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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 15, 1997)
2,000,000 SHARES
LTC PROPERTIES, INC.
8.5% SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $19.25 PER SHARE)
Dividends on the Series C Cumulative Convertible Preferred Stock, $.01 par
value per share (the "Series C Preferred Stock") of LTC Properties, Inc. (the
"Company") are cumulative from the date of original issue and are payable
quarterly, on March 31, June 30, September 30 and December 31 of each year,
commencing on September 30, 1998, at a rate of 8.5% per annum on the $19.25
liquidation preference (the "Liquidation Preference") per share (equivalent to a
fixed annual amount of $1.63625 per share). See "Description of Series C
Preferred Stock - Dividends." Except in certain circumstances relating to the
Company's maintenance of its ability to qualify as a real estate investment
trust ("REIT"), the Series C Preferred Stock is not redeemable. The Series C
Preferred Stock has no stated maturity and will not be subject to any sinking
fund or mandatory redemption. The Series C Preferred Stock is convertible into
shares of the Company's Common Stock, par value $.01 (the "Common Stock") at a
conversion price of $19.25 per share, subject to certain adjustments. See
"Description of Series C Preferred Stock - Maturity," "-Redemption" and
"-Conversion."
In order to ensure that the Company continues to meet the requirements
for qualification as a REIT under the Internal Revenue Code of 1986, as
amended, (the "Code"), shares of Series C Preferred Stock shall be deemed
"Excess Shares" pursuant to the Articles of Amendment and Restatement of the
Company if a holder owns more than 9.8% in value of the Company's outstanding
capital stock, and the Company will have the right to purchase Excess Shares
from the holder. See "Description of Series C Preferred Stock - Restrictions
on Ownership and Transfer."
All of the shares of the Series C Preferred Stock offered hereby are
being issued and sold by the Company to National Health Investors, Inc., a
healthcare REIT which is listed on the New York Stock Exchange ("NYSE") under
the symbol "NHI," at a negotiated price of $19.25 per share less a spread of
2% (the "Purchase Price"), resulting in net offering proceeds to the Company
of $37,730,000 (before deduction of estimated offering expenses of
approximately $50,000). See "Plan of Distribution."
The Company does not intend to apply for the listing of the Series C
Preferred Stock on any securities exchange. The Company's Common Stock is
listed on the NYSE under the symbol "LTC." On August 31, 1998, the last
reported sale price on the NYSE of the Common Stock was $16.6875 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE S-3 OF THIS PROSPECTUS SUPPLEMENT
AND PAGE 5 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.
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The date of this Prospectus Supplement is September 2, 1998.
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THE COMPANY
The Company is a health care real estate investment trust which invests
primarily 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, 1998, the Company's portfolio included investments in 279 skilled nursing
facilities with a total of 31,967 beds, 92 assisted living facilities with
4,442 units and three schools.
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS
DESCRIBED BELOW AND IN THE ACCOMPANYING PROSPECTUS TOGETHER WITH ALL OF THE
INFORMATION SET FORTH OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN DETERMINING WHETHER TO PURCHASE
SHARES OF SERIES C PREFERRED STOCK. INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR IN THE ACCOMPANYING PROSPECTUS MAY
CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, WHICH STATEMENTS CAN BE IDENTIFIED
BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
COMPARABLE TERMINOLOGY. THE FOLLOWING MATTERS AND CERTAIN OTHER FACTORS
NOTED THROUGHOUT THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
AND ANY DOCUMENTS INCORPORATED BY REFERENCE HEREIN OR THEREIN AND EXHIBITS
HERETO AND THERETO, CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT
FACTORS WITH RESPECT TO ANY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING
CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE THE COMPANY'S ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY SUCH FORWARD-LOOKING
STATEMENTS.
RELIANCE ON MAJOR OPERATORS OF HEALTH CARE FACILITIES
As of June 30, 1998, Retirement Care Associates, Inc. ("RCA") and Sun
Healthcare Group, Inc. ("Sun") operated, on a combined basis, 69 facilities
representing 17.9% ($166.2 million) of the Company's adjusted gross real
estate investment portfolio (adjusted to include the mortgage loans to third
parties underlying the investment in REMIC Certificates). Sun is a
publicly-traded company and RCA was a publicly-traded company prior to the
completion of its July 1, 1998 merger with Sun. Information regarding Sun
and RCA 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 bankruptcy,
insolvency or general downturn in 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.
GOVERNMENT REGULATION
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 services. Moreover, health care facilities have experienced increasing
pressures from private payers such as health maintenance organizations
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.
Governmental and popular concern regarding health care costs may result
in significant reductions in payments 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. In many instances, revenues from Medicaid
programs are already insufficient to cover the actual costs incurred in
providing care to those 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.
HEALTH CARE REFORM. The Balanced Budget Act of 1997 signed by President
Clinton on August 5, 1997 (the "Budget Act"), enacted significant changes to
the Medicare and Medicaid Programs designed to "modernize" payment and health
care delivery systems while achieving substantial budgetary savings. Based
on Congressional Budget Office reports, the Budget Act is expected to produce
net savings of $116.4 billion to the Medicare Program and $14.6 billion of
federal contributions to the Medicaid program over five years.
In seeking to limit Medicare reimbursement for long term care services,
the Budget Act mandated the establishment of a prospective payment system for
skilled nursing facility services to replace the current cost-based
reimbursement system. The cost-based system reimburses skilled nursing
facilities for reasonable direct and indirect allowable costs incurred in
providing "routine services" (as defined by the Program), as well as capital
costs and
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ancillary costs, subject to limits fixed for the particular geographic area
served by the skilled nursing facility. Under the prospective payment
system, skilled nursing facilities will be paid a federal per diem rate for
covered services. The per diem payment will cover routine service,
ancillary, and capital-related costs. The prospective payment system will be
phased in over three cost reporting periods, starting with periods beginning
on or after July 1, 1998. The actual rate paid to a skilled nursing facility
will be adjusted for case mix and relative wage-related costs. The
Congressional Budget Office has projected savings of $9.5 billion over five
years through implementation of the prospective payment system for skilled
nursing facilities.
Under provisions of the Budget Act, states will be provided additional
flexibility in managing their Medicaid programs while achieving in excess of
$13 million in federal budgetary savings over five years. Among other
things, the Budget Act repealed the Boren Amendment payment standard, which
had required states to pay "reasonable and adequate" payments to cover the
costs of efficiently and economically operated hospitals, nursing facilities,
and certain intermediate care facilities. States, however, will be required
to use a public notice and comment process in determining rates for such
facilities. During rate-setting procedures states also will be required to
take into account the situation of facilities that serve a disproportionate
number of low-income patients with special needs. The Secretary of the
Department of Health and Human Services is required to study and report to
Congress within four years concerning the effect of State rate-setting
methodologies on the access to and the quality of services provided to
Medicaid beneficiaries.
These health care reforms may reduce reimbursement to levels that are
insufficient to cover the cost of providing patient care, which could
adversely affect revenues of the Company's borrowers and lessees and thereby
adversely affect those borrowers' and lessees' abilitity to make their
respective 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.
FRAUD AND ABUSE REGULATION. The health care industry is highly
regulated by federal, state and local law, and is directly affected by state
and local licensure, fines, criminal penalties and loss of certification to
participate in the Medicare and Medicaid programs. The failure of any
borrower or lessee to comply with such laws, requirements and regulations
could affect its ability to operate its 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 remuneration to induce
the referral of Medicare and Medicaid patients is generally prohibited by
federal and state statutes. Both federal and state self-referral statutes
severely restrict the ability of physicians to refer patients to entities in
which they have a financial interest. The Budget Act provided the federal
government with expanded enforcement powers to combat waste, fraud and abuse
in the delivery of health care services. Further, pursuant to a government
initiative known as Operation Restore Trust, the Office of Inspector General
and the Health Care Financing Administration have increased investigations
and enforcement activity of fraud and abuse, specifically targeting skilled
nursing facilities, home health providers and medical equipment suppliers.
Failure to comply with the foregoing fraud and abuse laws or government
program integrity regulations may result in sanctions including the loss of
licensure or eligibility to participate in reimbursement programs (including
Medicare and Medicaid), asset forfeitures and civil and criminal penalties.
It is anticipated that the trend toward increased investigation and
informant activity in the areas of fraud and abuse and 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 licensure or certification to participate in
government reimbursement programs could be jeopardized, or that borrower or
lessee could be subject to civil and criminal fines and penalties. Either of
these occurrences could have a material adverse affect on the Company by
adversely affecting the borrower's or lessee's ability to make debt or lease
payments to the Company.
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USE OF PROCEEDS
The net cash proceeds to the Company from the sale of the Series C
Preferred Stock offered hereby is $37,730,000 (before deduction of estimated
offering expenses of approximately $50,000). The Company intends to use such
net proceeds to pay down borrowings outstanding under the Revolving Credit
Facility as described below.
The Company has a $170.0 million Senior Unsecured Revolving Line of
Credit (the "Revolving Credit Facility"). Borrowings under the Revolving
Credit Facility are used to make real estate investments and mature on or
before October 3, 2000. Borrowings under the Revolving Credit Facility
generally bear interest at rates that vary between LIBOR plus 1.25% and LIBOR
plus 1.5% depending on the Company's leverage ratio. The Revolving Credit
Facility also has a reference rate option. Borrowings outstanding for less
than three days are made at the current refernce rate. As of June 30, 1998,
the Company had $115.0 million outstanding, excluding accrued interest, under
the Revolving Credit Facility consisting of $71.0 million bearing interest at
LIBOR plus 1.25% (6.94% at June 30, 1998) and $44.0 million bearing interest
at the current reference rate (8.5% at June 30, 1998). Borrowings under the
reference rate option were converted to LIBOR pricing on July 3, 1998 (6.94%).
Based on the estimated net proceeds from this offering and the remaining
borrowing capacity of approximately $55.0 million under the Revolving Credit
Facility at June 30, 1998, the Company believes that it has sufficient funds
available to fund additional investments for at least the next six months.
Amounts paid to reduce outstanding indebtedness under the Revolving Credit
Facility subsequently may be reborrowed (subject to the terms and limits of
the line of credit) to finance investments in additional properties and for
other general corporate purposes.
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DESCRIPTION OF SERIES C PREFERRED STOCK
The description of the particular terms of the Series C Preferred Stock
supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Preferred Stock set
forth in the accompanying Prospectus, to which description reference is
hereby made.
GENERAL
Pursuant to the Company's Articles of Amendment and Restatement (the
"Charter"), the Company is authorized to issue up to 10,000,000 shares of
preferred stock ("Preferred Stock") in one or more series, with such
designations, powers, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption, in each case, if any,
as are permitted by Maryland law and as the Board of Directors may determine
by adoption of an amendment to the Charter without any further vote or action
by the Company's stockholders. As of the date of this Prospectus Supplement
and prior to the issuance of the Series C Preferred Stock, the issued and
outstanding preferred stock consisted of 3,080,000 shares of 9.5% Series A
Cumulative Preferred Stock (liquidation preference of $25.00 per share issued
and outstanding (the "Series A Preferred Stock")) and 2,000,000 shares of 9%
Series B Cumulative Preferred Stock (liquidation preference of $25.00 per
share issued and outstanding (the "Series B Preferred Stock")).
The following summary of the terms and provisions of the Series C
Preferred Stock does not purport to be complete and is qualified in its
entirety by reference to the pertinent sections in the Articles Supplementary
creating the Series C Preferred Stock (the "Articles Supplementary"), which
is available from the Company, the Charter and Bylaws of the Company and
applicable law.
MATURITY
The Series C Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
RANK
The Series C Preferred Stock will, with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company, rank (i)
senior to all classes or series of Common Stock of the Company, and to all
equity securities ranking junior to the Series C Preferred Stock with respect
to dividend rights or rights upon liquidation, dissolution or winding up of
the Company; (ii) on a parity with the Series A Preferred Stock, the Series B
Preferred Stock and with all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank on a
parity with the Series C Preferred Stock with respect to dividend rights or
rights upon liquidation, dissolution or winding up of the Company, and (iii)
junior to all existing and future indebtedness of the Company. The term
"equity securities" does not include convertible debt securities, which will
rank senior to the Series C Preferred Stock prior to conversion.
DIVIDENDS
Holders of shares of the Series C Preferred Stock are entitled to
receive, when and as declared by the Board of Directors (or a duly authorized
committee thereof), out of funds legally available for the payment of
dividends, preferential cumulative cash dividends at the rate of 8.5% per
annum of the Liquidation Preference per share (equivalent to a fixed annual
amount of $1.63625 per share).
Dividends on the Series C Preferred Stock shall be cumulative from the
date of original issue and shall be payable quarterly in arrears on each of
March 31, June 30, September 30 and December 31, or, if not a business day,
the immediately preceding business day (each, a "Dividend Payment Date").
The first dividend, which will be paid on September 30, 1998, will be for
less than a full quarter. Such dividend and any dividend payable on the
Series C Preferred Stock for any partial dividend period will be computed on
the basis of a 360-day year consisting of twelve 30-day months. Dividends
will be payable to holders of record as they appear in the stock records of
the Company at the
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close of business on the applicable record date, which shall be the fifteenth
day of the calendar month in which the applicable Dividend Payment Date falls
or on such other date designated by the Board of Directors of the Company for
the payment of dividends that is not more than 30 nor less than 10 days prior
to such Dividend Payment Date (each, a "Dividend Record Date").
No dividends on shares of Series C Preferred Stock shall be declared by
the Board of Directors or paid or set apart for payment by the Company at
such time as the terms and provisions of any agreement of the Company,
including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series C Preferred Stock
will accrue whether or not the Company has earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series C
Preferred Stock will bear interest from the applicable Dividend Payment Date
at the prime rate of interest established from time to time in the Wall
Street Journal. Except as set forth in the next sentence, no dividends will
be declared or paid or set apart for payment on any capital stock of the
Company or any other series of Preferred Stock ranking, as to dividends, on a
parity with or junior to the Series C Preferred Stock (other than a dividend
in shares of the Company's Common Stock or in shares of any other class of
stock ranking junior to the Series C Preferred Stock as to dividends and upon
liquidation) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for such payment on the Series C Preferred
Stock for all dividend periods ending prior to or on the most recent past
dividend payment date. When dividends for all such dividend periods are not
paid in full (or a sum sufficient for such full payment is not so set apart)
upon the Series C Preferred Stock and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Series C
Preferred Stock, all dividends declared upon the Series C Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends with
the Series C Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share of Series C Preferred Stock and such other
series of Preferred Stock, shall in all cases bear to each other the same
ratio that accrued dividends per share (plus interest if any thereon) on the
Series C Preferred Stock and such other series of Preferred Stock (which
shall not include any accrual in respect of unpaid dividends for prior
dividend periods if such Preferred Stock does not have a cumulative dividend)
bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series C Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all dividend periods ending
prior to or on the most recent past dividend payment date, no dividends
(other than in shares of Common Stock or other shares of capital stock
ranking junior to the Series C Preferred Stock as to dividends and upon
liquidation) shall be declared or paid or set aside for payment nor shall any
other distribution be declared or made upon the Common Stock, or any other
capital stock of the Company ranking junior to or on a parity with the Series
C Preferred Stock as to dividends or upon liquidation, nor shall any shares
of Common Stock, or any other shares of capital stock of the Company ranking
junior to or on a parity with the Series C Preferred Stock as to dividends or
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital stock of the Company ranking junior to the
Series C Preferred Stock as to dividends and upon liquidation or redemptions
for the purpose of preserving the Company's qualification as a REIT).
Holders of shares of the Series C Preferred Stock shall not be entitled to
any dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends on the Series C Preferred Stock as provided above. Any
dividend payment made on shares of the Series C Preferred Stock shall first
be credited against the earliest accrued but unpaid dividend due with respect
to such shares which remains payable.
LIQUIDATION PREFERENCES
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, the holders of shares of Series C Preferred
Stock are entitled to be paid out of the assets of the Company legally
available for distribution to its stockholders a liquidation preference of
$19.25 per share, plus an amount equal to any accrued and unpaid dividends to
the date of payment, with interest, before any distribution of assets is made
to holders of Common
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Stock or any other class or series of capital stock of the Company that ranks
junior to the Series C Preferred Stock as to liquidation rights. Holders of
Series C Preferred Stock will be entitled to written notice of any event
triggering the right to receive such Liquidation Preference. After payment
of the full amount of the Liquidation Preference, plus any accrued and unpaid
dividends and the interest thereon to which they are entitled, the holders of
Series C Preferred Stock will have no right or claim to any of the remaining
assets of the Company. The consolidation or merger of the Company with or
into any other corporation, trust or entity or of any other corporation with
or into the Company, or the sale, lease or conveyance of all or substantially
all of the property or business of the Company, shall not be deemed to
constitute a liquidation, dissolution or winding up of the Company.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of
shares of stock of the Company or otherwise is permitted under the Maryland
General Corporation Law (the "MGCL") no effect shall be given to amounts that
would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon distribution of holders
of shares of stock of the Company whose preferential rights upon distribution
are superior to those receiving the distribution.
REDEMPTION
Except in certain circumstances relating to the Company's maintenance of
the ability to qualify as a REIT as described under "-Restrictions on
Ownership and Transfer" herein, the shares of Series C Preferred Stock will
not be redeemable by the Company.
VOTING RIGHTS
Holders of the Series C Preferred Stock will not have any voting rights,
except as set forth below. Without limiting the generality of the foregoing
sentence, holders of Series C Preferred Stock will have no voting rights with
respect to any additional directors which the holders of any other class or
series of Preferred Stock may have the right to elect upon any defaults in the
payment of dividends on such class or series of Preferred Stock notwithstanding
that such class or series of Preferred Stock may rank on a parity with the
Series C Preferred Stock as to dividends or upon liquidation.
Whenever any dividend payment on any shares of Series C Preferred Stock
shall be in arrears for more than 10 business days after its applicable
dividend payment date (a "Preferred Dividend Default"), the number of
directors then constituting the Board of Directors shall be increased by two.
Such increase shall be separate and apart and in addition to any increase in
the number of directors which may be occasioned by defaults in the payments
of dividends on any other class or series of Preferred Stock. The holders of
such shares of Series C Preferred Stock will be entitled to vote separately
as a class, in order to fill the vacancies thereby created, for the election
of a total of two additional directors of the Company (the "Series C
Preferred Stock Directors") at a special meeting called by the holders of
record of at least 20% of the Series C Preferred Stock (unless such request
is received less than 90 days before the date fixed for the next annual or
special meeting of stockholders) or at the next annual meeting of
stockholders, and at each subsequent annual meeting until all dividends
accumulated on such shares of Series C Preferred Stock for the past dividend
periods and the dividend for the then current dividend period shall have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment. In the event the directors of the Company are divided into
classes, each such vacancy shall be apportioned among the classes of
directors to prevent stacking in any one class and to insure that the number
of directors in each of the classes of directors are as equal as possible.
Each Series C Preferred Stock Director, as a qualification for election as
such (and regardless of how elected), shall submit to the Board of Directors
of the Company a duly executed, valid, binding and enforceable letter of
resignation from the Board of Directors, to be effective upon the date upon
which all dividends accumulated on such shares of Series C Preferred Stock
for the past dividend periods and the dividend for the then current dividend
period shall have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment, whereupon the terms of office of all
persons elected as Series C Preferred Stock Directors by the holders of the
Series C Preferred Stock shall, upon the effectiveness of their respective
letters of resignation, forthwith terminate, and the number of directors then
constituting the Board of Directors shall be reduced accordingly. A quorum
for any such meeting to elect the Series C Preferred Stock Directors shall
exist if at least a majority of the outstanding shares of Series C Preferred
Stock are represented in person or by proxy at such meetings. Such Series C
Preferred Stock Directors shall be elected upon the affirmative vote of a
plurality of the shares of Series C
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Preferred Stock present and voting in person or by proxy at a duly called
and held meeting at which a quorum is present. If and when all accumulated
dividends and the dividend for the then current dividend period on the Series
C Preferred Stock shall have been paid in full or set aside for payment in
full, the holders thereof shall be divested of the foregoing voting rights
(subject to revesting in the event of each and every Preferred Dividend
Default) and the term of office of each Series C Preferred Stock Director so
elected shall terminate. Any Series C Preferred Stock Director may be
removed at any time with or without cause by, and shall not be removed
otherwise than by the vote of, the holders of record of a majority of the
outstanding shares of the Series C Preferred Stock when they have the voting
rights described above (voting separately as a class). So long as a
Preferred Dividend Default shall continue, any vacancy in the office of a
Series C Preferred Stock Director may be filled by written consent of the
Series C Preferred Stock Director remaining in office, or if none remains in
office, by a vote of the holders of record of a majority of the outstanding
shares of Series C Preferred Stock when they have the voting rights described
above (voting separately as a class). The Series C Preferred Stock Directors
shall each be entitled to one vote per director on any matter.
In addition, in the case of a Preferred Dividend Default, the holders of
Series C Preferred Stock shall be granted voting rights equivalent to those
rights of holders of the Common Stock except that the holders of Series C
Preferred Stock will not have the right to vote generally in the election of
directors but with respect to the election of directors will only have the
voting rights as set forth above to elect Series C Preferred Stock Directors.
In such case, the voting rights of the holders of the Series C Preferred Stock
would be determined on an as converted basis, determined pursuant to the
conversion provisions as described below. These voting rights shall continue
only during a Preferred Dividend Default, and all such rights shall immediately
terminate at such time as a Preferred Dividend Default ceases to exist.
So long as any shares of Series C Preferred Stock remain outstanding,
the Company will not, without the affirmative vote or consent of the holders
of at least two-thirds of the shares of the Series C Preferred Stock
outstanding at the time (voting separately as a class), given in person or by
proxy, either in writing or at a meeting, amend, alter or repeal the
provisions of the Charter or the Articles Supplementary, whether by merger,
consolidation or otherwise (an "Event"), so as to materially and adversely
affect any right, preference, privilege or voting power of the Series C
Preferred Stock or the holders thereof; PROVIDED, HOWEVER, that with respect
to the occurrence of any Event set forth above, so long as the Series C
Preferred Stock (or any equivalent class or series of stock issued by the
surviving corporation in any merger or consolidation to which the Company
became a party) remains outstanding with the terms thereof materially
unchanged, the occurrence of any such Event shall not be deemed to materially
and adversely affect such rights, preferences, privileges or voting power of
holders of the Series C Preferred Stock and PROVIDED, FURTHER that (i) any
increase in the amount of the authorized Preferred Stock (other than the
Series C Preferred Stock) or the creation or issuance of any other series of
Preferred Stock, or (ii) any increase in the amount of authorized shares of
such series, in each case ranking on a parity with or junior to the Series C
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or
voting powers.
Except as expressly stated in the Articles Supplementary, the Series C
Preferred Stock will not have any relative, participating, optional or other
special voting rights and powers, and the consent of the holders thereof
shall not be required of the taking of any corporate action, including but
not limited to, any merger or consolidation involving the Company or a sale
of all or substantially all of the assets of the Company, irrespective of the
effect that such merger, consolidation or sale may have upon the rights,
preferences or voting power of the holders of the Series C Preferred Stock.
CONVERSION
Shares of Series C Preferred Stock will be convertible in whole or in
part, at any time at the option of the holders thereof, into shares of Common
Stock at a conversion price of $19.25 per share of Common Stock, subject to
adjustment as described below ("Conversion Price").
Conversion of shares of Series C Preferred Stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to the Company or in blank to the office or agency to be
maintained by the Company for that purpose. Each conversion will be deemed
to have been effected immediately prior to the close of business on the date
on which the
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certificates for shares of Series C Preferred Stock shall have been
surrendered and notice shall have been received by the Company as aforesaid
(and if applicable, payment of an amount equal to the dividend payable on
such shares shall have been received by the Company as described below) and
the conversion shall be at the Conversion Price in effect at such time and on
such date.
Holders of shares of Series C Preferred Stock who convert and whose
conversion is deemed effective before the close of business on a dividend
payment record date will not be entitled to receive any portion of the
dividend payable on such shares of Series C Preferred Stock on the
corresponding dividend payment date notwithstanding the conversion of such
shares on the dividend payment record date and prior to such dividend payment
date but will, however, be entitled to receive the entire corresponding
dividend payable, if any, on the shares of Common Stock issuable upon
conversion provided that any conversion of Series C Preferred Stock becomes
effective prior to the close of business on the record date for such dividend
payable on such shares of Common Stock. A holder of shares of Series C
Preferred Stock on a dividend payment record date who (or whose transferee)
tenders any such shares for conversion into shares of Common Stock after such
dividend payment record date will receive the dividend payable by the Company
on such shares of Series C Preferred Stock on the dividend payment date.
Except as provided above, the Company will make no payment or allowance for
unpaid dividends, whether or not in arrears, on converted shares or for
dividends on the shares of Common Stock issued upon such conversion.
Fractional shares of Common Stock are not to be issued upon conversion
but, in lieu thereof, the Company will pay a cash adjustment based on the
current market price of the Common Stock on the day prior to the conversion
date.
Conversion Price Adjustments
The Conversion Price is subject to adjustment upon certain events,
including (i) dividends (and other distributions) on its Common Stock,
payable in shares of Common Stock or any class of capital stock of the
Company, (ii) the issuance to all or substantially all holders of Common
Stock of certain rights or warrants entitling them to subscribe for or
purchase Common Stock at a price per share less than the fair market value
per share of Common Stock, (iii) subdivisions, combinations and
reclassifications of Common Stock and (iv) distributions to all or
substantially all holders of Common Stock of cash, evidences of indebtedness
of the Company or assets (including securities, but excluding those
dividends, rights, warrants and distributions referred to above and excluding
any dividend or distribution paid in cash to the holders of Common Stock in
the ordinary course of the Company's business as determined in good faith by
the Board of Directors and not in excess of the stockholders' equity of the
Company); PROVIDED, HOWEVER, that in connection with the Company's spin-off
of LTC Healthcare, Inc. ("Healthcare"), each holder of Series C Preferred
Stock on the record date of the spin-off of LTC Healthcare, Inc. shall
receive as a special dividend 1/10 of a share of common stock, par value $.01
per share, of LTC Healthcare, Inc. for each share of LTC Common Stock into
which such holder's Series C Preferred Stock may be converted in lieu of
adjustment of the Conversion Price for such distribution. Notwithstanding
the foregoing, in the event that said spin-off does not involve the issuance
of 1/10 of a share of common stock of Healthcare for each share of the
Company's Common Stock, then the number of shares of common stock of
Healthcare issued to the holders of the Series C Preferred Stock shall be
adjusted accordingly such that each holder of one share of Series C Preferred
Stock is treated equivalently to the holder of a share of the Company's
Common Stock. In addition to the foregoing adjustments, the Company will be
permitted to make such reductions in the Conversion Price as it considers to
be advisable in order that any event treated for Federal income tax purposes
as a dividend of stock or stock rights will not be taxable to the holders of
the Common Stock.
In the event the Company shall (x) effect any capital reorganization or
reclassification of its shares or (y) consolidate or merge with or into any
other corporation (other than a consolidation or merger in which the Company is
the surviving corporation and each share of Common Stock outstanding immediately
prior to such consolidation or merger is to remain outstanding immediately after
such consolidation or merger) or (z) sell, lease or transfer substantially all
of its assets to any other person or entity for a consideration consisting in
whole or in part of equity securities of such other corporation, the holders of
shares of Series C Preferred Stock shall receive upon conversion thereof, in
lieu of each share of Common Stock into which the Series C Preferred Stock would
have been convertible prior to such transaction, the same kind and amount of
stock and other securities, cash or property as such holder would have been
entitled to receive upon such transaction if such holder had held the Common
Stock issuable upon conversion of the Series C Preferred Stock immediately prior
to such transaction.
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No adjustment of the Conversion Price will be required to be made in any
case until cumulative adjustments amount to 1% or more of the Conversion Price.
Any adjustments not so required to be made will be carried forward and taken
into account in subsequent adjustments.
A conversion price adjustment made according to the provisions of the
Series C Preferred Stock (or the absence of provision for such an adjustment)
might result in a constructive distribution to the holders of Series C
Preferred Stock or holders of Common Stock that would be subject to taxation
as a dividend. See "Federal Income Tax Considerations -Tax Considerations of
Preferred Holders."
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
actually or constructively, by five or fewer individuals (defined in the Code
to include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of 12 months or during a proportionate part
of a shorter taxable year. In addition, if the Company, or an actual or
constructive owner of 10% or more of the Company, actually or constructively,
owns 10% or more of a tenant of the Company (or a tenant of any partnership
in which the Company is a partner, including through one of its wholly owned
subsidiaries), the rent received by the Company (either directly or through
any such partnership or Subsidiary) from such tenant will not be qualifying
income for purposes of the REIT gross income tests of the Code. To ensure
that the Company continues to meet the requirements for qualification as a
REIT, the Amended and Restated Articles of Incorporation, subject to certain
exceptions, provides that no holder may own, or be deemed to own by virtue of
the attribution provisions of the Code, shares of the Company's capital stock
in excess of the Ownership Limit. The Board of Directors may waive the
Ownership Limit with respect to a stockholder if evidence satisfactory to the
Board of Directors and the Company's tax counsel is presented that the
changes in ownership will not then or in the future jeopardize the Company's
status as a REIT. The Board of Directors has waived National Health
Investors, Inc. (but not to any other holders of shares of Series C Preferred
Stock) from the Ownerhip Limit applicable to the outstanding shares of Series
C Preferred Stock; PROVIDED, HOWEVER, that National Health Investors, Inc.
remains subject to the Ownership Limit applicable to shares of Common Stock
whereby National Health Investors, Inc. may not own more than the aggregate
number of shares of Common Stock and shares of Series C Preferred Stock that,
if then converted by National Health Investors, Inc. into shares of Common
Stock, would make National Health Investors, Inc. or any other person the
owner of a number of shares of Common Stock that would exceed the Ownership
Limit applicable to Common Stock. Any transfer of capital stock or any
security convertible into capital stock that would result in actual or
constructive ownership of capital stock by a stockholder in excess of the
Ownership Limit or that would result in the failure of the Company to meet
the requirements for qualification as a REIT, including any transfer that
results in the capital stock being owned by fewer than 100 persons or results
in the Company being "closely held" within the meaning of section 856(h) of
the Code, shall, not withstanding any provisions of the Charter of the
Company to the contrary, be null and void, and the intended transferee will
acquire no rights to the capital stock. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to
attempt to qualify, or to continue to qualify, as a REIT.
Any shares of capital stock of the Company held by a stockholder in
excess of the Ownership Limit become Excess Shares. Upon shares of any class
or series of capital stock becoming Excess Shares, such shares shall be
deemed automatically to have been converted into a class separate and
distinct from their original class and from any other class of Excess Shares.
Upon any outstanding Excess Shares ceasing to be Excess Shares, such shares
shall be automatically reconverted back into shares of their original class
or series of capital stock.
The holder of Excess Shares will not be entitled to vote the Excess
Shares nor will such Excess Shares be considered issued and outstanding for
purposes of any stockholder vote or the determination of a quorum for such
vote. The Board of Directors, in its sole discretion, may choose to
accumulate all distributions and dividends payable upon the Excess Shares of
any particular holder in a non-interest bearing escrow account payable to the
holder of the Excess Shares upon such Excess ceasing to be Excess Shares.
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In addition, the Company will have the right to redeem all or any
portion of the Excess Shares from the holder at the redemption price, which
shall be the average market price (as determined in the manner set forth in
the Charter of the capital stock for the prior 30 days from the date the
Company gives notice of its intent to redeem such Excess Shares, or as
determined by the Board of Directors in good faith. The redemption price
shall only be payable upon the liquidation of the Company and shall not
exceed the sum of the per share distributions designated as liquidating
distributions declared subsequent to the redemption date with respect to
unredeemed shares of record of the class of the Company from which such
Excess Shares were converted. The Company shall rescind the redemption of
the Excess Shares in the event that within 30 days of the redemption date,
due to a sale of shares by the holder, such holder would not be the holder of
Excess Shares, unless such rescission would jeopardize the tax status of the
Company as a REIT or would be unlawful in any regard.
Each stockholder shall upon demand be required to disclose to the
Company in writing any information with respect to the actual and
constructive ownership of beneficial interests in the Company as the Board of
Directors deems necessary to comply with the provisions of the Code
applicable to REITs, to comply with the requirements of any taxing authority
or governmental agency or to determine any such compliance.
The Ownership Limit may have the effect of precluding the acquisition
of control of the Company unless the Board of Directors determines that
maintenance of REIT status is no longer in the best interests of the Company.
TRANSFER AND DIVIDEND PAYING AGENT
Harris Trust & Savings Bank will act as the transfer and dividend
payment agent in respect of the shares of Common Stock into which the Series
C Preferred Stock may be converted.
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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, Internal Revenue
Service ("IRS") rulings and judicial decisions, all in effect as of the date
of this Prospectus Supplement and all of which are subject to change
(possibly with retroactive effect) by subsequent legislative, judicial or
administrative action.
EACH PURCHASER IS ADVISED TO 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 OF THIS PROSPECTUS SUPPLEMENT.
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 December 18, 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 was based on various
assumptions and was 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. 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 in any particular taxable year will satisfy such
requirements. Further, the anticipated income tax treatment described in
this Prospectus Supplement 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. However, if the Company elects to retain and pay tax on its capital
gains, its
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stockholders will include such gains in income and receive a refund or
credit, as the case may be, for their proportionate share of such tax.
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" (defined generally as property acquired by the Company through
foreclosure or otherwise after a default on a loan secured by the property or
a lease of the 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 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 and
that the availability or nature of such election is not modified as proposed
in President Clinton's 1999 federal budget proposal.
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) at any
time 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 and the amount of its distributions. 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 conditions
described in (v) and (vi) above. Such ownership and transfer restrictions
are described in the accompanying Prospectus under the headings "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,
provided, however, beginning January 1, 1998, if the Company complies with
the rules contained in the applicable Treasury Regulations requiring the
Company to attempt to ascertain the actual ownership of its shares, and the
Company does not know, and would not have known through the exercise of
reasonable diligence, whether it failed to meet the requirement set forth in
condition (vi) above, the Company will be treated as having met such
condition. See "-Failure to Qualify."
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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, liabilities and items of income of the Partnerships will be treated
as assets, liabilities 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 certain gross income requirements. First, at
least 75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from: (i) rents from real property; (ii) interest on obligations
secured by mortgages on real property or interests in real property; (iii)
gain from the sale or other disposition of real property (including interests
in real property and interests in mortgages on real property) not held
primarily for sale to customers in the ordinary course of business; (iv)
dividends or other distributions on, and gain (other than gain from
prohibited transactions) from the sale or other disposition of, transferable
shares in other real estate investment trusts; (v) abatements and refunds of
taxes on real property; (vi) income and gain derived from foreclosure
property (as defined in the Code); (vii) amounts (other than amounts the
determination of which depend in whole or in part on the income or profits of
any person) received or accrued as consideration for entering into agreements
(a) to make loans secured by mortgages on real property or on interests in
real property or (b) to purchase or lease real property (including interests
in real property and interests in mortgages on real property); (viii) gain
from the sale or other disposition of a real estate asset which is not a
prohibited transaction; and (ix) 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, for each taxable year beginning on or prior to August 6, 1997,
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 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 (subject to a DE MINIMIS exception applicable to the
Company for its taxable years beginning in 1998) other than through an
independent contractor from whom the REIT derives no revenue. However, the
REIT 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
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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.
Notwithstanding the foregoing, the Company may have taken and may continue to
take certain of the actions set forth in (i) through (iv) above to the extent
that such action will not, based on the advice of tax counsel to the Company,
jeopardize the Company's tax status as a REIT.
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 quality 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.
The Company receives certain fees from the subservicing of mortgages
held by REMICs in which it holds an interest. Such fees do not constitute
qualifying income under the 95% and 75% gross income tests. Additionally,
the Company expects to recognize income from the performance of certain
administrative and management services related to Healthcare. At least a
portion, if not all, of this income will be non-qualifying income under the
95% and 75% gross income tests. The Company believes that the aggregate
amount of the services income (and any other non-qualifying income) it
recognizes will not exceed the limits on non-qualifying income under the
gross income tests described above.
SPIN-OFF OF HEALTHCARE. On May 20, 1998, the Company announced its
intention to spin-off Healthcare. In connection with the spin-off, the
Company will transfer certain equity investments, real properties and related
assets and liabilities held by the Company to Healthcare in exchange for
additional shares of Healthcare's nonvoting common stock. The Company will
generally recognize gain for Federal income tax purposes as a result of such
transfer of assets to Healthcare, in an amount equal to the excess of the
fair market value of the Healthcare stock received in the exchange plus any
liabilities assumed by Healthcare (as well as any liabilities to which the
transferred assets are subject) over the Company's adjusted basis in the
transferred assets immediately prior to the exchange. The nature of the gain
recognized by the Company, for purposes of the gross income tests described
above, will depend upon the nature of the assets transferred. With respect
to any gain recognized on the transfer of equity investments to Healthcare,
such gain will constitute qualifying income for purposes of the 95%, but not
the 75% gross income tests, unless such gain is characterized as a gain from
a prohibited transaction.
Because certain real properties being transferred to Healthcare in
connection with the spin-off have been held by the Company for a relatively
short period of time, there is a risk that any gain recognized in connection
with the transfer of such properties to Healthcare would be characterized as
gain from the sale or other disposition of property held for sale in the
ordinary course of business. If this result occurs, such gain would further
constitute gain from a "prohibited transaction," as such term is defined in
Section 857(b)(6) of the Code. Any such gain would be subject to a
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100% tax on the net income derived from such prohibited transaction. See
"-Prohibited Transaction." LTC believes that it will not, however, recognize
any gain in connection with the transfer of such assets to Healthcare that
would be characterized as gain from a prohibited transaction. In addition,
these properties are not held by LTC for sale in the ordinary course of LTC's
business. However, there can be no assurance that the IRS will not take a
different position.
The Company's taxable gain, if any, on the distribution of the
Healthcare common stock in connection with the spin-off will be measured by
the extent to which, at the time of such distribution, the fair market value
of the Healthcare common stock distributed by the Company exceeds the
Company's adjusted basis in such stock. Such gain, if any, will be
qualifying income for purposes of the 95%, but not the 75%, gross income test.
The Company also expects to recognize income from the performance of
certain administrative and management services relating to Healthcare after
the spin-off. At least a portion, if not all, of this income will be
non-qualifying income under the 95% and 75% gross income tests. The Company
believes that the aggregate amount of this services income (and any other
non-qualifying income) in any taxable year will not exceed the limits on
non-qualifying income under the gross income tests described above.
FAILURE TO SATISFY INCOME TESTS. If the Company fails to satisfy one or
both of the 75% or 95% gross income tests for any taxable year, it may
nevertheless qualify as a REIT for such year if it is entitled to relief
under certain provisions of the Code. These relief provisions 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. For instance, if the Company fails to satisfy the gross income
tests because non-qualifying income that the Company intentionally incurs
exceeds the limits on such income, the IRS could conclude that the Company's
failure to satisfy the tests was not due to reasonable cause. If these
relief provisions are inapplicable to a particular set of circumstances
involving the Company, the Company would 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 failed the 30%
gross income test in years prior to 1998. In such case, the Company would
have ceased to qualify as a REIT. As noted above, however, the 30% gross
income test no longer applies to the Company starting January 1, 1998.
Because of the nature of the assets being transferred to Healthcare in
connection with the spin-off of Healthcare and the uncertainty of the value
of the Healthcare stock to be distributed to the holders of Common Stock in
connection with the spin-off of Healthcare, as discussed above, the amount of
gain recognized by the Company in connection with the spin-off of Healthcare
could cause the Company to fail to satisfy the 75% gross income test for its
current taxable year. However, if the Company fails to satisfy the 75% gross
income test, it will nonetheless be deemed to satisfy such test (and
therefore will continue to qualify as a REIT for such taxable year) if the
disclosure requirements discussed above are met and the Company further
satisfies the reasonable cause requirement discussed above. The Company
believes that it has exercised ordinary business care and prudence in
connection with the spin-off of Healthcare in attempting to satisfy the 75%
gross income test, and that it will continue to exercise such ordinary
business care and prudence in attempting to satisfy the 75% gross income
test. Furthermore, the Company has engaged an independent, nationally
recognized valuation firm to render an opinion as to the value of the
Healthcare stock to be distributed to the holders of Common Stock in the
spin-off of Healthcare, and believes that its reliance on such opinion will
constitute reasonable cause for purposes of the relief provisions discussed
herein. The Company further has knowledge of no facts which would cause it
to believe that it will realize gain upon the distribution of the Healthcare
stock to the holders of Common Stock.
Even if the relief provisions discussed above apply, a tax would be
imposed on an amount equal to (a) the gross income attributable to the
greater of the amount by which the Company failed the 95% test or the 75%
test multiplied by (b) a fraction intended to reflect the Company's
profitability. See "General."
If the relief provisions discussed above do not apply, the Company's
REIT status would terminate in the taxable year of the distribution of the
Healthcare stock.
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PROHIBITED TRANSACTION. Any gain realized by the Company on the sale of
any property held as inventory or other property held primarily for sale to
customers in the ordinary course of business (including the Company's share
of any such gain realized by any of the Partnerships) will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax.
Such prohibited transaction income may also have an adverse effect upon the
Company's ability to satisfy the income tests for qualification as a REIT.
Under existing law, whether property is held as inventory or primarily for
sale to customers in the ordinary course of a trade or business is a question
of fact that depends on all the facts and circumstances with respect to the
particular transaction. The Company holds its properties for investment with
a view to long-term appreciation, engages in the business of acquiring,
developing, owning, and operating such properties (and other properties) and
makes such occasional sales of its properties as are consistent with the
Company's investment objectives. There can be no assurance, however, that the
IRS might not contend that one or more of such sales is subject to the 100%
penalty tax.
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
assets held by the Company's qualified REIT subsidiaries and its allocable
share of the assets held by the Partnerships) must be represented by real
estate assets, 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) public debt offering of the Company, cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of
the Company's total assets and the Company may not own more than 10% of any
one issuer's outstanding voting securities.
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 initially 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 owning the
nonqualifying asset), the failure can be cured by the disposition of
sufficient non-qualifying 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) the sum of
certain items of noncash income. In addition, if the Company disposes of any
Built-In Gain Asset during its Recognition Period, the Company would 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 after such
declaration and if the Company so elects and specifies the dollar amount in
its tax return. The amount distributed must not be preferential; i.e., each
class of the Company's stock must receive the same distribution per share.
Those distributions are taxable to holders of the Company's capital stock
(including its Common Stock) (other than tax-exempt entities, as discussed
below) in the year paid even though they relate to a prior year for purposes
of the 95% distribution requirement. Furthermore, if the Company should fail
to distribute during each calendar year (or in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of the following January) at least the sum of (1) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain income
for such year, and (iii) any undistributed taxable income from prior periods,
the Company would be subject
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to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Any REIT taxable income and net capital gain
on which this excise tax is imposed for any year is treated as an amount
distributed during that year for purposes of calculating such tax. The
Company believes it has made and intends to continue to make timely
distributions sufficient to satisfy these annual distribution requirements.
The Company's REIT taxable income has been and continues to be less than
its cash flow due to the allowance for depreciation and other non-cash
charges in computing REIT taxable income. Accordingly, the Company
anticipates that it will generally have sufficient cash or liquid assets to
enable it to satisfy the distribution requirements described above. It is
possible, however, that the Company, from time to time, may not have
sufficient cash or other liquid assets to meet these distribution
requirements 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 such timing differences occur, in order to
meet the distribution requirements, the Company may find it necessary to
arrange for short-term, or possibly long-term, borrowings or to pay dividends
in the form of taxable stock dividends.
If the Company fails to meet the 95% distribution test due to certain
adjustments (E.G., an increase in the Company's income or a decrease in its
deduction for dividends paid) by reason of a judicial decision or by
agreement with the IRS, the Company may be able to pay a "deficiency
dividend" to stockholders of the Company in the taxable year of the
adjustment, which dividend would relate back to the year being adjusted. In
such case, the Company would also be required to pay interest to the IRS and
would be subject to any applicable penalty provisions.
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).
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In 1997, the IRS 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.
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.
TAX RISKS ASSOCIATED WITH THE PARTNERSHIPS
The ownership of an interest in a Partnership may involve special tax
risks, including the possible challenge by the IRS of (i) allocations of income
and expense items, which could affect the computation of taxable income of the
Company, and (ii) the status of a Partnership as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. If any of
the Partnerships were treated as an association taxable as a corporation for
federal income tax purposes, the Partnership would be treated as a taxable
entity. In addition, in such a situation, (i) if the Company owned more than 10%
of the outstanding voting securities of such Partnership, or the value of such
securities exceeded 5% of the value of the Company's assets, the Company would
fail to satisfy the asset tests described above and would therefore fail to
qualify as a REIT, (ii) distributions from any such Partnership to the Company
would be treated as dividends, which are not taken into account in satisfying
the 75% gross income test described above and could, therefore, make it more
difficult for the Company to satisfy such test, (iii) the interest in any such
Partnership held by the Company would not qualify as a "real estate asset,"
which could make it more difficult for the Company to meet the 75% asset test
described above, and (iv) the Company would not be able to deduct its share of
any losses generated by the Partnership in computing its taxable income. See
"--Failure to Qualify" for a discussion of the effect of the Company's failure
to meet such tests for a taxable year. The Company believes that each of the
Partnerships will be
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treated for tax purposes as a partnership (rather than an association taxable
as a corporation). No assurance can be given that the IRS will not
successfully challenge the federal income tax status of the Partnerships as
partnerships.
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 presently owns 100% of the nonvoting common stock of
Healthcare and 100% of the nonvoting preferred stock of LTC Development
Company, Inc. ("LTCD," and together with Healthcare, the "Preferred Stock
Subsidiaries"), which ownership represents, in each case, approximately 99%
of the economic value of all classes of stock of each of the Preferred Stock
Subsidiaries. The Company does not and will not own any of the voting
securities of either of the Preferred Stock Subsidiaries, and therefore the
Company will not be considered to own more than 10% of the voting securities
of either of the Preferred Stock Subsidiaries (which would be prohibited by
the REIT asset tests currently set forth in the Code). President Clinton's
1999 federal budget proposal contains a provision which would amend the REIT
asset tests so as to prohibit REITs from owning stock of a corporation
possessing more than 10% of the vote or value of all classes of stock of the
corporation. This proposal would be effective with respect to stock acquired
on or after the date of the first Congressional committee action with respect
to the proposal (the "Action Date"). In addition, to the extent that a
REIT's stock ownership is grandfathered by virtue of this effective date,
such grandfathered status would terminate if the subsidiary corporation
engages in a trade or business that it is not engaged in on the Action Date
or acquires substantial new assets on or after such date. Accordingly, if
this provision of the budget proposal were enacted in its present form, the
Company's stock ownership in the Preferred Stock Subsidiaries would be
grandfathered, but such grandfathered status would terminate if the Preferred
Stock Subsidiaries engages in a trade or business that it is not engaged in
on the Action Date or acquires substantial new assets (including additional
mortgage loans) on or after such date, even if such activities are undertaken
or assets are acquired prior to the adoption of the proposal. In such case,
the Company's continued ownership of more than 10% of the economic value of
the Preferred Stock Subsidiaries beyond the Company's next quarterly asset
testing date following the Action Date (which could occur prior to the
adoption of the proposal) could cause the Company to fail to qualify as a
REIT. See "-Failure to Qualify." It is presently uncertain whether any
proposal regarding REIT subsidiaries, such as the Preferred Stock
Subsidiaries, will be enacted, or if enacted, what the terms of such proposal
(including its effective date) will be. At this time, it is expected that
LTCD will not continue to acquire additional properties notwithstanding the
proposed legislation regarding REIT subsidiaries. However, other than the
properties and assets contributed to Healthcare by the Company in connection
with the Company's spin-off of Healthcare, it is not presently expected that
Healthcare will acquire any other properties prior to the spin-off.
CLINTON ADMINISTRATION 1999 BUDGET PROPOSALS.
On February 2, 1998, the Department of the Treasury (the "Treasury")
released an explanation of the revenue proposals included in the Clinton
Administration's fiscal 1999 budget. In addition to the proposal restricting
a REIT from owning greater than 10% of either the voting power or value of
the stock of a corporation, these proposals contains several other provisions
which, it enacted in their proposed form, may have an adverse impact on the
Company's continued qualification as a REIT.
One provision would impose as an additional requirement for REIT
qualification that no person can own stock of a REIT possessing more than 50
percent of the combined voting power of all classes of voting stock or 50
percent of the total value of shares of all classes of stock. For purposes
of determining stock ownership, rules similar to the attribution rules for
REIT qualification under present law would apply. This proposal would be
effective for entities
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electing REIT status for taxable years beginning on or after the Action Date.
Another proposal regarding the "grandfathered" status of certain "stapled" or
"paired share" REITs that would otherwise be subject to Section 269B of the
Code has been enacted in a provision of the IRS Restructuring and Reform Act
of 1998, which was signed by President Clinton on July 22, 1998 (the "1998
Act"). Under the provision in the 1998 Act, such grandfathered status would
be revoked and the stapled entities would be treated as a single corporation
with respect to certain properties acquired by the stapled entities on or
after March 26, 1998 and activities or services relating to such properties
performed on or after such date. Under the 1998 Act, the anti-pairing rules
provided in the Code apply to real property interests acquired after March
26, 1998 by a REIT or a stapled entity, or a subsidiary or partnership in
which ten percent or greater interest is owned by the REIT or a stapled
entity unless (i) the real property interests are acquired pursuant to a
written agreement which was binding on March 26, 1998 and all times
thereafter or (ii) the acquisition of such real property interests was
described in a public announcement or in a filing with the Commission on or
before March 26, 1998.
With respect to the first proposal, because the Company's Common Stock
is widely held, and possesses approximately 80% of the value and 100% of the
voting power of all classes of the Company's stock, the Company does not
anticipate that, if this proposal is adopted as proposed, ownership of its
stock will cause it to fail to satisfy this test. Additionally, the Company
believes that the share ownership and transfer restrictions with respect to
the Company's Common Stock and Preferred Stock contained in the Company's
Charter and Articles Supplementary should enable it to satisfy this proposed
share ownership requirement. Furthermore, if required, the Company intends
to take other reasonable action to ensure that this proposed share ownership
requirement, if enacted, would be met.
The Treasury's explanation of the foregoing budget proposal and the
proposal restricting a REIT from owning greater than 10% of either the voting
power or value of the stock of a corporation as discussed above in "-- Other
Tax Matters" provides only a general description of the proposals, and the
details of the statutory amendments that would implement these proposals
would be subject to change until such time as they are enacted into law.
Consequently, it is impossible to determine all of the ramifications of these
proposals.
With respect to the stapled REIT provision under the 1998 Act discussed
above, Section 269B(a)(3) of the Code provides that if the shares of a REIT
and a non-REIT are paired or "stapled," then the REIT and the stapled
non-REIT shall be treated as one entity for purposes of determining whether
either company qualifies as a REIT. Section 269B(a)(3) does not apply,
however, if the shares of the REIT and the non-REIT were paired on June 30,
1983 and the REIT was taxable as a REIT on such date. While this
"grandfathering" of stapled REITs does not apply to the Company, the Company
is not a stapled entity with respect to any non-REIT corporate entity.
Therefore, the Company believes that the stapled REIT provision under the
1998 Act will have no effect on the Company's continued qualification as a
REIT. However, if Section 269B(a)(3) did apply to the Company and any other
non-REIT corporate entity (including Healthcare), the Company and such entity
would be treated as one entity for purposes of determining REIT
qualification, and the Company may not qualify as a REIT.
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. In
addition, a recent federal budget proposal contains a provision which, if
enacted in its present form, would result in the immediate taxation of all
gain inherent in a C corporation's assets upon an election by the corporation
to become a REIT in taxable years beginning
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after January 1, 1999, and thus could effectively preclude the Company from
re-electing to be taxed as a REIT following a loss of its REIT status.
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, (iii)
is an estate the income of which is subject to United States federal income
taxation regardless of its source or (iv) is a trust of the administration of
which is subject to the primary supervision of a United States court and
which has one or more United States persons who have the authority to control
all substantial decisions of trust.
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 constitute gain from the sale or other disposition of a
capital asset (to the extent that they do not exceed the Company's actual net
capital gain for the taxable year and provided that the recipient has held
the shares as a capital asset). U.S. Stockholders that are corporations may,
however, be required to treat up to 20% of certain capital gain dividends as
ordinary income. Depending upon the period of time that the Company held the
assets to which such gains were attributable, and upon certain designations,
if any, which may be made by the Company, such gains will be taxable to
non-corporate U.S. Stockholders at a rate of either 20%, 25% or 28%. 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 non-corporate U.S. Stockholder's adjusted basis in his shares
taxable as long-term capital gains (if the shares have been held for longer
than 18 months), mid-term capital gains (if the shares have been held for
longer than one year but not for more than 18 months) 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.
A REIT may elect to retain and pay income tax on net long-term capital
gains that it receives during a taxable year. If a REIT makes this election,
its stockholders are required to include in their income as long-term capital
gain their proportionate share of the undistributed long-term capital gains
so designated by the REIT or, if and to the extent the REIT designates
undistributed long-term capital gains as a 20% rate distribution, an
unrecaptured section 1250 gain distribution (taxable at a 25% rate) or a 28%
rate gain distribution, to include in their income as long-term capital gains
falling in, respectively, the 20% group, the 25% group or the 28% group of
long-term capital gains their proportionate share of the undistributed
long-term capital gain of the REIT falling within those categories. A
stockholder will be treated as having paid his or her share of the tax paid
by the REIT in respect of long-term capital gains so designated by the REIT,
for which the stockholder will be entitled to a credit or refund. In
addition, the stockholder's basis in his or her REIT shares will be increased
by the amount of the REIT's designated undistributed long-term capital gains
that are included in the stockholder's long-term capital gains, reduced by
the stockholder's proportionate share of the tax paid by the REIT on those
gains that the stockholder is treated as having paid. The earnings and
profits of the REIT will be reduced, and the earnings and profits of any
corporate stockholder of the REIT will be increased, to take into account
amounts designated by the REIT pursuant to this rule, in accordance with
Treasury Regulations to be prescribed by the IRS. A REIT must pay its tax on
its designated long-term capital gains within 30 days of the close of any
taxable year in which it designates long-term capital gains pursuant to this
rule, and it must mail a written notice of this designation to its
stockholder within 60 days of the close of the taxable year.
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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 (or distribution treated as such), 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, with respect to a non-corporate U.S. Stockholder, will be long-term
capital 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 distributions 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. Backup withholding is not an additional tax.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be required
to withhold a portion of capital gain distributions to any stockholders who
fail to certify their non-foreign status to the Company. See "--Taxation of
Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified
REIT do not constitute unrelated business taxable income ("UBTI") when
received by a tax-exempt entity. Based on that ruling, provided that a
tax-exempt stockholder (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 (generally, property of the
acquisition of which was financed through a borrowing by the tax-exempt
entity) and such shares are not otherwise used in a trade or business,
dividend income received from the Company will not be UBTI to a tax-exempt
stockholder. Similarly, income from the sale of Common Stock or Preferred
Stock will not constitute UBTI unless such tax-exempt stockholder 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 that 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
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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 if
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 is not now, and does not in the future 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-U.S. Stockholder
of a United States trade or business or, if an income tax treaty applies, as
attributable to a United States permanent establishment of the Non-U.S.
Stockholder. Dividends that are effectively connected with such a trade or
business (or, if an income tax treaty applies, that are attributable to a
United States permanent establishment of the Non-U.S. Stockholder) 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 Treasury regulations that will apply to payments made after December
31, 1998, however, a Non-U.S. Stockholder who wishes to claim the benefit of
an applicable treaty would be required to satisfy certain certification and
other requirements. See "New Withholding Regulations," below. 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
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exempt from withholding under the effectively connected income and United
States permanent establishment 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
(or, if an income tax treaty applies, is attributable to a United States
permanent establishment of the Non-U.S. Stockholder), 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. 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.
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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 (or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-U.S.
Stockholder), 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. The 10% withholding
requirement will not apply if the shares are "regularly traded" on an
established securities market.
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 WITHHOLDING REGULATIONS. Final regulations dealing with withholding
tax on income paid to foreign persons and related matters (the "New
Withholding Regulations") were recently promulgated. In general, the New
Withholding Regulations do not significantly alter the substantive
withholding and information reporting requirements, but unify current
certification procedures and forms and clarify reliance standards. For
example, the New Withholding Regulations adopt a certification rule which was
in the proposed regulations under which a foreign stockholder who wishes to
claim the benefit of an applicable treaty rate with respect to dividends
received from a United States corporation will be required to satisfy certain
certification and other requirements. In addition, the New Withholding
Regulations require a corporation that is a REIT to treat as a dividend the
portion of a distribution that is not designated as a capital gain dividend
or return of basis and apply the 30% withholding tax (subject to any
applicable deduction or exemption) to such portion, and to apply the FIRPTA
withholding rules (discussed above) with respect to the portion of the
distribution designated by the REIT as a capital gain dividend. The New
Withholding Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. THE DISCUSSION SET
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FORTH ABOVE IN "--Taxation of Non-U.S. Stockholders" DOES NOT TAKE INTO
ACCOUNT THE NEW WITHHOLDING REGULATIONS. PROSPECTIVE NON-U.S. STOCKHOLDERS
ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
TAX CONSIDERATIONS OF PREFERRED HOLDERS
TAX CONSEQUENCES UPON CONVERSION OF SERIES C PREFERRED STOCK INTO COMMON
STOCK. Generally, except with respect to cash received in lieu of fractional
shares, no gain or loss will be recognized upon the conversion of Series C
Preferred Stock into Common Stock. The tax basis of a holder of Series C
Preferred Stock (a "Preferred Holder") in the Common Stock received will
equal such holder's tax basis in the Series C Preferred Stock surrendered in
the conversion and the holding period for the Common Stock will include the
Preferred Holder's holding period for the Series C Preferred Stock. Cash
received in lieu of a fractional Common Stock upon conversion of Series C
Preferred Stock should be treated a as payment in redemption of the
fractional share interest in such Common Stock. See "-Redemption of Series C
Preferred Stock" below.
DEEMED DIVIDENDS ON SERIES C PREFERRED STOCK. The conversion price of
the Series C Preferred Stock may be adjusted if the Company makes certain
distributions of stock, cash, or other property to its stockholders. While
the Company does not presently contemplate making such a distribution, if the
Company makes a distribution of cash or property resulting in an adjustment
to the conversion price, a Preferred Holder may be viewed as receiving a
"deemed distribution" that is taxable as a dividend under Sections 301 and
305 of the Code. Treasury regulations issued under Section 305 of the Code
may treat as taxable events certain constructive distributions of stock with
respect to stock and convertible securities. For instance, an adjustment in
the conversion price of the Series C Preferred Stock to reflect taxable
distributions on Common Stock may be treated as a constructive distribution
of stock that is taxable to holders of Series C Preferred Stock as a dividend
to the extent of the current and accumulated earnings and profits of the
Company.
SALE OR EXCHANGE OF SERIES C PREFERRED STOCK. Upon the sale or exchange
of Series C Preferred Stock to a party other than the Company, a Preferred
Holder will realize a capital gain or loss measured by the difference between
the amount realized on the sale or other disposition and the Preferred
Holder's adjusted tax basis in the Series C Preferred Stock (provided the
Series C Preferred Stock are held as a capital asset). Such gain or loss
will be a long term capital gain or loss if the Preferred Holder's holding
period with respect to the Series C Preferred Stock is more than one year at
the time of sale or exchange. Further, any loss on a sale of Series C
Preferred Stock which was held by the Preferred Holder for six months or less
and with respect to which a capital gain dividend was received will be
treated as a long term capital loss, up to the amount of the capital gain
dividend received with respect to such shares.
REDEMPTION OF SERIES C PREFERRED STOCK. In the limited situations in
which Series C Preferred Stock may be redeemed for cash (i.e., the redemption
of Excess Shares or cash received in lieu of fractional shares on
conversion), the treatment to be accorded to such redemption by the Company
(as distinguished from a sale, exchange or other disposition) of Series C
Preferred Stock can only be determined on the basis of particular facts as to
each Preferred Holder at the time of redemption. In general, a Preferred
Holder will recognize capital gain or loss measured by the difference between
the amount received by the Preferred Holder upon the redemption and such
holders' adjusted tax basis in the Series C Preferred Stock redeemed
(provided the Series C Preferred Stock are held as a capital asset) if such
redemption (i) results in a "complete termination" of the Preferred Holder's
stock interest in all classes of stock of the Company under Section 302(b)(3)
of the Code, (ii) is "substantially disproportionate" with respect to the
Preferred Holder's interest in the Company under Section 302(b)(2) of the
Code, or (iii) is "not essentially equivalent to a dividend" with respect to
the Preferred Holder under Section 302(b)(1) of the Code. In applying these
tests, there must be taken into account not only any Series C Preferred Stock
owned by the Preferred Holder, but also such holder's ownership of Common
Stock, other series of preferred stock and any other options (including stock
purchase rights) to acquire any of the foregoing. The stockholder must also
take into account any such securities (including options) which are
considered to be owned by such stockholder by reason of the constructive
ownership rules set forth in Sections 318 and 302(c) of the Code.
A "substantially disproportionate" reduction in the interest of a Preferred
Holder will have occurred if, as a result of the cash redemption, (1) the
Preferred Holder's ownership of all of the outstanding voting stock of the
Company is reduced immediately after the redemption to less than 80 percent of
the holder's percentage interest in such
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stock immediately before the redemption; (2) the holder's percentage
ownership of the Common Stock after and before the redemption meets the same
80 percent requirement, and (3) the holder owns, immediately after the
redemption, less than 50 percent of the total combined voting power of all
classes of stock entitled to vote. Based upon current law, it is possible
that a cash redemption of Series C Preferred Stock from a Preferred Holder
would be considered "not essentially equivalent to a dividend." However,
whether a distribution is "not essentially equivalent to a dividend" depends
on all of the facts and circumstances.
This description of tax consequences to Preferred Holders is in addition
to the more complete description of Tax Considerations included in "Federal
Income Tax Considerations" in the accompanying Prospectus.
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.
PLAN OF DISTRIBUTION
All of the shares of Series C Preferred Stock offered hereby are being
sold to National Health Investors, Inc. at at the negotiated Purchase Price
of $19.25 per share less a spread of 2%, resulting in net offering proceeds
to the Company of $37,730,000 (before deduction of estimated offering
expenses of approximately $50,000).
LEGAL MATTERS
The validity of the Series C Preferred Stock 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.
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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 December 1, 1997, the closing sale price of
the Common Stock on the NYSE was $20.50 per share.
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 5 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 DECEMBER 15, 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/A for its fiscal year
ended December 31, 1996 (the "1996 Form 10-K/A");
(2) The Company's Current Report on Form 8-K dated March 4, 1997 and
August 4, 1997;
(3) The Company's definitive proxy statement for the Annual Meeting of
Stockholders held on May 19, 1997; and
(4) The Company's Quarterly Reports on Form 10-Q/A for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 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
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<PAGE>
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, President and Chief Financial Officer, LTC Properties, Inc., 300
Esplanade Drive, Suite 1860, Oxnard, California 93030, telephone number (805)
981-8655.
3
<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 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.
4
<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 Balanced Budget Act of 1997 signed by President
Clinton on August 5, 1997 (the "Act"), enacted significant changes to the
Medicare and Medicaid Programs designed to "modernize" payment and health care
delivery systems while achieving substantial budgetary savings.
In seeking to limit Medicare reimbursement for long term care services,
Congress has established a prospective payment system for skilled nursing
facility services to replace the current cost-based reimbursement system. The
cost based system reimburses nursing facilities for reasonable direct and
indirect allowable costs incurred in providing "routine services" (as defined by
the Program) as well as capital costs and ancillary costs. Cost based
reimbursement has been subject to limits fixed for the particular geographic
area served by a nursing facility. Under the prospective payment system, skilled
nursing facilities will be paid a federal per diem rate for covered services.
The per diem payment will cover routine service, ancillary, and capital-related
costs. The prospective payment system will be phased in over three cost
reporting periods, starting with periods beginning on or after July 1, 1998. The
actual rate paid to a skilled nursing facility will be adjusted for case mix and
relative wage-related costs.
Under provisions of the Act, states will be provided additional flexibility
in managing their Medicaid programs while achieving in excess of $13 billion in
federal budgetary savings over five years. Among other things, the Act repealed
the Boren Amendment payment standard, which had required states to pay
"reasonable and adequate" payments to cover the costs of efficiently and
economically operated hospitals, nursing facilities, and certain intermediate
care facilities. States, however, will be required to use a public notice and
comment process in determining rates for such facilities. During rate-setting
procedures states also will be required to take into account the situation of
facilities that serve a disproportionate number of low-income patients with
special needs. The Secretary of the Department of Health and Human Services is
required to study and report to Congress within four years concerning the effect
of State rate-setting methodologies on the access to and the quality of services
provided to Medicaid beneficiaries. The Act also provides the Federal Government
with expanded enforcement powers to combat waste, fraud and abuse in delivery of
health care services. In light of forthcoming regulations and continuing state
program reform, no assurance can be given that the implementation of such
regulations and reform 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.
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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 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.
6
<PAGE>
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.
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
7
<PAGE>
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
Assisted Living Concepts, Inc. ("ALC") operated 48 facilities, representing
approximately 14.06% ($110,137,000) of the Company's adjusted gross real estate
investment portfolio at September 30, 1997. In addition, Home and Community
Care, Inc. and Carriage House Assisted Living, Inc., which were acquired by ALC
subsequent to September 30, 1997, operated a total of 9 facilities, representing
approximately 1.5% ($11,626,000) of the Company's adjusted gross real estate
investment portfolio at September 30, 1997.
As of September 30, 1997, Sun Healthcare Group, Inc. ("Sun") and Retirement
Care Associates, Inc. ("RCA") operated 26 and 40 facilities, respectively,
representing approximately 7.42% ($58,146,000) and 14.08% ($110,341,000),
respectively, of the Company's adjusted gross real estate investment portfolio
(adjusted to include the mortgage loans to third parties underlying the
$87,744,000 investment in REMIC Certificates). If the proposed Sun and RCA
merger is completed, it will result in Sun operating facilities representing
approximately 21.51% ($168,487,000) of the Company's adjusted gross real estate
investment portfolio. As of September 30, 1997, Horizon Healthcare/CMS
Corporation, which was subsequently acquired by HealthSouth Corp., operated 16
facilities representing approximately 7.36% ($57,629,000) of the Company's
adjusted gross real estate investment portfolio.
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 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
8
<PAGE>
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>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
---------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed...................... 1.29x (1) 2.07x 3.62x 2.94x 2.34x 2.44x 2.18x
Charges
</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 prior to 1997 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 line of credit and for funding of additional mortgage loans and
acquisitions of additional health care facilities.
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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The summary of the terms of the capital stock of the Company set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to the 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, 24,974,336 shares were
issued and outstanding on December 1, 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 December
1, 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.
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<PAGE>
The Company's Board of Directors has authority to classify or reclassify
authorized but unissued shares of Preferred Stock by setting or changing the
preferences, conversion and other rights, voting powers, restrictions and
limitations as to dividends, qualifications and terms and conditions of
redemption of stock.
REDEMPTION AND OWNERSHIP LIMITATION PROVISIONS
The Company's Charter contains certain limitations on the number of shares
of the Company's Common Stock and Preferred Stock (collectively, the "Stock")
that any one stockholder may own, which limitations are designed to ensure that
the Company maintains its status as a REIT.
Upon demand of the Company's Board of Directors, each stockholder must
disclose to the Company such information with respect to actual or constructive
ownership of Stock owned (or deemed to be owned 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 approved a technical
amendment to the Charter as required by the NYSE which provides 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
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equity securities) between a Maryland corporation and any person who
beneficially owns 10% or more of the corporation's stock (an "Interested
Stockholder") must be: (a) recommended by the corporation's board of directors;
and (b) approved by the affirmative vote of at least (i) 80% of the
corporation's outstanding shares entitled to vote and (ii) two-thirds of the
outstanding shares entitled to vote which are not held by the Interested
Stockholder with whom the business combination is to be effected, unless, among
other things, the corporation's common stockholders receive a minimum price (as
defined in the statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
his shares. In addition, an Interested Stockholder or any affiliate thereof may
not engage in a "business combination" with the corporation for a period of five
years following the date he becomes an Interested Stockholder. These provisions
of Maryland law do not apply, however, to business combinations that are
approved or exempted by the board of directors of a Maryland corporation prior
to a person's becoming an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The Maryland General Corporation Law provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" may not be voted
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast by stockholders excluding shares owned by the acquirer, officers and
directors who are employees of the corporation. "Control shares" are shares
which, if aggregated with all other shares previously acquired which the person
is entitled to vote, would entitle the acquirer to vote (i) 20% or more but less
than one-third, (ii) one-third or more but less than a majority, or (iii) a
majority of the outstanding shares. Control shares do not include shares the
acquiring person is entitled to vote because 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
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of any series (the "Holder") may not convert any Debt Security, and such Debt
Security shall not be convertible by any Holder, to the extent that as a result
of such conversion, any Person would then own or be deemed to beneficially own,
directly or indirectly, 9.8% or more of the then outstanding shares of Common
Stock.
The conversion price will be subject to adjustment under certain conditions,
including (i) the payment of dividends (and other distributions) in shares of
Common Stock on any class of capital stock of the Company; (ii) subdivisions,
combinations and reclassifications of the Common Stock; (iii) the issuance to
all or substantially all holders of Common Stock of rights or warrants entitling
them to subscribe for or purchase shares of Common Stock at a price per share
(or having a conversion price per share) less than the then current market
price; and (iv) distributions to all or substantially all holders of shares of
Common Stock of evidences of indebtedness or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to above
and dividends and distributions not prohibited under the terms of the Indenture)
of the Company, subject to the limitation that all adjustments by reason of any
of the foregoing would not be made until they result in a cumulative change in
the conversion price of at least 1%. No adjustments in the conversion price of
the Debt Securities will be made for regular quarterly or other periodic or
recurring cash dividends or distributions. In the event the Company shall effect
any capital reorganization or reclassification of its shares of Common Stock or
shall consolidate or merge with or into any trust or corporation (other than a
consolidation or merger in which the Company is the surviving entity) or shall
sell or transfer substantially all of its assets to any other trust or
corporation, the holders of the Debt Securities of any series shall, if entitled
to convert such Debt Securities at any time after such transaction, receive upon
conversion thereof, in lieu of each share of Common Stock into which the Debt
Securities of such series would have been convertible prior to such transaction,
the same kind and amount of stock and other securities, cash or property as
shall have been issuable or distributable in connection with such transaction
with respect to each share of Common Stock.
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.
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SUBORDINATION
The indebtedness evidenced by the Debt Securities of any series may be
subordinated and junior in right of payment to the extent set forth in the
Indenture to the prior payment in full of amounts then due or thereafter created
on all Senior Indebtedness (as defined). The terms, if any, on which the Debt
Securities of any series may be subordinated and junior in right of payment to
the prior payment in full of amounts then due or thereafter created on all
Senior Indebtedness will be set forth in the Prospectus Supplement relating
thereto. No payment shall be made by the Company on account of principal of (or
premium, if any) or interest on the Debt Securities of any series or on account
of the purchase or other acquisition of Debt Securities of any series, if there
shall have occurred and be continuing a default with respect to any Senior
Indebtedness permitting the holders to accelerate the maturity thereof or with
respect to the payment of any Senior Indebtedness, and such default shall be the
subject of a judicial proceeding or the Company shall have received notice of
such default from any holder of Senior Indebtedness, unless and until such
default or event of default shall have been cured or waived or shall have ceased
to exist. By reason of these provisions, in the event of default on any Senior
Indebtedness, whether now outstanding or hereafter issued, payment of principal
of (and premium, if any) and interest on the Debt Securities of any series may
not be permitted to be made until such Senior Indebtedness is paid in full, or
the event of default on such Senior Indebtedness is cured or waived.
Upon any acceleration of the principal of the Debt Securities or any
distribution of assets of the Company upon any receivership, dissolution,
winding-up, liquidation, reorganization, or similar proceedings of the Company,
whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts
due or to become due upon all Senior Indebtedness must be paid in full before
the holders of the Debt Securities of any series or the Trustee are entitled to
receive or retain any assets so distributed in respect of the Debt Securities.
By reason of this provision, in the event of insolvency, holders of the Debt
Securities of any series may recover less, ratably, than holders of Senior
Indebtedness.
"Senior Indebtedness" is defined to mean the principal, premium, if any,
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or
not a claim for post-filing interest is allowed in such proceedings), fees,
charges, 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);
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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.
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.
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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.
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.
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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 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.
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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
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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.
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.
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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 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
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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
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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 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
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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 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. Pursuant to the
Taxpayer Relief Act of 1997, this gross income requirement is eliminated,
commencing with a REIT's first taxable year that begins after August 5, 1997.
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
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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.
Pursuant to the Taxpayer Relief Act of 1997, starting with a REIT's first
taxable year that begins after August 5, 1997, income derived by a REIT from
services provided to tenants or from managing or operating a property will be
treated as rents from real property provided the income from such activities
does not exceed 1% of the REIT's gross income derived from the property.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of gross
receipts or sales. Generally, if a loan is secured by both personal property and
real property, interest must be allocated between the personal property and the
real property, with only the interest allocable to the real property qualifying
as mortgage interest under the 75% gross income test. Treasury Regulations
provide that if a loan is secured by both personal and real property and the
fair market value of the real property as of the commitment date equals or
exceeds the amount of the loan, the entire interest amount will qualify under
the 75% gross income test. If the amount of the loan exceeds the fair market
value of the real property, the interest income is allocated between real
property and personal property based on the relative fair market value of each.
Under certain circumstances, income from shared appreciation mortgages may
qualify under the REIT gross income requirements.
The Company believes that interest received under the Company's mortgage
loans should qualify as "interest" for purposes of the REIT gross income
requirements and, except for certain interest receipts not material in amount,
should qualify as mortgage interest for purposes of the REIT 75% gross income
requirement.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions 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
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would cease to qualify as a REIT. As noted above, however, the 30% gross income
test no longer will apply to the Company starting January 1, 1998.
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. Those distributions are taxable
to holders of Common Stock (other than tax-exempt entities, as discussed below)
in the year paid even though they relate to a prior year for purposes of the 95%
distribution requirement. 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.
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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.
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
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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.
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.
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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.
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 constitute gain from the sale or other disposition of a capital asset
held for more than one year to a U.S. Stockholder (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. Gain recognized by the Company on disposition of a property will not
qualify as capital gain to the extent that is does not exceed prior depreciation
deductions taken with respect to the property. On November 10, 1997, the IRS
issued Notice 97-64, in which it stated that temporary Treasury regulations will
be issued providing that a REIT that designates a dividend as a capital gain
distribution also may designate the dividend as a 20% rate gain distribution, an
unrecaptured section 1250 gain distribution (taxable at a 25% rate) or a 28%
rate gain distribution, to the extent the net capital gain of the REIT consists
of long-term capital gains that, in the hands of the REIT, would be treated as
falling in, respectively, the 20% group, the 25% group or the 28% group of
long-term capital gains (and if no additional designation is made, the dividend
is a 28% rate gain distribution). 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 non-corporate U.S. Stockholder's
adjusted basis in his shares taxable as long-term capital gains (if the shares
have been held for longer than 18 months), mid-term capital gains (if the shares
have been held for longer than one year but not for more than 18 months) 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
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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.
Pursuant to the Taxpayer Relief Act of 1997, starting with a REIT's first
taxable year that begins after August 5, 1997, a REIT may elect to retain and
pay income tax on net long-term capital gains that it receives during a taxable
year. If a REIT makes this election, its stockholders are required to include in
their income as long-term capital gain their proportionate share of the
undistributed long-term capital gains so designated by the REIT or, if and to
the extent the REIT, pursuant to Notice 97-64 (discussed above) designates
undistributed long-term capital gains as a 20% rate distribution, an
unrecaptured section 1250 gain distribution (taxable at a 25% rate) or a 28%
rate gain distribution, to include in their income as long-term capital gains
falling in, respectively, the 20% group, the 25% group or the 28% group of
long-term capital gains their proportionate share of the undistributed long-term
capital gain of the REIT falling within those categories. A stockholder will be
treated as having paid his or her share of the tax paid by the REIT in respect
of long-term capital gains so designated by the REIT, for which the stockholder
will be entitled to a credit or refund. In addition, the stockholder's basis in
his or her REIT shares will be increased by the amount of the REIT's designated
undistributed long-term capital gains that are included in the stockholder's
long-term capital gains, reduced by the stockholder's proportionate share of the
tax paid by the REIT on those gains that the stockholder is treated as having
paid. The earnings and profits of the REIT will be reduced, and the earnings and
profits of any corporate stockholder of the REIT will be increased, to take into
account amounts designated by the REIT pursuant to this rule. A REIT must pay
its tax on its designated long-term capital gains within 30 days of the close of
any taxable year in which it designates long-term capital gains pursuant to this
rule, and it must mail a written notice of its designation to its stockholders
within 60 days of the close of the taxable year.
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, with respect to a
non-corporate U.S. Stockholder, will be mid-term or long-term capital gain or
loss if such shares have been held for more than one year or more than 18
months, respectively. 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
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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 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,
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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-U.S. Stockholder of a United States trade
or business or, if an income tax treaty applies, as attributable to a United
States permanent establishment of the Non-U.S. Stockholder. Dividends that are
effectively connected with such a trade or business (or, if an income tax treaty
applies, that are attributable to a United States permanent establishment of the
Non-U.S. Stockholder) 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
Treasury regulations that will apply to payments made after December 31, 1998,
however, a Non-U.S. Stockholder who wishes to claim the benefit of an applicable
treaty would be required to satisfy certain certification and other
requirements. See "New Withholding Regulations," below. 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 and United States permanent establishment
exemptions 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.
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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 (or, if an income tax
treaty applies, is attributable to a United States permanent establishment of
the Non-U.S. Stockholder), 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. 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 (or, if an income tax
treaty applies, is attributable to a United States permanent establishment of
the Non-U.S. Stockholder), 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).
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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.
The 10% withholding requirement will not apply if the shares are "regularly
traded" on an established securities market.
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 WITHHOLDING REGULATIONS. Final regulations dealing with withholding tax
on income paid to foreign persons and related matters (the "New Withholding
Regulations") were recently promulgated. In general, the New Withholding
Regulations do not significantly alter the substantive withholding and
information reporting requirements, but unify current certification procedures
and forms and clarify reliance standards. For example, the New Withholding
Regulations adopt a certification rule which was in the proposed regulations
under which a foreign stockholder who wishes to claim the benefit of an
applicable treaty rate with respect to dividends received from a United States
corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designated by the REIT as a capital
gain dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules. THE
DISCUSSION SET FORTH ABOVE IN "Taxation of Non-U.S. Stockholders" DOES NOT TAKE
INTO ACCOUNT THE NEW WITHHOLDING REGULATIONS.
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PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (H.R. 2014), which will have the effect of modifying certain
REIT-related Code provisions for taxable years beginning on or after January 1,
1998. In addition to the changes contained in this legislation which are
discussed above, some of the other potentially significant REIT-related changes
contained in the legislation include: (i) the rule disqualifying a REIT for any
year in which it fails to comply with certain regulations requiring the REIT to
monitor its stock ownership is replaced with an intermediate financial penalty;
(ii) the rule disqualifying a REIT in any year in which it is "closely held"
does not apply if during such year the REIT complied with certain regulations
requiring the REIT to monitor its stock ownership, and the REIT did not know or
have reason to know that it was closely held; (iii) the rules regarding
attribution to partnerships of ownership in another entity for purposes of
defining qualified rent and independent contractors are modified so that
attribution occurs only when a partner owns a 25% or greater interest in the
partnership; (iv) the class of excess noncash items for purposes of the REIT
distribution requirements is expanded; (v) any corporation wholly-owned by a
REIT is permitted to be treated as a qualified REIT subsidiary regardless of
whether such corporation has always been wholly-owned by the REIT; and (vi)
certain other Code provisions relating to REIT's are amended. Some or all of the
provisions could affect both the Company's operations and its ability to
maintain its REIT status for its taxable years beginning on or after January 1,
1998.
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
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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 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/A 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 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
PAGE
The Company.......................................................... S-2
Risk Factors......................................................... S-3
Use of Proceeds...................................................... S-5
Description of Series C Preferred
Stock............................................................... S-6
Federal Income Tax Considerations.................................... S-13
Plan of Distribution................................................. S-29
Legal Matters........................................................ S-29
PROSPECTUS
Available Information................................................ 2
Documents Incorporated by
Reference........................................................... 2
The Company.......................................................... 4
Risk Factors......................................................... 5
Ratio of Earnings to Fixed Charges................................... 10
Use of Proceeds...................................................... 10
Description of the Company's Capital
Stock............................................................... 11
Description of Debt Securities....................................... 14
Description of Preferred Stock....................................... 21
Federal Income Tax Considerations.................................... 25
ERISA Considerations................................................. 39
Plan of Distribution................................................. 40
Legal Matters........................................................ 40
Experts.............................................................. 40
2,000,000 SHARES
LTC PROPERTIES, INC.
8.5% SERIES C CUMULATIVE
CONVERTIBLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $19.25 PER
SHARE)
-----------------
PROSPECTUS SUPPLEMENT
-----------------
September 2, 1998
