<PAGE> 1
Rule 424b3
Registration Statement No. 333-34763
Information contained herein and in the accompanying Prospectus is subject to
completion or amendment. A Registration Statement relating to these securities
has been filed with the Securities and Exchange Commission. This Prospectus
Supplement and the accompanying Prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy these securities nor shall there be any
sale of these securities in any jurisdiction in which such offer, solicitation
or sale would be unlawful prior to the registration or qualification under the
securities laws of any such jurisdiction.
SUBJECT TO COMPLETION, DATED APRIL 20, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 3, 1997)
2,000,000 SHARES
OMEGA HEALTHCARE INVESTORS, INC.
% SERIES B CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
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OMEGA HEALTHCARE INVESTORS, INC. LOGO
The shares of the % Series B Cumulative Preferred Stock, par value $1.00
(the "Series B Preferred Stock"), are being offered by Omega Healthcare
Investors, Inc., a Maryland corporation (the "Company"), that has elected to be
taxed for Federal income tax purposes as a real estate investment trust (a
"REIT"). Dividends on the Series B Cumulative Preferred Stock are cumulative
from the date of original issue and are payable quarterly, commencing on August
15, 1998, to shareholders of record on July 31, 1998 for the period through July
31, 1998 at the rate of % per annum of the $25 liquidation preference (the
"Liquidation Preference") per share (equivalent to a fixed annual amount of
$ per share). See "Description of Series B Preferred Stock -- Dividends."
Except in certain circumstances relating to preservation of the Company's
qualification as a REIT, the Series B Preferred Stock is not redeemable prior to
July 1, 2003. On and after such date, the Series B 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 without interest. The Series B 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.
The Series B Preferred Stock will rank on a parity with the outstanding shares
of Series A Preferred Stock of the Company (as defined herein), and senior to
the Common Stock (as defined herein), in each case with respect to the payment
of dividends and the distribution of amounts upon liquidation, dissolution or
winding up of the Company. The redemption price (other than any portion thereof
consisting of accumulated and unpaid distributions) is payable solely out of the
sale proceeds of other capital stock of the Company, which may include other
series of preferred stock. See "Description of Series B Preferred Stock --
Maturity" and "-- Redemption."
In order to ensure that the Company continues to meet the requirements for
qualification as a REIT under the Internal Revenue Code of 1986, as amended,
(the "Code"), shares of Series B Preferred Stock shall be deemed "Excess Shares"
if a holder owns more than 9.9% 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 B Preferred Stock -- Restrictions on
Ownership."
Application has been made to list the Series B Preferred Stock on the New
York Stock Exchange ("NYSE"), under the symbol "OHI PrB." Trading of the Series
B Preferred Stock on the NYSE is expected to commence within 30 days of initial
delivery of the Series B Preferred Stock. While the Underwriters have advised
the Company that they intend to make a market in the Series B Preferred Stock
prior to commencement of trading on the NYSE, they are under no obligation to do
so and no assurance can be given that a market for the Series B Preferred Stock
will exist prior to commencement of trading or at any time. See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 OF THIS PROSPECTUS SUPPLEMENT FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SERIES B PREFERRED STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
<TABLE>
<CAPTION>
======================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Per Share.......................................... $ 25.00 $ .7875 $ 24.2125
- ----------------------------------------------------------------------------------------------------------------------
Total(4)........................................... $50,000,000 $1,575,000 $48,425,000
======================================================================================================================
</TABLE>
(1) Plus accrued distributions, if any, from the date of original issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting estimated expenses of $425,000 payable by the Company.
------------------
The Series B Preferred Stock is offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
subject to approval of certain legal matters by counsel for the Underwriters and
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the certificates evidencing the Series B Preferred
Stock will be made at the offices of Salomon Smith Barney, 333 West 34th Street,
New York, New York 10001 on or about , 1998.
------------------
SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC.
COWEN & COMPANY
EVEREN SECURITIES, INC.
MORGAN STANLEY DEAN WITTER
April , 1998
<PAGE> 2
AVAILABLE INFORMATION
Electronic filings made through the electronic data gathering, analysis and
retrieval system are publicly available through the Commission's web site
(http://www.sec.gov).
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES B PREFERRED
STOCK, INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING INFORMATION
This Prospectus Supplement and the accompanying Prospectus contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995 and is including this statement
for purposes of complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project" or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations and future prospects of
the Company include, but are not limited to, changes in: economic conditions
generally and the real estate market specifically, legislative/regulatory
changes (including changes to laws governing the taxation of REITs),
availability of capital, interest rates, competition, supply and demand for
healthcare properties in the Company's current and proposed market areas and
general accounting principles, policies and guidelines applicable to REITs.
These risks and uncertainties, together with those stated under the caption
"Risk Factors" in the accompanying Prospectus, should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein or therein by reference.
Investors should consider carefully the risk factors related to the purchase of
Series B Preferred Stock of the Company. See "Risk Factors."
THE COMPANY
Omega Healthcare Investors, Inc. (the "Company") was incorporated in the
State of Maryland on March 31, 1992. It is a self-administered real estate
investment trust ("REIT") which invests in income-producing healthcare
facilities, principally long-term care facilities located in the United States.
As of December 31, 1997, the Company's portfolio of domestic investments
consisted of 258 long-term care facilities, 3 medical office buildings and 2
rehabilitation hospitals. The Company owns and leases 178 long-term facilities,
3 medical office buildings and 2 rehabilitation hospitals, and provides
mortgages, including participating and convertible participating mortgages, on
80 long-term healthcare facilities. The facilities are located in 26 states and
operated by 29 unaffiliated operators. The Company's gross real estate
investments at December 31, 1997 totaled $779.4 million. During 1997, new
investments approximated $196 million as a result of entering into
sale/leaseback transactions and making mortgage loans and other investments.
The investment objectives of the Company are to pay regular cash dividends
to shareholders; to provide the opportunity for increased dividends from annual
increases in rental and interest income from revenue participations and from
portfolio growth; to preserve and protect shareholders' capital; and to provide
the opportunity to realize capital growth.
The Company intends to make and manage its investments (including the sale
or disposition of property or other investments) in such a manner as to be
consistent with the requirements of the Code (and regulations thereunder) to
qualify as a REIT, unless, because of changes in circumstances or changes in the
Code (or regulations thereunder), the Board of Directors determines that it is
no longer in the best interests of the Company to qualify as a REIT.
The executive offices of the Company are located at 905 West Eisenhower
Circle, Suite 110, Ann Arbor, Michigan 48103. Its telephone number is (734)
747-9790.
INVESTMENT STRATEGIES AND POLICIES
The Company maintains a diversified portfolio of income-producing
healthcare facilities or mortgages thereon, with a primary focus on long-term
care facilities located in the United States. In making investments, the Company
generally seeks established, creditworthy, middle market healthcare operators
which meet the Company's standards for quality and experience of management.
Although the Company has emphasized long-term care investments, it intends to
diversify prudently into other types of healthcare facilities or other
properties. The Company actively seeks to diversify its investments in terms of
geographic location, operators and facility types.
In evaluating potential investments, the Company considers such factors as:
(i) the quality and experience of management and the creditworthiness of the
operator of the facility; (ii) the adequacy of the facility's historical,
current and forecasted cash flow to meet operational needs, capital expenditures
and lease or debt service obligations, while providing a competitive return on
investment to the Company; (iii) the construction quality, condition and design
of the facility; (iv) the geographic area and type of facility; (v) the tax,
growth, regulatory and reimbursement environment of the community in which the
facility is located; (vi) the occupancy and demand for similar healthcare
facilities in the same or nearby communities; and (vii) the payor mix of
private, Medicare and Medicaid patients.
The Company plans to maintain its percentage of equity and equity-linked
investments at approximately 65% to 75% of its portfolio and to increase the
number of operators and geographic diversity of the facilities in its portfolio
as well as to continue to expand its relationships with current operators.
S-3
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The Company believes that a growing market exists for REITs focusing in the
long-term care industry. According to data from the U.S. Census Bureau, in 1995
there were approximately 3.6 million Americans over the age of 85, comprising
1.4% of the total U.S. population. From 1960 to 1994, the population within this
age group increased at more than five times the rate of the increase for the
total population. The Company believes that the fundamentals of the long-term
care and nursing home industry will continue to be strong and provide good
opportunity for additional investment in the foreseeable future. The long-term
care industry provides sub-acute medical and custodial care to the senior
population of the United States. The demand for long-term care comes principally
from those individuals over 85 years of age. Due to demographic trends,
regulation and government support, the Company believes that the long-term care
sector of the healthcare industry has been one of the less volatile segments of
the industry.
The Company continually assesses and reassesses investments in other
healthcare and senior medical services markets, including the assisted living
market. Assisted living units are designed for seniors who need assistance with
basic activities such as bathing, meal preparation and eating. While strong
demographic demands support this segment, low barriers to entry and the
unregulated nature of assisted living pose additional risks in this healthcare
segment. The Company believes that there may be selected opportunities to
participate in this sector, but to date has not made significant investments in
properties of this type.
Additionally, the Company believes that acute care hospitals presently
represent a substantial portion of healthcare expenditures in the United States.
While the Company has made limited investments in this segment, with a total of
approximately $50 million invested to date, the Company anticipates that future
investments will result from the need for capital and the evolving demand for
healthcare properties operated by acute care delivery systems.
A fundamental investment strategy of the Company is to obtain contractual
rent escalations under long-term, non-cancelable triple net leases (whereby the
tenant is responsible for all maintenance, repairs, taxes and insurance on the
leased properties), revenue participations through participating mortgage loans
and substantial security deposits. Additional security is typically provided by
covenants regarding minimum working capital and net worth, liens on accounts
receivable and other operating assets, and various provisions for cross-default,
cross-collateralization and corporate/personal guarantees, when appropriate.
The Company prefers to invest in equity ownership of properties. Due to
regulatory, tax or other considerations, the Company sometimes pursues
alternative investment structures, including Convertible Participating and
Participating Mortgages, that achieve returns comparable to equity investments.
The following summarizes the four primary structures currently used by the
Company:
Purchase/Leaseback. The Company's owned properties are generally
leased under provisions of leases for terms ranging from 5 to 17 years,
plus renewal options. The leases originated by the Company generally
provide for minimum annual rentals which are subject to annual formula
increases (i.e., based upon such factors as increases in the Consumer Price
Index ("CPI") or increases in the revenues of the underlying properties),
with certain fixed minimum and maximum levels. Generally, the operator
holds an option to repurchase the property at set dates and at prices based
on specified formulas.
Convertible Participating Mortgage. Convertible Participating
Mortgages are secured by first mortgage liens on the underlying real estate
and personal property of the mortgagor. Interest rates are usually subject
to annual increases based upon increases in the CPI or increases in
revenues of the underlying long-term care facilities, with certain maximum
limits. Convertible Participating Mortgages afford the Company an option to
convert its mortgage into direct ownership of the property, generally
within six to nine years from inception; they are then subject to a
leaseback to the operator for the balance of the original agreed term and
for the original agreed participations in revenues or CPI adjustments. This
allows the Company to capture a portion of the potential appreciation in
value of the real estate. The operator has the right to purchase the
Company's option at prices based on specified formulas.
Participating Mortgage. Participating Mortgages of the Company are
secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor. Interest rates are usually subject to
S-4
<PAGE> 5
annual increases based upon increases in the CPI or increases in revenues
of the underlying long-term care facilities, with certain maximum limits.
Fixed-Rate Mortgage. These Mortgages of the Company, with a fixed
interest rate for the mortgage term, are also secured by first mortgage
liens on the underlying real estate and personal property of the mortgagor.
The Company may determine to finance acquisitions through the exchange of
properties or the issuance of shares of its capital stock to others, if such
transactions otherwise satisfy the Company's investment criteria. The Company
also has authority to repurchase or otherwise reacquire its Common Stock or any
other securities and may determine to do so in the future.
To the extent that the Company's Board of Directors determines to obtain
additional capital, the Company may raise such capital through additional equity
offerings, debt financings or retention of cash flow (subject to provisions of
the Code, as amended concerning the taxability of undistributed income of
REITs), or a combination of these methods.
The Board of Directors, without the approval of the shareholders, may alter
the Company's investment policies if the Board determines in the future that
such a change is in the best interests of the Company and its shareholders. The
methods of implementing the Company's investment policies may vary as new
investments and financing techniques are developed or otherwise employed.
RECENT DEVELOPMENTS
Omega Worldwide, Inc. In 1995, the Company sponsored the organization of
Principal Healthcare Finance Limited (Principal), an Isle of Jersey company,
whose purpose is to invest in nursing homes and long-term care facilities in the
United Kingdom. At December 31, 1997, Principal owned and leased to operators
154 facilities representing approximately 7,200 nursing home beds in England,
Scotland and Northern Ireland for which it had invested approximately L215
million. In November 1997 the Company determined to form a separate company --
Omega Worldwide, Inc. -- and to capitalize it by contributing to it
substantially all of the interest held by the Company in Principal. Worldwide
was established to provide investment advisory services to and hold equity and
debt interests in real estate companies engaged in providing sale/leaseback and
other capital financing to healthcare providers throughout the world,
principally in countries other than the United States. Worldwide anticipates
conducting certain activities in the United States, such as investment advisory
services, which do not fit easily within the Company because of REIT
requirements.
The Company had invested approximately $7 million for 4,327,500 ordinary
shares of Principal and owned approximately 46% of the outstanding ordinary
shares at December 31, 1997 together with a L15 million principal amount
subordinated debenture due June 30, 2000 and warrants to purchase 10,555,000
ordinary shares. The Company also provided investment advisory and management
services to Principal and from time to time had advanced temporary loans to
Principal. The Company determined to contribute substantially all of its
Principal assets to Omega Worldwide in exchange for approximately 8.5 million
shares of Worldwide common stock, reserving in the Company only 990,000 ordinary
shares of Principal (approximately 9%).
A registration statement for 11,250,000 shares of Worldwide was filed with
the SEC in December, 1997 and became effective on April 2, 1998.
Of the 8,500,000 shares of Worldwide received by the Company, approximately
5,200,000 were distributed on April 2, 1998 to the shareholders of the Company
on the basis of one Worldwide share for every 3.77 common shares of the Company
held by shareholders of the Company on the record date of February 1, 1998. Of
the remaining 3,300,000 shares of Worldwide received by the Company,
approximately 1,000,000 shares or approximately 9% of Worldwide are being held
by the Company, and the other 2,300,000 shares were sold by the Company on April
3, 1998 for net proceeds of approximately $16,250,000 in a secondary offering
pursuant to a registration statement of Worldwide declared effective by the
Securities and Exchange
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<PAGE> 6
Commission on April 2, 1998. The carrying value of the interests transferred by
the Company to Worldwide exceeds the net proceeds of the secondary offering by
approximately $10 million.
Worldwide, in its registration statement referred to above, also registered
and sold in a primary offering 500,000 shares of its common stock, the proceeds
of which were received by Worldwide. Worldwide also registered rights (the
"Rights") to acquire 2,250,000 of its common shares at $7.50 per share on the
basis of one Right for every 4.00 shares of Worldwide common stock held on the
record date of April 3, 1998. Shareholders of the Company who hold Worldwide
shares as a result of the distribution by the Company of 5,200,000 shares will
also have the opportunity to participate in the Rights offering. Shareholders of
Worldwide who exercise their Rights may also oversubscribe for additional shares
of Worldwide not purchased through the exercise of Rights.
Unison Healthcare Corp. Through two subsidiaries (BritWill I and BritWill
II) and an affiliated partnership (BritWill Indiana Partnership) (the "BritWill
Entities") Unison Healthcare Corporation (the "Tenant") currently operates
twenty nursing homes representing approximately 2,000 licensed nursing beds with
a total Company investment of $45 million, or approximately 5.7% of the assets
of the Company at December 31, 1997. Fourteen of the facilities are leased in
Indiana and Texas and six facilities are subject to a mortgage loan of
approximately $10.5 million. At December 31, 1997 Unison was in default under
several provisions of its lease agreement and mortgage notes with the Company,
including non-payment of rents and interest totaling $1.5 million. Pursuant to
due notice, the Company as of January 2, 1998, terminated the leases with
respect to fourteen properties and accelerated the indebtedness with respect to
six properties. Subsequently in January 1998, the BritWill Entities filed for
protection under the bankruptcy code in order to stay the Company's recovery of
possession of the premises.
At January 1, 1998, the Company held cash deposits totaling approximately
$3.9 million as security for the performance by the BritWill Entities of their
obligations and, in addition, held the guarantee of the Tenant and the personal
guarantee of its Chairman of the Board.
The Company has vigorously pursued its remedies under various agreements,
guarantees and undertakings, has applied to the bankruptcy court for relief from
the automatic bankruptcy stay and has also filed an action in Federal court and
then refiled in Texas court to enforce the guarantee of the Chairman of the
Board of Directors of the Tenant. The Company has also requested and been
granted an order compelling payment in an amount equal to the monthly rent which
would have been payable by the BritWill Entities under the leases. The BritWill
Entities have made payments of $362,675 monthly during January, February and
March 1998.
In January 1998 the Company applied $1.6 million from the cash deposits
held to reduce the mortgage indebtedness and interest due thereunder; the
Company continues to hold approximately $2.3 million in liquidity and security
deposits.
Because the Company has been advised by bankruptcy counsel that BritWill
Entities leased certain Texas properties from an affiliated partnership to which
the automatic stay may be applicable, the Company has suspended its Texas state
foreclosure proceedings and its claims under the Tenant's guarantee, pending
action by the bankruptcy court to lift the automatic stay.
The Tenant requested that the Company enter into negotiations to reinstate
or renew its leases and reinstate the mortgage. While the Company has continued
to pursue its legal remedies in bankruptcy and in Texas state courts, it has
also begun negotiations with the Tenant and the holders of the Tenant's senior
and subordinated bonds. Such negotiations are in a preliminary stage and no
assurance can be given that such negotiations will achieve a result satisfactory
to the Company. The Company believes that there will be no material adverse
effect on its financial condition or results of operations as a result of the
bankruptcy and expects that it will either recover possession of its assets in
order to lease them to others or will come to agreement with respect to their
continued operation by the Tenant. However, there can be no assurance that
further adverse financial developments within the Tenant or in the bankruptcy
proceeding will not occur.
First Quarter 1998. Funds from operations for the first quarter of 1998
increased 16.7% to $16,057,000 ($0.80 per share on a fully diluted basis)
compared to the first quarter of 1997. Revenues for the quarter increased 31% to
$26.3 million, and net earnings available to common increased 8.3% to
$10,817,000.
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During the first quarter of 1998, the Company acquired $97.8 million in
real estate properties and placed $12 million in real estate mortgages, for
total real estate investments for the quarter of $109.8 million. The mortgage
loan was placed at a 9.5% rate, while the leases on the purchased properties
have initial yields ranging from 9.8% to 10.9%.
At March 31, 1998, the Company had 276 facilities with over 26,000 beds
located in 28 states operated by 29 independent healthcare operating companies.
The Company's total assets were $941.4 million at March 31, 1998.
After giving effect to the 1998 acquisitions, 67.6% of the Company's real
estate investments are operated by seven public companies, including Sun
Healthcare Group, Inc. (25.6%), Integrated Health Services, Inc. (13.3%),
Advocat Inc. (12.7%), Paragon Health Network, Inc. (6.6%) and 3 other public
companies (9.4%).
Other Transactions. The Company regularly evaluates investment
opportunities and extends credit to its customers in the ordinary course of its
business. It is regularly engaged in lease and loan extensions and modifications
and believes its management has the experience and expertise to deal with such
issues as may arise from time to time.
THE OFFERING
Securities Offered............ 2,000,000 shares of % Series B Cumulative
Preferred Stock. The Company has applied to
list its Series B Preferred Stock on the NYSE
under the symbol "OHI PrB." See "Underwriting."
Maturity...................... The Series B Preferred Stock has no stated
maturity and will not be subject to any sinking
fund or mandatory redemption. See "Description
of Series B Preferred Stock -- Maturity."
Use of Proceeds............... Net proceeds from the sale of the Series B
Preferred Stock will be used to repay
outstanding borrowings on the Company's
revolving line of credit. See "Use of
Proceeds."
Ranking....................... With respect to the payment of dividends and
amounts upon liquidation, the Series B
Preferred Stock will rank senior to the Common
Stock, and will rank on a parity with the
Company's 9.25% Series A Cumulative Preferred
Stock. See "Description of Series B Preferred
Stock -- Rank," "-- Dividends" and "--
Liquidation Preference."
Dividends..................... Dividends on the Series B Preferred Stock are
cumulative from the date of original issue and
are payable quarterly on or before the 15th day
of August, November, February, and May
commencing on August 15, 1998 to shareholders
of record on the last business day of the
preceding month, for the periods ended July 31,
October 31, January 31 and April 30 as
applicable at the rate of per annum of
the Liquidation Preference. See "Description of
Series B Preferred Stock -- Dividends."
Liquidation Preference........ The Liquidation Preference is equal to $25 per
share of Series B Preferred Stock, plus accrued
and unpaid dividends (whether or not declared).
See "Description of Series B Preferred Stock --
Liquidation Preference."
Redemption.................... Except in certain circumstances relating to
preservation of the Company's status as a REIT,
the Series B Preferred Stock is not redeemable
prior to July 1, 2003. On and after such date,
the Series B Preferred Stock will be redeemable
for cash at the option
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<PAGE> 8
of the Company, in whole or in part, at a
redemption price of $25 per share, plus
dividends accrued and unpaid at the redemption
date (whether or not declared) without
interest. See "Description of Series B
Preferred Stock -- Redemption" and "--
Restrictions on Ownership."
Voting Rights................. Holders of Series B Preferred Stock generally
will have no voting rights. However, whenever
dividends on any shares of Series B Preferred
Stock shall be in arrears for six or more
quarterly periods, whether or not such
quarterly periods are consecutive, the holders
of such shares (voting separately as a class
with the holders of the 9.25% Series A
Cumulative Preferred Stock and with the holders
of all other series of preferred stock upon
which like voting rights have been conferred
and are exercisable), will be entitled to vote
for the election of two additional directors of
the Company until all dividends accumulated on
such shares of Series B Preferred Stock have
been fully paid or declared and a sum
sufficient for the payment thereof set aside
for payment. In addition, certain changes to
the terms of the Series B Preferred Stock that
would be materially adverse to the rights of
holders of the Series B Preferred Stock cannot
be made without the affirmative vote of holders
of at least two-thirds of the outstanding
Series B Preferred Stock. See "Description of
Series B Preferred Stock -- Voting Rights."
Conversion.................... The Series B Preferred Stock is not convertible
into or exchangeable for any other property or
securities of the Company.
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RISK FACTORS
An investment in the Series B Preferred Stock involves various risks,
including those described below. Investors should carefully consider these risk
factors together with all of the information set forth or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus in
determining whether to purchase shares of Series B 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.
GOVERNMENT REGULATION
Potential Reduction in Revenues of Lessees/Borrowers Due to Healthcare
Reform. Federal healthcare legislation enacted in 1996 focused on assuring
portability of employee healthcare benefits and increasing enforcement powers of
federal agencies that investigate and prosecute fraud and abuse in federally
funded healthcare programs. Ongoing federal budget constraints will continue to
place priority on the need to slow the growth rate in federal healthcare
expenditures. It is anticipated that further debate on overall structural reform
of federal healthcare programs will affect additional legislative action on
cost-containment. It also is anticipated that private payor efforts to contain
or reduce healthcare costs will continue. These trends are likely to lead to
reduced or slower growth in reimbursement for certain services provided by some
of the Company's lessees and borrowers. No assurance can be given that the
implementation of any reforms will not have a material adverse effect on the
Company's financial condition or results of operations.
Potential Loss of Licensure or Certification by Lessees/Borrowers. The
healthcare 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 lessee or borrower to comply with such
laws, requirements and regulations could adversely affect its ability to operate
its facilities and could affect such lessee's or borrower's ability to make debt
or lease payments to the Company.
Reliance on Government Reimbursement by Lessees/Borrowers. A significant
portion of the revenue of the Company's lessees and borrowers 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.
The levels of revenues and profitability of the Company's lessees and
mortgagors will continue to be affected by the ongoing efforts of third-party
payors to contain or reduce the costs of healthcare. Recent legislation changes
the Medicare payment methodology for skilled nursing facilities effective for
cost reporting years commencing after July 1, 1998. The cost-based system will
be replaced by a federal per diem rate that is phased in over four years. The
new per diem rate will be the sole payment for both direct nursing care ("Part A
services") and ancillary services that were previously billed separately from
the cost-based reimbursement system ("Part B services"). Capital costs are also
to be included in the per diem rate. Many states have also converted to a system
based on prospectively determined fixed rates.
Until 1997, state Medicaid programs were required to reimburse nursing
facilities based on rates that were reasonable and adequate to meet the costs
that must be incurred by efficiently and economically operated facilities in
order to provide services in conformity with federal and state standards and to
assure reasonable access to patients. This law restricted the ability of the
states to reduce Medicaid payments. Congress repealed this requirement in 1997.
Under the new law, states need only publish the methodology used to develop the
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<PAGE> 10
proposed rates, along with a justification for the methodology, and allow public
comment. Proposals have also been made to limit Medicaid reimbursement for
healthcare services in many of the states in which the Company's facilities are
located.
Any changes in reimbursement policies which reduce reimbursement levels
could adversely affect revenues of the Company's lessees and borrowers and
thereby adversely affect those lessees' and borrowers' abilities to make their
monthly lease or debt payments to the Company. Failure of the lessees or
borrowers to make their monthly payments would have a direct and material
adverse impact on the Company.
HEALTHCARE REAL ESTATE INVESTMENT RISKS
The Company's investments in healthcare facilities are subject to various
real estate related risks.
Volatility of Income and Returns. The possibility that the healthcare
facilities will not generate income sufficient to meet operating expenses or
will yield returns lower than those available through investments in comparable
real estate or other investments are additional risks of investing in healthcare
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.
There can be no assurance that the Medicaid reimbursement programs in each
of the states where the lessees' and mortgagors' facilities are located will
reimburse rent or interest costs of the lessees and mortgagors at increased
levels recognizing the initial sales to or borrowings from the Company. Failure
by these state Medicaid programs to provide reimbursement at current or
increased levels could have an adverse effect upon the cash flow of the
facilities and, hence, on the ability of the Company's lessees and mortgagors to
meet their respective payment obligations to the Company. Additionally, Medicare
regulations provide that effective December 1, 1997, when a facility changes
ownership (by sale or under certain lease transactions), reimbursement for
depreciation and interest will be based on the cost to the owner of record as of
August 5, 1997, less depreciation allowed. Previously, the buyer would use its
cost of purchase up to the original owner's historical cost before depreciation.
Such changes could adversely affect the resale value of the Company's healthcare
facilities.
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. Healthcare facilities that participate in Medicare or Medicaid must meet
extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs -- in some cases without a prior hearing -- for
failure to meet program requirements. Transfers of operations of nursing homes
and other healthcare-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 lessee or borrower becomes unable to meet its obligations on the
lease or mortgage loan, the liquidation value of the property may be
substantially less, particularly relative to the amount owing on any related
mortgage loan, than would be the case if the property were readily adaptable to
other uses. The receipt of liquidation proceeds or the replacement of an
operator that has defaulted on its lease or loan could be delayed by the
approval process of any federal, state or local agency necessary for the
transfer of the property or the replacement of the operator licensed to manage
the facility. 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 cash flows from
operations would be adversely affected.
S-10
<PAGE> 11
Uninsured Loss. The Company currently requires, and it is the intention of
the Company to continue to require, all lessees and borrowers to secure adequate
comprehensive property and liability insurance that covers the Company as well
as the lessee and borrower. 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.
RELIANCE ON OPERATORS OF HEALTHCARE FACILITIES
As of December 31, 1997, three public companies (Sun Healthcare Group,
Inc., Advocat Inc., and Paragon Health Network, Inc.) operated/managed 103
facilities representing 51.2% ($398.9 million) of the total of the Company's
real estate investments. After giving effect to the 1998 acquisitions, 67.6% of
the Company's real estate investments are operated by seven public companies,
including Sun Healthcare Group, Inc. (25.6%), Integrated Health Services, Inc.
(13.3%), Advocat Inc. (12.7%), Paragon Health Network, Inc. (6.6%) and 3 other
public companies (9.4%). The financial position of the Company and its ability
to service its debt may be adversely affected by financial difficulties
experienced by any of such operators, or any other major operator of the
Company. See "Properties -- Operators of Properties." As of December 31, 1997,
Unison Healthcare Corp., which operates/manages 20 of the Company's facilities
representing approximately 5.7% (approximately $45 million) of the total of the
Company's real estate investments, was in default of certain provisions of its
lease agreements and mortgages with the Company. See "The Company -- Recent
Developments -- Unison Healthcare Corp."
In early 1996, Emerald Healthcare, Inc. ("Emerald") and ExtendaCare, Inc.
("ExtendaCare") became the operators of certain facilities in Indiana owned by
the Company. Because ownership of the real property did not change, the State of
Indiana initially declined to adjust cost based Medicaid rates as is required
for a "new provider." The delays in receipt of such incremental reimbursement as
well as occupancy issues and a buildup of Medicare/Medicaid receivables have
created cash flow difficulties for each company. As a result, the Company agreed
to defer receipt of certain payments pending receipt of the incremental Medicaid
reimbursements. Emerald and ExtendaCare recently received Notice of New Medicaid
Rates effective April 1, 1997, and are now entitled to receive the incremental
reimbursement for paid Medicaid claims retroactive to April 1, 1997. Emerald and
ExtendaCare are not in default under the terms of their revised agreements
except that certain principal payments due from Emerald have been deferred. The
Company is continuing to review issues with these operators and there can be no
assurance that the performance of these operators will be satisfactory over
time. At March 31, 1998 the Indiana properties operated by Emerald represent
investments of $28.5 million or 3.1% of investments; the Indiana properties
operated by ExtendaCare represent investments of $21.1 million or 2.3% of
investments.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property or a secured lender (such as the Company)
may be liable in certain circumstances for the costs of removal or remediation
of certain hazardous or toxic substances at, under or disposed of in connection
with such property, as well as certain other potential costs relating to
hazardous or toxic substances (including government fines and damages for
injuries to persons and adjacent property). Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence or disposal of such substances and may be imposed on the owner in
connection with the activities of an operator of the property. The cost of any
required remediation, removal, fines or personal or property damages and the
owner's liability therefore could exceed the value of the property, and/or the
assets of the owner. In addition, the presence of such substances, or the
failure to properly dispose of or remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral which, in turn, would reduce the Company's revenues.
Although the Company's leases and mortgage loans require the lessee and the
borrower 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.
S-11
<PAGE> 12
RESTRICTIONS ON TRANSFER AND LIMITATION ON OWNERSHIP OF STOCK
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 actually or
constructively of 10% or more of the value of the Company, actually or
constructively owns 10% or more of the value or voting power 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 "Certain 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 each taxable year.
In order to protect the Company against the risk of losing REIT status due
to a concentration of ownership among its shareholders, certain provisions of
the Amended and Restated Articles of Incorporation of the Company and Articles
Supplementary authorize the Company (i) to refuse to permit the transfer of
capital stock to any person if such transfer could jeopardize the qualification
of the Company as a REIT and (ii) to redeem any shares of capital stock in
excess of 9.9% of the value of the outstanding capital stock of the Company
beneficially owned by any person ("Excess Shares"). In addition, the Amended and
Restated Articles of Incorporation of the Company and Articles Supplementary
provide that any transfer of shares of capital stock, options, warrants or other
securities convertible into capital stock that would create a beneficial owner
of more than 9.9% of the outstanding shares of capital stock of the Company
shall be deemed void ab initio and the intended transferee shall be deemed never
to have had an interest in such shares. If such provision is determined to be
void or invalid by virtue of any legal decision, statute, rule or regulation,
then the transferee of such shares, options, warrants or other securities
convertible into such shares shall be deemed, at the option of the Company, to
have acted as agent on behalf of the Company in acquiring such shares and to
hold such shares on behalf of the Company. Such provisions may inhibit market
activity and the resulting opportunity for shareholders to realize a premium for
their capital stock that might otherwise exist if an individual were attempting
to assemble a block of capital stock in excess of 9.9% of the value of the
outstanding capital stock. Also, there can be no assurance that such provisions
will in fact prevent the Company from failing to meet such ownership
requirements. See "Description of Series B Preferred Stock -- Restrictions on
Ownership."
CERTAIN BANKRUPTCY LIMITATIONS
Generally, the Company's lease arrangements with a single operator who
operates more than one of the Company's Facilities is pursuant to a single
master lease (a "Master Lease" or collectively, the "Master Leases"). Although
each lease or Master Lease provides that the Company may terminate the Master
Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy Reform Act
of 1978 ("Bankruptcy Code") provides that a trustee in a bankruptcy or
reorganization proceeding under the Bankruptcy Code (or debtor-in-possession in
a reorganization under the Bankruptcy Code) has the power and the option to
assume or reject the unexpired lease obligations of a debtor-lessee. In the
event that the unexpired lease is assumed on behalf of the debtor-lessee, all
the rental obligations thereunder generally would be entitled to a priority over
other unsecured claims. However, the court also has the power to modify a lease
if a debtor-lessee in a reorganization were required to perform certain
provisions of a lease that the court determined to be unduly burdensome. It is
not possible to determine at this time whether or not any lease or Master Lease
contains any such provisions. If a lease is rejected, the lessor has a general
unsecured claim limited to any unpaid rent already due plus an amount equal to
the rent reserved under the lease, without acceleration, for the greater of one
year or 15% of the remaining term of such lease, not to exceed three years. If
any lease is rejected, the Company may also lose the benefit of any
participation interest or conversion right.
POSSIBLE CHANGE OF INVESTMENT STRATEGIES AND POLICIES AND CAPITAL STRUCTURE
The Board of Directors, without the approval of the shareholders, may alter
the Company's investment strategies and policies if they determine in the future
that such a change is in the best interests of the
S-12
<PAGE> 13
Company and its shareholders. The methods of implementing the Company's
investment strategies and policies may vary as new investments and financing
techniques are developed.
TAX RISKS
The Company was organized and believes that it has conducted and it intends
to conduct its operations so as to qualify for taxation as a REIT under Sections
856 through 860 of the Code. See "Certain Federal Income Tax Considerations."
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.
If the Company were to fail to qualify as a REIT in any taxable year, as a
result of a determination that it failed to meet the annual distribution
requirements or otherwise, the Company would be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Moreover, unless entitled to relief under certain
statutory provisions, the Company also would be disqualified from treatment as a
REIT for the four taxable years following the year during which qualification is
lost. This treatment would reduce the net earnings and cash flow of the Company
available for investment, debt service or distribution to shareholders because
of the additional tax liability to the Company for the years involved. In
addition, distributions to shareholders would no longer be required to be made.
See "Certain Federal Income Tax Considerations."
RISKS ASSOCIATED WITH DEBT FINANCING
The Company currently uses and intends to continue to use debt financing
for existing and additional investments. Such debt financing may include the
revolving credit agreement or secured or unsecured long-term debt. The Company's
use of debt financing presents the risk to holders of the Series B Preferred
Stock that payments of principal and interest on borrowings will leave the
Company with insufficient cash resources to pay dividends required by the terms
of the Series B Preferred Stock.
RISKS RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation do not limit
the issuance of additional series of preferred stock ranking on a parity with
the Series B Preferred Stock, which ranks on a parity with the Series A
Preferred Stock issued in April 1997. The issuance of additional preferred stock
on a parity with the Series B Preferred Stock and the Series A Preferred Stock
could have the effect of diluting the interests of purchasers of the Series B
Preferred Stock.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The ratios of earnings to fixed charges are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends(1)...................................... 2.48x 2.66x 2.92x 2.69x 3.51x
</TABLE>
- ---------------
(1) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, net earnings available to common (before
extraordinary charge from prepayment of debt in 1995) has been added to
fixed charges and that sum has been divided by such fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and, starting with the period ended December 31, 1997, preferred stock
dividends for the Series A Cumulative Preferred Stock, which is the only
series of preferred stock outstanding at December 31, 1997.
S-13
<PAGE> 14
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of Series B Preferred
Stock after payment of all underwriting discounts and commissions and expenses
of the Offering (estimated to be $2,000,000) will be approximately $48 million.
The Company intends to use such net proceeds to pay down a portion of its
borrowings outstanding at March 31, 1998 of $190 million under its revolving
line of credit. The amounts borrowed were used primarily for acquisitions of
healthcare facilities.
On September 30, 1997, the Company consummated a second amended and
restated loan agreement. The agreement provides for total permitted borrowings
of up to $200 million, reduced interest rates on borrowings, and extends the
term of the agreement to September 2000. Borrowings presently bear interest at
LIBOR plus 1.00% or, at the Company's option, at the prime rate. Although
portions of the borrowings under the Company's line of credit will be paid down
with the net proceeds from the Offering, the Company expects to incur additional
indebtedness under the revolving credit facility to finance future investments.
S-14
<PAGE> 15
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as reported as of December 31, 1997, and on a pro forma basis giving
effect to the issuance of the 2,000,000 shares of Series B Preferred Stock
offered hereby and the application of the net proceeds therefrom as described in
"Use of Proceeds." The capitalization table should be read in conjunction with
the Company's condensed consolidated financial statements for the year ended
December 31, 1997 and related notes thereto incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Acquisition line of credit(1)............................. $ 58,300 $ 10,300
Unsecured borrowings...................................... 186,705 186,705
Secured borrowings........................................ 22,261 22,261
Subordinated convertible debentures....................... 62,485 62,485
--------- ---------
Total debt............................................. 329,751 281,751
SHAREHOLDERS' EQUITY(2):
Preferred stock $1.00 par value: 10,000 shares authorized,
2,300 shares Series A.................................. 57,500 57,500
2,000 shares Series B.................................. 50,000
Common stock $.10 par value; 50,000 shares authorized,
19,475 issued and outstanding.......................... 1,947 1,947
Additional paid-in capital................................ 439,214 437,214
Cumulative net earnings................................... 136,225 136,225
Cumulative dividends paid................................. (165,824) (165,824)
Unamortized restricted stock awards....................... (841) (841)
--------- ---------
Total shareholders' equity............................. 468,221 516,221
--------- ---------
TOTAL CAPITALIZATION................................... $ 797,972 $ 797,972
========= =========
</TABLE>
- ---------------
(1) At March 31, 1998, borrowing under the Company's acquisition line of credit
totalled $190 million.
(2) Excludes the pro-forma effects of the Worldwide distribution as of April 2,
1998. The carrying value of the Company's interest in Principal transferred
to Worldwide exceeds the proceeds received from the secondary offering by
approximately $10 million.
S-15
<PAGE> 16
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth summary operating and financial information
which should be read in conjunction with the condensed consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, which are incorporated by reference
into this Prospectus Supplement. This data also should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994(1) 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental income........................... $ 54,073 $ 42,688 $ 40,335 $ 22,142 $ 10,035
Mortgage interest income................ 28,727 24,692 18,621 14,578 10,077
Other................................... 8,020 5,747 2,474 1,027 638
-------- -------- -------- -------- --------
90,820 73,127 61,430 37,747 20,750
Expenses:
Depreciation and amortization........... 16,910 13,693 12,995 6,684 2,743
Interest................................ 24,423 20,836 15,325 10,549 4,605
General and administrative.............. 4,636 4,008 3,620 2,737 1,829
-------- -------- -------- -------- --------
45,969 38,537 31,940 19,970 9,177
-------- -------- -------- -------- --------
Net earnings before extraordinary
charge.................................. 44,851 34,590 29,490 17,777 11,573
Extraordinary charge from prepayment of
debt.................................... -- -- 6,479 -- --
Preferred stock dividends................. 3,546 -- -- -- --
-------- -------- -------- -------- --------
Net earnings available to common.......... $ 41,305 $ 34,590 $ 23,011 $ 17,777 $ 11,573
======== ======== ======== ======== ========
Per share:
Net earnings before extraordinary
charge............................... $2.16 $2.01 $1.83 $1.70 $1.78
Net earnings -- basic and diluted....... $2.16 $2.01 $1.43 $1.70 $1.78
Dividends per share(2):
Common.................................. $2.58 $2.48 $2.36 $2.20 $2.04
Preferred............................... $1.16 -- -- -- --
Weighted average number of shares
outstanding (000's).................. 19,085 17,196 16,071 10,451 6,513
Basic................................ 19,085 17,196 16,071 10,451 6,513
Diluted.............................. 19,137 17,240 16,081 10,459 6,518
BALANCE SHEET DATA:
Real estate properties -- net............. $512,907 $343,293 $336,720 $325,048 $123,753
Mortgage notes receivable................. 218,353 217,474 158,290 141,360 104,641
Total investments......................... 791,780 610,377 527,609 466,408 228,394
Total assets.............................. 816,108 634,836 551,188 500,731 243,587
Acquisition line of credit................ 58,300 6,000 74,690 20,000 14,500
Subordinated convertible debentures....... 62,485 94,810 -- -- --
Long-term borrowings...................... 208,966 135,659 120,453 133,602 103,573
Total liabilities......................... 347,887 251,829 204,059 162,188 120,873
Total shareholders' equity................ 468,221 383,007 347,129 338,543 122,714
OTHER DATA:
Number of facilities...................... 263 217 186 176 71
</TABLE>
- ---------------
(1) The Company acquired Health Equity Properties Incorporated on September 30,
1994.
(2) Dividends per share are those declared and paid during such period.
S-16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated financial statements and accompanying notes.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 totaled $90,820,000,
increasing $17.7 million over 1996 revenues. The 1997 revenue growth stems
primarily from additional investments during 1996 and 1997. A partial year of
revenues from 1997 investments provided revenue increases of approximately $9.8
million, while a full year of revenues from 1996 investments added $5.1 million
to revenues. Additionally, approximately $1.9 million of the revenue growth
stems from participating incremental revenues which became effective during
1997.
Real estate investments of $779.4 million as of December 31, 1997 will
provide 1998 annualized revenues of $93.1 million. Revenues will continue at
this level until additional 1998 investments are made and additional escalation
provisions commence in 1998. Annualized revenues for 1998 represent a $20.1
million increase over the 1997 annualized revenues of $73.0 million based on
real estate investments of $593.7 million as of January 1, 1997.
The following table summarizes the years of expiration of the Company's
revenues based on the contractual maturity dates of the leases and mortgages:
<TABLE>
<CAPTION>
MORTGAGE
RENT INTEREST TOTAL %
------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998.................................................... $ 243 $ 243 0.28%
1999.................................................... $ 2,462 29 2,491 2.85%
2000.................................................... 1,026 3,328 4,354 4.98%
2001.................................................... 3,268 1,825 5,093 5.83%
2002.................................................... 8,224 9,462 17,686 20.23%
Thereafter.............................................. 45,511 12,026 57,537 65.83%
------- ------- ------- -------
$60,491 $26,913 $87,404 100.00%
======= ======= ======= =======
</TABLE>
The total excludes approximately $5.7 million of annualized revenues from Unison
(See Recent Developments).
Expenses for the year ended December 31, 1997 totaled $45,969,000,
increasing approximately $7.4 million over expenses of $38.5 million for 1996.
The 1997 provision for depreciation and amortization of real estate totaled
$16,910,000, increasing $3.2 million over 1996. This increase stems from a full
year provision for 1996 investments, plus a partial year of provision for 1997
investments.
Interest expense for the year ended December 31, 1997 was approximately
$24,423,000, compared with $20.8 million for 1996. The increase in interest
expense is primarily due to an increase in average outstanding borrowings on the
acquisition line of credit, partially offset by lower rates.
General and administrative expenses for 1997 totaled $4,636,000 or
approximately 5.1% of revenues as compared to 5.5% for 1996. The 1997 percentage
decrease stems primarily from economies of scale resulting from additional
investments made in 1997.
No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.
S-17
<PAGE> 18
Funds from operations (FFO) for the year ended December 31, 1997 totaled
$58,815,000 an increase of $9.8 million over the $49.0 million for 1996. FFO is
net earnings available to common shareholders, excluding any gains or losses
from debt restructuring and sales of property, plus depreciation and
amortization associated with real estate investments and charges to earnings for
non-cash common stock based compensation. The 1997 growth in cash flow is
primarily due to the additional investments in 1997 and 1996 and the increase in
operating earnings before provisions for depreciation and amortization.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues for the year ended December 31, 1996 totaled $73,127,000,
increasing $11.7 million over 1995 revenues. The 1996 revenue growth stems
primarily from additional investments during 1995 and 1996. A partial year of
revenues from 1996 investments provided revenue increases of approximately $6.1
million, while a full year of revenues from 1995 investments added $3.8 million
to revenues. Additionally, approximately $1.4 million of the revenue growth
stems from participating incremental revenues which became effective during
1996.
Total real estate investments of $594 million as of December 31, 1996 will
provide 1997 annualized operating revenues of $73.0 million. Revenues will
continue at this level until additional 1997 investments are made and additional
escalation provisions commence in 1997. Annualized revenues for 1997 represent
an $10.5 million increase over the 1996 annualized revenues of $62.5 million
based on investments of $516 million as of January 1, 1996.
Expenses for the year ended December 31, 1996 totaled $38,537,000,
increasing $6.6 million over expenses of $31.9 million for 1995. The 1996
provision for depreciation and amortization of real estate totaled $13,693,000,
increasing $698,000 over 1995. This increase stems from additional investments
funded in 1995 and 1996.
Interest expense for the year ended December 31, 1996 was approximately
$20,836,000, compared with $15.3 million for 1995. The increase in interest
expense is due to higher average borrowings of approximately $88 million, offset
by lower interest rates and reduced amortization of debt issue costs.
General and administrative expenses for 1996 totaled $4,008,000 or
approximately 5.5% of revenues as compared to 5.9% for 1995. The 1996 percentage
decrease relates to economies of scale stemming from additional investments made
in 1996 and 1995.
Funds from operations available for distribution for 1996 were $48,989,000,
an increase of $5.5 million from the $43.5 million for 1995. Funds from
operations for the year ended December 31, 1996 totaled $49,008,000, an increase
of $6.0 million over the $43.0 million for 1995. The 1996 growth in cash flow is
primarily due to the additional investments in 1996 and 1995 and the related
increase in operating earnings before provisions for depreciation and
amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company continually seeks new investments in healthcare properties,
primarily long-term care facilities, with the objective of profitable growth and
further diversification of the investment portfolio. Permanent financing for
future investments is expected to be provided through a combination of private
and public offerings of debt and equity securities. Management believes the
Company's liquidity and sources of available capital are adequate to finance
operations, fund future investments, and meet debt service requirements.
The Company has a strong financial position at December 31, 1997, with
total assets of $816.1 million, shareholders' equity of $468.2 million, and
long-term debt of $271.5 million, representing approximately 33% of total
capitalization. Long-term debt excludes funds borrowed under its acquisition
credit agreement. The Company anticipates eventually attaining and then
maintaining a long-term debt-to-capitalization ratio of approximately 40%. The
Company has a $200 million acquisition credit facility, of which $58.3 million
was drawn at year end and an additional $128.2 million was subsequently drawn
through March 31, 1998.
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<PAGE> 19
In February 1997, the Company filed a Form S-4 shelf registration statement
with the Securities and Exchange Commission registering common stock totaling
$100 million to be issued in connection with future property acquisitions.
Additionally, on August 29, 1997 the Company filed a Form S-3 registration
statement with the Securities and Exchange Commission permitting the issuance of
up to $200 million related to common stock, unspecified debt, preferred stock
and convertible securities.
The Company has demonstrated a strong capacity to access the capital
markets, raising more than $1 billion in capital since it was organized in 1992.
The Company has raised more than $450 million in equity, including $130 million
from the initial public offering in 1992, $73 million from a follow-on common
stock offering in 1994, $165 million from the HEP acquisition in 1994 and two
additional offerings, the latest being the $57.5 million issuance of preferred
stock in April 1997. Over $600 million of debt capital has been raised, some of
which has been used to retire secured borrowing debt with higher interest rates.
In 1996, the Company completed a placement of $95 million of 8.5% Convertible
Subordinated Debentures due 2001. In August 1997 the Company completed a $100
million 10-year senior note offering priced to yield 6.99%. In September 1997
the Company executed a Second Amended and Restated Loan Agreement with its banks
which provides for total borrowings of up to $200 million, reduces interest
rates from previous levels, and extends the term of the agreement to September
2000.
The Company distributes a large portion of the cash available from
operations. Cash dividends paid totaled $2.58 per share for 1997 compared with
$2.46 per share for the year ended December 31, 1996. The dividend pay-out
ratio, that is the ratio of per share amounts for dividends paid to the diluted
per share amount of funds from operations, was approximately 86% for 1997,
compared with 89% for 1996, and 88% for 1995. The Company believes that cash
provided from quarterly operating activities at current levels will continue to
be sufficient to fund normal working capital requirements and pay 1998 dividends
at a quarterly rate of $0.67 per share as declared at the January 15, 1998 Board
of Directors meeting. Approximately 45-50% of incremental cash flow from
operations is retained annually through gradual reductions in the dividend
payout ratio, to fund additional investments and provide financial flexibility.
New investments generally are funded from borrowings under the Company's
acquisition credit agreement. Interest cost incurred by the Company on
borrowings under the acquisition line will vary depending upon fluctuations in
prime and/or LIBOR rates, and upon changes in the Company's ratings by national
agencies. Borrowings bear interest at LIBOR plus 1.00% or, at the Company's
option at the prime rate. The Company expects to periodically replace funds
drawn on the acquisition credit agreement through fixed-rate long-term
borrowings, the placement of convertible debentures, or the issuance of
additional shares of capital stock. Historically, the Company's strategy has
been to match the maturity of its indebtedness with the maturity of its assets
and to employ fixed-rate long-term debt to the extent practicable.
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<PAGE> 20
PROPERTIES
The following is a summary of the Company's investments as of December 31,
1997:
OWNED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF NUMBER COST OF ANNUALIZED
LOCATION FACILITIES OF BEDS INVESTMENTS REVENUES(1)
- -------- ---------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Alabama......................................... 9 1,121 $ 35,223,753 $ 4,231,493
Arkansas........................................ 12 1,273 37,887,832 5,134,504
California...................................... 18 1,453 56,012,510 5,465,963
Colorado........................................ 1 56 750,000 97,920
Florida......................................... 4 770 35,643,043 4,011,909
Idaho........................................... 1 40 600,000 64,260
Illinois........................................ 9 1,302 42,972,770 4,659,498
Indiana......................................... 68 3,327 101,391,238 12,851,633
Iowa............................................ 7 568 15,693,318 1,698,153
Kansas.......................................... 1 173 2,500,000 219,304
Kentucky........................................ 9 943 35,994,808 3,874,589
Louisiana....................................... 1 131 4,602,574 517,968
Massachusetts................................... 1 135 8,300,000 888,930
Missouri........................................ 1 360 9,000,000 1,183,253
North Carolina.................................. 7 891 29,745,741 3,146,659
Ohio............................................ 4 453 15,953,638 1,687,797
Pennsylvania.................................... 3 0 30,031,250 3,945,821
Tennessee....................................... 5 606 17,447,259 2,092,004
Texas........................................... 14 2,099 42,220,714 5,005,183
Washington...................................... 2 319 15,900,000 1,761,287
West Virginia................................... 6 616 23,183,746 2,391,816
--- ------ ------------ -----------
Total........................................... 183 16,636 $561,054,194 $64,929,944
=== ====== ============ ===========
</TABLE>
- ---------------
(1) Based upon contractual terms of leases and levels of investment at December
31, 1997.
The Company's owned properties, represented by 178 long-term care
facilities, 3 medical office buildings and 2 rehabilitation hospitals at
December 31, 1997, are leased under provisions of master leases with initial
terms ranging from 5 to 17 years, plus renewal options. Substantially all of the
master leases provide for minimum annual rentals which are subject to annual
increases based upon increases in the Consumer Price Index or increases in
revenues of the underlying properties, with certain maximum limits. Under the
terms of the leases, the lessee is responsible for all maintenance, repairs,
taxes and insurance on the leased properties.
S-20
<PAGE> 21
MORTGAGES
<TABLE>
<CAPTION>
NUMBER OF NUMBER FACE AMOUNT CURRENT AMOUNT ANNUALIZED
LOCATION FACILITIES OF BEDS OF MORTGAGE LOANS OF MORTGAGE LOANS REVENUES(1)
- -------- ---------- ------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
California.................... 3 250 $ 3,073,280 $ 2,850,467 $ 318,796
Florida....................... 12 1,370 43,953,750 43,899,523 5,282,612
Iowa.......................... 2 250 3,799,546 3,730,015 400,977
Kentucky...................... 6 486 14,703,692 14,646,581 1,632,063
Maine......................... 11 619 24,386,000 24,183,000 2,924,019
Massachusetts................. 1 33 2,114,000 2,096,402 253,481
Michigan...................... 13 1,863 58,800,000 58,800,000 9,242,124
Missouri...................... 5 330 5,600,000 5,296,219 599,455
Nevada........................ 1 73 598,661 496,384 53,361
New Mexico.................... 2 156 1,623,692 1,588,018 170,712
Ohio.......................... 7 735 20,031,888 19,141,118 2,088,101
Tennessee..................... 4 546 18,232,000 18,232,000 2,583,155
Texas......................... 12 1,373 20,570,450 19,301,416 2,257,025
Utah.......................... 1 100 1,917,430 1,910,267 205,354
Other -- construction loans... 2,181,597 2,181,597 234,522
-- ----- ------------ ------------ -----------
Total......................... 80 8,184 $221,585,986 $218,353,007 $28,245,757
== ===== ============ ============ ===========
</TABLE>
- ---------------
(1) Based upon contractual terms of the mortgages and principal outstanding at
December 31, 1997.
The mortgage notes are secured by first mortgage liens on the borrowers'
underlying real estate and personal property.
DESCRIPTION OF SERIES B PREFERRED STOCK
The description of the particular terms of the Series B 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 reference is hereby made.
GENERAL
Pursuant to the Company's amended and restated Articles of Incorporation
(the "Charter"), the Company is authorized to issue up to 10,000,000 shares of
preferred stock ("Preferred Stock") in one or more series, with such
designations, powers, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, in each case, if any, as are permitted by
Maryland law and as the Board of Directors may determine by adoption of an
amendment to the Charter without any further vote or action by the Company's
shareholders. In April 1997, the Company issued 2,300,000 shares of its 9.25%
Series A Cumulative Preferred Stock (the "Series A Preferred Stock").
The following summary of the terms and provisions of the Series B 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 B Preferred Stock, (the "Articles Supplementary") which has been filed as
an Exhibit to the registration statement.
MATURITY
The Series B Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption.
S-21
<PAGE> 22
RANK
The Series B 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 B 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 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 B 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 B Preferred Stock prior to
conversion.
DIVIDENDS
Holders of shares of the Series B Preferred Stock are entitled to receive,
when and as declared by the Board of Directors (or a duly authorized committee
thereof), out of funds legally available for the payment of dividends,
preferential cumulative cash dividends at the rate of % per annum of the
Liquidation Preference per share (equivalent to a fixed annual amount of $
per share).
Dividends on the Series B Preferred Stock shall be cumulative from the date
of original issue and shall be payable in arrears for each period ended July 31,
October 31, January 31, and April 30 on or before the 15th day of August,
November, February and May of each year, or, if not a business day, the next
succeeding business day (each, a "Dividend Payment Date"). The first dividend
will be paid on August 15, 1998 with respect to the period commencing on the
date of issue and ending July 31, 1998. Any quarterly dividend payable on the
Series B Preferred Stock for any partial dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Dividends will be
payable to holders of record as they appear in the stock records of the Company
at the close of business on the applicable record date, which shall be the last
day of the preceding calendar month prior to the applicable Dividend Payment
Date or 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 B 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 B 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 B
Preferred Stock will not bear interest and holders of the Series B Preferred
Stock will not be entitled to any distributions in excess of full cumulative
distributions described above. Except as set forth in the next sentence, no
dividends will be declared or paid or set apart for payment on any capital stock
of the Company or any other series of Preferred Stock ranking, as to dividends,
on a parity with or junior to the Series B 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 B 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 B Preferred Stock
for all past dividend periods and the then current dividend period. When
dividends are not paid in full (or a sum sufficient for such full payment is not
so set apart) upon the Series B Preferred Stock and the Series A Preferred Stock
and the shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Series B Preferred Stock and the Series A Preferred Stock,
all dividends declared upon the Series B Preferred Stock and the Series A
Preferred Stock and any other series of Preferred Stock ranking on a parity as
to dividends with the Series B Preferred Stock and the Series A Preferred Stock
shall be declared pro rata so that the amount of dividends declared per share of
Series B Preferred Stock and the Series A Preferred Stock and such other
S-22
<PAGE> 23
series of Preferred Stock, shall in all cases bear to each other the same ratio
that accrued dividends per share on the Series B Preferred Stock and the Series
A Preferred Stock and such other series of Preferred Stock (which shall not
include any accrual in respect of unpaid dividends for prior dividend periods if
such Preferred Stock does not have a cumulative dividend) bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series B Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of Common Stock
or other shares of capital stock ranking junior to the Series B 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 B Preferred Stock and the Series A Preferred Stock as to
dividends or upon liquidation, nor shall any shares of Common Stock, or any
other shares of capital stock of the Company ranking junior to or on a parity
with the Series B Preferred Stock and the Series A Preferred Stock as to
dividends or upon liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any such shares) by the Company (except by conversion into
or exchange for other capital stock of the Company ranking junior to the Series
B 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 B 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 B Preferred Stock as provided above. Any dividend payment made on
shares of the Series B Preferred Stock shall first be credited against the
earliest accrued but unpaid dividend due with respect to such shares which
remains payable.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, the holders of shares of Series B Preferred Stock
are entitled to be paid out of the assets of the Company legally available for
distribution to its shareholders a liquidation preference of $25 per share, plus
an amount equal to any accrued and unpaid dividends to the date of payment, but
without interest, before any distribution of assets is made to holders of Common
Stock or any other class or series of capital stock of the Company that ranks
junior to the Series B Preferred Stock as to liquidation rights. Holders of
Series B Preferred Stock will be entitled to written notice of any event
triggering the right to receive such Liquidation Preference. After payment of
the full amount of the Liquidation Preference, plus any accrued and unpaid
dividends to which they are entitled, the holders of Series B 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
The Series B Preferred Stock is not redeemable prior to July 1, 2003.
However, in order to ensure that the Company will continue to meet the
requirements for qualification as a REIT, the Company will have the right to
purchase from the holder any shares of Series B Preferred Stock in excess of
9.9% of the value of the outstanding capital stock of the Company (the "Excess
Shares"). See "-- Restrictions on Ownership." On and after July 1, 2003, the
Company, at its option, upon not less than 30 nor more than 60 days' written
notice, may redeem shares of the Series B Preferred Stock, in whole or in part,
at any time or from time to time, for
S-23
<PAGE> 24
cash at a redemption price of $25 per share, plus all accrued and unpaid
dividends thereon to the date fixed for redemption (except with respect to
Excess Shares. See "-- Restrictions on Ownership."), without interest. The
redemption price (other than the portion thereof consisting of accrued and
unpaid dividends) is payable solely out of the sale proceeds of other capital
stock of the Company and from no other source. For purposes of the preceding
sentence, "capital stock" means any common stock, preferred stock, depositary
shares, interests, participations or other ownership interests (however
designated) and any rights (other than debt securities convertible into or
exchangeable for equity securities) or options to purchase any of the foregoing.
Holders of Series B Preferred Stock to be redeemed shall surrender such Series B
Preferred Stock at the place designated in such notice and shall be entitled to
the redemption price and any accrued and unpaid dividends payable upon such
redemption following such surrender. If notice of redemption of any shares of
Series B Preferred Stock has been given and if the funds necessary for such
redemption have been set aside by the Company in trust for the benefit of the
holders of any shares of Series B Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such shares
of Series B Preferred Stock, such shares of Series B Preferred Stock shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. If less than all of
the outstanding Series B Preferred Stock is to be redeemed, the Series B
Preferred Stock to be redeemed shall be selected pro rata (as nearly as may be
practicable without creating fractional shares) or by any other equitable method
determined by the Company.
Unless full cumulative dividends on all shares of Series B Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series B Preferred
Stock shall be redeemed unless all outstanding shares of Series B Preferred
Stock are simultaneously redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Series B Preferred Stock
(except by exchange for capital stock of the Company ranking junior to the
Series B Preferred Stock as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the purchase by the Company of
Excess Shares in order to ensure that the Company continues to meet the
requirements for qualification as a REIT, or the purchase or acquisition of
shares of Series B Preferred Stock pursuant to a purchase or exchange offer made
on the same terms to holders of all outstanding shares of Series B Preferred
Stock. So long as no dividends are in arrears, the Company shall be entitled at
any time and from time to time to repurchase shares of Series B Preferred Stock
in open-market transactions duly authorized by the Board of Directors and
effected in compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series B Preferred Stock to
be redeemed at their respective addresses as they appear on the stock transfer
records of the Company. No failure to give such notice or any defect therein or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Series B Preferred Stock except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of shares of Series
B Preferred Stock to be redeemed; (iv) the place or places where the Series B
Preferred Stock is to be surrendered for payment of the redemption price; and
(v) that dividends on the shares to be redeemed will cease to accrue on such
redemption date. If less than all of the Series B Preferred Stock held by any
holder is to be redeemed, the notice mailed to such holder shall also specify
the number of shares of Series B Preferred Stock held by such holder to be
redeemed.
Immediately prior to any redemption of Series B Preferred Stock, the
Company shall pay, in cash, any accumulated and unpaid dividends through the
redemption date, unless a redemption date falls after a Dividend Record Date and
prior to the corresponding Dividend Payment Date, in which case each holder of
Series B Preferred Stock at the close of business on such Dividend Record Date
shall be entitled to the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the redemption of such shares before such
Dividend Payment Date.
S-24
<PAGE> 25
The Series B Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that
the Company continues to meet the requirements for qualification as a REIT,
Series B Preferred Stock acquired by a shareholder, actually or constructively,
in excess of 9.9% of the value of the outstanding capital stock of the Company
will automatically become Excess Shares, and the Company will have the right to
purchase such Excess Shares from the holder. In addition, Excess Shares may be
redeemed, in whole or in part, at any time when outstanding shares of Series B
Preferred Stock are being redeemed, for cash at a redemption price of $25 per
share, but excluding accrued and unpaid dividends on such Excess Shares, without
interest. Such Excess Shares shall be redeemed in such proportion and in
accordance with such procedures as shares of Series B Preferred Stock are being
redeemed.
VOTING RIGHTS
Holders of the Series B Preferred Stock will not have any voting rights,
except as set forth below.
Whenever dividends on any shares of Series B Preferred Stock shall be in
arrears for eighteen or more months (a "Preferred Dividend Default"), the number
of directors then constituting the Board of Directors shall be increased by two
(if not already increased by reason of a similar arrearage with respect to any
Parity Preferred (as hereinafter defined), the holders of such shares of Series
B Preferred Stock (voting separately as a class with the Series A Preferred
Stock and with all other series of Preferred Stock ranking on a parity with the
Series B Preferred Stock and the Series A Preferred Stock as to dividends or
upon liquidation (and upon which like voting rights have been conferred and are
exercisable ("Parity Preferred")) will be entitled to vote separately as a
class, in order to fill the vacancies thereby created, for the election of a
total of two additional directors of the Company (the "Preferred Stock
Directors") at a special meeting called by the holders of record of at least 20%
of the Series B Preferred Stock or of the Series A Preferred Stock or the
holders of record of at least 20% of any series of Parity Preferred so in
arrears (unless such request is received less than 90 days before the date fixed
for the next annual or special meeting of shareholders) or at the next annual
meeting of shareholders, and at each subsequent annual meeting until all
dividends accumulated on such shares of Series B Preferred Stock and the Series
A Preferred Stock and Parity Preferred for the past dividend periods and the
dividend for the then current dividend period shall have been fully paid or
declared and a sum sufficient for the payment thereof set aside for payment. In
the event the directors of the Company are divided into classes, each such
vacancy shall be apportioned among the classes of directors to prevent stacking
in any one class and to insure that the number of directors in each of the
classes of directors, are as equal as possible. Each Preferred Stock Director,
as a qualification for election as such (and regardless of how elected) shall
submit to the Board of Directors of the Company a duly executed, valid, binding
and enforceable letter of resignation from the Board of Directors, to be
effective upon the date upon which all dividends accumulated on such shares of
Series B Preferred Stock and the Series A Preferred Stock and Parity Preferred
for the past dividend periods and the dividend for the then current dividend
period shall have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment, whereupon the terms of office of all
persons elected as Preferred Stock Directors by the holders of the Series B
Preferred Stock and the Series A Preferred Stock and any Parity Preferred shall,
upon the effectiveness of their respective letters of resignation, forthwith
terminate, and the number of directors then constituting the Board of Directors
shall be reduced accordingly. A quorum for any such meeting shall exist if at
least a majority of the outstanding shares of Series B Preferred Stock and the
Series A Preferred Stock and shares of Parity Preferred upon which like voting
rights have been conferred and are exercisable are represented in person or by
proxy at such meetings. Such Preferred Stock Directors shall be elected upon the
affirmative vote of a plurality of the shares of Series B Preferred Stock and
the Series A Preferred Stock and such Parity Preferred present and voting in
person or by proxy at a duly called and held meeting at which a quorum is
present. If and when all accumulated dividends and the dividend for the then
current dividend period on the Series B Preferred Stock and the Series A
Preferred Stock shall have been paid in full or declared and set aside for
payment in full, the holders thereof shall be divested of the foregoing voting
rights (subject to revesting in the event of each and every Preferred Dividend
Default) and, if all accumulated dividends and the dividend for the then current
dividend period have been paid in full or declared and set aside for payment in
full on the Series B Preferred Stock and the Series A Preferred Stock and all
series of Parity Preferred upon which like voting rights have been conferred and
are exercisable, the term of office of each Preferred Stock Director so elected
shall
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<PAGE> 26
terminate. Any Preferred Stock Director may be removed at any time with or
without cause by, and shall not be removed otherwise than by the vote of, the
holders of record of a majority of the outstanding shares of the Series B
Preferred Stock and the Series A Preferred Stock when they have the voting
rights described above (voting separately as a class with all series of Parity
Preferred upon which like voting rights have been conferred and are
exercisable). So long as a Preferred Dividend Default shall continue, any
vacancy in the office of a Preferred Stock Director may be filled by written
consent of the Preferred Stock Director remaining in office, or if none remains
in office, by a vote of the holders of record of a majority of the outstanding
shares of Series B Preferred Stock and the Series A Preferred Stock when they
have the voting rights described above (voting separately as a class with the
Series A Preferred Stock and all series of Parity Preferred upon which like
voting rights have been conferred and are exercisable). The Preferred Stock
Directors shall each be entitled to one vote per director on any matter.
So long as any shares of Series B 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 B Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class), amend, alter or repeal the provisions of the Charter or
the Articles Supplementary, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of the Series B Preferred Stock or the holders
thereof; including without limitation, the creation of any series of Preferred
Stock ranking senior to the Series B Preferred Stock with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up; provided, however, that with respect to the occurrence of any Event set
forth above, so long as the Series B 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 B Preferred Stock and
provided, further that (i) any increase in the amount of the authorized
Preferred Stock or the creation or issuance of any other series of Preferred
Stock, or (ii) any increase in the amount of the authorized shares of such
series, in each case ranking on a parity with or junior to the Series B
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series B Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
Except as expressly stated in the Articles Supplementary, the Series B
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 for 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 B Preferred Stock.
CONVERSION
The Series B Preferred Stock is not convertible into or exchangeable for
any other property or securities of the Company.
RESTRICTIONS ON OWNERSHIP
If the Board of Directors shall, at any time and in good faith, be of the
opinion that actual or constructive ownership of at least 9.9% or more of the
value of the outstanding capital stock of the Company, has or may become
concentrated in the hands of one owner, the Board of Directors shall have the
power (i) by means deemed equitable by it to call for the purchase from any
holder of Series B Preferred Stock of the Company that number of shares of
Series B Preferred Stock sufficient, in the opinion of the Board of Directors,
to maintain or bring the actual or constructive ownership of such owner to a
level of no more than 9.9% of the value of the outstanding capital stock of the
Company, and (ii) to refuse to transfer or issue shares of Series B
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Preferred Stock to any person whose acquisition of such shares of Series B
Preferred Stock would, in the opinion of the Board of Directors, result in the
actual or constructive ownership by that person of more than 9.9% of the value
of the outstanding capital stock of the Company. The purchase price for any
shares of Series B Preferred Stock so redeemed shall be equal to the fair market
value of the shares reflected in the closing sales price for the sales, if then
listed on a national securities exchange, or if the shares are not then listed
on a national securities exchange, the purchase price shall be equal to the
redemption price of shares of Series B Preferred Stock. From and after the date
fixed for purchase by the Board of Directors, the holder of any shares so called
for purchase shall cease to be entitled to distributions and other benefits with
respect to such shares, except the right to payment of the purchase price for
the shares. Any transfer of Series B Preferred Stock that would create an actual
or constructive owner of more than 9.9% of the value of the outstanding shares
of capital stock of the Company shall be deemed void ab initio and the intended
transferee shall be deemed never to have had an interest therein. If the
foregoing provision is determined to be void or invalid by virtue of any legal
decision, statute, rule or regulation, then the transferee of such Series B
Preferred Stock shall be deemed, at the option of the Company, to have acted as
agent on behalf of the Company in acquiring such shares and to hold such shares
on behalf of the Company.
The Company and its transfer agent may refuse to transfer any shares of
Series B Preferred Stock passing either by voluntary transfer, by operation of
law, or under the last will and testament of any shareholder if such transfer
would or might, in the opinion of the Board of Directors or counsel to the
Company, disqualify the Company as a REIT under the Code. Nothing herein
contained shall limit the ability of the Company to impose or seek judicial or
other imposition of additional restrictions if deemed necessary or advisable to
preserve the Company's tax status as a qualified REIT.
TRANSFER AND DIVIDEND PAYING AGENT
First Chicago Trust Company of New York will act as the transfer and
dividend payment agent in respect of the Series B Preferred Stock
BOOK ENTRY, DELIVERY AND FORM
The depository will be The Depository Trust Company ("DTC") and its nominee
will be Cede & Co. ("Cede"). Accordingly, Cede is expected to be the initial
registered holder of the Series B Preferred Stock which will be represented by
one or more global certificates issued in the name of Cede (the "Global
Preferred Security"). No person that acquires an interest in such Series B
Preferred Stock will be entitled to receive a certificate representing such
person's interest in such Series B Preferred Stock except as set forth herein.
Unless and until definitive Series B Preferred Stock is issued under the limited
circumstances described herein, all references to actions by holders of Series B
Preferred Stock issued in global form shall refer to actions taken by DTC upon
instructions from its Participants (as defined below), and all references herein
to payments and notices to such holders shall refer to payments and notices to
DTC or Cede, as the registered holder of such Series B Preferred Stock.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act, and was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions among
Participants through electronic book-entry, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations, and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Holders that are not Participants or Indirect Participants but that desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Series B Preferred Stock may do so only through Participants and Indirect
Participants. Under a book-entry format, holders may experience some delay in
their receipt of
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payments, as such payments will be forwarded by the agent designated by the
Transfer Agent to Cede, as nominee for DTC. DTC will forward such payments to
its Participants, which thereafter will forward them to Indirect Participants or
holders. Holders will not be recognized by the Company as registered holders of
the Series B Preferred Stock entitled to the benefits of the terms of the Series
B Preferred Stock. Holders that are not Participants will be permitted to
exercise their rights as such only indirectly through and subject to the
procedures of Participants and, if applicable, Indirect Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations as currently in effect (the "Rules"), DTC will be required to
make book-entry transfers of Series B Preferred Stock among Participants and to
receive and transmit payments to Participants. Participants and Indirect
Participants with which holders have accounts with respect to the Series B
Preferred Stock similarly are required by the Rules to make book-entry transfers
and receive and transmit such payments on behalf of their respective holders.
Because DTC can act only on behalf of Participants, who in turn act only on
behalf of holders or Indirect Participants, and on behalf of certain banks,
trust companies and other persons approved by it, the ability of a holder to
pledge Series B Preferred Stock to persons or entities that do not participate
in the DTC system, or to otherwise act with respect to such Series B Preferred
Stock, may be limited due to the absence of physical certificates for such
Series B Preferred Stock.
DTC will take any action permitted to be taken by a registered holder of
any Series B Preferred Stock under the terms of the Series B Preferred Stock
only at the direction of one or more Participants to whose accounts with DTC
such Series B Preferred Stock are credited.
GLOBAL PREFERRED SECURITIES; CERTIFICATED SECURITIES
A Global Preferred Security will be exchangeable for the relevant
definitive Series B Preferred Stock registered in the names of persons other
than DTC or its nominee only if (i) any person having a beneficial interest in
the Global Preferred Security requests that the transfer and dividend paying
agent exchange such beneficial interest for Series B Preferred Stock in
definitive form, (ii) DTC notifies the Company that it is unwilling or unable to
continue as depository for such Global Preferred Security or if at any time DTC
ceases to be a clearing agency registered under the Exchange Act at a time when
DTC is required to be so registered in order to act as such depository or, (iii)
the Company in its sole discretion determines that the Global Preferred Security
will be so exchangeable. Any Global Preferred Security that is exchangeable
pursuant to the preceding sentence will be exchangeable for definitive
certificates registered in such names as DTC directs. If Series B Preferred
Stock is issued in definitive form, such Series B Preferred Stock will be in
denominations of $25 and integral multiples thereof and may be transferred or
exchanged at the offices described below.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC is generally required to notify all Participants of the
availability through DTC of definitive Series B Preferred Stock. Upon surrender
by DTC of the Global Preferred Security representing the Series B Preferred
Stock and delivery of instructions for re-registration, the Transfer Agent will
reissue the Series B Preferred Stock as definitive Series B Preferred Stock, and
thereafter the Company will recognize the holders of such definitive Series B
Preferred Stock as registered holders of Series B Preferred Stock entitled to
the benefits of the terms of the Series B Preferred Stock.
Except as described above, the Global Preferred Security may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or another nominee of DTC or to a successor depository appointed by the
Company. Except as described above, DTC may not sell, assign, transfer or
otherwise convey any beneficial interest in a Global Preferred Security
evidencing all or part of the Series B Preferred Stock unless such beneficial
interest is in an amount equal to an authorized denomination for the Series B
Preferred Stock.
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PAYMENT AND PAYING AGENCY
Payments in respect of the Series B Preferred Stock will be made to the
depository, which will credit the relevant accounts at the depository on the
applicable Distribution Dates or, if any Series B Preferred Stock is not held by
the depository, such payments will be made by check mailed to the address of the
holder entitled thereto as such address shall appear on the securities register
relating to the Series B Preferred Stock.
Payments on Series B Preferred Stock represented by a Global Preferred
Security will be made to DTC, as the depository for the Series B Preferred
Stock. If Series B Preferred Stock is issued in definitive form, the amounts
payable in respect of the Series B Preferred Stock will be payable, the transfer
of the Series B Preferred Stock will be registrable, and Series B Preferred
Stock will be exchangeable for Series B Preferred Stock of other denominations
of a like aggregate Liquidation Amount, at the offices of any paying agent or
transfer agent appointed by the Company, provided that payment of any
Distributions may be made at the option of the Company by check mailed to the
address of the persons entitled thereto or by wire transfer.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to
holders of Series B Preferred Stock is based on current law, is for general
information only, and is not tax advice. All references herein to "shareholders"
shall mean or include holders of Series B Preferred Stock and all references to
"stock" shall mean or include Series B Preferred Stock, unless otherwise
indicated. The tax treatment of a holder of Series B Preferred Stock will vary
depending upon such holder's particular situation, and this discussion does not
purport to deal with all aspects of taxation that may be relevant to particular
shareholders in light of their personal investment or tax circumstances, or to
certain types of shareholders subject to special treatment under the federal
income tax laws, including, without limitation, life insurance companies,
certain financial institutions, dealers in securities or currencies,
shareholders holding Series B Preferred Stock as part of a conversion
transaction, as part of a hedge or hedging transaction, or as a position in a
straddle for tax purposes, tax-exempt organizations, foreign corporations,
foreign partnerships and persons who are not citizens or residents of the United
States. In addition, the summary below does not consider the effects of any
foreign, state, local or other tax laws that may be applicable to prospective
holders of Series B Preferred Stock.
A general summary of certain federal income tax considerations to holders
of Series B Preferred Stock is provided under the headings "Taxation of
Shareholders -- General," "Taxation of Tax-Exempt Shareholders" and "Taxation of
Non-U.S. Shareholders." The taxation of the Company and the impact on the
Company of its election to be taxed as a REIT are discussed under the heading
"Taxation of the Company."
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH HIS OWN TAX ADVISOR
REGARDING THE TAX CONSEQUENCES TO HIM OF THE ACQUISITION, OWNERSHIP AND SALE OF
SERIES B PREFERRED STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
REDEMPTION OF SERIES B PREFERRED STOCK
A cash redemption of shares of the Series B Preferred Stock will be treated
under Section 302 of the Code as a distribution taxable as a dividend (to the
extent of the Company's current and accumulated earnings and profits) at
ordinary income rates unless the redemption satisfies one of the tests set forth
in Section 302(b) of the Code and is therefore treated as a sale or exchange of
the redeemed shares. The cash redemption will be treated as a sale or exchange
if it (i) is "substantially disproportionate" with respect to the holder, (ii)
results in a "complete termination" of the holder's stock interest in the
Company, or (iii) is "not essentially equivalent to a dividend" with respect to
the holder, all within the meaning of Section 302(b) of the Code. In determining
whether any of these tests have been met, shares of capital stock (including
Common Stock and other equity interests in the Company) considered to be owned
by the holder by reason of certain constructive ownership rules set forth in the
Code, as well as shares of capital stock actually owned by the holder, must
generally be taken into account. Because the determination as to whether any of
the
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alternative tests of Section 302(b) of the Code will be satisfied with respect
to any particular holder of the Series B Preferred Stock depends upon the facts
and circumstances at the time that the determination must be made, prospective
holders of the Series B Preferred Stock are advised to consult their own tax
advisors to determine such tax treatment.
If a cash redemption of shares of the Series B Preferred Stock is not
treated as a distribution taxable as a dividend to a particular holder, it will
be treated, as to that holder, as a taxable sale or exchange. As a result, such
holder will recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market value
of any property received (less any portion thereof attributable to accumulated
and declared but unpaid dividends, which will be taxable as a dividend to the
extent of the Company's current and accumulated earnings and profits), and (ii)
the holder's adjusted basis in the shares of the Series B Preferred Stock for
tax purposes. Such gain or loss will be capital gain or loss if the shares of
the Series B Preferred Stock have been held as a capital asset, and will be
long-term capital gain or loss if such shares have been held for more than one
year. See "Taxation of Shareholders -- General".
If a cash redemption of shares of the Series B Preferred Stock is treated
as a distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
the Series B Preferred Stock for tax purposes will be transferred to the
holder's remaining shares of capital stock in the Company, if any. If the holder
owns no other shares of capital stock in the Company, such basis may, under
certain circumstances, be transferred to a related person or it may be lost
entirely.
TAXATION OF THE COMPANY
General. The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Code. The Company believes that 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, but no
assurance can be given that the Company has operated or will be able to continue
to operate in a manner so as to qualify or remain qualified.
The sections of the Code that govern the Federal income tax treatment of a
REIT are highly technical and complex. The following sets forth the material
aspects of those sections. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
In the opinion of Argue Pearson Harbison & Myers, LLP, whose opinion has
been filed as an Exhibit to the Registration Statement of which the Prospectus
is a part, the Company is organized in conformity with the requirements for
qualifications as a REIT, and its proposed method of operation will enable it to
continue to meet the requirements for continued qualification and taxation as a
REIT under the Code. This opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters. In addition, this opinion is based upon the factual representations of
the Company concerning its business and properties set forth in the 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, and the various qualification tests imposed
under the Code discussed below, the results of which have not and will not be
reviewed by Argue Pearson Harbison & Myers. Accordingly, no assurance can be
given that the various results of the Company's operation for any particular
taxable year will satisfy such requirements. Further, such requirements may be
changed, perhaps retroactively, by legislative or administrative actions at any
time. The Company has neither sought nor obtained any formal ruling from the
Internal Revenue Service regarding its qualification as a REIT and presently has
no plan to apply for any such ruling. See "-- Failure to Qualify."
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 shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) that generally results from
investment in a corporation. However, 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
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undistributed net capital gains; provided, however, that if the Company has a
net capital gain, it will be taxed at regular corporate rates on its
undistributed REIT taxable income, computed without regard to net capital gain
and the deduction for capital gains dividends, plus a 35% tax on undistributed
net capital gain, if its tax as thus computed is less than the tax computed in
the regular manner. Second, under certain circumstances, the Company may be
subject to the "alternative minimum tax" on its items of tax preference. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest regular corporate rate on
such income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the ordinary
course of business by the Company, (i.e., when the Company is acting as a
dealer)), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on an amount equal to (a) the gross income attributable to the greater of
the amount by which the Company fails the 75% or 95% test, multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, if the Company
should fail to distribute by the end of each year at least the sum of (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset (a "Built-In Gain Asset") from a C corporation (i.e.,
generally a corporation subject to full corporate-level tax) in a transaction in
which the basis of the Built-In Gain Asset in the Company's hands is determined
by reference to the basis of the asset (or any other property) in the hands of
the C corporation, and the Company recognizes gain on the disposition of such
asset during the 10-year period (the "Recognition Period") beginning on the date
on which such asset was acquired by the Company, then, to the extent of the
Built-In Gain (i.e., the excess of (a) the fair market value of such asset on
the date such asset was acquired by the Company over (b) the Company's adjusted
basis in such asset on such date), such gain will be subject to tax at the
highest regular corporate rate pursuant to Treasury Regulations that have not
yet been promulgated. The results described above with respect to the
recognition of Built-In Gain assume the Company will make an election pursuant
to IRS Notice 88-19.
Requirements for Qualifications. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 859 of the Code; (4) which
is neither a financial institution nor an insurance company subject to the
provisions of the Code; (5) the beneficial ownership of which is held by 100 or
more persons; (6) during the last half year 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, the "not closely held requirement"); and (7) which meets
certain other tests, described below, regarding the nature of its income and
assets and the amount of it annual distributions to shareholders. The Code
provides that conditions (1) to (4), inclusive, must be met during the entire
taxable year and that condition (5) must be met during at least 335 days of a
taxable year of twelve months, or during a proportionate part of a taxable year
of less than twelve months. For purposes of conditions (5) and (6), pension
funds and certain other tax-exempt entities are treated as individuals, subject
to a "look-through" exception in the case of condition (6).
Income Tests. In order to maintain its qualification as a REIT, the Company
annually must satisfy two 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 investment
relating to real property or mortgages on real property (including generally
"rents from real property," interest on mortgages on real property and gains on
sale of real property, other than property described in Section 1221 of the
Code) and income derived 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 such real property
investments, dividends, interest and gain from the sale or disposition of stock
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or securities other than property held for sale to customers in the ordinary
course of business (from any combination of the foregoing).
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 the rent must not be based in
whole or in part on the income or profits of any person. However, any 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 receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the REIT, or an owner (actually or constructively) of 10%
or more of the value of the REIT, actually or constructively owns 10% or more of
the value or voting power of such tenant (a "Related Party Tenant"). Third, 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." Finally, for rents received to qualify as "rents
from real property," the REIT generally must not operate or manage the property
or furnish or render services to the tenants of such property, other than
through an independent contractor for whom the REIT derives no revenue. The REIT
may, however, directly perform certain services that are "usually or customarily
rendered" in connection with the rental of space for occupance only and are not
otherwise considered "rendered to the occupant" of 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. 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 be generally
available if the Company's 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 return, and any incorrect information on the
schedule 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. Even if these relief provisions apply, a
special 100% tax is imposed (see "General").
Asset Tests. The Company, at the close of each quarter of its taxable year,
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 must be represented by real
estate assets (including (i) its allocable share of real estate assets held by
partnerships in which the Company owns an interest and (ii) 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 of 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.
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 any of 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, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
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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
action within 30 days after the close of any quarter as may be required to cure
any noncompliance.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount of 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 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 after such declaration. The Company may also be
entitled to pay and deduct deficiency dividends in later years as a relief
measure to correct errors in determining its taxable income. In addition, such
distributions are required to be made pro rata, with no preference to any share
of stock as compared with other shares of the same class, and with no preference
to one class of stock as compared with another class except to the extent that
such class is entitled to such a preference. 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. The Company
intends to make timely distributions sufficient to satisfy these annual
distribution requirements.
The availability of the Company of, among other things, depreciation
deductions with respect to its owned facilities depends upon the treatment of
the Company as the owner of such facilities for federal income tax purposes, and
the classification of the leases with respect to such facilities as "true
leases" rather than financing arrangements for federal income tax purposes. The
questions of whether the Company is the owner of such facilities and whether the
leases are true leases for federal tax purposes are essentially factual matters.
The Company believes and it is the opinion of tax counsel to the Company, that
the Company will be treated as the owner of each of the facilities that it
leases, and such leases will be treated as true leases for federal income tax
purposes. This opinion is not binding on the IRS, however, and no assurances can
be given that the IRS may not successfully challenge the status of the Company
as the owner of its facilities subject to leases, and the status of such leases
as true leases, asserting that the purchase of the facilities by the Company and
the leasing of such facilities merely constitute steps in secured financing
transactions in which the lessees are owners of the facilities and the Company
merely a secured creditor. In such event, the Company would not be entitled to
claim depreciation deductions with respect to any of the affected facilities. As
a result, the Company may fail to meet the 95% distribution requirement or, if
such requirement is met, then a larger percentage of distributions from the
Company would constitute ordinary dividend income to shareholders, rather than a
partial return of capital.
FAILURE TO QUALIFY
If the Company fails to qualify as a REIT in any taxable year, and the
relief provisions 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 shareholders in any year in which the Company
fails to qualify will not be deductible and the Company's failure to qualify as
a REIT would reduce the cash available for distribution by the Company to its
shareholders. In addition, if the Company fails to qualify as a REIT, all
distributions to shareholders will be taxable as ordinary income, to the extent
of current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief. Failure to qualify could result in the
Company's incurring indebtedness or liquidating investments in order to pay the
resulting taxes.
S-33
<PAGE> 34
OTHER TAX MATTERS
The Company owns and operates a number of properties through qualified REIT
subsidiaries (the "QRSs"). The Company has owned 100% of the stock of each of
the QRSs at all times that each of the QRSs has been in existence. As a result,
the QRSs will be treated as qualified REIT subsidiaries under the Code. Code
Section 856(i) provides that a corporation which is a qualified REIT subsidiary
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a qualified REIT subsidiary shall be
treated as assets, liabilities and such items (as the case may be) of the REIT.
Thus, in applying the tests for REIT qualification described in the Prospectus
under the heading "-- Taxation of the Company," the QRSs will be ignored, and
all assets, liabilities and items of income, deduction, and credit of such QRSs
will be treated as assets, liabilities and items of the Company. The Company has
not, however, sought or received a ruling from the IRS that the QRSs are
qualified REIT subsidiaries.
TAXATION OF SHAREHOLDERS -- GENERAL
As long as the Company qualifies as a REIT, distributions made to the
Company's shareholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be taken into account by them as
ordinary income (which will not be eligible for the dividends received deduction
for corporations). Distributions that are properly designated as capital gain
dividends will be taxed as long-term capital gains to the extent they do not
exceed the Company's actual net capital gain for the taxable year, without
regard to the period for which a shareholder has held his stock, although
corporate shareholders may be required to treat up to 20% of any such capital
gain dividend as ordinary income. Individuals are generally subject to differing
rates of tax on various transactions giving rise to long-term capital gains or
losses. In general, the long-term capital gains rate is (i) 28% on capital gain
from the sale or exchange of assets held more than one year, but not more than
18 months; (ii) 20% on capital gain from the sale or exchange of assets held
more than 18 months; and (iii) 25% on capital gain from the sale or exchange of
certain depreciable real estate otherwise eligible for the 20% rate, up to the
amount of depreciation deductions previously taken with respect to such real
estate. For purposes of computing the Company's earnings and profits,
depreciation on real estate will be computed on a straight-line basis over a 40
year recovery period. Distributions (not designated as capital gain dividends)
in excess of current or accumulated earnings and profits will not be taxable to
a shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's shares of stock, but rather will reduce the adjusted basis of such
shares of stock (but not below zero). To the extent that such distributions
exceed the adjusted basis of a shareholder's shares of stock they will be
included in income as long-term or short-term capital gain assuming the shares
are held as a capital asset in the hands of the shareholder. The Company will
notify shareholders at the end of each year as to the portions of the
distributions which constitute ordinary income, net capital gain or return of
capital.
In addition, any dividend declared by the Company in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by the Company and received by the
shareholder 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.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
In general, any gain or loss upon a sale or exchange of stock by a
shareholder who has held such stock as a capital asset will be long-term or
short-term depending on whether the stock was held for more than one year;
provided, however, any loss on the sale or exchange of stock that have been held
by such shareholder for six months or less will be treated as a long-term
capital loss to the extent of distributions from the Company required to be
treated by such shareholder as long-term capital gain.
Individual shareholders are generally subject to differing rates of tax on
long-term capital gains, ranging from 20% to 28%, depending upon the holding
period of the asset that is sold and which gives rise to such gain. Subject to
certain limitations the Company may designate which category of tax rate that
will apply to capital gain dividends or the Company may retain such capital
gains and pay the tax for the shareholders on such gains. If the Company elects
to retain capital gains, the affected shareholders will receive certain credits
and basis adjustments reflecting the resultant deemed distribution and tax
payments for the shareholders.
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<PAGE> 35
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling the dividend income from the Company
should not, subject to certain exceptions described below, be UBTI to a
qualified plan, IRA or other tax-exempt entity (a "Tax-Exempt Shareholder")
provided the Tax-Exempt Shareholder has not held its shares as "debt financed
property" within the meaning of the Code and the shares are not otherwise used
in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly,
income from the sale of Series B Preferred Stock should not, subject to certain
exceptions described below, constitute UBTI unless the Tax-Exempt Shareholder
has held such stock as a dealer (under Section 512(b)(5)(B) of the Code) or as
"debt financed property" within the meaning of the Code or has used the stock in
a trade or business.
For Tax-Exempt Shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements. Capital gain dividends received by a
Tax-Exempt Shareholder that is a private foundation appear to be subject to a 2%
excise tax under Section 4940 of the Code but are not included in adjusted net
income for purposes of determining under Section 4942 the amount which the
private foundation must distribute.
Notwithstanding the above, however, the recently enacted Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act") provides that, effective for taxable
years beginning in 1994, a portion of the dividends paid by a "pension held
REIT" shall be treated as UBTI as to any trust which (i) is described in Section
401 (a) of the Code, (ii) is tax-exempt under Section 501(a) of the Code, and
(iii) holds more than 10% (by value) of the interests in the REIT. Tax-exempt
pension funds that are described in Section 401(a) of the Code are referred to
below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act)
provides that stock owned by qualified trusts shall be treated, for purposes of
the "not closely held" requirement, as owned by the beneficiaries of the trust
(rather than by the trust itself), and (ii) either (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, or
(b) one or more such qualified trusts, each of whom owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The Company believes that it is not
currently a "pension held REIT" within the meaning of the Code.
TAXATION OF NON-U.S. SHAREHOLDERS
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. Shareholders") 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. Shareholder in light of its particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Shareholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in preferred Stock, including any reporting
requirements.
Distributions. Distributions by the Company to a Non-U.S. Shareholder 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
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<PAGE> 36
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. Shareholder of
a United States trade or business. Dividends that are effectively connected with
such a trade or business will be subject to tax on a net basis (that is, after
allowance of deductions) at graduated rates, in the same manner as domestic
shareholders are taxed with respect to such dividends and are generally not
subject to withholding. Any such dividends received by a Non-U.S. Shareholder
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.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's stock, but rather
will reduce the adjusted basis of such stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's 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. Shareholder 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 Series B Preferred Stock is effectively connected with the Non-U.S.
Shareholder's United States trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as domestic shareholders with
respect to such gain (except that a shareholder that is a foreign corporation
may also be subject to the 30% branch profits tax, as discussed above), or (ii)
the Non-U.S. Shareholder 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. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to
domestic shareholders (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. Shareholder that is a corporation.
The Company is required to withhold 35% of any such distribution. That amount is
creditable against the Non-U.S. Shareholder's United States federal income tax
liability.
Pursuant to Treasury Regulations effective through December 31, 1998,
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 requirements discussed above and
the applicability of any treaty rate. Under revised Treasury Regulations
effective January 1, 1999, different presumptions and procedures apply to
determine whether a dividend is subject to withholding and whether a possibly
reduced treaty rate of withholding is available. In addition, new rules apply to
dividends to foreign entities, including partnerships and other pass-through
entities. Distributions in excess of current or accumulated earnings and profits
of the Company to a Non-U.S. Shareholder, to the extent they are not subject to
30% withholding or are subject to a lower treaty rate, may nevertheless be
subject to separate withholding at a rate of 10% under the rules of Code Section
1445. Non-U.S. Shareholders should discuss these new complex withholding rules
with their tax advisors.
Sales of Series B Preferred Stock. Gain recognized by a Non-U.S.
Shareholder upon a sale or other disposition of Series B Preferred Stock
generally will not be subject to United States federal income tax, unless (i)
the Company is not a "domestically controlled REIT" or (ii) investment in the
Series B Preferred
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<PAGE> 37
Stock is effectively connected with the Non-Shareholder's United States trade or
business or (iii) in the case of a Non-U.S. Shareholder who is a nonresident
alien individual, the individual is present in the United States for 183 days or
more during the taxable year and has a "tax home" in the United States. A
domestically controlled REIT is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. The Company believes that it is
a domestically controlled REIT. In the circumstances described above in clauses
(i) and (ii), the Non-U.S. Shareholders will generally be subject to the same
treatment as domestic shareholders with respect to such gain (subject to a
special alternative minimum tax in the case of nonresident alien individuals in
the circumstances described above in clause (i) and, in the case of foreign
corporations, subject to the possible applications of the 30% branch profits
tax, as discussed above). In the circumstances described above in clause (iii),
the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain. However, gain recognized by a Non-U.S. Shareholder
upon a sale or other disposition of Series B Preferred Stock will be subject to
United States Federal Income Tax if (i) the company is a
"domestically-controlled REIT", (ii) at any time during the calendar year of the
sale or other disposition, any class of stock of the company is regularly traded
on an established securities market (as is expected), and (iii) the selling Non-
U.S. Shareholder held more than 5% of the fair market value of the Series B
Preferred Stock at any time during a specified testing period.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States reporting requirements) and information reporting will generally not
apply to distributions paid to Non-U.S. Shareholders outside the United States
that are treated as (i) dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above, or (ii) capital gains dividends or (iii)
distributions attributable to gain from the sale or exchange by the Company of
United States real property interest. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of Series B 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 Series B Preferred Stock by a foreign
office of a broker that (a) is a United States person, or (b) derives 50% or
more of its gross income for certain periods from the conduct of a trade or
business in the United States or (c) is a "controlled foreign corporation"
(generally, a foreign corporation controlled by United States shareholders) for
United States tax purposes, unless the broker has documentary evidence in its
records that the holder is a Non-U.S. Shareholder and certain other conditions
are met, or the shareholder otherwise establishes an exemption. Payment to or
through a United States office of a broker of the proceeds of sale of Series B
Preferred Stock is subject to both backup withholding and information reporting
unless the shareholder certifies under penalties of perjury that the shareholder
is a Non-U.S. Shareholder, or otherwise establishes an exemption. A Non-U.S.
Shareholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS.
Effective January 1, 1999, additional procedures may be required for the Company
to verify whether any specific shareholder is subject to backup withholding on
dividends, and additional new requirements must be satisfied by shareholders
that are pass-through entities for income tax purposes to avoid backup
withholding.
The backup withholding and information reporting rules are under review by
the United States Treasury, and their application to the Common Stock could be
changed prospectively by future Treasury Regulations.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders 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 shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and when
required, demonstrates this fact, or (b) provides a correct tax payor
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with his
correct tax payor identification number may also be
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<PAGE> 38
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the shareholder's income tax liability. In addition,
the Company may be required to withhold a portion of capital gain distributions
to any shareholders who fail to certify their non-foreign status to the Company.
OTHER TAX CONSEQUENCES
The Company and its investors may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. There may be other federal, state, local or foreign
tax considerations applicable to the circumstances of a particular investor.
Prospective investors are urged to consult their own tax advisors with respect
to such matters.
Certain employee benefit plans and individual retirement accounts and
individual retirement annuities ("IRAs") (collectively, "Plans"), are subject to
various provisions of the Employee Retirement Income Security Act 1974, as
amended ("ERISA") and the Code. Before investing in the Series B Preferred Stock
of the Company, a Plan fiduciary should ensure that such investment is in
accordance with ERISA's general fiduciary standards. In making such a
determination, a Plan fiduciary should ensure that the investment is in
accordance with the governing instruments and the overall policy of the Plan,
and that the investment will comply with the diversification and composition
requirements of ERISA. In addition, provisions of ERISA and the Code prohibit
certain transactions using Plan assets that involve persons who have specified
relationships with a Plan. The consequences of such prohibited transactions
include excise taxes, disqualifications of IRAs and other liabilities. A Plan
fiduciary should ensure that any investment in the Securities will not
constitute such a prohibited transaction.
S-38
<PAGE> 39
UNDERWRITING
Upon the terms and subject to the conditions stated in the underwriting
agreement, dated the date hereof (the "Underwriting Agreement"), each of the
Underwriters named below (each, an "Underwriter" and together, the
"Underwriters"), has severally agreed to purchase, and the Company has agreed to
sell to each Underwriter, the number of shares of Series B Preferred Stock set
forth opposite the name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Smith Barney Inc............................................
A.G. Edwards & Sons, Inc. ..................................
Cowen & Company.............................................
EVEREN Securities, Inc. ....................................
Morgan Stanley & Co. Incorporated...........................
Total..................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Series B Preferred
Stock is subject to approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all the
shares of Series B Preferred Stock offered hereby if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Series B
Preferred Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus Supplement and part of the shares to certain
dealers at a price which represents a concession not in excess of $ per
share under the public offering price. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the initial offering of the shares of Series B
Preferred Stock to the public, the public offering price and other selling terms
may be changed by the Underwriters.
In connection with this Offering and in compliance with applicable law, the
Underwriters may effect transactions which stabilize, maintain or otherwise
affect the market price of the Series B Preferred Stock at levels above those
which might otherwise prevail in the open market. Such transactions may include
placing bids for the Series B Preferred Stock or effecting purchases of the
shares of Series B Preferred Stock for the purpose of pegging, fixing or
maintaining the price of the securities or for the purpose of reducing a
syndicate short position created in connection with the Offering. In addition,
the contractual arrangements among the Underwriters include a provision whereby,
if the lead managing underwriters, Smith Barney Inc. and A.G. Edwards & Sons,
Inc., purchase Series B Preferred Stock in the open market for the account of
the underwriting syndicate and the securities purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Series B Preferred Stock in question at the cost price to the
syndicate or may recover from (or decline to pay) the Underwriter or selling
group member in question the selling concession applicable to the securities in
question. The Underwriters are not required to engage in any of these activities
and any such activities, if commenced, may be discontinued at any time.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
A.G. Edwards & Sons, Inc., Cowen & Company, EVEREN Securities, Inc. and
Morgan Stanley & Co. Incorporated have each performed certain investment banking
or other financial services on behalf of the Company during the past two (2)
years for which each received customary fees and expenses and may continue to
provide such services in the future. Application has been made to list the
Series B Preferred Stock on the NYSE under the symbol "OHI PrB". Prior to this
Offering, there has been no public market for the Series B Preferred Stock.
Trading of the Series B Preferred Stock on the NYSE is expected to commence
within 30 days after the initial delivery of the Series B Preferred Stock. The
Underwriters have advised the Company that they intend to make a market in the
Series B Preferred Stock prior to the commencement of
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<PAGE> 40
trading on the NYSE, but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given that a market for
the Series B Preferred Stock will exist prior to commencement of trading on the
NYSE or at any other time.
LEGAL MATTERS
The validity of the Series B Preferred Stock offered hereby will be passed
upon for the Company by Venable, Baetjer and Howard, LLP in Baltimore, Maryland.
Certain legal matters are being passed upon for the Company by Argue Pearson
Harbison & Myers, LLP in Los Angeles, California and for the Underwriters by
Bryan Cave LLP in St. Louis, Missouri.
S-40
<PAGE> 41
PROSPECTUS
- -----------------
OMEGA HEALTHCARE INVESTORS, INC.
COMMON STOCK, PREFERRED STOCK,
DEBT SECURITIES AND SECURITIES WARRANTS
Omega Healthcare Investors, Inc., (the "Company") may from time to time
offer in one or more series (i) shares of its common stock, par value $.10 per
share (the "Common Stock"); (ii) shares of its preferred stock, par value $1.00
per share (the "Preferred Stock"); (iii) its unsecured debt securities (the
"Debt Securities"); or (iv) warrants to purchase Common Stock (the "Common Stock
Warrants"), warrants to purchase Debt Securities (the "Debt Securities
Warrants"), and warrants to purchase Preferred Stock (the "Preferred Stock
Warrants"), with an aggregate public offering price of up to $200,000,000, on
terms to be determined at the time of offering. The Common Stock Warrants, the
Debt Securities Warrants and the Preferred Stock Warrants shall be referred to
herein collectively as the "Securities Warrants." The Common Stock, Preferred
Stock, Debt Securities, and Securities Warrants (collectively, the "Securities")
may be offered, separately or together, in separate series amounts, at prices
and on terms to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement").
The terms of the Preferred Stock, including specific designation and stated
value per share, any dividend, liquidation, redemption, conversion, voting and
other rights, and all other specific terms of the Preferred Stock will be set
forth in the applicable Prospectus Supplement. In the case of the Debt
Securities, the specific title, aggregate principal amount, form (which may be
registered or global), maturity, rate (or manner of calculation thereof) and
time of payment of interest, terms for redemption at the option of the Company
or repayment at the option of the Holder, any sinking fund provisions and any
conversion provisions will be set forth in the applicable Prospectus Supplement.
In the case of the Securities Warrants, the duration, offering price, exercise
price and detachability, if applicable, will be set forth in the applicable
Prospectus Supplement. In addition, such specific terms may include limitations
on direct or beneficial ownership and restrictions on transfer of the Securities
or redemption or conversion terms, in each case as may be appropriate to
preserve the status of the Company as a real estate investment trust ("REIT")
for United States federal income tax purposes. The applicable Prospectus
Supplement will also contain information, where applicable, about certain United
States federal income tax considerations relating to, and any listing on a
securities exchange of, the Offered Securities covered by such Prospectus
Supplement.
(continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 SEPTEMBER 3, 1997
<PAGE> 42
Securities may be offered directly, through agents designated from time to
time by the Company, or to or through underwriters or dealers. If any agents or
underwriters are involved in the sale of any of the Securities, their names, and
any applicable purchase price, fee, commission or discount arrangement between
or among them, will be set forth, or will be calculable from the information set
forth, in the applicable Prospectus Supplement. See "Plan of Distribution." No
Securities may be sold without delivery of the applicable Prospectus Supplement
describing the method and terms of the offering of such series of Securities.
The net proceeds to the Company from the sale of any of the Securities will be
set forth in the applicable Prospectus Supplement.
2
<PAGE> 43
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 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 can be
inspected and copied at the public reference facilities maintained by the
Commission in Washington, D.C. (Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549), and at the Commission's Regional Offices in Chicago
(500 West Madison Street, Suite 1400, Chicago, Illinois 60665) and New York City
(7 World Trade Center, 13th Floor, New York, New York 10048). Copies of such
material can be obtained from the Commission's Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The common stock
of the Company is listed on the New York Stock Exchange and reports, proxy
statements and other information concerning Omega Healthcare Investors, Inc. can
be inspected at 20 Broad Street, New York, New York. The Company has filed with
the Commission a Registration Statement on Form S-3 with respect to the
securities offered hereby. This Prospectus and any accompanying Prospectus
Supplement do not contain all information set forth in the Registration
Statement, in accordance with the rules and regulations of the Commission, and
exhibits thereto which the Company has filed with the Commission under the
Securities Act of 1933 and to which reference is hereto made.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the Commission are
incorporated in this Prospectus by reference:
- Annual Report of the Company on Form 10-K for the year ended
December 31, 1996;
- Quarterly Reports of the Company on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997;
- Current Reports of the Company on Form 8-K dated April 25, 1997 and
August 5, 1997;
- The description of the Company's Common Stock, $.10 par value,
contained in its Initial Registration Statement on Form 8-A, filed under
Section 12 of the Securities Exchange Act of 1934, and declared effective
by the Commission on August 7, 1992.
All documents filed by Omega Healthcare Investors, Inc. pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, subsequent to
the date hereof and prior to the termination of the offering made hereby, shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing such documents. All information appearing in this
Prospectus is qualified in its entirety by the detailed information and
financial statements (including the notes thereto) appearing in the documents
incorporated by reference. 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 which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
Omega Healthcare Investors, Inc. will provide without charge to each person
to whom this Prospectus is delivered, on written or oral request of such person,
a copy (without exhibits other than exhibits specifically incorporated by
reference therein) of any or all documents incorporated by reference into this
Prospectus within the meaning of Section 10(a) of the Securities Act of 1933.
Requests for such copies should be directed to Essel W. Bailey, Jr., President
of the Company, at the Company's principal executive offices at 905 West
Eisenhower Circle, Suite 110, Ann Arbor, Michigan 48103, telephone (734)
747-9790.
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<PAGE> 44
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF THE
COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
4
<PAGE> 45
THE COMPANY
Omega Healthcare Investors, Inc. (the "Company") was incorporated in the
State of Maryland on March 31, 1992. It is a self administered real estate
investment trust which invests in income producing healthcare facilities,
principally long-term care facilities located primarily in the United States.
As of June 30, 1997, the Company's portfolio of investments in the United
States consisted of 232 long-term care facilities and 3 medical office
buildings. The Company owns and leases to healthcare operators 144 of such
long-term care facilities with a total of approximately 13,250 beds and the 3
medical office buildings, and provides mortgages, including participating and
convertible mortgages, on 88 of such long-term care facilities with a total of
approximately 9,200 beds. The Company's facilities are located in 26 states and
operated by 34 unaffiliated operators. The Company also has an interest in and
provides management/advisory services to Principal Healthcare Finance Limited, a
partially-owned affiliate which owns and leases to healthcare operators 116
nursing homes in the United Kingdom. The net carrying amount of the Company's
investments at June 30, 1997 totaled $711 million.
The Company's business objectives are to generate stable and increasing
cash flow and provide the opportunity for increased dividends from annual
increases in rental and interest revenue participation and from portfolio growth
and to preserve and protect shareholders' capital, pay regular cash dividends
and provide holders of common stock the opportunity to realize capital growth.
The Company intends to make and manage its investments (including the sale
or disposition of property or other investments) in such a manner as to be
consistent with the requirements of the Code (or regulations thereunder) to
qualify as a real estate investment trust ("REIT"), unless, because of changes
in circumstances or changes in the Code (or regulations thereunder), the Board
of Directors determines that it is no longer in the best interests of the
Company to qualify as a REIT.
The executive offices of the Company are located at 905 West Eisenhower
Circle, Suite 110, Ann Arbor, Michigan 48103. Its telephone number is (734)
747-9790.
INVESTMENT STRATEGIES AND POLICIES
The Company maintains a diversified portfolio of income-producing
healthcare facilities or mortgages thereon, with a primary focus on long-term
care facilities located in the United States. In making investments, the Company
generally seeks established, creditworthy, middle market healthcare operators
which meet the Company's standards for quality and experience of management.
Although the Company has emphasized long-term care investments, it intends to
diversify prudently into other types of healthcare facilities or other
properties. The Company actively seeks to diversify its investments in terms of
geographic location, operators and facility types.
In evaluating potential investments, the Company considers such factors as:
(i) the quality and experience of management and the creditworthiness of the
operator of the facility; (ii) the adequacy of the facility's historical,
current and forecasted cash flow to meet operational needs, capital expenditures
and lease or debt service obligations; (iii) the construction quality, condition
and design of the facility; (iv) the geographic area and type of facility; (v)
the tax, growth, regulatory and reimbursement environment of the community in
which the facility is located; (vi) the occupancy and demand for similar
healthcare facilities in the same or nearby communities; and (vii) the payor mix
of private, Medicare and Medicaid patients.
The Company plans to maintain its percentage of equity and equity-linked
investments at approximately 70% of its portfolio and to increase the number of
operators and geographic diversity of the facilities in its portfolio as well as
to continue to expand its relationships with current operators.
The Company believes that a growing market exists for REITs focusing on the
long-term care industry. According to data from the U.S. Census Bureau, in 1995
there were approximately 3.6 million Americans over the age of 85, comprising
1.4% of the total U.S. population. From 1960 to 1994, the population within this
age group increased at more than five times the rate of the increase for the
total population. The Company believes that the fundamentals of the long-term
care and nursing home industry will continue to be strong and provide
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<PAGE> 46
good opportunity for additional investment in the foreseeable future. The
long-term care industry provides sub-acute medical and custodial care to the
senior population of the United States. The demand for long-term care comes
principally from those individuals over 85 years of age. Due to demographic
trends, regulation and government support, the company believes that the
long-term care sector of the healthcare industry has been one of the less
volatile segments of the industry.
The Company continually assesses and reassesses investments in other
healthcare and senior medical services markets, including the assisted living
market. Assisted living units are designed for seniors who need assistance with
basic activities such as bathing, meal preparation and eating. While strong
demographic demands support this segment, low barriers to entry and the
unregulated nature of assisted living pose additional risks in this healthcare
segment. The Company believes that there may be selected opportunities to
participate in this sector, but to date has not made significant investments in
properties of this type.
Additionally, the Company believes that acute care hospitals presently
represent a substantial portion of healthcare expenditures in the United States.
While the Company has made limited investments in this segment, with a total of
approximately $30 million invested as of the date of this Prospectus, the
Company anticipates that future investments will result from the need for
capital and the evolving demand for healthcare properties operated by acute care
delivery systems.
A fundamental investment strategy of the Company is to obtain contractual
rent escalations under long-term, non-cancelable "triple net" leases and revenue
participations through participating mortgage loans, and to obtain substantial
security deposits. The Company may participate in mortgage loans through
ownership of collateralized mortgage obligations or other securitization of
mortgages.
The Company may determine to finance acquisitions through the exchange of
properties or the issuance of shares of its capital stock to others, if such
transactions otherwise satisfy the Company's investment criteria. The Company
also has authority to repurchase or otherwise reacquire its Common Stock or any
other securities and may determine to do so in the future.
To the extent that the Company's Board of Directors determines to obtain
additional capital, the Company may raise such capital through additional equity
offerings, debt financings or retention of cash flow (subject to provisions of
the Internal Revenue Code of 1986, as amended concerning the taxability of
undistributed income of "real estate investment trusts"), or a combination of
these methods.
BORROWING POLICIES
The Company may incur additional indebtedness, and anticipates eventually
attaining and then expects to generally maintain a long-term
debt-to-capitalization ratio of approximately 40%. The Company intends to review
periodically its policy with respect to its debt-to-capitalization ratio and to
adapt such policy as its management deems prudent in light of prevailing market
conditions. The Company's strategy generally has been to match the maturity of
its indebtedness with the maturity of its assets, and to employ long term, fixed
rate debt to the extent practicable.
The Company will use the proceeds of any additional indebtedness to provide
permanent financing for investments in additional healthcare facilities. The
Company may obtain either secured or unsecured indebtedness, which may be
convertible into capital stock or accompanied by warrants to purchase capital
stock. Where debt financing is present on terms deemed favorable, the Company
may invest in properties subject to existing loans, secured by mortgages, deeds
of trust or similar liens on the properties.
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<PAGE> 47
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The ratio of earnings to combined fixed charges and preferred stock
dividends are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 14, 1992 DECEMBER 31, JUNE 30,
(INCEPTION) TO -------------------------------- --------------
DECEMBER 31, 1992(1) 1993 1994 1995 1996 1996 1997
-------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends(2).............. 15.45x 3.51x 2.69x 2.92x 2.66x 2.75x 2.63x
</TABLE>
- ---------------
(1) Operations of the Company commenced on August 14, 1992.
(2) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, net earnings (before extraordinary charge
from prepayment of debt in 1995) has been added to fixed charges and that
sum has been divided by such fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and, starting
with the period ended June 30, 1997, preferred stock dividends for the
Series A Cumulative Preferred Stock.
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 the repayment of the Company's revolving
line of credit, to fund additional investments and general corporate purposes.
DESCRIPTION OF SECURITIES
The Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Common Stock, par value $0.10
per share; (ii) shares of its Preferred Stock, par value $1.00 per share, in one
or more series; (iii) Debt Securities, in one or more series; (iv) Common Stock
Warrants; (v) Preferred Stock Warrants; (vi) Debt Warrants; and (vii) any
combination of the foregoing, either individually or as units consisting of one
or more of the types of Securities described in clauses (i) through (vi). The
terms of any specific offering of Securities, including the terms of any units
offered, will be set forth in a Prospectus Supplement relating to such offering.
The authorized capital stock of the Company currently consists of
50,000,000 shares of Common Stock, par value $0.10 per share, and 10,000,000
shares of Preferred Stock, par value $1.00 per share. As of June 30, 1997, the
Company had 19,065,324 shares of its Common Stock and 2,300,000 shares of its
9.25% Series A Cumulative Preferred Stock issued and outstanding. The Common
Stock and 9.25% Series A Cumulative Preferred Stock are listed on the New York
Stock Exchange. The Company intends to apply to list any additional shares of
its Common Stock which are issued and sold hereunder. The Company may apply to
list any additional series of Preferred Stock which are offered and sold
hereunder, as described in the Prospectus Supplement relating to such Preferred
Stock.
COMMON STOCK
All shares of Common Stock participate equally in dividends payable to
stockholders of Common Stock when and as declared by the Board of Directors and
in net assets available for distribution to stockholders of Common Stock on
liquidation or dissolution, have one vote per share on all matters submitted to
a vote of the stockholders and do not have cumulative voting rights in the
election of directors. All issued and outstanding shares of Common Stock are,
and the Common Stock offered hereby will be upon issuance, validly issued, fully
paid and nonassessable. Holders of the Common Stock do not have preference,
conversion, exchange or preemptive rights. The Common Stock is listed on the New
York Stock Exchange (NYSE Symbol "OHI").
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<PAGE> 48
REDEMPTION AND BUSINESS COMBINATION PROVISIONS
If the Board of Directors shall, at any time and in good faith, be of the
opinion that direct or indirect ownership of at least 9.9% or more of the voting
shares of capital stock has or may become concentrated in the hands of one
beneficial owner, the Board of Directors shall have the power (i) by lot or
other means deemed equitable by it to call for the purchase from any stockholder
of the Company a number of voting shares sufficient, in the opinion of the Board
of Directors, to maintain or bring the direct or indirect ownership of voting
shares of capital stock of such beneficial owner to a level of no more than 9.9%
of the outstanding voting shares of the Company's capital stock, and (ii) to
refuse to transfer or issue voting shares of capital stock to any person whose
acquisition of such voting shares would, in the opinion of the Board of
Directors, result in the direct or indirect ownership by that person of more
than 9.9% of the outstanding voting shares of capital stock of the Company.
Further, any transfer of shares, options, warrants, or other securities
convertible into voting shares that would create a beneficial owner of more than
9.9% of the outstanding voting shares shall be deemed void ab initio and the
intended transferee shall be deemed never to have had an interest therein. The
purchase price for any voting shares of capital stock so redeemed shall be equal
to the fair market value of the shares reflected in the closing sales prices for
the shares, if then listed on a national securities exchange, or the average of
the closing sales prices for the shares if then listed on more than one national
securities exchange, or if the shares are not then listed on a national
securities exchange, the latest bid quotation for the shares if then traded
over-the-counter, on the last business day immediately preceding the day on
which notices of such acquisitions are sent by the Company, or, if no such
closing sales prices or quotations are available, then the purchase price shall
be equal to the net asset value of such stock as determined by the Board of
Directors in accordance with the provisions of applicable law. From and after
the date fixed for purchase by the Board of Directors, the holder of any shares
so called for purchase shall cease to be entitled to distributions, voting
rights and other benefits with respect to such shares, except the right to
payment of the purchase price for the shares.
The Articles of Incorporation require that, except in certain
circumstances, Business Combinations (as defined) between the Company and a
beneficial holder of 10% or more of the Company's outstanding voting stock (a
"Related Person") be approved by the affirmative vote of at least 80% of the
outstanding voting shares of the Company.
A Business Combination is defined in the Articles of Incorporation as (a)
any merger or consolidation of the Company with or into a Related Person, (b)
any sale, lease, exchange, transfer or other disposition, including without
limitation a mortgage or any other security device, of all or any "Substantial
Part" (as defined) of the assets of the Company (including without limitation
any voting securities of a subsidiary) to a Related Person, (c) any merger or
consolidation of a Related Person with or into the Company, (d) any sale, lease,
exchange, transfer or other disposition of all or any Substantial Part of the
assets of a Related Person to the Company, (e) the issuance of any securities
(other than by way of pro rata distribution to all stockholders) of the Company
to a Related Person, and (f) any agreement, contract or other arrangement
providing for any of the transactions described in the definition of Business
Combination. The term "Substantial Part" shall mean more than 10% of the book
value of the total assets of the Company as of the end of its most recent fiscal
year ending prior to the time the determination is being made.
Pursuant to the Articles of Incorporation, the Company's Board of Directors
is classified into three classes. Each class of directors serves for a term of
three years, with one class being elected each year. As of the date of this
Prospectus, there are seven directors, two in each of two classes of directors,
and three in one class.
The foregoing provisions of the Articles of Incorporation and certain other
matters may not be amended without the affirmative vote of at least 80% of the
outstanding voting shares of the Company.
The foregoing provisions may have the effect of discouraging unilateral
tender offers or other takeover proposals which certain stockholders might deem
in their interests or in which they might receive a substantial premium. The
Board of Directors' authority to issue and establish the terms of currently
authorized Preferred Stock, without stockholder approval, may also have the
effect of discouraging takeover attempts. See "Preferred Stock." The provisions
could also have the effect of insulating current management against the
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<PAGE> 49
possibility of removal and could, by possibly reducing temporary fluctuations in
market price caused by accumulation of shares, deprive stockholders of
opportunities to sell at a temporarily higher market price. However, the Board
of Directors believes that inclusion of the Business Combination provisions in
the Articles of Incorporation may help assure fair treatment of stockholders and
preserve the assets of the Company.
The foregoing summary of certain provisions of the Articles of
Incorporation does not purport to be complete or to give effect to provisions of
statutory or common law. The foregoing summary is subject to, and qualified in
its entirety by reference to, the provisions of applicable law and the Articles
of Incorporation, a copy of which is incorporated by reference as an exhibit to
the Registration Statement of which this Prospectus is a part.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York is the transfer agent and registrar
of the Common Stock and Preferred Stock.
PREFERRED STOCK
The terms of any series of the Preferred Stock offered by any Prospectus
Supplement will be as described in such Prospectus Supplement. The following
description of the terms of the Preferred Stock, except as modified in a
Prospectus Supplement, sets forth certain general terms and provisions of the
Preferred Stock. 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 Company's
Articles of Incorporation (the "Articles of Incorporation"), 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 as an exhibit to the Registration
Statement of which this Prospectus is a part at or prior to the time of the
issuance of such series of the Preferred Stock.
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $0.10 par value per share, and 10,000,000 shares of preferred
stock, $1.00 par value per share ("preferred stock of the Company," which term,
as used herein, includes the Preferred Stock offered hereby).
Under the Articles of Incorporation, the Board of Directors of the Company
is authorized without further stockholder action to provide for the issuance of
up to an additional 7,700,000 shares of preferred stock of the Company, in one
or more series, with such designations, preferences, powers and relative
participating, optional or other special rights and 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 preferences 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 Company has outstanding
2,300,000 shares of its 9.25% Series A Cumulative Preferred Stock.
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;
(vii) any additional voting, dividend, liquidation, redemption, sinking fund and
other rights, preferences, privileges, limitations and restrictions.
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<PAGE> 50
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 ARTICLES OF INCORPORATION
See "Common Stock -- Redemption and Business Combination Provisions" for a
description of certain provisions of the Articles of Incorporation, including
provisions relating to redemption rights and provisions which may have certain
anti-takeover effects.
DIVIDEND RIGHTS
Holders of the Preferred Stock of each series will be entitled to receive,
when and if declared by the Board of Directors of the Company, out of funds of
the Company legally available therefor, cash dividends on such dates and at such
rates as will be set forth in, or as are determined by, the method described in
the Prospectus Supplement relating to such series of the Preferred Stock. Such
rate may be fixed or variable or both. Each such dividend will be payable to the
holders of record as they appear on the stock books of the Company on such
record dates, fixed by the Board of Directors of the Company, as specified in
the Prospectus Supplement relating to such series of Preferred Stock.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. 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 of the
Company (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 the Company of any class or
series (other than Junior Stock), the Company may not declare any dividends on
any shares of Common Stock of the Company 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 is made to the
holders of Common Stock or any other shares of stock of the Company ranking
junior as to such distribution to such series of Preferred Stock, the amount set
forth in the Prospectus Supplement relating to such series of the Preferred
Stock. If, upon any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the
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<PAGE> 51
amounts payable with respect to the Preferred Stock of any series and any other
shares of preferred stock of the Company (including any other series of the
Preferred Stock) ranking as to any such distribution on a parity with such
series of the Preferred Stock are not paid in full, the holders of the Preferred
Stock of such series and of such other shares of preferred stock of the Company
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 liquidating distributions 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 Junior Stock, according to their respective
rights and preferences and in each case according to their respective number of
shares. For such purposes, the consolidation or merger of the Company with or
into any other corporation, or the sale, lease or conveyance of all or
substantially all of the property or business of the Company, shall not be
deemed to constitute a liquidation, dissolution or winding up of the Company.
REDEMPTION
A series of the Preferred Stock may be redeemable, in whole or from time to
time in part, at the option of the Company, and may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon terms, at
the time 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
default shall be made by the Company in providing for 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 distribution 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 pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion.
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.
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<PAGE> 52
So long as any shares of the Preferred Stock of a series remain
outstanding, the consent or the affirmative vote of the holders of at least 80%
of the votes entitled to be cast with respect to the then outstanding shares of
such series of the Preferred Stock together with any Parity Preferred (as
defined below), voting as one class, either expressed in writing or at a meeting
called for that purpose, will be necessary (i) to permit, effect or validate the
authorization, or any increase in the authorized amount, of any class or series
of shares of the Company ranking prior to the Preferred Stock of such series as
to dividends, voting or distribution of assets and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner which adversely affects the powers, preferences, voting
power or other rights or privileges of such series of the Preferred Stock. In
case any series of the Preferred Stock would be so affected by any such action
referred to in clause (ii) above in a different manner than one or more series
of the Parity Preferred then outstanding, the holders of shares of the Preferred
Stock of such series, together with any series of the Parity Preferred which
will be similarly affected, will be entitled to vote as a class, and the Company
will not take such action without the consent or affirmative vote, as above
provided, of at least 80% of the total number of votes entitled to be cast with
respect to each such series of the Preferred Stock and the Parity Preferred,
then outstanding, in lieu of the consent or affirmative vote hereinabove
otherwise required.
With respect to any matter as to which the Preferred Stock of any series is
entitled to vote, holders of the Preferred Stock of such series and any other
series of preferred stock of the Company ranking on a parity with such series of
the Preferred Stock as to dividends and distributions of assets and which by its
terms provides for similar voting rights (the "Parity Preferred") will be
entitled to cast the number of votes set forth in the Prospectus Supplement with
respect to that series of Preferred Stock. As a result of the provisions
described in the preceding paragraph requiring the holders of shares of a series
of the Preferred Stock to vote together as a class with the holders of shares of
one or more series of Parity Preferred, it is possible that the holders of such
shares of Parity Preferred could approve action that would adversely affect such
series of Preferred Stock, including the creation of a class of capital stock
ranking prior to such series of Preferred Stock as to dividends, voting or
distributions of assets.
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
Unless otherwise indicated in a Prospectus Supplement relating thereto,
First Chicago Trust Company of New York will be the transfer agent, dividend and
redemption price disbursement agent and registrar for shares of each series of
the Preferred Stock.
DEBT SECURITIES
Debt Securities may be issued from time to time in series under an
Indenture (the "Indenture") dated August 27, 1997 between the Company and NBD
Bank, as Trustee (the "Trustee"). As used under this caption, unless the context
otherwise requires, Offered Debt Securities shall mean the Debt Securities
offered by this Prospectus and the accompanying Prospectus Supplement. The
statements under this caption are brief summaries of certain provisions
contained in the Indenture, do not purport to be complete and are qualified in
their entirety by reference to the Indenture, including the definition therein
of certain terms, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following sets forth certain
general terms and provisions of the Debt Securities. Further terms of the
Offered Debt Securities will be set forth in the Prospectus Supplement.
GENERAL
The Indenture provides for the issuance of Debt Securities in series, and
does not limit the principal amount of Debt Securities which may be issued
thereunder.
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Reference is made to the Prospectus Supplement for the following terms of
the Offered Debt Securities: (i) the specific title of the Offered Debt
Securities; (ii) the aggregate principal amount of the Offered Debt Securities;
(iii) the percentage of the principal amount at which the Offered Debt
Securities will be issued; (iv) the date on which the Offered Debt Securities
will mature; (v) the rate or rates per annum or the method for determining such
rate or rates, if any, at which the Offered Debt Securities will bear interest;
(vi) the times at which any such interest will be payable; (vii) any provisions
relating to optional or mandatory redemption of the Offered Debt Securities at
the option of the Company or pursuant to sinking fund or analogous provisions;
(viii) the denominations in which the Offered Debt Securities are authorized to
be issued if other than $100,000; (ix) any provisions relating to the conversion
or exchange of the Offered Debt Securities into Common Stock or into Debt
Securities of another series; (x) the portion of the principal amount, if less
than the principal amount, payable on acceleration; (xi) the place or places at
which the Company will make payments of principal (and premiums, if any) and
interest, if any, and the method of payment; (xii) whether the Offered Debt
Securities will be issued in whole or in part in global form; (xiii) any
additional covenants and Events of Default and the remedies with respect thereto
not currently set forth in the Indenture; (xiv) the identity of the Trustee for
the Debt Securities, and if not the Trustee, the identity of each paying agent
and the Debt Securities Registrar; (xv) the currency or currencies other than
United States Dollars in which any series of Debt Securities will be issued; and
(xvi) any other specific terms of the Offered Debt Securities.
One or more series of the Debt Securities may be issued as discounted Debt
Securities (bearing no interest or bearing interest at a rate which at the time
of issuance is below market rates) to be sold at a substantial discount below
their stated principal amount. Tax and other special considerations applicable
to any such discounted Debt Securities will be described in the Prospectus
Supplement relating thereto.
STATUS OF DEBT SECURITIES
The Debt Securities will be unsecured obligations of the Company and may be
ranking on a parity with all other unsecured and unsubordinated indebtedness, or
may be subordinated to certain other indebtedness of the Company.
CONVERSION RIGHTS
The terms, if any, on which Debt Securities of a 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 beneficial Holder may not convert any
Debt Security, and such Debt Security shall not be convertible by any Holder, if
as a result of such conversion any person would then be deemed to beneficially
own, directly or indirectly, 9.9% or more of the Company's shares of Common
Stock.
ABSENCE OF RESTRICTIVE COVENANTS
Except as noted below under "Dividends, Distributions and Acquisitions of
Capital Stock," the Company is not restricted by the Indenture from paying
dividends or from incurring, assuming or becoming liable for any type of debt or
other obligations or from creating liens on its property for any purpose. The
Indenture does not require the maintenance of any financial ratios or specified
levels of net worth or liquidity. Except as may be set forth in the Prospectus
Supplement, there are no provisions of the Indenture which afford holders of the
Debt Securities protection in the event of a highly leveraged transaction
involving the Company.
OPTIONAL REDEMPTION
The Debt Securities will be subject to redemption, in whole or from time to
time in part, at any time for certain reasons intended to protect the Company's
status as a REIT, at the option of the Company in the manner specified in the
Indenture at a redemption price equal to 100% of the principal amount, premium,
if any, plus interest accrued to the date of redemption. The Indenture does not
contain any provision requiring
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<PAGE> 54
the Company to repurchase the Debt Securities at the option of the Holders
thereof in the event of a leveraged buyout, recapitalization or similar
restructuring of the Company.
DIVIDENDS, DISTRIBUTIONS AND ACQUISITIONS OF CAPITAL STOCK
The Indenture provides that the Company will not (i) declare or pay any
dividend or make any distribution on its capital stock or to holders of its
capital stock (other than dividends or distributions payable in its capital
stock or other than as the Company determines is necessary to maintain its
status as a REIT) or (ii) purchase, redeem or otherwise acquire or retire for
value any of its capital stock, or any warrants, rights or options or other
securities to purchase or acquire any Shares of its capital stock (other than
the Debt Securities) or permit any subsidiary to do so, if at the time of such
action an Event of Default (as defined in the Indenture) has occurred and is
continuing or would exist immediately after giving effect to such action.
EVENTS OF DEFAULT
An Event of Default with respect to Debt Securities of any series is
defined in the Indenture as being (a) failure to pay principal of or any premium
on any Debt Security of that series when due; (b) failure to pay any interest on
any Debt Security of that series when due, continued for 30 days; (c) failure to
deposit any sinking fund payment when due, in respect of any Debt Security of
that series; (d) failure to perform any other covenant of the Company in the
Indenture (other than a covenant included in the Indenture solely for the
benefit of one or more series of Debt Securities other than that series),
continued for 60 days after written notice as provided in the Indenture; (e)
certain events of bankruptcy, insolvency, conservatorship, receivership or
reorganization; and (f) any other Event of Default provided with respect to the
Debt Securities of that series.
If an Event of Default with respect to the outstanding Debt Securities of
any series occurs and is continuing, either the Trustee or the Holders of at
least 25% in aggregate principal amount of the outstanding Debt Securities of
that series may declare the principal amount (or, if the Debt Securities of that
series are original issue discount Debt Securities, such portion of the
principal amount as may be specified in the terms of that series) of all the
outstanding Debt Securities of that series to be due and payable immediately. At
any time after the declaration of acceleration with respect to the Debt
Securities of any series has been made, but before a judgment or decree based on
acceleration has been obtained, the Holders of a majority in aggregate principal
amount of the outstanding Debt Securities of that series may, under certain
circumstances, rescind and annul such acceleration.
The Indenture provides that, subject to the duty of the Trustee during
default to act with the required standard of care, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee and subject to certain limitations, the Holders
of a majority in aggregate principal amount of the outstanding Debt Securities
of any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the Debt Securities
of that series.
The Company is required to furnish to the Trustee annually a statement as
to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
MODIFICATIONS AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee without the consent of any Holders to, among other things, (a)
evidence the succession of another corporation to the Company, (b) add to the
covenants of the Company or surrender any right or power conferred upon the
Company, (c) establish the form or terms of Debt Securities, including any
subordination provisions, (d) cure any ambiguity, correct or supplement any
provision which may be defective or inconsistent or make any other provisions
with respect to matters or questions arising under the Indenture, provided that
such action does not adversely affect the interests of the Holders of Debt
Securities of any series in any material respect, (e) add to,
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<PAGE> 55
delete, or revise conditions, limitations and restrictions on the authorized
amounts, terms or purpose of Debt Securities, as set forth in the Indenture, or
(f) evidence and provide for a successor Trustee.
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the outstanding Debt Securities of each series affected by
such modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the Holder of each outstanding Debt
Security affected thereby, (a) change the stated maturity date of the principal
of, or any installment of principal of or interest , if any, on any Debt
Security , (b) reduce the principal amount of, or premium or interest if any, on
any Debt Security, (c) reduce the amount of principal of an original issue
discount Debt Security payable upon acceleration of the maturity thereof, (d)
change the currency of payment of the principal of, or premium or interest, if
any, on any Debt Security, (e) impair the right to institute suit for the
enforcement of any payment on or with respect to any Debt Security, (f) modify
the conversion provisions, if any, of any Debt Security in a manner adverse to
the Holder of that Debt Security, or (g) reduce the percentage in principal
amount of the outstanding Debt Security of any series, the consent of whose
Holders is required for modification or amendment of that Indenture or for
waiver of compliance with certain provisions of that Indenture or for waiver of
certain defaults.
The Holders of a majority in aggregate principal amount of the outstanding
Debt Security of each series may, on behalf of all Holders of the Debt
Securities of that series, waive, insofar as that series is concerned,
compliance by the Company with certain restrictive provisions of the Indenture.
The Holders of a majority in aggregate principal amount of the outstanding Debt
Securities of each series may, on behalf of all Holders of the Debt Securities
of that series, waive any past default under the Indenture with respect to the
Debt Securities of that series, except a default in the payment of principal or
premium or interest, if any, or a default in respect of a covenant or provision
which under the terms of the Indenture cannot be modified or amended without the
consent of the Holder of each outstanding Debt Security of the series affected.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company, without the consent of the Holders
of any of the Debt Securities, may consolidate or merge with or into or transfer
its assets substantially as an entirety to, any entity organized under the laws
of the United States or any state, provided that the successor entity assumes
the Company's obligations under the Indenture, that after giving effect to the
transaction no Event of Default, and no event which, after notice or lapse of
time, would become an Event of Default, shall have occurred and be continuing,
and that certain other conditions are met.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in global
form (the "Global Securities"). Except as set forth in a Prospectus Supplement,
the terms and provisions with respect to any Global Securities will be as set
forth in this Section captioned "Global Securities." The Global Securities will
be deposited with a depositary (the "Depositary"), or with a nominee for a
Depositary, 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 of the series to be represented by such Global Security or
Securities. Unless and until it is exchanged in whole or in part for Debt
Securities in definitive form, a Global Security may not be transferred except
as a whole by the Depositary for such Global Security to a nominee of such
Depositary or by a nominee of such Depositary to such Depositary or another
nominee of such Depositary or by such Depositary or any such nominee to a
successor of such Depositary or a nominee of such successor.
The specific material terms of the depositary arrangement with respect to
any portion of a series of Debt Securities to be represented by a Global
Security will be described in the Prospectus Supplement. The Company anticipates
that the following provisions will apply to all depositary arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit, on its book-entry registration and transfer system, the
respective principal amounts of the Debt Securities represented by
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such Global Security to the accounts of persons that have accounts with such
Depositary ("participants"). The accounts to be credited shall be designated by
any underwriters or agents participating in the distribution of such Debt
Securities. Ownership of beneficial interests in a Global Security will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests in such Global Security will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by the Depositary for such Global Security (with respect to interests of
participants) or by participants or persons that hold through participants (with
respect to interests of persons other than participant). So long as the
Depositary for a Global Security, or its nominee, is the registered owner of
such Global Security, such Depositary or such nominee, as the case may be, will
be considered the sole owner or Holder of the Debt Securities represented by
such Global Security for all purposes under the Indenture; provided, however,
that the 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 Depositary. Except as set forth herein
or otherwise provided in the Prospectus Supplement, owners of beneficial
interests in a Global Security will not be entitled to have the Debt Securities
represented by such Global Security registered in their names, will not receive
physical delivery of such Debt Securities in definitive form and will not be
considered the registered owners or Holders thereof under the Indenture, but the
beneficial owners and Holders only.
Principal, premium, if any, and interest payments on Debt Securities
represented by a Global Security registered in the name of a Depositary or its
nominee will be made to such Depositary or its nominee, as the case may be, as
the registered owner of such Global Security. None of the Company, the Trustee
or any Paying Agent for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in such Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that the Depositary 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 Depositary. 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 Depositary for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depositary and a successor
Depositary is not appointed by the Company within 90 days, the Company will
issue such Debt Securities in definitive form 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.
The laws of some states require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in Debt Securities represented by
Global Securities.
SECURITIES WARRANTS
The Company may issue Securities Warrants for the purchase of Common Stock,
Preferred Stock or Debt Securities. Securities Warrants may be issued
independently or together with Common Stock, Preferred Stock or Debt Securities
offered by any Prospectus Supplement and may be attached to or separate from
such Common Stock, Preferred Stock, or Debt Securities. Each series of
Securities Warrants will be issued under a separate warrant agreement (a
"Securities Warrant Agreement") to be entered into between the Company and a
bank or trust company, as Securities Warrant agent, all as set forth in the
Prospectus Supplement relating to the particular issue of offered Securities
Warrants. The Securities Warrant agent will act solely as an agent of the
Company in connection with the Securities Warrants of such series and will not
assume any
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obligation or relationship of agency or trust for or with any holders or
beneficial owners of Securities Warrants. The following summaries of certain
provisions of the Securities Warrant Agreement and Securities Warrants do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Securities Warrant Agreement and the
Securities Warrants relating to each series of Securities Warrants which will be
filed with the Commission and incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Securities Warrants.
In the case of Securities Warrants for the purchase of Common Stock or
Preferred Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise of
such Securities Warrants, the exercise price, and in the case of Securities
Warrants for Preferred Stock the designation, aggregate number and terms of the
series of Preferred Stock purchasable upon exercise of such Securities Warrants;
(iii) the designation and terms of any series of Preferred Stock with which such
Securities Warrants are being offered and the number of such Securities Warrants
being offered with such Preferred Stock; (iv) the date, if any, on and after
which such Securities Warrants and the related series of Preferred Stock or
Common Stock will be transferable separately; (v) the date on which the right to
exercise such Securities Warrants shall commence and the Expiration Date; (vi)
any special United States Federal income tax consequences; and (vii) any other
terms of such Securities Warrants.
If Securities Warrants for the purchase of Debt Securities are offered, the
applicable Prospectus Supplement will describe the terms of such Securities
Warrants, including the following where applicable: (i) the offering price; (ii)
the denominations and terms of the series of Debt Securities purchasable upon
exercise of such Securities Warrants; (iii) the designation and terms of any
series of Debt Securities, with which such Securities Warrants are being offered
with each such Debt Securities; (iv) the date, if any, on and after which such
Securities Warrants and the related series of Debt Securities will be
transferable separately; (v) the principal amount of the series of Debt
Securities purchasable upon exercise of each such Securities Warrant and the
price at which such principal amount of Debt Securities of such series may be
purchased upon such exercise; (vi) the date on which the right shall expire (the
"Expiration Date"); (vii) whether the Securities Warrants will be issued in
registered or bearer form; (viii) any special United States Federal income tax
consequences; (ix) the terms, if any, on which the Company may accelerate the
date by which the Securities Warrants must be exercised; and (x) any other terms
of such Securities Warrants.
Securities Warrant certificates may be exchanged for new Securities Warrant
certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the Securities Warrant agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrant to purchase Debt Securities, holders of such Securities Warrants will
not have any of the rights of holders of the Debt Securities purchasable upon
such exercise, including the right to receive payments of principal or premium,
if any, or interest, if any, on such Debt Securities or to enforce covenants in
the applicable indenture. Prior to the exercise of any Securities Warrants to
purchase Common Stock or Preferred Stock, holders of such Securities Warrants
will not have any rights of holders of such Common Stock or Preferred Stock,
including the right to receive payments of dividends, if any, on such Common
Stock or Preferred Stock, or to exercise any applicable right to vote.
EXERCISE OF SECURITIES WARRANTS
Each Securities Warrant will entitle the holder thereof to purchase a
number of shares of Common Stock, Preferred Stock or such principal amount of
Debt Securities, as the case may be, at such exercise price as shall in each
case be set forth in, or calculable from, the Prospectus Supplement relating to
the offered Securities Warrants. After the close of business on the Expiration
Date (or such later date to which such Expiration Date may be extended by the
Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities
Warrant agent payment as provided in the applicable Prospectus Supplement of the
amount required to purchase the Common Stock, Preferred Stock or Debt
Securities, as the case may be, purchasable upon such exercise together with
certain
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information set forth on the reverse side of the Securities Warrant certificate.
Securities Warrants will be deemed to have been exercised upon receipt of
payment of the exercise price, subject to the receipt within five (5) business
days, of the Securities Warrant certificate evidencing such Securities Warrants.
Upon receipt of such payment and the Securities Warrant certificate properly
completed and duly executed at the corporate trust office of the Securities
Warrant agent or any other office indicated in the applicable Prospectus
Supplement, the Company will, as soon as practicable, issue and deliver the
Common Stock, Preferred Stock or Debt Securities, as the case may be,
purchasable upon such exercise. If fewer than all of the Securities Warrants
represented by such Securities Warrant certificate are exercised, a new
Securities Warrant certificate will be issued for the remaining amount of
Securities Warrants.
AMENDMENTS AND SUPPLEMENTS TO SECURITIES WARRANT AGREEMENT
The Securities Warrant Agreements may be amended or supplemented without
the consent of the holders of the Securities Warrants issued thereunder to
effect changes that are not inconsistent with the provisions of the Securities
Warrants and that do not adversely affect the interests of the holders of the
Securities Warrants.
COMMON STOCK WARRANT ADJUSTMENTS
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by a Common
Stock Warrant are subject to adjustment in certain events, including (i) payment
of a dividend on the Common Stock payable in capital stock and stock splits,
combinations or reclassifications of the Common Stock, (ii) issuance to all
holders of Common Stock of rights or warrants to subscribe for or purchase
shares of Common Stock at less than their current market price (as defined in
the Securities Warrant Agreement for such series of Common Stock Warrants), and
(iii) certain distributions of evidences of indebtedness or assets (including
cash dividends or distributions paid out of consolidated earnings or retained
earnings or dividends payable in Common Stock) or of subscription rights and
warrants (excluding those referred to above).
No adjustment in the exercise price of, and the number of shares of Common
Stock covered by a Common Stock Warrant will be made for regular quarterly or
other periods of recurring cash dividends or distributions or for cash dividends
or distributions to the extent paid from consolidated earnings or retained
earnings. No adjustment will be required unless such adjustment would require a
change of at least 1% in the exercise price then in effect. Except as stated
above, the exercise price of, and the number of shares of Common Stock covered
by, a Common Stock Warrant will not be adjusted for the issuance of Common Stock
or any securities convertible into or exchangeable for Common Stock, or carrying
the right or option to purchase or otherwise acquire the foregoing in exchange
for cash, other property or services.
In the event of any (i) consolidation or merger of the Company with or into
any entity (other than a consolidation or a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock), (ii) sale, transfer, lease or conveyance of all or substantially
all of the assets of the Company or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value or from par value to no par value), then any holder of a Common Stock
Warrant will be entitled, on or after the occurrence of any such event, to
receive on exercise of such Common Stock Warrant the kind and amount of shares
of stock or other securities, cash or other property (or any combination
thereof) that the holder would have received had such holder exercised such
holder's Common Stock Warrant immediately prior to the occurrence of such event.
If the consideration to be received upon exercise of the Common Stock Warrant
following any such event consists of common stock of the surviving entity, then
from and after the occurrence of such event, the exercise price of such Common
Stock Warrant will be subject to the same anti-dilution and other adjustments
described in the second preceding paragraph, applied as if such common stock
were Common Stock.
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PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
Securities will be named in the applicable Prospectus Supplement. The Company
has reserved the right to sell Securities directly to investors on its own
behalf in those jurisdictions where and in such manner as it is authorized to do
so.
Underwriters may offer and sell Securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The Company
also may, from time to time, authorize underwriters or dealers, acting as the
Company's agents, to offer and sell Securities upon the terms and conditions as
are set forth in the applicable Prospectus Supplement. In connection with the
sale of Securities, underwriters may be deemed to have received compensation
from the Company in the form of underwriting discounts or commissions and may
also receive commissions from purchasers of the Securities for whom they may act
as agent. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable Prospectus Supplement. Dealers and agents participating in the
distribution of Securities may be deemed to be underwriters, and any discounts
and commissions received by them and any profit realized by them on resale of
the Securities may be deemed to be underwriting discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act.
The net proceeds to the Company from the sale of the Securities will be the
purchase price of the Securities less any such discounts or commissions and the
other attributable expenses of issuance and distribution.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
LEGAL MATTERS
Certain legal matters with respect to the Securities offered hereby will be
passed upon for the Company by Argue Pearson Harbison & Myers, LLP, Los Angeles,
California.
EXPERTS
The consolidated financial statements of Omega Healthcare Investors, Inc.
(the Company), incorporated by reference from the Company's Annual Report on
Form 10-K, for the year ended December 31, 1996, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report incorporated by
reference 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 PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS AND RELATED PROSPECTUS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS AND RELATED PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Available Information.................... S-2
Forward-Looking Information.............. S-2
Prospectus Supplement Summary............ S-3
The Offering............................. S-7
Risk Factors............................. S-9
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends.............................. S-13
Use of Proceeds.......................... S-14
Capitalization........................... S-15
Selected Financial and Operating Data.... S-16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. S-17
Properties............................... S-20
Description of Series B Preferred
Stock.................................. S-21
Certain Federal Income Tax
Considerations......................... S-29
Underwriting............................. S-39
Legal Matters............................ S-40
PROSPECTUS
Available Information.................... 3
Documents Incorporated by Reference...... 3
The Company.............................. 5
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends.............................. 7
Use of Proceeds.......................... 7
Description of Securities................ 7
Common Stock............................. 7
Preferred Stock.......................... 9
Debt Securities.......................... 12
Securities Warrants...................... 16
Plan of Distribution..................... 19
Legal Matters............................ 19
Experts.................................. 19
</TABLE>
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======================================================
2,000,000 SHARES
OMEGA HEALTHCARE
INVESTORS, INC.
% SERIES B CUMULATIVE
PREFERRED STOCK
(LIQUIDATION PREFERENCE $25 PER SHARE)
OMEGA HEALTHCARE INVESTORS, INC. LOGO
------------
PROSPECTUS
SUPPLEMENT
APRIL __, 1998
------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
COWEN & COMPANY
EVEREN SECURITIES, INC.
MORGAN STANLEY DEAN WITTER
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