively owns 10% or more of such tenant (a "Related
Party Tenant"). The results of this 10% ownership test are determined by
applying complex attribution rules which are provided in the Code. Third, for
rents received to qualify as "rent from real property," the Company generally
must not manage or operate the property or furnish or render services to the
tenants of such property other than through an independent contractor from whom
the Company derives no revenue. However, the Company may directly perform
certain services that are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant" of the property. Finally, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property."
The Company has represented that it does not and will not (i) charge rent for
any property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage of gross receipts or
sales, as described above), (ii) rent any property to a Related Party Tenant,
(iii) derive rental income (except for certain rentals not material in amount)
attributable to personal property (other than personal property leased in
connection with the lease of real property, the amount of which is less than 15%
of the total rent received under the lease except for rental income derived
pursuant to the lease of Rockwood Manor), or (iv) perform services considered to
be rendered to the occupant of the property, other than through an independent
contractor from whom the Company derives no revenue.
The term "interest" generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of gross receipts or sales.
Generally, if a loan is secured by both personal property and real property,
interest must be allocated between the personal property and the real property,
with only the interest allocable to the real property qualifying as mortgage
interest under the 75% gross income test. Treasury Regulations provide that if
a loan is secured by both personal and real property and the fair market value
of the real property as of the commitment date equals or exceeds the amount of
the loan, the entire interest amount will qualify under the 75% gross income
test. If the amount of the loan exceeds the fair market value of the real
property, the interest income is allocated between real property and personal
property based on the relative fair market value of each. Under certain
circumstances, income from shared appreciation mortgages may qualify under the
REIT gross income requirements.
The Company believes that interest received under the Company's mortgage loans
should qualify as "interest" for purposes of the REIT gross income requirements
and, except for certain interest receipts not material in amount, should qualify
as mortgage interest for purposes of the REIT 75% gross income requirement.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions are generally expected to be available if the Company can establish
that its failure to meet such tests was due to reasonable cause and not due to
willful neglect, the Company attaches a schedule of the sources of its income to
its federal income tax return, and any incorrect information was not due to
fraud with intent to evade tax. It is not possible, however, to state whether
in all circumstances the Company would be entitled to the benefit of these
relief provisions. If these relief provisions are inapplicable to a particular
set of circumstances involving the Company, the Company will not qualify as a
REIT. If these relief provisions apply, a special 100% tax is imposed (see
"General"). No similar mitigation provision provides relief if the Company fails
the 30% income test. In such case, the Company would cease to qualify as a
REIT.
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Asset Tests. At the close of each quarter of its taxable year, the Company
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including its allocable
share of the assets held by the Partnerships) must be represented by real estate
assets including (i) its allocable share of real estate assets held by the
Partnerships in which the Company owns an interest and (ii) stock of debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company,
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities.
REMIC. A regular or residual interest in a REMIC will be treated as a real
estate asset for purposes of the REIT asset tests and income derived with
respect to such interest will be treated as interest on an obligation secured by
a mortgage on real property, assuming that at least 95% of the assets of the
REMIC are real estate assets. If less than 95% of the assets of the REMIC are
real estate assets, only a proportionate share of the assets of and income
derived from the REMIC will be treated as qualifying under the REIT asset and
income tests. The Company believes that its REMIC interests fully qualify for
purposes of the REIT income and asset tests.
After meeting the asset tests at the close of any quarter, the Company will
not lose its status as a REIT for failure to satisfy the asset tests at the end
of a later quarter solely by reason of changes in asset values. If the failure
to satisfy the asset tests results from an acquisition of securities or other
property during a quarter (including as a result of the Company increasing its
interest in any of the Partnerships), the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
The Company intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take such other actions within 30
days after the close of any quarter as may be required to cure any
noncompliance. If the Company fails to cure noncompliance with the asset tests
within such time period, it would cease to qualify as a REIT.
Distribution Requirements. The Company, in order to qualify as a REIT, is
required to distribute dividends (other than capital gain dividends) to its
stockholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income
(after tax), if any, from foreclosure property, minus (B) the sum of certain
items of non-cash income. In addition, if the Company disposes of any Built-In
Gain Asset during its Recognition Period, the Company will be required, pursuant
to Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-In-Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment date after such declaration and if the Company so
elects and specifies the dollar amount in its tax return. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it
will be subject to tax thereon at regular ordinary and capital gain corporate
tax rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
Tax Aspects of the Partnerships
In General. Some the Company's investments are held indirectly through the
Partnerships. In general, partnerships are "pass-through" entities which are
not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. The Company
includes and will continue to include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income.
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Moreover, for purposes of the REIT asset tests, the Company will include its
proportionate share of assets held by the Partnerships. See "Taxation of the
Company."
Entity Classification. The Company's interests in the Partnerships involve
special tax considerations, including the possibility of a challenge by the IRS
of the status of any one of the Partnerships as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. If any
one of the Partnerships were treated as an association, such partnership would
be taxable as a corporation and therefore be subject to an entity-level tax on
its income. In such a situation, the character of the Company's assets and
items of gross income would change and preclude the Company from satisfying the
asset tests and possibly the income tests (see "Federal Income Tax
Considerations -- Taxation of the Company -- Asset Tests" and "-- Income
Tests"), and in turn would prevent the Company from qualifying as a REIT. See
"-Failure to Qualify" above for a discussion of the effect of the Company's
failure to meet such tests for a taxable year. In addition, a change in any one
of the Partnerships' status for tax purposes might be treated as a taxable event
in which case the Company might incur a tax liability without any related cash
distributions.
An organization formed as a partnership will be treated as a partnership for
federal income tax purposes, rather than as a corporation, only if it has no
more than two of the four corporate characteristics that the Treasury
Regulations use to distinguish a partnership from a corporation for tax
purposes. These four characteristics are (i) continuity of life, (ii)
centralization of management, (iii) limited liability and (iv) free
transferability of interests. The Company has not requested, and does not
intend to request, a ruling from the IRS that the Partnerships will be treated
as partnerships for federal income tax purposes. However, the Company believes
that the Partnerships have been and will continue to be treated as partnerships
for federal income tax purposes (and not as associations or a publicly traded
partnerships taxable as corporations).
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Partnerships' allocations of taxable
income and loss are intended to comply with the requirements of Section 704(b)
of the Code and the Treasury Regulations promulgated thereunder.
Basis in Partnership Interests. The Company's adjusted tax basis in its
interest in each of the Partnerships generally (i) will be equal to the amount
of cash and the basis of any other property contributed to the Partnership by
the Company, (ii) will be increased by (a) its allocable share of the
Partnership's income and (b) its allocable share of indebtedness of the
Partnership and (iii) will be reduced, but not below zero, by the Company's
allocable share of (a) losses suffered by the Partnership, (b) the amount of
cash distributed to the Company and (c) by constructive distributions resulting
from a reduction in the Company's share of indebtedness of the Partnership.
If the allocation of the Company's distributive share of a Partnership's loss
exceeds the adjusted tax basis of the Company's partnership interest in such
Partnership, the recognition of such excess loss will be deferred until such
time and to the extent that the Company has adjusted tax basis in its interest
in the Partnership. To the extent that a Partnership's distributions, or any
decrease in the Company's share of the indebtedness of such Partnership (such
decreases being considered a constructive cash distribution to the partners),
exceeds the Company's adjusted tax basis, such excess distributions (including
such constructive distributions) constitute taxable income to the Company. Such
taxable income will normally be characterized as a capital gain, and if the
Company's interest in the Partnership has been held for longer than the long-
term capital gain holding period (currently one year), such distributions and
constructive distributions will constitute long-term capital gain.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the distribution requirements described
above due to timing differences between (i) the actual receipt of income and
actual payment of deductible expenses on the one hand and (ii) the inclusion of
such income and deduction of such expenses in arriving at taxable income of the
Company on the other hand. The
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Company will closely monitor the interrelationship between its REIT taxable
income and cash flow to avoid problems with the distribution requirements. In
the event that timing differences occur, in order to meet the distribution
requirements, the Company might find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
Failure to Qualify
If the Company should fail to qualify for taxation as a REIT in any taxable
year, and the relief provisions described above do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in any
year in which the Company fails to qualify will not be deductible by the Company
nor will they be required to be made. As a result, the Company's failure to
qualify as a REIT would substantially reduce the cash available for distribution
by the Company to its stockholders. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company would
also be prohibited from electing REIT status for the four taxable years
following the year during which qualification is lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief. Failure to qualify for even one year could result in the
Company's incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
Taxation Of Stockholders--General
As long as the Company qualifies as a REIT, distributions made to the
Company's stockholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be taken into account by them as
ordinary income (which will not be eligible for the dividends received deduction
for corporations). Distributions that are properly designated as capital gain
dividends will be taxed as long-term capital gains to the extent they do not
exceed the Company's actual net capital gain for the taxable year, without
regard to the period for which a stockholder has held his stock, although
corporate stockholders may be required to treat up to 20% of any such capital
gain dividend as ordinary income. For purposes of computing the Company's
earnings and profits, depreciation on real estate will be computed on a
straight-line basis over a 40 year recovery period. Distributions (not
designated as capital gain dividends) in excess of current or accumulated
earnings and profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's shares of stock, but
rather will reduce the adjusted basis of such shares of stock (but not below
zero). To the extent that such distributions exceed the adjusted basis of a
stockholder's shares of stock they will be included in income as long-term or
short-term capital gain assuming the shares are held as a capital asset in the
hands of the stockholder. The Company will notify stockholders at the end of
each year as to the portions of the distributions which constitute ordinary
income, net capital gain or return of capital.
In addition, any dividend declared by the Company in October, November or
December of any year payable to a stockholder of record on a specified date in
any such month shall be treated as both paid by the Company and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by the Company on or before January 31 of the following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
In general, any gain or loss upon a sale or exchange of shares by a
stockholder who has held such shares as a capital asset will be long-term or
short-term depending on whether the stock was held for more than one year;
provided, however, any loss on the sale or exchange of shares that have been
held by such
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stockholder for six months or less will be treated as a long-term capital loss
to the extent of distributions from the Company required to be treated by such
stockholder as long-term capital gain.
Taxation of Tax-exempt Stockholders
The IRS has ruled that amounts distributed as dividends by a qualified REIT do
not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling the dividend income from the Company
should not, subject to certain exceptions described below, be UBTI to a
qualified plan, IRA or other tax-exempt entity (a "Tax-Exempt Stockholder")
provided the Tax-Exempt Stockholder has not held its shares as "debt financed
property" within the meaning of the Code and the shares are not otherwise used
in an unrelated trade or business of the Tax-Exempt Stockholder. Similarly,
income from the sale of Common Stock should not, subject to certain exceptions
described below, constitute UBTI unless the Tax-Exempt Stockholder has held such
Common Stock as a dealer (under Section 512(b)(5)(B) of the Code) or as "debt
financed property" within the meaning of the Code or has used the shares in a
trade or business.
For Tax-Exempt Stockholders which are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their tax advisors concerning these "set-
aside" and reserve requirements.
Notwithstanding the above, however, the recently enacted Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act") provides that, effective for taxable
years beginning in 1994, a portion of the dividends paid by a "pension held
REIT" shall be treated as UBTI as to any trust which (i) is described in Section
401 (a) of the Code, (ii) is tax-exempt under Section 501(a) of the Code, and
(iii) holds more than 10% (by value) of the interests in the REIT. Tax-exempt
pension funds that are described in Section 401(a) of the Code are referred to
below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act)
provides that stock owned by qualified trusts shall be treated, for purposes of
the "not closely held" requirement, as owned by the beneficiaries of the trust
(rather than by the trust itself), and (ii) either (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, or
(b) one or more such qualified trusts, each of whom owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The Company believes that it is not
currently a "pension held REIT" within the meaning of the Code.
Taxation of Non-U.S. Stockholders
The rules governing United States federal income taxation of the ownership and
disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United
States federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Stockholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in Common Stock, including any reporting
requirements.
Distributions. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are
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<PAGE>
made out of current or accumulated earnings and profits of the Company. Such
distributions ordinarily will be subject to withholding of United States federal
income tax on a gross basis (that is, without allowance of deductions) at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty,
unless the dividends are treated as effectively connected with the conduct by
the Non-U.S. Stockholder of a United States trade or business. Dividends that
are effectively connected with such a trade or business will be subject to tax
on a net basis (that is, after allowance of deductions) at graduated rates, in
the same manner as domestic stockholders are taxed with respect to such
dividends and are generally not subject to withholding. Any such dividends
received by a Non-U.S. Stockholder that is a corporation may also be subject to
an additional branch profits tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits of the
Company will not be taxable to a Non-U.S. Stockholder to the extent that they do
not exceed the adjusted basis of the stockholder's Common Stock, but rather will
reduce the adjusted basis of such Common Stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Stockholder's Common
Stock, they will give rise to gain from the sale or exchange of his Common
Stock, the tax treatment of which is described below. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current or accumulated earnings and profits, the
distribution will generally be treated as a dividend for withholding purposes.
However, amounts thus withheld are generally refundable if it is subsequently
determined that such distribution was, in fact, in excess of current or
accumulated earnings and profits of the Company.
Distributions to a Non-U.S. Stockholder that are designated by the Company at
the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the Common Stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business, in which case the Non-U.S. Stockholder will be
subject to the same treatment as domestic stockholders with respect to such gain
(except that a stockholder that is a foreign corporation may also be subject to
the 30% branch profits tax, as discussed above), or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Stockholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders (subject to a special alternative minimum tax in the case
of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Stockholder that is a corporation,
as discussed above. The Company is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
United States federal income tax liability.
Sales of Common Stock. Gain recognized by a Non-U.S. Stockholder upon a sale
or other disposition of Common Stock generally will not be subject to United
States federal income tax, unless (i) the Company is not a "domestically
controlled REIT" or (ii) investment in the Common Stock is effectively connected
with the Non-Stockholder's United States trade or business or (iii) in the case
of a Non-U.S. Stockholder who is a nonresident alien individual, the individual
is present in the United States for 183 days or more during the taxable year and
has a "tax home" in the United States. A domestically controlled REIT is defined
generally as
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a REIT in which at all times during a specified testing period less than 50% in
value of the stock was held directly or indirectly by foreign persons. The
Company believes that it is a domestically controlled REIT. In the circumstances
described above in clauses (i) and (ii), the Non-U.S. Stockholders will
generally be subject to the same treatment as domestic stockholders with respect
to such gain (subject to a special alternative minimum tax in the case of
nonresident alien individuals in the circumstances described above in clause (i)
and, in the case of foreign corporations, subject to the possible applications
of the 30% branch profits tax, as discussed above). In the circumstances
described above in clause (iii), the nonresident alien individual will be
subject to a 30% tax on the individual's capital gain.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States reporting requirements) and information reporting will generally not
apply to distributions paid to Non-U.S. Stockholders outside the United States
that are treated as (i) dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above, or (ii) capital gains dividends or (iii)
distributions attributable to gain from the sale or exchange by the Company of
United States real property interest. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of Common Stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of Common Stock by a foreign office of a broker that (a) is a
United States person, or (b) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (c) is a
"controlled foreign corporation" (generally, a foreign corporation controlled by
United States stockholders) for United States tax purposes, unless the broker
has documentary evidence in its records that the holder is a Non-U.S.
Stockholder and certain other conditions are met, or the stockholder otherwise
establishes an exemption. Payment to or through a United States office of a
broker of the proceeds of sale of Common Stock is subject to both backup
withholding and information reporting unless the stockholder certifies under
penalties of perjury that the stockholder is a Non-U.S. Stockholder, or
otherwise establishes an exemption. A Non-U.S. Stockholder may obtain a refund
of any amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.
The backup withholding and information reporting rules are under review by the
United States Treasury, and their application to the Common Stock could be
changed prospectively by future Treasury Regulations.
Backup Withholding
The Company will report to its domestic stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and when
required, demonstrates this fact, or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against
the stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any stockholders
who fail to certify their non-foreign status to the Company.
Other Tax Consequences
The Company and its investors may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside.
There may be other federal, state, local or foreign tax considerations
applicable to the circumstances of a particular investor. Prospective investors
are urged to consult their own tax advisors with respect to such matters.
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<PAGE>
ERISA CONSIDERATIONS
THE FOLLOWING IS INTENDED TO BE A SUMMARY ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL PLANNING WITH A PROFESSIONAL. EMPLOYEE BENEFIT PLANS SUBJECT TO ERISA
AND THE CODE ("Plans") CONSIDERING PURCHASING THE SECURITIES SHOULD CONSULT WITH
THEIR OWN TAX OR OTHER APPROPRIATE COUNSEL REGARDING THE APPLICATION OF ERISA
AND THE CODE TO THEIR PURCHASE OF THE SECURITIES. PLANS SHOULD ALSO CONSIDER
THE ENTIRE DISCUSSION UNDER THE HEADING OF "FEDERAL INCOME TAX CONSIDERATIONS"
AS MATERIAL CONTAINED THEREIN IS RELEVANT TO ANY DECISION BY A PLAN TO PURCHASE
THE SECURITIES.
Fiduciary Considerations
Certain employee benefit plans and individual retirement accounts and
individual retirement annuities ("IRAs") (collectively, "Plans"), are subject to
various provisions of the Employee Retirement Income Security Act 1974, as
amended ("ERISA") and the Code. Before investing in the Securities of the
Company, a Plan fiduciary should ensure that such investment is in accordance
with ERISA's general fiduciary standards. In making such a determination, a
Plan fiduciary should ensure that the investment is in accordance with the
governing instruments and the overall policy of the Plan, and that the
investment will comply with the diversification and composition requirements of
ERISA. In addition, provisions of ERISA and the Code prohibit certain
transactions using Plan assets that involve persons who have specified
relationships with a Plan. The consequences of such prohibited transactions
include excise taxes, disqualifications of IRAs and other liabilities. A Plan
fiduciary should ensure that any investment in the Securities will not
constitute such a prohibited transaction.
Plan Assets Issue
A prohibited transaction may occur if the assets of the Company are deemed to
be Plan assets. In certain circumstances where a Plan holds an interest in an
entity, the assets of the entity are deemed to be Plan assets (the "look-through
rule"). Under such circumstances, any person that exercises authority or control
with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued Regulations, effective March 13, 1987 (the
"Regulations"), that outline the circumstances under which a Plan's interest in
an entity will be subject to the look-through rule.
The Regulations provide that the look-through rule applies only to the
purchase by a Plan of an "equity interest" in an entity, such as common stock of
a REIT. The term "equity interest" means any interest in an entity other than an
instrument that is treated as indebtedness under applicable local law and that
has no substantial equity features. However, the Regulations provide an
exception to the look-through rule for equity interests that are "publicly-
offered securities" and certain other exceptions.
Under the Regulations a "publicly-offered security" is a security that is (1)
freely transferable, (2) part of a class of securities that is widely-held, and
(3) part of a class of securities that is registered under Section 12(b) or
12(g) of the Exchange Act or sold to a Plan as part of an offering of securities
to the public pursuant to an effective registration statement under the
Securities Act and the class of securities of which such security is a part is
registered under the Exchange Act within 120 days after the end of the fiscal
year of the issuer during which the offering of such securities to the public
occurred. Whether a security is considered "freely transferable" depends on the
facts and circumstances of each case. Generally, if the security is part of an
offering in which the minimum investment is $10,000 or less and any restriction
on or prohibition against any transfer or assignment of such security is for the
purposes of preventing a termination or reclassification of the entity for
federal or state tax purposes, such restrictions will not prevent the security
from being considered freely transferable. A class of securities is considered
"widely-held" only if it is a class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A class of securities
will not
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<PAGE>
fail to be widely held solely because subsequent to the initial offering the
number of independent investors falls below 100 as a result of events beyond the
control of the Company.
It is anticipated by the Company that the Common Stock will meet the criteria
of the publicly-offered securities exception to the look-through rule. First,
the Company anticipates that the Common Stock will be considered to be freely
transferable, as the only restriction upon its transfer are those required under
federal tax laws to maintain the Company's status as a REIT. Second, the
Company believes that the Common Stock will be held by 100 or more investors and
that at least 100 or more of these investors will be independent of the Company
and of one another. Third, the Common Stock will be part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and will be registered under the Exchange Act within 120 days
after the end of the fiscal year of the Company during which the offering of
such securities to the public occurs. Accordingly, the Company believes that if
a Plan purchases the Common Stock, the Company's assets should not be deemed to
be Plan assets and, therefore, that any person who exercises authority or
control with respect to the Company's assets should not be a Plan fiduciary. If
the Company sells Preferred Stock and/or Debt Securities, the Prospectus
Supplement with respect to such offering will disclose whether the Company
believes that such Preferred Stock and/or Debt Securities would be Plan assets.
If the Preferred Stock and/or Debt Securities are considered Plan assets, the
Company will not sell such Preferred Stock and/or Debt Securities to Plans
unless an exception or exemption is applicable.
PLAN OF DISTRIBUTION
The Company may sell Securities in any of three ways: (i) through
underwriting syndicates represented by one or more managing underwriters, or by
one or more underwriters without a syndicate; (ii) through agents designated
from time to time; and (iii) directly to institutional investors. The names of
any underwriters or agents of the Company involved in the sale of the Securities
in respect of which this Prospectus is being delivered and any applicable
commissions or discounts will be set forth in the Prospectus Supplement. The
net proceeds to the Company from each such sale will also be set forth in the
Prospectus Supplement.
Agents and underwriters may be entitled under agreements entered into with the
Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may engage in transactions with or perform
services for the Company in the ordinary course of business.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Latham & Watkins, Los Angeles, California.
EXPERTS
The consolidated financial statements and financial statement schedules of LTC
Properties, Inc. appearing in the 1995 Annual Report on Form 10-K have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such financial
statements are incorporated by reference in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
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No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement and the Prospectus, in connection with the Offering
covered by this Prospectus Supplement and the Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus Supplement and
the Prospectus do not constitute an offer to sell or the solicitation of any
offer to buy, any of the Securities in any jurisdiction where, or to any person
to whom, it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this Prospectus Supplement or the
Prospectus or in the affairs of the Company since the date hereof.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............................. S-2
Prospectus Supplement Summary..................... S-3
Risk Factors...................................... S-11
Use of Proceeds................................... S-12
Capitalization.................................... S-13
Selected Financial and Operating Data............. S-14
Management's Discussion and Analysis of
Financial Condition and Results of Operations... S-16
Industry.......................................... S-19
Properties........................................ S-21
Certain Transactions with Assisted
Living Affiliates............................... S-24
Management........................................ S-25
Security Ownership of Management.................. S-27
Description of Series A Preferred Stock........... S-28
Certain Federal Income Tax Considerations......... S-35
Underwriting...................................... S-37
Legal Matters..................................... S-37
PROSPECTUS
Available Information............................. 2
Documents Incorporated by Reference............... 2
The Company....................................... 3
Risk Factors...................................... 4
Ratio of Earnings to Fixed Charges................ 8
Use of Proceeds................................... 8
Description of the Company's Capital
Stock........................................ 9
Description of Debt Securities.................... 11
Description of Preferred Stock.................... 18
Federal Income Tax Considerations................. 21
ERISA Considerations.............................. 31
Plan of Distribution.............................. 32
Legal Matters..................................... 32
Experts........................................... 32
</TABLE>
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1,000,000 SHARES
LTC PROPERTIES, INC.
% SERIES A
CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE
$25 PER SHARE)
________________________
PROSPECTUS SUPPLEMENT
________________________
MORGAN KEEGAN & COMPANY, INC.
J.C. BRADFORD & CO.
CROWELL, WEEDON & CO.
, 1997
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