<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-25787
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 6, 1997)
500,000 SHARES
LTC PROPERTIES, INC.
COMMON STOCK
_______________
LTC Properties, Inc. (the "Company") is hereby offering (the "Offering")
500,000 shares (the "Shares") of the Company's common stock, $.01 par value per
share (the "Common Stock"). The Company is a health care real estate investment
trust ("REIT") that invests in long-term care and other health care related
facilities through mortgage loans, facility lease transactions and other
investments.
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "LTC." On August 4, 1997, the last reported sale price
on the NYSE of the Common Stock was $18.75 per share. In order to qualify as a
REIT, the Company has limited actual or constructive ownership to no more than
9.8% of the Common Stock (including Common Stock into which the Company's
outstanding debt is convertible or exchangeable) by any holder.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 IN THE ACCOMPANYING PROSPECTUS 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 AND 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.
<TABLE>
<CAPTION>
================================================================================
Price to Underwriting Discounts Proceeds to
Public and Commissions (1) Company (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ 18.50 $ 0.25 $ 18.25
- --------------------------------------------------------------------------------
Total $9,250,000 $125,000 $9,125,000
================================================================================
</TABLE>
(1) The Shares are being offered by the Company to selected institutional
investors. Schroder & Co. Inc. ("Schroders") has been retained to act as
placement agent for the Company in connection with the arrangement of such
offers and sales on a best efforts, all or none basis. The Company has
agreed (i) to pay Schroders a fee in connection with the arrangement of
this transaction and (ii) to indemnify Schroders against certain
liabilities including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). It is anticipated that the Shares will be
delivered against payment therefor on August 8, 1997; the Offering will not
continue after such date. See "Plan of Distribution."
(2) Before deducting estimated expenses of $100,000 payable by the Company.
The date of this Prospectus Supplement is August 5, 1997.
<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 and assisted living facilities managed by experienced operators
providing quality care. To meet this objective, the Company attempts to invest
in transactions that would provide the opportunity for additional returns to its
stockholders and diversify its investment portfolio by geographic location,
operator and form of investment. At June 30, 1997, the Company's portfolio
included investments in 267 skilled nursing facilities with a total of 30,670
beds and 62 assisted living facilities with 2,516 units in 32 states.
RECENT DEVELOPMENTS
In June 1997, the Company sold $11,811,000 face amount of its mortgage-
backed securities recognizing a gain of approximately $1,230,000. Also in June
1997, the Company recognized $1,120,000 of compensation expense resulting from
the accelerated vesting of certain restricted shares held by executives, certain
management and non-employee directors of the Company.
Subsequent to June 30, 1997, the Company completed net investments
totaling approximately $1,060,000. Two of the Company's construction loans
totaling $4,290,000 converted into owned properties. As of August 1, 1997,
the Company had outstanding commitments aggregating approximately $178,700,000.
Included in these amounts were commitments to Assisted Living Concepts, Inc. of
approximately $24,440,000 and Home and Community Care, Inc. ("HCI") of
$50,000,000. HCI was formed to own, operate and develop assisted living
residences and to provide home health and hospice care services. The Company
owns 2,000,000 shares of non-voting common stock of HCI which it acquired for
$5,000,000. Certain of the Company's executive officers and directors are
executive officers and directors of HCI, and executive officers of the Company
own more than a majority of the voting common stock of HCI.
S-2
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (approximately
$9,025,000 after deducting the placement agent's fee and estimated expenses of
the Offering) will be used to pay down borrowings outstanding under the
Company's lines of credit as described below. Although borrowings under the
lines of credit will be paid down with the proceeds from the Offering, the
Company expects to incur additional indebtedness to finance future investments.
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 July 31, 1997, the Company had $45,000,000
outstanding under the Credit Agreement bearing an average interest rate of
approximately 7.17%.
The Company has a repurchase agreement with an institution (the "Repurchase
Agreement") whereby it may borrow up to $84,000,000 for general corporate and
real estate investment purposes at LIBOR plus 2%. Under the Repurchase
Agreement, the Company may borrow an amount based on the Company's existing
mortgage loans with no additional commitment or unused fees. Under the terms of
the Agreement, borrowings are secured by the 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. At July 31, 1997, there were
$56,500,000 of outstanding borrowings, excluding accrued interest, under the
Repurchase Agreement bearing an average interest rate of approximately 7.58%.
S-3
<PAGE>
PLAN OF DISTRIBUTION
The Shares are being offered for sale by the Company principally to
selected unaffiliated institutional investors. Some of the Shares may be
offered to institutional investors outside of the United States. Schroders has
been retained to act as placement agent for the Company in connection with the
arrangement of such offers and sales on a best efforts, all or nothing, basis.
It is anticipated that Schroders will obtain indications of interest from
potential investors for the amount of the Offering and that no investor funds
will be accepted until indications of interest have been received for the full
amount of the Offering. Confirmations and definitive prospectuses will be
distributed to all investors at the time of pricing, informing investors of the
closing date, which will be scheduled for three business days after the date
hereof. Prior to the closing date, all investor funds will promptly be placed in
escrow with Citibank, N.A., or similar national banking institution as escrow
agent (the "Escrow Agent"), in an escrow account established for the benefit of
the investors. The Escrow Agent will invest such funds in accordance with Rule
15c2-4 under the Securities Exchange of 1934, as amended. Prior to the closing
date, the Escrow Agent will advise the Company that payments for the purchase of
the Shares have been affirmed by the investors and that the investors have
deposited the requisite funds in the escrow account. Upon receipt of such
notice, the Company will deposit with the Depository Trust Company ("DTC"), as
Depository, the Shares to be credited to the respective accounts of the
investors. Investor funds together with interest thereon, if any, will only be
collected by the Company through the facilities of the Escrow Agent on the
scheduled closing date. The Offering will not continue after the closing date.
In the event that investor funds are not received in the full amount necessary
to satisfy the requirements of the Offering, the Escrow Agent will return all
escrowed investor funds to the respective investors as promptly as practicable.
The Company has agreed (i) to pay Schroders approximately 1.35% of the gross
proceeds to the Company from the Offering and (ii) to indemnify Schroders
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain
legal matters will be passed upon for the Company by Latham & Watkins, Los
Angeles, California and for Schroders by Stroock & Stroock & Lavan LLP, New
York, New York.
S-4
<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 $150,000,000 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 April 18, 1997, the closing sale price of
the Common Stock on the NYSE was $ 17.50 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 MAY 6, 1997.
<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. 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 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, 1996 (the "1996 Form 10-K");
(2) The Current Report of the Company on Form 8-K filed with the Commission
on March 7, 1997; and
(3) The Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 19, 1997.
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 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. In March 1997, the Company completed an offering of
3,080,000 shares of 9.5% Series A Cumulative Preferred Stock for gross proceeds
of $77,000,000.
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.
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.
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 and continued consolidation of health care
providers (both vertically and horizontally). The pressure to control health
care costs intensified during 1993 and 1994 as a result of the national health
care reform debate and will continue as efforts to balance the federal budget
focus significantly on slowing the rate of growth in federal health care
expenditures. In the last several years, the federal budget process has
produced bills calling 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
than presently afforded under federal law. As substantial annual losses in
Medicare Trust Fund reserves threaten the solvency of the federal program, it is
anticipated that further debate on overall structural reform of federal health
care programs will affect additional legislative action on cost-containment.
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. Additional refinements and enhancements
to those prosecutorial powers will continue to be proposed.
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. 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
4
<PAGE>
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.
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.
5
<PAGE>
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.
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. 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. 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.
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
6
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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 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 capital 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 capital 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") and the Articles Supplementary Classifying 9.5% Shares of Series A
Cumulative Preferred Stock ("Articles Supplementary") authorize the Company (i)
to refuse to permit the transfer of Common Stock or Preferred 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 or Preferred Stock in excess
of 9.8% of the outstanding Common Stock or Preferred Stock, respectively of the
Company beneficially owned by any person ("Excess Shares"). See "Description of
the Company's Capital Stock - Redemption and Ownership Limitation Provisions."
Also, any purported acquisition of Common Stock or Preferred Stock that would
result in the Company's disqualification as a REIT is null and void. Such
provisions may inhibit market activity and the resulting opportunity for
stockholders to realize a premium for their Common Stock or Preferred Stock that
might otherwise exist if an individual were attempting to assemble a block of
Common Stock or Preferred Stock in excess of 9.8% of the outstanding Common
Stock or Preferred Stock, respectively. 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 or Preferred 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 or Preferred 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."
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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 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 1.29x (1) 2.07x 3.34x 3.12x 2.05x
</TABLE>
___________________________________________
(1) From August 25, 1992 (commencement of operations) through December 31,
1992.
(2) 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.
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 and for funding of additional mortgage loans and
acquisitions of additional health care facilities.
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 April 15, 1997, the Company had $13,500,000
outstanding under the Credit Agreement bearing an average interest rate of
approximately 7.19%.
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.
Borrowings under the Repurchase Agreement 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 April 15, 1997, the Company had $63,000,000 outstanding under the Repurchase
Agreement bearing an interest rate of approximately 7.69%.
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<PAGE>
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 Amended and Restated Articles of Incorporation (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 (the "Preferred Stock").
COMMON STOCK
Of the 40,000,000 authorized shares of Common Stock, 22,766,486 shares were
issued and outstanding on March 31, 1997. 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
Of the 10,000,000 authorized shares of Preferred Stock, 3,080,000 shares of
9.5% Series A cumulative preferred stock were issued and outstanding on March
31, 1997 (the "Series A Preferred Stock"). Dividends on the 9.5% Series A
Preferred Stock are cumulative from the date of original issue and are payable
monthly, commencing on April 15, 1997, to stockholders of record on the first
day of each month at the rate of 9.5% per annum of the $25 liquidation
preference per share (equivalent to a fixed annual amount of $2.375 per share).
Except in certain circumstances relating to preservation of the Company's
qualification 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 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. Holders of
Series A Preferred Stock generally will have no voting rights.
Additional shares of 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.
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<PAGE>
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 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.
At its Annual Meeting on May 19, 1997, the stockholders are being asked to
approve a technical amendment to the Charter as required by the NYSE which will
provide that nothing in the Charter will preclude the settlement of any
transaction entered into through the facilities of the NYSE or any other
national securities exchange or automated inter-dealer quotation system. The
Board of Directors of the Company will still be authorized to take any actions
it deems necessary or advisable to protect the Company and the interests of the
stockholders in preserving the Company's status as a REIT.
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.
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<PAGE>
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 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 and Series A Preferred Stock.
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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.
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,
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<PAGE>
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.
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.
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"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post-filing interest is allowed in such proceedings), fees,
charges, 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 stockholders (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) 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.
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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 (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
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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." For a description of the Company's outstanding Series A Preferred
Stock, see "Description of the Company's Capital Stock--Preferred 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 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.
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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 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
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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 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.
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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.
Latham & Watkins has rendered an opinion dated April 23, 1997 to the effect
that the Company is organized in conformity with the requirements for
qualification as a REIT, and that the Company's 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, and that Latham & Watkins undertakes no obligation to update
this opinion subsequent to such date. 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 ownership,
the various qualification tests imposed under the Code discussed below, the
results of which have not been 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."
The REIT provisions of the Code and the corresponding Treasury Regulations
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, all of which are subject to change (which
change may apply retroactively).
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. 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 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
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as a REIT because certain other requirements have been met, it will be subject
to a 100% tax on an amount equal to (a) the gross income attributable to the
greater of the amount by which the Company fails the 75% or 95% test, multiplied
by (b) a fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year, and (iii) any undistributed taxable income from
prior 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 corporation
which is or has been a C corporation (i.e. generally a corporation subject to
full corporate-level tax) in a transaction in which the basis of the Built-In
Gain Asset in the 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 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 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 and Articles Supplementary provides for
restrictions regarding the transfer and ownership of Common Stock and Preferred
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 believes that is has operated and intends
to operate them consistently 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
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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) income from certain types of temporary investments.
Second, at least 95% of the Company's gross income (excluding gross income
from prohibited transactions for each taxable year must be derived from 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.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
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 actual or constructive
owner of 10% or more of the REIT, actually or constructively owns 10% or more of
such tenant (a "Related Party Tenant"). Third, 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), or (iv) perform services which are
not usually or customarily rendered in connection with the rental of space for
occupancy only or are 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
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provisions will generally 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.
Even if these relief provisions apply, a special 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.
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 stock or 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.
Annual 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) 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 has made and intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
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 and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company. The
Company will closely monitor the relationship 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.
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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.
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. 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 the 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.
Under Treasury Regulations in effect at the time of the formation of the
Partnerships, 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).
The IRS recently finalized and published certain Treasury Regulations (the
"Final Regulations") which provide that a domestic business entity not otherwise
classified as a corporation and which has at least two members (an "Eligible
Entity") may elect to be taxed as a partnership for federal income tax purposes.
The Final Regulations apply for tax periods beginnings on or after January 1,
1997 (the "Effective Date"). Unless it elects otherwise, an Eligible Entity in
existence prior to the Effective Date will have the same classification for
federal income tax purposes that it claimed under the entity classification
Treasury Regulations in effect prior to the Effective Date. In addition, an
Eligible Entity which did not exist, or did not claim a classification, prior to
the Effective Date, will be classified as a partnership for federal income tax
purposes unless it elects otherwise.
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.
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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.
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 requirements described herein, 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.
The Company owns 100% of the nonvoting preferred stock of LTC Ventures,
Inc. ("Ventures"). Such shares of nonvoting preferred stock will not constitute
voting securities for purposes of the asset tests. Furthermore, the Company has
not owned and will not own any of the voting securities of Ventures. Therefore,
the Company will not be considered to own more than 10% of the voting securities
of such corporation. In addition, the Company believes (and has represented to
tax counsel to the Company for purposes of its opinion, as described above) that
the value of its securities of Ventures have not exceeded 5% of the total value
of the Company's assets, and will not exceed such amounts in the future. Latham
& Watkins, in rendering its opinion as to the qualification of the Company as a
REIT, is relying on the representation of the Company to such effect. No
independent appraisals have been obtained to support this conclusion. The
Company will receive dividends from Ventures, which will qualify under the 95%
gross income test, but not the 75% gross income test. The Company believes that
the aggregate amount of nonqualifying income in any taxable year has not
exceeded and will not exceed the limit on nonqualifying income under the gross
income tests.
FAILURE TO QUALIFY
If the Company fails 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.
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TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock or Preferred Stock who (for United States federal income tax
purposes) (i) is a citizen or resident of the United States, (ii) is a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, or (iii) is
an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations. Distributions
made by the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. Stockholders as long-term capital
gains (to the extent that they do not exceed the Company's actual net capital
gain for the taxable year) without regard to the period for which a U.S.
Stockholder has held his shares of Common Stock or Preferred Stock. U.S.
Stockholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income. To the extent that the
Company makes distributions (not designated as capital gain dividends) in excess
of its current and accumulated earnings and profits, such distributions will be
treated first as a tax-free return of capital to each U.S. Stockholder, reducing
the adjusted basis which such U.S. Stockholder has in his shares of Common Stock
or Preferred Stock for purposes by the amount of such distribution (but not
below zero), with distributions in excess of a U.S. Stockholder's adjusted basis
in his shares taxable as long-term capital gains (or short-term capital gains if
the shares have been held for one year or less), provided that the shares have
been held as a capital asset. Dividends declared by the Company in October,
November, or December of any year and 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 own income tax
returns any net operating losses or capital losses of the Company.
Distributions made by the Company and gain arising from the sale or
exchange by a U.S. Stockholder of shares of Common Stock or Preferred Stock will
not be treated as passive activity income, and as a result, U.S Stockholders
generally will not be able to apply any "passive losses" against such income or
gain. Distributions made by the Company (to the extent they do not constitute a
return of capital) generally will be treated as investment income for purposes
of computing the investment income limitation. Gain arising from the sale or
other disposition of Common Stock or Preferred Stock, however, will not be
treated as investment income unless the U.S. Stockholder elects to reduce the
amount of such U.S. Stockholder's total net capital gain eligible for the 28%
maximum capital gains rate by the amount of such gain with respect to such
Common Stock or Preferred Stock.
Upon any sale or other disposition of Common Stock or Preferred Stock, a
U.S. Stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in such shares of Common Stock or Preferred Stock
for tax purposes. Such gain or loss will be capital gain or loss if the shares
have been held by the U.S. Stockholder as a capital asset, and will be long-term
gain or loss if such shares have been held for more than one year. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition of
shares of Common Stock or Preferred Stock that have been held for six months or
less (after applying certain holding period rules) will be treated as long-term
capital loss, to the extent of capital gain dividends received by such U.S.
Stockholder from the Company which were required to be treated as long-term
capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. 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
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gain distributions to any stockholders who fail to certify their non-foreign
status to the Company. See "--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividend by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt stockholders described below) has not held its shares
of Common Stock or Preferred Stock as "debt financed property" within the
meaning of the Code and such shares are not otherwise used in a trade or
business, the dividend income from the Company will not be UBTI to a tax-exempt
shareholder. Similarly, income from the sale of Common Stock or Preferred Stock
will not constitute UBTI unless such tax-exempt shareholder has held such shares
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 Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, 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 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 which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (ii) the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5% for any year. The provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the "look-
through" exception with respect to qualified trusts. As a result of certain
limitations on transfer and ownership of Common Stock or Preferred Stock
contained in the Articles of Incorporation, the Company does not expect to be
classified as a "pension held REIT."
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, including, for example, if the investment in the Company is
connected to the conduct by a Non-U.S. Stockholder of a U.S. trade or business.
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 advisors to
determine the impact of federal, state, local and foreign income tax laws with
regard to an investment in Common Stock or Preferred 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 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-
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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 or
Preferred Stock, but rather will reduce the adjusted basis of such stock. For
FIRPTA withholding purposes (discussed below), such distributions (i.e.,
distributions that are not made out of earnings and profits) will be treated as
consideration for the sale or exchange of shares of Common Stock or Preferred
Stock. To the extent that such distributions exceed the adjusted basis of a Non-
U.S. Stockholder's Common Stock or Preferred Stock, they will give rise to gain
from the sale or exchange of his 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 or Preferred 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. A Non-U.S.
Stockholder would thus generally be entitled to offset its gross income by
allowable deductions and would pay tax on the resulting taxable income 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 and is not entitled to treaty relief or exemption, 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. To the extent that such withholding
exceeds the actual tax owed by the Non-U.S. Stockholder, the Non-U.S.
Stockholder may claim a refund from the IRS.
The Company or any nominee (e.g., a broker holding shares in street name)
may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the disposition
of United States real property interests. A domestic person who holds shares of
Common Stock or Preferred Stock on behalf of a Non-U.S. Stockholder will
generally bear the burden of withholding, unless the Company has properly
designated the appropriate portion of a distribution as a capital gain dividend.
Sale of Common Stock or Preferred Stock. Gain recognized by a Non-U.S.
Stockholder upon the sale or exchange of shares of Common Stock or Preferred
Stock generally will not be subject to United States taxation unless such shares
constitute a "United States real property interest" within the meaning of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). The Common Stock
or the Preferred Stock will not constitute a "United States real property
interest" so long as the Company is a "domestically controlled REIT." A
"domestically controlled REIT" is a REIT in which at all times during a
specified testing period less than 50% in value of its stock is held directly or
indirectly by Non-U.S.
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Stockholders. The Company believes that it is a "domestically controlled REIT,"
and therefore that the sale of shares of Common Stock or Preferred Stock will
not be subject to taxation under FIRPTA. However, because the shares of Common
Stock or Preferred Stock will be publicly traded, no assurance can be given that
the Company will continue to be a "domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock or Preferred Stock not otherwise subject to FIRPTA will be taxable
to a Non-U.S. Stockholder if (i) 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, which nonresident alien
individual will be subject to a 30% United States withholding tax on the amount
of such individual's gain, or (ii) the investment in Common Stock or Preferred
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 holders (except that a 30% branch profits tax may
also apply as described above).
If the Company does not qualify as or ceases to be a "domestically-
controlled REIT," gain arising from the sale or exchange by a Non-U.S.
Stockholder of shares of Common Stock or Preferred Stock would be subject to
United States taxation under FIRPTA as a sale of a "United States real property
interest" unless the shares are "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market (e.g., the New York
Stock Exchange) and the selling Non-U.S. Stockholder held no more than 5% (after
applying certain constructive ownership rules) of the shares of Common Stock or
Preferred Stock during the shorter of (i) the period during which the taxpayer
held such shares, or (ii) the 5-year period ending on the date of the
disposition of such shares. If gain on the sale or exchange of shares of Common
Stock or Preferred Stock were subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to regular United States income tax with respect to
such gain in the same manner as a U.S. Stockholder (subject to any applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of foreign corporations), and the purchaser of the stock
would be required to withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting 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, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock or Preferred 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 or
Preferred Stock by a foreign office of a broker that (a) is a United States
person, (b) derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States or (c) is a "controlled
foreign corporation" (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 a sale of Common Stock or Preferred Stock is subject to both backup
withholding and information reporting unless the stockholder certifies under
penalty of perjury that the stockholder is a Non-U.S. Stockholder, or otherwise
establishes an exemption. A Non-U.S. Stockholder may obtain a refund of any
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS.
New Proposed Regulations. The United States Treasury has recently issued
proposed Treasury Regulations regarding the withholding and information
reporting rules discussed above. In general, the proposed Treasury Regulations
do not alter the substantive withholding and information reporting requirements
but unify current certification procedures and forms and clarify and modify
reliance standards. If finalized in their current form, the proposed Treasury
Regulations would generally be effective for payments made after December 31,
1997, subject to certain transition rules.
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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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, INDIVIDUAL
RETIREMENT ACCOUNTS AND INDIVIDUAL RETIREMENT ANNUITIES SUBJECT TO ERISA AND/OR
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 AND PROHIBITED TRANSACTIONS 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/or 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 other 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 also occur if the underlying assets of the
Company are deemed to be Plan assets. In certain circumstances where a Plan
holds an interest in an entity, the underlying 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 underlying assets, and any person who provides investment
advice with respect to such assets for a fee (direct or indirect), 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 (or such later time as may be
allowed by the Securities and Exchange Commission) 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 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 issuer.
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 restrictions on and prohibitions against its
transfer or assignment are those required under federal
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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 sold as 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 Securities 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 underlying 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 underlying assets or who
provides investment advice with respect to such assets for a fee (direct or
indirect) 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 1996 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 consolidated
financial statements LTC PROPERTIES, INC. are incorporated herein 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, salesman or other person has been authorized to give any
information or to make any representations, other than those herein, in
connection with this offering and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any other person. This Prospectus and related Prospectus Supplement does not
constitute an offer to sell, or solicitation of an offer to buy, any of the
Securities in any jurisdiction any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. The delivery of this Prospectus and
related Prospectus Supplement at any time does not imply that the information in
the Prospectus and related Prospectus Supplement is correct as of any time
subsequent to its date.
TABLE OF CONTENTS
-----------------
Prospectus Supplement
<TABLE>
PAGE
----
<S> <C>
The Company............................................................... S-2
Recent Developments....................................................... S-2
Use of Proceeds........................................................... S-3
Plan of Distribution...................................................... S-4
Legal Matters............................................................. S-4
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............................................ 12
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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500,000 SHARES
LTC PROPERTIES, INC.
COMMON STOCK
_________________
PROSPECTUS SUPPLEMENT
_________________
August 5, 1997
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