<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration Statement No. 33-97926
PROSPECTUS SUPPLEMENT
(To Prospectus Dated December 6, 1995)
1,300,000 SHARES
CAPSTONE CAPITAL CORPORATION
COMMON STOCK
[CAPSTONE LOGO]
------------------
Capstone Capital Corporation (the "Company") is a self-managed real estate
investment trust ("REIT"), which owns, leases and invests in a diversified
portfolio of healthcare properties (the "Investments") located in 18 states.
Substantially all of the Investments are in the form of sale leaseback
arrangements and mortgage loans.
All of the shares (the "Shares") of the Common Stock, $.001 par value per
share (the "Common Stock"), offered hereby (the "Offering") are being sold by
the Company. The Common Stock is listed on the New York Stock Exchange ("NYSE")
under the symbol "CCT." The last reported sale price of the Common Stock on the
NYSE on June 25, 1997 was $24 3/8.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 OF THE PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES OFFERED HEREBY.
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 AND COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $24.25 $1.24 $23.01
- --------------------------------------------------------------------------------------------------------------
Total(3) $31,525,000 $1,612,000 $29,913,000
==============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at
approximately $250,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
195,000 additional Shares on the same terms and conditions as set forth
above solely to cover over-allotments, if any. See "Underwriting." If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $36,253,750,
$1,853,800 and $34,399,950, respectively.
------------------
The Common Stock is being offered by the Underwriter named herein, subject
to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that delivery of the Common Stock will be made at the
offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001 on
or about June 30, 1997.
------------------
SMITH BARNEY INC.
The date of this Prospectus Supplement is June 25, 1997.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed descriptions and financial information and
statements appearing elsewhere or incorporated by reference in the accompanying
Prospectus or in this Prospectus Supplement. Except as otherwise indicated
herein, this Prospectus Supplement assumes no exercise of the Underwriter's
over-allotment option. As used herein, unless the context requires otherwise,
the term "Company" includes Capstone Capital Corporation, a Maryland
corporation, and its subsidiaries.
THE COMPANY
The Company is a real estate investment trust which owns, leases and
invests in a diversified portfolio of healthcare properties. As of March 31,
1997, the Investments consisted of (i) 72 healthcare properties leased to 18
healthcare operators (the "Leased Properties") and (ii) 22 mortgage loans on
healthcare properties (the "Mortgage Loans"). The Investments are located in 18
states primarily in the southeastern and western regions of the United States
and represent a variety of facility types in diverse healthcare industry
segments. The Investments, including commitments to invest certain of which have
been partially funded, have grown from approximately $115 million at inception
on June 30, 1994 to approximately $544 million on March 31, 1997.
The Company intends to use the net proceeds of the Offering to reduce
outstanding borrowings under the Company's $170 million unsecured line of credit
(the "Bank Credit Facility") provided by a consortium of banks led by
NationsBank, N.A. (South) ("NationsBank"), which the Company has used primarily
to fund Investments. See "Use of Proceeds." The Company expects to reborrow
under the Bank Credit Facility to make additional investments.
Substantially all of the leases (the "Leases") for Leased Properties are
triple net leases which require the lessees to pay all operating expenses,
taxes, insurance and other costs. The Leases generally provide for increases in
rent commencing after the first year, have primary terms of 10 to 15 years with
options to extend the term at least 10 years and grant the lessees a right of
first refusal to acquire the Company's interest. Mortgage Loans generally have
initial maturities of between five and 15 years and bear interest at a rate
which increases annually at either a specified rate or a rate based on the
consumer price index. Approximately 66% of the Company's Investments as of March
31, 1997 are operated by public healthcare companies or their subsidiaries,
including HEALTHSOUTH Corporation ("HEALTHSOUTH"), Columbia/HCA Healthcare
Corporation ("Columbia/HCA"), MedPartners, Inc. ("MedPartners"), Integrated
Health Services, Inc. ("Integrated Health"), and Tenet Healthcare Corporation
("Tenet").
The Company believes it is an important source of capital for the
healthcare industry and intends to continue investing in a high-quality
portfolio of properties managed by established operators of rehabilitation,
alternate-site care, long-term care and acute-care facilities. The Company
diversifies its portfolio by operator, geography, facility type and healthcare
industry segment. Management's investment criteria emphasize evaluation of the
(i) creditworthiness of a proposed lessee, borrower, guarantor, developer or,
under certain circumstances, sublessee of a healthcare facility, (ii)
competitive position of a proposed property, (iii) attractiveness of the
industry segment and (iv) strategic fit of a proposed property with the
Company's existing portfolio. The Company believes that there is significant
demand for REIT financing capital in the healthcare industry. In addition, the
Company believes that the substantial healthcare industry experience and
industry relationships of its management and directors will help the Company
identify, evaluate and complete additional investments.
The Company's primary objective is to provide current income for
distribution to stockholders. The Company commenced paying quarterly dividends
of $.425 per share for the quarter ended September 30, 1994, increased its
quarterly dividend to $.445 per share for the quarter ended June 30, 1995,
increased it to $.455 per share for the quarter ended June 30, 1996, increased
it to $.46 per share for the quarter ended September 30, 1996, increased it to
$.465 for the quarter ended December 31, 1996, and increased it to $.47 for the
quarter ended March 31, 1997.
S-3
<PAGE> 4
THE OFFERING
Common Stock to be offered.......... 1,300,000 shares
Common Stock to be outstanding after
the Offering(1)..................... 15,589,769 shares
Use of Proceeds..................... To reduce outstanding borrowings under
the Bank Credit Facility incurred to
make Investments.
NYSE Common Stock Symbol............ CCT
- ---------------
(1) Does not include as of March 31, 1997, (a) 1,054,264 shares of Common Stock
reserved for issuance upon conversion of $17,000,000 aggregate principal
amount of the Company's 10 1/2% convertible subordinated debentures due 2002
(the "10 1/2% Debentures"), subject to adjustment in certain events, (b)
2,950,787 shares of Common Stock reserved for issuance upon conversion of
$74,750,000 aggregate principal amount of the Company's 6.55% convertible
subordinated debentures due 2002 (the "6.55% Debentures"), subject to
adjustment in certain events, (c) 645,000 shares of Common Stock reserved
for issuance pursuant to the Company's 1994 Stock Incentive Plan or (d)
995,386 shares of Common Stock reserved for issuance pursuant to the
Company's Dividend Reinvestment Plan.
S-4
<PAGE> 5
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
JUNE 30,
1994
(INCEPTION) YEAR ENDED THREE MONTHS
TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ----------------- -----------------
1994 (1) 1995 1996 1996 1997
-------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $8,240 $24,707 $35,952 $ 7,442 $11,284
Expenses:
Interest.................................... 1,439 8,787 8,812 1,615 2,551
Depreciation and amortization............... 1,502 4,697 6,315 1,352 1,786
Other operating............................. 536 1,515 1,911 335 702
------ ------- ------- ------- -------
Total expenses...................... 3,477 14,999 17,038 3,302 5,039
------ ------- ------- ------- -------
Net income.................................... $4,763 $ 9,708 $18,914 $ 4,140 $ 6,245
====== ======= ======= ======= =======
Net income per share.......................... $ 0.80 $ 1.55 $ 1.71 $ 0.42 $ 0.43
====== ======= ======= ======= =======
OTHER DATA:
Funds from operations(2)...................... $5,628 $12,523 $22,633 $ 4,966 $ 7,377
Funds from operations per share (primary)..... $ 0.94 $ 2.00 $ 2.04 $ 0.50 $ 0.51
Funds from operations per share (fully
diluted).................................... -- $ 1.91 $ 1.97 $ 0.48 $ 0.51
Weighted average shares outstanding
(primary)................................... 5,980 6,271 11,086 9,934 14,522
Weighted average shares outstanding (fully
diluted).................................... -- 8,597 13,159 12,839 16,253
Dividends declared............................ $5,083 $12,519 $21,431 $10,547 $14,770
Dividends declared per share.................. $ 0.85 $ 1.76 $ 1.825 $ 0.445 $ 0.47
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate properties, net............. $151,328 $207,257 $303,997 $230,486 $342,186
Mortgage notes receivable............... 13,224 24,989 39,326 26,070 67,506
Total assets............................ 166,364 240,625 356,695 263,035 427,519
Bank credit facility.................... 67,500 30,225 68,500 52,375 68,800
Mortgage note payable(3)................ -- -- 23,228 -- 23,184
10 1/2% Convertible subordinated
debentures............................ -- 43,947 17,657 43,805 17,000
6.55% Convertible subordinated
debentures............................ -- -- -- -- 67,310
Total stockholders' equity.............. 98,389 163,747 241,556 163,577 241,578
</TABLE>
- ---------------
(1) The Company commenced operations on June 30, 1994.
(2) Funds from operations is computed as net income (computed in accordance with
generally accepted accounting principles), excluding gains on sale of real
estate and rental income recognized on a straight-line basis on those leases
with scheduled rent increases, plus depreciation and amortization.
Management considers funds from operations to be an informative measure of
the performance of an equity REIT and consistent with measures used by
analysts to evaluate equity REITs. Funds from operations does not represent
cash generated from operating activities in accordance with generally
accepted accounting principles, is not necessarily indicative of cash
available to fund cash needs and should not be considered as an alternative
to net income as an indicator of the Company's operating performance or as
an alternative to cash flow as a measure of liquidity.
(3) Nonrecourse indebtedness of Capstone of Las Vegas, Ltd., an Alabama limited
partnership of which Capstone Capital of Las Vegas, Inc., an Alabama
corporation and a wholly-owned subsidiary of the Company, is the general
partner.
S-5
<PAGE> 6
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $29.7 million, after deduction
of underwriting discounts and commissions and estimated Offering expenses
payable by the Company (approximately $34.1 million assuming the Underwriters'
over-allotment option is exercised in full). The Company intends to use the net
proceeds to reduce the outstanding balance under its Bank Credit Facility, which
was approximately $135,949,800 million as of June 25, 1997.
Borrowings under the Bank Credit Facility bear interest at a rate chosen by
the Company from either the base rate of NationsBank or the Eurodollar rate plus
a percentage that varies from 1.00% to 1.625%. At June 25, 1997, the weighted
average interest rate under the Bank Credit Facility was 6.85%. The Company has
used borrowings under the Bank Credit Facility primarily for the acquisition of
or investment in the Investments. The Company expects to borrow under the Bank
Credit Facility in the future to make additional acquisitions and investments.
The Bank Credit Facility will be available until June 24, 1999, and the
principal balance outstanding thereunder will mature on that date.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock is listed on the NYSE under the symbol "CCT." As
of June 25, 1997, there were 488 holders of record of the Common Stock. The
following table sets forth, for the fiscal periods indicated, the high and low
closing sales prices of the Common Stock on the NYSE and the dividend
distributions per share declared by the Company with respect to each applicable
quarter.
<TABLE>
<CAPTION>
DISTRIBUTIONS
HIGH LOW PER SHARE
---- --- -------------
<S> <C> <C> <C>
1995:
First Quarter............................................... 17 1/8 15 5/8 .425
Second Quarter.............................................. 18 15 3/8 .445
Third Quarter............................................... 19 1/4 17 3/8 .445
Fourth Quarter.............................................. 19 1/4 18 1/8 .445
1996:
First Quarter............................................... 21 1/2 18 7/8 .445
Second Quarter.............................................. 21 1/2 19 1/2 .455
Third Quarter............................................... 21 1/4 19 3/4 .46
Fourth Quarter.............................................. 21 7/8 20 3/4 .465
1997:
First Quarter............................................... 24 1/8 22 3/8 .47
Second Quarter (through June 25, 1997)...................... 24 3/8 21 3/8 --
</TABLE>
The Company makes quarterly distributions to stockholders of approximately
85% to 95% of its cash available for distribution; however, the Company may
elect to pay more or less than such amount as determined by the Board of
Directors of the Company. In any event, the Company expects to make
distributions annually in excess of 95% of its REIT taxable income in order to
satisfy the annual distribution requirements of a REIT. See "Federal Income Tax
Considerations -- Taxation of the Company" in the Prospectus. Payment of
distributions, however, will be at the discretion of the Board of Directors at
all times and will depend upon various factors including the Company's financial
condition, earnings, anticipated investments and other relevant factors.
The Company has a dividend reinvestment plan under which stockholders of
record may invest all or a portion of their dividend distributions and up to an
additional $5,000 per quarter to purchase additional shares of Common Stock.
S-6
<PAGE> 7
CAPITALIZATION
The following sets forth the capitalization of the Company as of March 31,
1997, on an actual basis, and on an adjusted basis to give effect to the sale of
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated Offering expenses payable by the Company, and the use
of the net proceeds therefrom to reduce the outstanding balance under the Bank
Credit Facility. See "Use of Proceeds." The information set forth below should
be read in conjunction with the Company's historical consolidated financial
statements and notes thereto included in the documents incorporated herein by
reference.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Indebtedness:
Bank credit facility...................................... $ 68,800,000 $ 39,137,000
Mortgage loan............................................. 23,184,447 23,184,447
10 1/2% Convertible subordinated debentures............... 17,000,000 17,000,000
6.55% Convertible subordinated debentures................. 67,310,175 67,310,175
------------ ------------
Total Indebtedness................................ $176,294,622 $146,631,622
============ ============
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; none outstanding..............................
Common Stock, $.001 par value; 50,000,000 authorized;
14,289,769 shares issued and outstanding actual and
15,589,769 as adjusted(1)................................. $ 14,290 $ 15,590
Additional paid-in capital.................................. 241,253,769 270,915,469
Loans to officers to finance stock purchases................ (286,944) (286,944)
Retained earnings........................................... 596,683 596,683
------------ ------------
Total stockholders' equity........................ $241,577,798 $271,240,798
------------ ------------
Total capitalization.............................. $417,872,420 $417,872,420
============ ============
</TABLE>
- ---------------
(1) Does not include as of March 31, 1997, (a) 1,054,264 shares of Common Stock
reserved for issuance upon conversion of $17,000,000 aggregate principal
amount of the 10 1/2% Debentures, subject to adjustment in certain events,
(b) 2,950,787 shares of Common Stock reserved for issuance upon conversion
of $74,750,000 aggregate principal amount of the 6.55% Debentures, subject
to adjustment in certain events, (c) 645,000 shares of Common Stock reserved
for issuance pursuant to the Company's 1994 Stock Incentive Plan or (d)
995,386 shares of Common Stock reserved for issuance pursuant to the
Company's Dividend Reinvestment Plan.
S-7
<PAGE> 8
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement, Smith Barney Inc. (the "Underwriter") has agreed to purchase, and the
Company has agreed to sell to the Underwriter, 1,300,000 shares of Common Stock
at the public offering price less the underwriting discounts and commissions set
forth on the cover of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Shares offered hereby are subject to
approval of certain legal matters by its counsel and to certain other
conditions. The Underwriter is obligated to take and pay for all the Shares
offered hereby (other than those covered by the over-allotment option described
below) if any of such Shares are taken.
The Company has been advised by the Underwriter that the Underwriter
proposes to offer the Shares to the public at the public offering price set
forth on the cover of this Prospectus Supplement and to certain dealers at such
price, less a concession not in excess of $.75 per share. The Underwriter may
allow, and such dealers may re-allow, a concession not in excess of $.10 per
share to certain other dealers. After the initial offering of the Shares to the
public, the offering price and other selling terms may be changed by the
Underwriter.
The Company has granted to the Underwriter an option, exercisable not later
than 30 calendar days from the date of this Prospectus Supplement, to purchase
up to 195,000 additional Shares at the same price per share as the Company
receives for the Shares that the Underwriter has agreed to purchase. The
Underwriter may exercise such option only to cover overallotments made in
connection with the sale of the Shares offered hereby. If purchased, the
Underwriter will sell such additional 195,000 Shares on the same terms as those
on which the Shares are being offered.
In connection with this offering and in compliance with applicable law, the
Underwriter may overallot (i.e., sell more Shares than the total amount shown in
the first paragraph above) and may effect transactions which stabilize, maintain
or otherwise affect the market price of the Shares at levels above those which
might otherwise prevail in the open market. Such transactions may include
placing bids for the Shares or effecting purchases of the Shares for the purpose
of pegging, fixing or maintaining the price of the Shares or for the purpose of
reducing a short position created in connection with the offering. A short
position may be covered by exercise of the option described above in lieu of or
in addition to open market purchases. In addition, if the Underwriter purchases
Shares in the open market and the securities purchased can be traced to a
particular member of the selling group, the Underwriter may require the selling
group member in question to purchase the Shares in question at the cost price to
the Underwriter or may recover from (or decline to pay to) the selling group
member in question the selling concession applicable to the securities in
question. The Underwriter is not required to engage in any of these activities,
and any such activities, if commenced, may be discontinued at any time.
The Underwriting Agreement contains covenants of indemnity between the
Underwriter and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company, each officer and certain directors of the Company have agreed
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or grant any option or warrants to purchase Common Stock,
except, in the case of the Company, pursuant to the grant or exercise of options
under the Stock Incentive Plan and shares of Common Stock issuable upon
conversion of the Company's 10 1/2% Debentures or the 6.55% Debentures, for a
period of 90 days from the date of this Prospectus Supplement, without the prior
written consent of Smith Barney Inc.
The Underwriter has engaged and may in the future engage in investment
banking services for the Company.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Sirote & Permutt, P.C., Birmingham, Alabama, and for the Underwriters
by Dewey Ballantine, New York, New York. As to matters of Maryland law, Sirote &
Permutt, P.C. and Dewey Ballantine will rely upon an opinion of Ballard Spahr
Andrews & Ingersoll, Baltimore, Maryland.
S-8
<PAGE> 9
PROSPECTUS
$250,000,000
CAPSTONE CAPITAL CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
[CAPSTONE LOGO]
---------------------
Capstone Capital Corporation (the "Company") may offer from time to time,
together or separately, in one or more series (i) debt securities ("Debt
Securities"), which may be either senior debt securities (the "Senior Debt
Securities") or subordinated debt securities (the "Subordinated Debt
Securities"), (ii) shares of Preferred Stock of the Company ("Preferred Stock"),
and (iii) shares of Common Stock of the Company ("Common Stock") (the Debt
Securities, Preferred Stock and Common Stock are collectively referred to as the
"Securities"), at an aggregate initial offering price not to exceed U.S.
$250,000,000, in amounts, at prices and on terms to be determined at the time of
sale. The Debt Securities, Preferred Stock and Common Stock may be offered
separately or together, in separate series, in amounts, at prices and on terms
to be set forth in a supplement or supplements to this Prospectus (a "Prospectus
Supplement").
The accompanying Prospectus Supplement will set forth with regard to the
particular Securities in respect of which this Prospectus is being delivered (i)
in the case of Debt Securities, the title, aggregate principal amount,
denominations (which may be in United States dollars, or in any other currency,
currencies or currency unit, including the European Currency Unit), maturity,
rate, if any (which may be fixed or variable), or method of calculation thereof,
time of payment of any interest, any terms for redemption at the option of the
Company or the holder, any terms for sinking fund payments, rank, any conversion
or exchange rights, any listing on a securities exchange, and the initial public
offering price and any other terms in connection with the offering and sale of
such Debt Securities, (ii) in the case of Preferred Stock, the specific title,
the aggregate amount and the stated value, any dividend (including the method of
calculating the payment of dividend), liquidation, redemption, conversion,
voting or other rights and the initial offering price and (iii) in the case of
Common Stock, the number of shares of Common Stock, the initial offering price
and the terms of the offering thereof. The Prospectus Supplement will also
contain information, as applicable, about material U.S. federal income tax
considerations relating to the Securities in respect of which this Prospectus is
being delivered.
The Common Stock of the Company is listed on the New York Stock Exchange
("NYSE") under the symbol "CCT". The Prospectus Supplement will also contain
information, where applicable, as to any listing on a securities exchange of the
Securities covered by such Prospectus Supplement.
SEE "RISK FACTORS" ON PAGES 3 TO 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Company may sell Securities to or through underwriters, and also may
sell Securities directly to other purchasers or through agents. The accompanying
Prospectus Supplement will set forth the names of any underwriters or agents
involved in the sale of the Securities in respect of which this Prospectus is
being delivered, the amounts of Securities, if any, to be purchased by
underwriters and the compensation, if any, of such underwriters or agents. See
"Plan of Distribution" herein.
The date of this Prospectus is December 6, 1995
<PAGE> 10
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS, AGENTS OR DEALERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY AND ITS SUBSIDIARIES
SINCE THE DATE HEREOF OR THE INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's public reference section, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following regional offices of the Commission:
Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material can also be obtained at prescribed rates by
writing to the public reference section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the Company's Common Stock is listed
on the NYSE and similar information concerning the Company can be inspected and
copied at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
This Prospectus constitutes a part of a registration statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"). As permitted by
the rules and regulations of the Commission, this Prospectus omits certain of
the information contained in the Registration Statement and reference is hereby
made to the Registration Statement and related exhibits for further information
with respect to the Company and the Securities offered hereby. Statements
contained herein concerning the provisions of any documents filed as an exhibit
to the Registration Statement or otherwise filed with the Commission are not
necessarily complete, and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1994 (filed on April 1, 1995), Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 1995 (filed on May 17, 1995), June 30, 1995
(filed on August 15, 1995) and September 30, 1995 (filed on November 8, 1995),
as amended by a Quarterly Report on Form 10-Q/A (filed on November 14, 1995) and
the description of the Common Stock and the description of certain provisions of
Maryland Law and the Company's Articles of Incorporation and Bylaws, both
contained in the Company's Registration Statement of Form 8-A, dated June 21,
1994, and the information thereby incorporated by reference contained in the
Company's Registration Statement on Form S-11, dated March 23, 1995 are hereby
incorporated by reference into this Prospectus. The file number for the
Company's filings under the Exchange Act is 1-11345. All other documents filed
by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange
Act subsequent to the date of this Prospectus and prior to the termination of
the offering of any Securities shall be deemed to be incorporated by reference
in this Prospectus and to be part hereof from the date of filing such documents
(provided, however, that the information referred to in Item 402(a)(8) of
Regulation S-K of the Commission shall not be deemed specifically incorporated
by reference herein).
Any statement contained herein or 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 the applicable Prospectus Supplement) 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 such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner of the Securities,
to whom this Prospectus is delivered, upon written or oral request. Requests
should be made to Mr. Andrew L. Kizer, Vice President-Finance and Chief
Financial Officer of the Company, 1000 Urban Center Drive, Suite 630,
Birmingham, Alabama 35242 (telephone number: (205) 967-2092).
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<PAGE> 11
THE COMPANY
The Company is a real estate investment trust ("REIT") which owns, leases
and invests in a diversified portfolio of healthcare properties (the
"Investments"). As of September 30, 1995, the Investments consisted of (i) 35
healthcare properties leased to eight healthcare operators (the "Leased
Properties") and (ii) four mortgage loans on healthcare properties (the
"Mortgage Loans"). The Investments are located in 13 states primarily in the
southeastern and western regions of the United States and represent a variety of
facility types in diverse healthcare industry segments. The Investments,
including amounts committed, have grown from approximately $115 million at
inception on June 30, 1994 to approximately $237 million on September 30, 1995.
The Company was incorporated in Maryland in March 1994. The Company's
principal executive offices are located at 1000 Urban Center Drive, Suite 630,
Birmingham, Alabama 35242, and its telephone number is (205) 967-2092.
RISK FACTORS
An investment in the Company involves various risks. In addition to general
investment risks and those factors set forth elsewhere in this Prospectus or in
the applicable Prospectus Supplement, investors should consider the following
factors before making a decision to purchase the Securities.
LIMITED OPERATING HISTORY AND EXPERIENCE OF MANAGEMENT IN OPERATING A REIT
The Company has been in operation since June 30, 1994, and has a limited
operating history. The Company is self-administered and does not have a
third-party investment advisor. The Company's Board of Directors and executive
officers have overall responsibility for management of the Company. Although
certain of the Company's officers and directors have extensive experience in the
acquisition, development, financing and leasing of real properties and certain
of the Company's directors have extensive experience in the operation of
healthcare facilities and publicly-owned corporations, prior to commencement of
the Company's operations, no officer had significant experience in the
healthcare industry or in operating a business in accordance with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
DEPENDENCE ON LESSEES, BORROWERS AND GUARANTORS
The Company's revenues are derived primarily from rent under the leases and
payments under the Mortgage Loans, and therefore any defaults by the lessees,
borrowers or their guarantors in their obligations to the Company will result in
lower revenues and less cash available for repayment of indebtedness and
distribution to stockholders. The guarantors' obligations are unsecured and may
be structurally subordinated to their secured indebtedness to the extent of the
assets securing such indebtedness. While the Company has not established any
definitive credit criteria, the Company evaluates the creditworthiness of
lessees, borrowers and guarantors based upon a review of publicly available
financial and other information, as well as a due diligence review of the
individual financial statements and other non-financial information provided by
lessees, borrowers and guarantors, to the extent available, and other data
customarily reviewed when a company makes an acquisition or significant
investment. The operating results of properties underlying existing Investments
and any future acquisitions depend upon various factors over which the Company
has no control and which may affect the present or future cash flows of the
Company. Those factors include general economic conditions, changes in the
supply of, or demand for, competing healthcare facilities, changes in occupancy
levels, the ability of lessees and borrowers through rate increases or otherwise
to absorb increases in operating expenses, and changes in government regulations
and zoning laws.
No assurance can be given that a lessee will exercise any option to renew
its lease upon the expiration of the initial term. In such an instance, the
Company may not be able to locate a qualified purchaser or a qualified
replacement tenant, as a result of which it would lose a source of revenue while
remaining responsible for the payment of its obligations.
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<PAGE> 12
LACK OF INDUSTRY DIVERSIFICATION
While the Company is authorized to invest in various types of
income-producing real estate and real estate-related loans, its current strategy
is to invest in healthcare-related properties. Consequently, the Company
currently has chosen not to include assets selected to reduce risks associated
with an investment in real estate in the healthcare industry, and is subject to
the risks associated with investments in a single industry.
SPECIFIC RISKS RELATING TO HEALTHCARE FACILITIES
Reliance on Government Reimbursement. A significant portion of the revenue
of the lessees, borrowers and guarantors is derived, directly or indirectly,
from government reimbursement programs, such as Medicare and Medicaid. While the
specific portion with respect to each lessee, borrower and guarantor varies and
changes over time, approximately one-third to two-thirds of the revenue of each
of the Company's existing lessees, borrowers and guarantors is derived from such
programs. Although lease and loan payments to the Company are not linked to the
level of government reimbursement, to the extent that changes in these programs
have a material adverse effect on the lessees, borrowers and guarantors, such
changes could adversely affect their ability to make lease and loan payments.
The Medicare program is highly regulated and subject to frequent and substantial
changes. In recent years, fundamental changes in the Medicare program (including
the implementation of a prospective payment system ("Prospective Payment System"
or "PPS") in which facilities are reimbursed generally a flat amount based on a
patient's diagnosis and not based on the facility's cost for inpatient services
at medical surgical hospitals) have resulted in reduced levels of payment for a
substantial portion of healthcare services. The Medicaid program is a
federally-mandated, state-run program providing benefits to low income and other
eligible persons and is funded through a combination of state and federal
funding. The method of reimbursement under Medicaid varies from state to state,
but is typically based on rates negotiated between the provider and the state,
or is based on per diem or per diagnosis rates similar to Medicare. Moreover,
healthcare facilities have experienced increasing pressures from private payors
attempting to control healthcare costs that have reduced reimbursement to levels
approaching that of government payors.
Considerable uncertainties surround the future determination of payment
levels under government reimbursement programs. In addition, future budget
reductions in government-financed programs could significantly reduce payments
made to lessees, borrowers and guarantors, and there can be no assurance that
future payment rates will be sufficient to cover cost increases in providing
services to patients. Reductions in payments pursuant to government healthcare
programs could have an adverse impact on a lessee's, borrower's or guarantor's
financial condition and, therefore, could adversely affect the ability of such
lessee, borrower or guarantor to make lease and loan payments.
Impact of Reduced Occupancy Rates in Hospitals Adjacent to Ancillary
Hospital Facilities. Most of the hospitals adjacent to the ancillary hospital
facilities owned by the Company or securing Mortgage Loans are substantially
less than fully occupied on an inpatient basis. Despite such occupancy rates,
however, the Company believes that operating cash flow produced by such
hospitals will adequately cover lease and loan payments to the Company. If the
inpatient occupancy rate at any such hospital were to deteriorate to a level at
which operating cash flow would be insufficient to cover the lease or loan
payments to the Company with respect to such ancillary hospital facility the
Company would have to rely upon the general credit of the lessee, borrower, or
related guarantor.
Healthcare Reform. The healthcare industry is undergoing significant
changes as third-party payors attempt to control the cost, utilization and
delivery of healthcare services. In addition to extensive existing governmental
healthcare regulation, there are numerous initiatives at the federal and state
levels for comprehensive reforms affecting the payment for and availability of
healthcare services. Aspects of certain of these healthcare proposals, such as
further reductions in Medicare and Medicaid payments and shifting greater
control of Medicare to the states, if adopted, could adversely affect the
Company. Other cost-control initiatives regarding the cost and delivery of
healthcare are also currently being considered, and reductions in payments to
physicians or other changes in reimbursement for healthcare services by other
third-party payors could materially adversely affect the financial condition of
the sublessees. Substantially all of the tenants or
4
<PAGE> 13
sublessees under leases are in the medical profession and the Company believes
that such tenants are dependent on payment for their services by third-party
payors. No assurance can be given whether or to what extent any of the
healthcare proposals will be enacted into law, or the effect any such proposals
or subsequent legislation or other changes regarding healthcare would have on
the financial condition of the tenants or owners of the healthcare facilities
underlying the Investments and their ability to make lease or loan payments or
renew leases.
Government Regulation of Healthcare Industry. The healthcare industry is
highly regulated by federal, state and local laws, state and local licensing
requirements, facility inspections, reimbursement policies, regulations
concerning capital and other expenditures, certification requirements and other
laws, regulations and rules. The failure of any lessee, borrower or their
sublessees or tenants to comply with such laws, requirements and regulations
could affect such lessee's or borrower's ability to operate the healthcare
facilities underlying the Investments.
Potential Operator Loss of License or Certification. Healthcare operators
are subject to federal and state laws and regulations which govern financial and
other arrangements between healthcare providers. These laws prohibit certain
direct and indirect payments or fee-splitting arrangements between healthcare
providers that are designed to induce or encourage the referral of patients to,
or the recommendation of, a particular provider for medical products and
services. They also require compliance with a variety of safety, health and
other requirements relating to the conditions of the licensed facility and
quality of care provided. Possible sanctions for violation of these laws and
regulations include loss of license or certification, the imposition of civil
monetary and criminal penalties and potential exclusion from Medicare and
Medicaid programs.
In certain circumstances, conviction of abusive or fraudulent behavior with
respect to one facility may subject other facilities under common control or
ownership to disqualification from participation in the Medicare and Medicaid
programs.
Because this area of the law currently is subject to intense scrutiny,
additional laws and regulations may be enacted which could require changes in
certain operations of lessees, borrowers, guarantors or sublessees. For example,
a tenant's loss of license or Medicare/Medicaid certification could result in
the Company or a lessee or borrower having to obtain another tenant for the
affected healthcare facilities underlying the Investments. No assurances can be
given that the Company or any lessee, borrower or guarantor could contract with
such a tenant on a timely basis or on acceptable terms and a failure to do so
could have an adverse effect on the Company's revenues.
Limitations on Transfers and Alternative Uses of Investments. Transfers of
operations of certain healthcare facilities are subject to regulatory approvals
not required for transfers of other types of commercial operations and other
types of real estate. In addition, certain of the healthcare facilities
underlying the Investments are special purpose facilities that may not be easily
adaptable to non-healthcare-related uses.
Proximity to Hospitals. Most of the healthcare facilities underlying the
Investments are in close proximity to one or more hospitals. The relocation or
closure of a hospital could make the Investments in such area less desirable to
doctors affiliated with such hospital and affect a lessee's, borrower's or any
sublessee's ability to renew leases and attract new tenants.
RISKS OF LEVERAGE AND DEFAULT
Borrowings under the Company's $100 million line of credit from NationsBank
of Georgia, N.A., as agent for a consortium of bank lenders (the "Bank Credit
Facility"), are unsecured; however, the lenders may require such borrowings to
become secured upon the occurrence of material defaults thereunder. If the
Company defaults on any loan secured by mortgages the Company may place on any
of its properties, the lenders may foreclose on such properties and the Company
could lose its investment therein.
The Company may borrow additional funds and mortgage its properties in
connection with the acquisition of additional properties and for purposes of
funding other capital and operating expenditures, including expenditures
relating to the renovation, modification or expansion of the Leased Properties.
In addition, the Company could be required to borrow money and/or mortgage its
properties to fund any cash shortfall in order to meet its obligation to
distribute 95% of the Company's REIT taxable income. See " -- Consequences of
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<PAGE> 14
Failure to Qualify as a REIT" and "Federal Income Tax Considerations -- Taxation
of the Company." The Company's current policy limits the incurrence of debt
(secured or unsecured) to 70% of total capitalization. However, this limitation
can be changed by the Board of Directors without stockholder approval. Moveover,
there are no provisions in the Company's Amended and Restated Articles of
Incorporation (the "Charter") or Bylaws of the Company, as amended (the
"Bylaws"), which require such limitation.
The degree of risk associated with borrowings will increase to the extent
that the Company borrows on terms involving variable interest rates and/or
"balloon" payments at maturity. Borrowings under the Bank Credit Facility bear
interest at a variable interest rate. At September 30, 1995, the Company had
variable interest rate indebtedness aggregating approximately $78.2 million
under the Bank Credit Facility. Future indebtedness may also bear interest at a
floating rate. Increases in interest rates could increase the Company's interest
expense, which could adversely affect the Company's ability to pay dividends to
stockholders. The Bank Credit Facility matures on June 22, 1997. The Company
intends to renew the Bank Credit Facility or repay the outstanding balance at
that time with proceeds from a refinancing or from a sale of debt or equity
securities. There can be no assurances that the lenders will agree to renew the
Bank Credit Facility on terms favorable to the Company or that the Company will
be able to obtain refinancing proceeds or proceeds from the sale of debt or
equity securities.
REAL ESTATE INVESTMENT RISKS
Development Projects. Investments in facilities under development subject
the Company to risks related to possible delays in construction, cost of
materials, financing availability, volatility in interest rates, labor
availability and other property development uncertainties. In addition, the
Company has made Mortgage Loans for the construction of a long-term care
facility and an ancillary hospital facility. Development projects and
construction loans generally involve greater risks than the sale and leaseback
of operating properties. Although the Company attempts to minimize the risks
associated with development activities and construction loans, including
obtaining additional forms of security and collateral beyond that provided by
the leases and term Mortgage Loans, no assurance can be given that such
additional security will be sufficient.
Illiquidity of Real Estate Investments. The Investments are subject to
risks typically associated with investments in real estate. Equity investments
in real estate are relatively illiquid, and, therefore, the ability of the
Company to vary its portfolio in response to changed conditions will be limited.
ENVIRONMENTAL RISKS AND COST OF REMEDIATION
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real property may be liable 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 injuries to
persons and adjacent property). Such laws often impose 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
therefor could exceed the value of the property and/or the aggregate 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.
Although property acquisition agreements, leases and mortgage loans
generally require the seller, lessee or borrower, as the case may be, 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 seller,
lessee or borrower will be able to fulfill its indemnification obligations. Nor
can there be any assurance that those indemnities will be sufficient to cover
any liability for any or all of the hazardous substances that may exist at the
healthcare facilities underlying the Investments.
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<PAGE> 15
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers, John W.
McRoberts, William C. Harlan and Andrew L. Kizer. The loss of the services of
any one of these individuals could have a material adverse effect on the
performance of the Company. The Company has not entered into any employment
agreement with any of its executive officers.
CONFLICTS OF INTEREST
Three of the Company's eight directors are executive officers and/or
directors of certain existing lessees and guarantors (the "Interested
Directors") including HEALTHSOUTH Corporation ("HEALTHSOUTH"), Integrated Health
Systems, Inc. ("Integrated Health") and MedPartners, Inc. ("MedPartners")
(collectively the "Interested Lessees"). In particular, Richard M. Scrushy, the
Chairman of the Board of the Company, is a director of each of the Interested
Lessees as well as Chairman of the Board and Chief Executive Officer of
HEALTHSOUTH. The Company paid to HEALTHSOUTH and Integrated Health $74,770,000
and $28,475,000, respectively, to acquire Leased Properties from the Interested
Lessees or their respective subsidiaries. The Company received rental income
during the period from January 1 through September 30, 1995 of $6,741,299,
$2,436,223, and $1,041,744 from HEALTHSOUTH, Integrated Health and MedPartners,
respectively.
There may from time to time be disputes between the Company as landlord and
the Interested Lessees and their subsidiaries as tenants with respect to
maintenance, repairs, defaults and similar items. It is also possible that the
Company will engage in other transactions with the Interested Lessees, such as
purchasing additional properties from the Interested Lessees and their
subsidiaries and leasing back all or a portion of such additional properties. As
a result, conflicts of interest may arise in the Interested Directors' duties to
the stockholders of the Company and to the stockholders of Interested Lessees.
Officers of the Company spend substantially all of their time managing the
Company and do not compete with the Company's business. Certain directors of the
Company and affiliates of such directors are now engaged, and may engage in the
future, in other real estate ownership, management or development activities for
their own accounts. Accordingly, certain conflicts of interest may arise with
respect to the allocation of the time and efforts of such entities and persons
between their own activities and the activities of the Company. Several of the
Company's directors, including the three directors mentioned above, are involved
with healthcare companies which own properties that may compete with the
Company's properties.
The Company's Bylaws require that any transactions (including a property
acquisition or loan) between the Company and any of its officers and directors
or their affiliates be approved by a majority of the directors not interested in
such transaction.
CONSEQUENCES OF FAILURE TO CONTINUE TO QUALIFY AS A REIT
The Company has elected and at all times intends to operate so as to
qualify as a REIT. If the Company qualifies as a REIT, it will generally be
allowed a deduction for dividends paid to its stockholders in computing its
federal taxable income. This treatment substantially eliminates the "double
taxation" of corporate earnings. If in any taxable year the Company did not
qualify as a REIT, it would be taxed as a corporation and distributions to
stockholders would not be deductible by the Company in computing taxable income.
In addition, unless the Company were entitled to relief under certain statutory
provisions, the Company would also be disqualified from electing treatment as a
REIT for the four succeeding years following the year in which qualification was
lost. Failure to so qualify, even in one taxable year, could dramatically affect
the Company's ability to pay interest on Debt Securities and dividends to
stockholders.
To qualify as a REIT, the Company is required, among other things, to
distribute at least 95% of its REIT taxable income to stockholders each year. In
order to maintain status as a REIT, the Company must satisfy certain
requirements on a continuing basis, which requirements may substantially affect
day-to-day decision making by the Company. No assurance can be given that the
Company will at all times satisfy these tests. Possible timing differences
between receipt of income and payment of expenses, and the inclusion and
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<PAGE> 16
deduction of such amounts in determining taxable income, could require the
Company to reduce its dividends below the level necessary to maintain its
qualification as a REIT, which would adversely affect the Company's ability to
maintain REIT status. See "Federal Income Tax Considerations -- Taxation of the
Company."
Even if the Company qualifies as a REIT, certain transactions or other
events could result in the imposition of federal tax at rates ranging from 4% to
100% on certain types of the Company's income or gains.
USE OF PROCEEDS
Unless otherwise set forth in an accompanying Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which may include acquisitions and repayment,
reduction and/or refinancing of other indebtedness, including acquisition
indebtedness, working capital, capital expenditures and additional acquisitions.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS
For purposes of calculating the following ratios, (i) earnings represent
income from continuing operations before income taxes, plus fixed charges, and
(ii) fixed charges represent interest expense on all indebtedness (including
amortization of deferred debt issuance costs) and the portion of operating lease
rental expense that is representative of the interest factor (deemed to be
one-third of operating lease rentals). There were no shares of Preferred Stock
outstanding during any of the periods below indicated and therefore the ratio of
earnings to combined fixed charges and Preferred Stock dividend requirements
would have been the same as the ratio of earnings to fixed charges for each
period indicated.
<TABLE>
<CAPTION>
FROM JUNE 30, 1994
NINE MONTHS (INCEPTION)
ENDED THROUGH
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------- ------------------
<S> <C> <C>
Ratio of earnings to fixed charges:......................... 2.0x 4.0x
</TABLE>
DESCRIPTION OF DEBT SECURITIES
The Debt Securities may be issued from time to time in one or more series.
The particular terms of each series of Debt Securities offered by any Prospectus
Supplement or Prospectus Supplements will be described therein. The Senior Debt
Securities are to be issued under an Indenture (the "Senior Indenture") between
the Company and AmSouth Bank of Alabama, as trustee (the "Senior Trustee"). The
Subordinated Debt Securities are to be issued under a separate Indenture (the
"Subordinated Indenture") between the Company and AmSouth Bank of Alabama, as
trustee (the "Subordinated Trustee"). The Senior Indenture and the Subordinated
Indenture are sometimes referred to collectively as the "Indentures" and the
Senior Trustee and Subordinated Trustee are sometimes referred to collectively
as the "Trustees."
The following summaries of certain provisions of the Senior Debt
Securities, the Subordinated Debt Securities, the Senior Indenture and the
Subordinated Indenture, as modified or superseded by any applicable Prospectus
Supplement, are brief summaries of certain provisions thereof, do not purport to
be complete and are subject, and are qualified in their entirety by reference to
all the provisions of the Indenture applicable to a particular series of Debt
Securities. Wherever particular defined terms of the Indentures are referred to
herein or in a Prospectus Supplement, such defined terms are incorporated herein
or therein by reference.
GENERAL
Unless otherwise specified in the applicable Prospectus Supplement or
Prospectus Supplements, the Debt Securities will be general unsecured
obligations of the Company. The Indentures do not limit the aggregate amount of
Debt Securities which may be issued thereunder, and Debt Securities may be
issued thereunder from time to time in separate series up to the aggregate
amount from time to time authorized by the Company
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<PAGE> 17
for each series. (Section 301) Unless otherwise specified in the Prospectus
Supplement or Prospectus Supplements, the Senior Debt Securities when issued
will be unsubordinated obligations of the Company and will rank equally and
ratably with all other unsecured and unsubordinated indebtedness of the Company.
The Subordinated Debt Securities when issued will be subordinated in right of
payment to the prior payment in full of all Senior Debt (as defined herein and
in the Subordinated Indenture) of the Company as described below under
"-- Subordination of Subordinated Debt Securities" and in the Prospectus
Supplement applicable to an offering of Subordinated Debt Securities. (Article
Fifteen)
The applicable Prospectus Supplement or Prospectus Supplements pursuant to
which any Debt Securities are offered will describe the following terms of the
Debt Securities in respect of which this Prospectus is being delivered: (1) the
title of such Debt Securities; (2) any limit on the aggregate principal amount
of such Debt Securities; (3) the person to whom any interest on any Debt
Security of the series shall be payable if other than the person in whose name
the Debt Security is registered on the regular record date; (4) the date or
dates on which such Debt Securities will mature; (5) the rate or rates of
interest, if any, or the method of calculation thereof, which such Debt
Securities will bear, the date or dates from which any such interest will
accrue, the interest payment dates on which any such interest on such Debt
Securities will be payable and the regular record date for any interest payable
on any interest payment date; (6) the place or places where the principal of,
premium, if any, and interest on such Debt Securities will be payable; (7) the
period or periods within which, the events upon the occurrence of which, and the
price or prices at which, such Debt Securities may, pursuant to any optional or
mandatory provisions, be redeemed or purchased, in whole or in part, by the
Company and any terms and conditions relevant thereto; (8) the obligations of
the Company, if any, to redeem or repurchase such Debt Securities pursuant to
any sinking fund provision or analogous provision or at the option of the
holders and the period or periods within which, and the other terms and
conditions upon which, such Debt Securities shall be redeemed, repaid or
repurchased, in whole or in part, pursuant to such obligations; (9) the
denominations in which any such Debt Securities will be issuable, if other than
denominations of $1,000, and any integral multiple thereof; (10) any index or
formula used to determine the amount of payments of principal of and any premium
and interest on such Debt Securities; (11) the currency, currencies or currency
unit or units of payment of principal of and any premium and interest on such
Debt Securities if other than U.S. dollars; (12) if the principal of, or
premium, if any, or interest on such Debt Securities is to be payable, at the
election of the Company or a holder thereof, in one or more currencies or
currency units other than that or those in which such Debt Securities are stated
to be payable, the currency, currencies or currency units in which payment of
the principal of and any premium and interest on Debt Securities of such series
as to which such election is made shall be payable, and the periods within which
and the terms and conditions upon which such election is to be made; (13) if
other than the principal amount thereof, the portion of the principal amount of
such Debt Securities of the series which will be payable upon acceleration of
the maturity thereof; (14) if the principal amount of any Debt Securities which
will be payable at the maturity thereof will not be determinable as of any date
prior to such maturity, the amount which will be deemed to be the outstanding
principal amount of such Debt Securities; (15) the applicability of any
provisions described below under "Defeasance"; (16) whether any of such Debt
Securities are to be issuable in permanent global form ("Global Security") and,
if so, the terms and conditions, if any, upon which interests in such Securities
in global form may be exchanged, in whole or in part, for the individual Debt
Securities represented thereby; (17) the applicability of any covenant with
respect to such Debt Securities and the applicability of any provisions
described below under "Events of Default" and any additional Events of Default
applicable thereto; (18) any covenants applicable to such Debt Securities; (19)
the terms and conditions, if any, pursuant to which the Debt Securities are
convertible or exchangeable into shares of Common Stock or other Securities; and
(20) any other terms of such Debt Securities not inconsistent with the
provisions of the Indentures. (Section 301)
Debt Securities may be issued at a discount from their principal amount.
U.S. federal income tax considerations and other special considerations
applicable to any such original issue discount Securities will be described in
the applicable Prospectus Supplement. (Section 301)
If the purchase price of any of the Debt Securities is denominated in a
foreign currency or currencies or a foreign currency unit or units or if the
principal of and any premium and interest on any series of Debt
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<PAGE> 18
Securities is payable in a foreign currency or currencies or a foreign currency
unit or units, the restrictions, elections, general tax considerations, specific
terms and other information with respect to such issue of Debt Securities will
be set forth in the applicable Prospectus Supplement.
Since the Company is a holding company, the rights of the Company, and
hence the right of creditors of the Company (including the holders of Debt
Securities), to participate in any distribution of the assets of any subsidiary
upon its liquidation or reorganization or otherwise is necessarily subject to
the prior claims of creditors of any such subsidiary, except to the extent that
claims of the Company itself as a creditor of the subsidiary may be recognized.
The Indentures do not contain any provisions that limit the Company's
ability to incur indebtedness. Holders of Debt Securities will not have the
benefit of any specific covenants or provisions in the applicable Indenture or
Debt Securities that would protect them in the event the Company engages in or
becomes the subject of a highly leveraged transaction, other than any covenants
described in any Prospectus Supplement, and the limitations on mergers,
consolidations and transfers of substantially all of the Company's properties
and assets as an entirety to any person as described below under
"-- Consolidation, Merger and Sale of Assets." Such covenants may not be waived
or modified by the Company or its Board or Directors, although holders of Debt
Securities could waive or modify such covenants as more fully described below
under "-- Modification and Waiver."
CONVERSION OR EXCHANGE OF DEBT SECURITIES
If so indicated in the applicable Prospectus Supplement with respect to a
particular series of Debt Securities, such series will be convertible or
exchangeable into shares of Common Stock or other securities on the terms and
conditions set forth therein. Such terms shall include provisions as to whether
conversion is mandatory, at the option of the holder or at the option of the
Company, and may include provisions pursuant to which the number of shares of
Common Stock or other securities of the Company to be received by the holders of
Debt Securities would be calculated according to the market price of the Common
Stock or other securities of the Company as of a time stated in the Prospectus
Supplement. The applicable Prospectus Supplement will indicate certain
restrictions on ownership which may apply in the event of a conversion or
exchange. See "Description of Capital Stock -- Restrictions on Ownership."
FORM, EXCHANGE, REGISTRATION, CONVERSION, TRANSFER AND PAYMENT
Unless otherwise indicated in the applicable Prospectus Supplement, the
Debt Securities will be issued only in fully registered form in denominations of
$1,000 or integral multiples thereof. (Section 302) Unless otherwise indicated
in the applicable Prospectus Supplement, payment of principal, premium, if any,
and interest on the Debt Securities will be payable, and the exchange,
conversion and transfer of Debt Securities will be registerable, at the office
or agency of the Company or the Trustee maintained for such purposes and at any
other office or agency maintained for such purpose. (Section 1002) No service
charge will be made for any registration of transfer or exchange of the Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge imposed in connection therewith. (Section 305)
All monies paid by the Company to a paying agent for the payment of
principal of and any premium or interest on any Debt Security which remain
unclaimed for two years after such principal, premium or interest has become due
and payable may be repaid to the Company and thereafter the holder of such Debt
Security may look only to the Company for payment thereof. (Section 1003)
BOOK-ENTRY DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a depositary (the "Global Depositary") or its nominee identified in the
applicable Prospectus Supplement. In such a case, one or more Global Securities
will be issued in a denomination or aggregate denomination equal to the portion
of the aggregate principal amount of outstanding Debt Securities of the series
to be represented by such Global Security or Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in registered form, a Global
Security may not be
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registered for transfer or exchange except as a whole by the Global Depositary
for such Global Security to a nominee of such Global Depositary or by a nominee
of such Global Depositary to such Global Depositary or another nominee of such
Global Depositary or by such Global Depositary or any nominee to a successor
Global Depositary or a nominee of such successor Global Depositary and except in
the circumstances described in the applicable Prospectus Supplement. (Section
305)
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the applicable Prospectus Supplement. The Company expects
that the following provisions will apply to depositary arrangements, although no
assurance can be given that such will be the case.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities which are to be represented by a Global Security to be deposited with
or on behalf of a Global Depositary will be represented by a Global Security
registered in the name of such Global Depositary or its nominee. Upon the
issuance of such Global Security, and the deposit of such Global Security with
or on behalf of the Global Depositary for such Global Security, the Global
Depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts of the Debt Securities represented by such Global
Security to the accounts of institutions that have accounts with such Global
Depositary or its nominee ("participants"). The accounts to be credited will be
designated by the underwriters or agents for the sale of such Debt Securities or
by the Company, if such Debt Securities are offered and sold directly by the
Company. Ownership of beneficial interests in such Global Security will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests by participants in such Global Security will
be shown on, and the transfer of that ownership interest will be effected only
through, records maintained by the Global Depositary or its nominee for such
Global Security. Ownership of beneficial interests in such Global Security by
persons that hold through participants will be shown on, and the transfer of
such ownership interests within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in certificated form. The foregoing limitations and such laws may impair the
ability to transfer beneficial interests in such Global Securities.
So long as the Global Depositary for a Global Security, or its nominee, is
the registered owner of such Global Security, such Global Depositary or such
nominee, as the case may be, will be considered the sole owner or holder of the
Securities represented by such Global Security for all purposes under the
applicable Indenture. Except as set forth below, unless otherwise specified in
the applicable Prospectus Supplement, owners of beneficial interests in such
Global Security will not be entitled to have Debt Securities of the series
represented by such Global Security registered in their names, will not receive
or be entitled to receive physical delivery of Debt Securities of such series in
certificated form and will not be considered the holders thereof for any
purposes under the applicable Indenture. Accordingly, each person owning a
beneficial interest in such Global Security must rely on the procedures of the
Global Depositary and, if such person is not a participant, on the procedures of
the participant through which such person owns its interest, to exercise any
rights of a holder under the applicable Indenture. The Company understands that
under existing industry practices, if the Company requests any action of holders
or an owner of a beneficial interest in such Global Security desires to give any
notice or take any action a holder is entitled to give or take under the
applicable Indenture, the Global Depositary would authorize the participants to
give such notice or take such action, and participants would authorize
beneficial owners owning through such participants to give such notice or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
If the Global Depositary for Debt Securities of a series is at any time
unwilling, unable or ineligible to continue as Global Depositary and a successor
Global Depositary is not appointed by the Company within 90 days or an Event of
Default under the applicable Indenture has occurred and is continuing, the
Company will issue Debt Securities of such series in definitive form in exchange
for the Global Security or Securities representing the Debt Securities of such
series. In addition, the Company may at any time and in its sole discretion,
subject to any limitations described in the applicable Prospectus Supplement,
determine not to have any 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 the Global Security or Securities
representing
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<PAGE> 20
such Debt Securities. Further, if the Company so specifies with respect to the
Debt Securities of a series, an owner of a beneficial interest in a Global
Security representing Debt Securities of such series may, on terms acceptable to
the Company and the Global Depositary for such Global Security, receive Debt
Securities of such series in definitive form in exchange for such beneficial
interest, subject to any limitations described in the applicable Prospectus
Supplement relating to such Debt Securities. In any such instance, an owner of a
beneficial interest in a Global Security will be entitled to physical delivery
in definitive form of Debt Securities of the series represented by such Global
Security equal in principal amount to such beneficial interest and to have such
Debt Securities registered in its name (if the Debt Securities of such series
are issuable as registered securities).
Principal of and any premium and interest on a Global Security will be
payable in the manner described in the applicable Prospectus Supplement.
CERTAIN COVENANTS OF THE COMPANY
If so indicated in the applicable Prospectus Supplement with respect to a
particular series of Debt Securities, the Company will be subject to the
covenants described therein.
EVENTS OF DEFAULT
Unless otherwise indicated in the applicable Prospectus Supplement, the
following constitute Events of Default under the Indentures with respect to Debt
Securities of any series: (a) failure to pay principal of or premium, if any, on
any Debt Security of that series when due; (b) failure to pay any interest on
any Debt Security of that series when due, continued for 30 days; (c) failure in
the deposit of any sinking fund payment in respect of any Debt Security of that
series; (d) failure to perform any other covenant of the Company in the
Indentures (other than a covenant included in the applicable Indenture solely
for the benefit of a series of Debt Securities other than that series),
continued for 60 days after written notice to the Company as provided in the
applicable Indenture; (e) acceleration of the maturity of indebtedness of the
Company or any of its subsidiaries having an outstanding principal amount of at
least $5,000,000 or a failure to pay such indebtedness at its stated maturity
after demand therefor, provided that within 10 days after such acceleration or
maturity the Trustee or holders of at least 25% in aggregate principal amount of
the Debt Securities of such series then outstanding have given notice thereof
and demand for the discharge of such acceleration or repayment at maturity; (f)
a final judgment or final judgments that exceed $5,000,000 for the payment of
money have been entered by a court or courts of competent jurisdiction against
the Company and/or any subsidiary of the Company and such judgment or judgments
have not been discharged within 30 days after all rights to appeal have been
exhausted; and (g) certain events of bankruptcy, insolvency or reorganization.
(Section 501) The applicable Prospectus Supplement with respect to Debt
Securities of any series will indicate any other Event or Events of Default with
respect to Debt Securities of that series.
Unless otherwise indicated in the applicable Prospectus Supplement, if (i)
an Event of Default with respect to outstanding Debt Securities of any series
shall occur and be continuing (other than an Event of Default described in
clause (g) of the foregoing paragraph), either the applicable Trustee or the
holders of not less than 25% in principal amount of the outstanding Debt
Securities of that series by notice as provided in the Indentures may declare
the principal amount (or, if the Debt Securities of that series are original
issue discount Securities, such portion of the principal amount as may be
specified in the terms of that series) of all Debt Securities of that series to
be due and payable immediately or (ii) an Event of Default described in clause
(g) of the foregoing paragraph occurs with respect to outstanding Debt
Securities of any series, all principal of, premium, if any, and accrued and
unpaid interest on all Debt Securities of that series (or, if the Debt
Securities of that series are original issue discount securities, such portion
of the principal amount as may be specified in the terms of that series) shall
be immediately due and payable without any declaration by the Trustee or
holders. (Section 502) However, at any time after a declaration of acceleration
with respect to Debt Securities of any series has been made, but before a
judgment or decree based on such acceleration has been obtained, the holders of
a majority in principal amount of the outstanding Debt Securities of that series
may, under certain circumstances, rescind and annul such acceleration. (Section
502) For information as to waiver or defaults, see "-- Modification and Waiver"
below.
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The Indentures provide that, subject to the duty of the applicable Trustee
thereunder during an Event of Default to act with the required standard of care,
such Trustee will be under no obligation to exercise any of its rights or powers
under the applicable Indenture at the request or direction of any of the
holders, unless such holders shall have offered to such Trustee reasonable
security or indemnity. (Section 603) Subject to certain provisions, including
those requiring security or indemnification of the Trustees, the holders of a
majority in principal amount of the outstanding Debt Securities of any series
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustees, or exercising any trust or
power conferred on such Trustees, with respect to the Debt Securities of that
series. (Section 512)
No holder of a Debt Security of any series will have the right to institute
any proceeding with respect to the Indentures or for any remedy thereunder,
unless (i) such holder shall have previously given to the applicable Trustee
written notice of a continuing Event of Default (as defined) with respect to
Debt Securities of that series; (ii) the holders of not less than 25% in
aggregate principal amount of the outstanding Debt Securities of the same series
shall have made written request, and offered reasonable indemnity, to the
applicable Trustee to institute proceedings in respect of such Event of Default
in its own name as trustee under the applicable Indenture; (iii) the Trustee
shall have failed to institute such proceedings within 60 days; and (iv) the
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Debt Securities of the same series a
direction inconsistent with such request; provided, however, that such
limitations do not apply to a suit instituted by a holder of a Debt Security for
enforcement of payment of the principal of and any premium and interest on such
Debt Security on or after the respective due dates expressed in such Debt
Security, or in the case of convertible Debt Securities, for enforcement of a
right of conversion. (Section 507, Section 508)
The Company will be required to furnish to the Trustees annually a
statement as to the performance by the Company of its obligations under the
Indentures and as to any default in such performance. (Section 1004)
MODIFICATION AND WAIVER
Without the consent of any holder of outstanding Debt Securities, the
Company and the applicable Trustee may amend or supplement the applicable
Indenture or Debt Securities to cure any ambiguity, defect or inconsistency, or
to make certain specified changes and other changes that do not adversely affect
the rights of any holder of Debt Securities. Other modifications and amendments
of the Indentures may be made by the Company and the applicable Trustee only
with the consent of the holders of not less than a majority in aggregate
principal amount of the outstanding Debt Securities of each series affected
thereby; provided, however, that no such modification or amendment may, without
the consent of the holder of each outstanding Debt Security affected thereby:
(a) change the stated maturity of the principal of, or any installment of
principal of, or interest on, any Debt Security; (b) reduce the principal amount
of, the rate of interest on, or the premium, if any, payable upon the redemption
or repurchase of, any Debt Security; (c) reduce the amount of principal of an
original issue discount Security payable upon acceleration of the maturity
thereof; (d) change the place or currency of payment of principal of, or
premium, if any, or interest on any Debt Security; (e) impair the right to
institute suit for the enforcement of any payment on or with respect to any Debt
Security on or after the stated maturity or redemption date thereof; (f) modify
the conversion provisions applicable to convertible Debt Securities in a manner
adverse to the holders thereof; (g) modify the subordination provisions
applicable to any series of Debt Securities in a manner adverse to the holders
thereof; or (h) reduce the percentage in principal amount of outstanding Debt
Securities of any series, the consent of the holders of which is required for
modification or amendment of the Indentures or for waiver of compliance with
certain provisions of the applicable Indenture or for waiver of certain
defaults. (Section 901)
The holders of at least a majority in aggregate principal amount of the
outstanding Debt Securities of any series may on behalf of the holders of all
Debt Securities of that series waive, insofar as that series is concerned,
compliance by the Company with certain covenants of the Indentures. The holders
of not less than a majority in principal amount of the outstanding Debt
Securities of any series may, on behalf of the holders of all Debt Securities of
that series, waive any past default under the applicable Indenture with respect
to that series, except a default in the payment of the principal of, or premium,
if any, or interest on, any Debt Security
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<PAGE> 22
of that series or in respect of a provision which under such applicable
Indenture cannot be modified or amended without the consent of the holder of
each outstanding Debt Security of that series affected. (Section 513)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of any holders of outstanding Debt
Securities, may consolidate with or merge into, or transfer or lease its assets
substantially as an entirety to, any Person, and any other Person may
consolidate with or merge into, or transfer or lease its assets substantially as
an entirety to, the Company, provided that (a) the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or
which acquires or leases the assets of the Company substantially as an entirety
assumes the Company's obligations on the Debt Securities and under the Indenture
relating thereto and (b) after giving effect to such transaction no Event of
Default, and no event which, after notice or lapse of time or both, would become
an Event of Default, shall have happened and be continuing. (Section 801) A
Prospectus Supplement may set forth any additional provisions regarding a
consolidation with, merger into, or transfer or lease of its assets
substantially as an entirety to, any Person (or of such Person with, into or to
the Company).
DEFEASANCE
If so indicated in the applicable Prospectus Supplement with respect to the
Debt Securities of a series, the Company, at its option (i) will be discharged
from any and all obligations in respect of the Debt Securities of such series
(except for certain obligations to register the transfer or exchange of Debt
Securities of such series, to replace destroyed, stolen, lost or mutilated Debt
Securities of such series, and to maintain an office or agency in respect of the
Debt Securities and hold moneys for payment in trust) or (ii) will be released
from its obligations to comply with any covenants that may be specified in the
applicable Prospectus Supplement with respect to the Debt Securities of such
series, and the occurrence of an event described in clause (d) under "Events of
Default" above with respect to any defeased covenants shall no longer be an
Event of Default, if in either case the Company irrevocably deposits with the
applicable Trustee, in trust, money or U.S. Government Obligations that through
the payment of interest thereon and principal thereof in accordance with their
terms will provide money in an amount sufficient to pay all of the principal of
and premium, if any, and any interest on the Debt Securities of such series on
the dates such payments are due (which may include one or more redemption dates
designated by the Company) in accordance with the terms of such Debt Securities.
(Section 1302, Section 1303) Such a trust may only be established if, among
other things, (a) no Event of Default or event which with the giving of notice
or lapse of time, or both, would become an Event of Default under the applicable
Indenture shall have occurred and be continuing on the date of such deposit, (b)
no Event of Default described under clause (g) under "Events of Default" above
or event which with the giving of notice or lapse of time, or both, would become
and Event of Default described under such clause (g) shall have occurred and be
continuing at any time during the period ending on the 91st day following such
date of deposit, and (c) the Company shall have delivered an opinion of counsel
to the effect that the holders of the Debt Securities will not recognize gain or
loss for U.S. federal income tax purposes as a result of such deposit or
defeasance and will be subject to U.S. federal income tax in the same manner as
if such deposit and defeasance had not occurred, which opinion of counsel, in
the case of a deposit and defeasance of such Indenture with respect to the Debt
Securities of any series as described under clause (i) above, shall be based on
either (A) a ruling to such effect that the Company has received from, or that
has been published by, the Internal Revenue Service or (B) a change in the
applicable federal income tax law, occurring after the date of the applicable
Indenture, to such effect. (Section 1304) In the event the Company omits to
comply with its remaining obligations under such Indenture after a defeasance of
such Indenture with respect to the Debt Securities of any series as described
under clause (ii) above and the Debt Securities of such series are declared due
and payable because of the occurrence of any undefeased Event of Default, the
amount of money and U.S. Government Obligations on deposit with the applicable
Trustee may be insufficient to pay amounts due on the Debt Securities of such
series at the time of the acceleration resulting from such Event of Default.
However, the Company will remain liable for such payments.
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<PAGE> 23
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
Unless otherwise indicated in the Prospectus Supplement, the following
provisions will apply to the Subordinated Debt Securities.
The Subordinated Debt Securities will, to the extent set forth in the
Subordinated Indenture, be subordinate in right of payment to the prior payment
in full of all Senior Debt, including the Senior Debt Securities. (Section 1501)
The Prospectus Supplement will set forth as of the most recent practicable date
the aggregate amount of outstanding indebtedness that by the terms of the
Subordinated Debt Securities will be senior to the Subordinated Debt Securities.
Except as may otherwise be provided in the applicable Prospectus Supplement,
there will be no limitation on the Company's ability to issue additional Senior
Debt. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshalling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Debt will first be
entitled to receive payment in full of principal of (and premium, if any) and
interest, if any, on such Senior Debt before the holders of the Subordinated
Debt Securities will be entitled to receive or retain any payment in respect of
the principal of (and premium, if any) or interest, if any, on the Subordinated
Debt Securities. (Section 1502)
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are not holders of Senior Debt or Subordinated Debt
Securities may recover less, ratably, than holders of Senior Debt and may
recover more, ratably, than the holders of the Subordinated Debt Securities.
In the event of the acceleration of the maturity of any Subordinated Debt
Securities, the holders of all Senior Debt outstanding at the time of such
acceleration will first be entitled to receive payment in full of all amounts
due thereon before the holders of the Subordinated Debt Securities will be
entitled to receive any payment upon the principal of (or premium, if any) or
interest, if any, on the Subordinated Debt Securities. (Section 1503)
No payments on account of principal (or premium, if any) or interest, if
any, in respect of the Subordinated Debt Securities may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Debt, or an event of default with respect to any Senior Debt resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default. (Section 1504) For purposes of the
subordination provisions, the payment, issuance and delivery of cash, property
or securities (other than stock and certain subordinated securities of the
Company) upon conversion of a Subordinated Debt Security will be deemed to
constitute payment on account of the principal of such Subordinated Debt
Security. (Section 1515)
"Senior Debt" is defined to mean the principal, premium, if any, unpaid
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceeding), fees, charges,
expenses, reimbursement and indemnification obligations, and all other amounts
payable under or in respect of Indebtedness (as defined) of the Company, whether
any such Indebtedness exists as of the date of the Subordinated Indenture or is
created, incurred, assumed or guaranteed after such date, other than (i)
Indebtedness that by its terms or by operation of law is subordinated to or on a
parity with the Subordinated Debt Security, (ii) Indebtedness owed to a
subsidiary or partnership of the Company, and (iii) Indebtedness owing in
respect of the Company's 10 1/2% Convertible Subordinated Debentures due 2002.
(Section 101)
"Indebtedness" with respect to any Person is defined to mean:
(i) any debt (a) for money borrowed, or (b) evidenced by a bond, note,
debenture, or similar instrument (including purchase money obligations)
given in connection with the acquisition of any business, property or
assets, whether by purchase, merger, consolidation or otherwise, but shall
not include any account payable or other obligation created or assumed by a
Person in the ordinary course of business in connection with the obtaining
of materials or services, or (c) which is a direct or indirect obligation
which arises as a result of banker's acceptances or bank letters of credit
issued to secure
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<PAGE> 24
obligations of such Person, or to secure the payment of revenue bonds
issued for the benefit of such Person, whether contingent or otherwise;
(ii) any debt of others described in the preceding clause (i) which
such Person has guaranteed or for which it is otherwise liable;
(iii) the obligation of such Person as lessee under any lease of
property which is reflected on such Person's balance sheet as a capitalized
lease; and
(iv) any deferral, amendment, renewal, extension, supplement or
refunding of any liability of the kind described in any of the preceding
clauses (i), (ii) and (iii);
provided, however, that, in computing the Indebtedness of any Person, there
shall be excluded any particular indebtedness if, upon or prior to the maturity
thereof, there shall have been deposited with a depository in trust money (or
evidence of Indebtedness, if permitted by the instrument creating such
Indebtedness) in the necessary amount to pay, redeem or satisfy such
Indebtedness as it becomes due, and the amount so deposited shall not be
included in any computation of the assets of such Person. (Section 101)
DESCRIPTION OF CAPITAL STOCK
The following descriptions do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the more complete
descriptions thereof set forth in the Company's Charter and Bylaws, which
documents are exhibits to this Registration Statement.
For the Company to qualify as a REIT under the Code, not more than 50% of
the value of the outstanding stock may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year and the stock must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of 12 months (or
during a proportionate part of a shorter taxable year). Accordingly, the Charter
contains provisions that restrict the ownership and transfer of shares of stock.
See " -- Restrictions on Ownership."
The Charter authorizes the issuance of up to 60,000,000 shares, consisting
of 50,000,000 shares of Common Stock, $.001 par value per share ("Common Stock")
and 10,000,000 shares of Preferred Stock, par value $.001 per share ("Preferred
Stock"). As of September 30, 1995, the Company had 6,016,898 shares of Common
Stock and no shares of Preferred Stock outstanding.
PREFERRED STOCK
The following is a description of certain general terms and provisions of
the Preferred Stock. The particular terms of any series of Preferred Stock will
be described in the applicable Prospectus Supplement. If so indicated in a
Prospectus Supplement, the terms of any such series may differ from the terms
set forth below. This summary does not purport to be complete and is subject to,
and qualified in its entirety by, the provisions of the Charter and the articles
supplementary relating to each series of the Preferred Stock, which will be
filed as an exhibit to or incorporated by reference in the Registration
Statement of which this Prospectus is a part at or prior to the time of issuance
of such series of the Preferred Stock (the "Articles Supplementary").
The Preferred Stock authorized by the Charter may be issued from time to
time in one or more series in such amounts and with such designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as may be fixed by the Board of Directors. Under certain
circumstances, the issuance of Preferred Stock could have the effect of
delaying, deferring or preventing a change of control of the Company and may
adversely affect the voting and other rights of the holders of Common Stock. The
Charter authorizes the Board of Directors to classify or reclassify any unissued
shares of Preferred Stock by setting or changing the designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms and conditions of redemption of such
Preferred Stock.
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The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below unless otherwise described in a Prospectus
Supplement relating to a particular series of the Preferred Stock. The
applicable Prospectus Supplement will describe the following terms of the series
of Preferred Stock in respect of which this Prospectus is being delivered: (1)
the title of such Preferred Stock and the number of shares offered; (2) the
amount of liquidation preference per share; (3) the initial public offering
price at which such Preferred Stock will be issued; (4) the dividend rate (or
method of calculation), the dates on which dividends shall be payable and the
dates from which dividends shall commence to cumulate, if any; (5) any
redemption or sinking fund provisions; (6) any conversion or exchange rights;
(7) any additional voting, dividend, liquidation, redemption, sinking fund and
other rights, preferences, privileges, limitations and restrictions; (8) any
listing of such Preferred Stock on any securities exchange; (9) a discussion of
U.S. federal income tax considerations applicable to such Preferred Stock; (10)
the relative ranking and preferences of such Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company; (11) any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; and (12) any limitations on direct or beneficial
ownership and restrictions on transfer, in each case as may be appropriate to
preserve the status of the Company as a REIT.
General
The Preferred Stock offered hereby will be issued in one or more series.
The Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The liquidation preference is
not indicative of the price at which the Preferred Stock will actually trade on
or after the date of issuance.
Rank
The Preferred Stock shall, with respect to dividend rights and rights upon
liquidation, dissolution and winding up of the Company, rank prior to the Common
Stock and to all other classes and series of equity securities of the Company
now or hereafter authorized, issued or outstanding (the Common Stock and such
other classes and series of equity securities collectively may be referred to
herein as the "Junior Stock"), other than any classes or series of equity
securities of the Company which by their terms specifically provide for a
ranking on a parity with (the "Parity Stock") or senior to (the "Senior Stock")
the Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the Company. The Preferred Stock shall be junior to
all outstanding debt of the Company. The Preferred Stock shall be subject to
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
expressly prohibited by the Charter.
Dividends
Holders of Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of assets of the Company legally
available for payment, dividends, or distributions in cash, property or other
assets of the Company or in Securities of the Company or from any other source
as the Board of Directors in their discretion shall determine and at such dates
and at such rates per share per annum as described in the applicable Prospectus
Supplement. Such rate may be fixed or variable or both. Each declared dividend
shall be payable to holders of record as they appear at the close of business on
the books of the Company on such record dates, not more than 90 calendar days
preceding the payment dates therefor, as are determined by the Board of
Directors (each of such dates, a "Record Date").
Such dividends may be cumulative or noncumulative, as described in the
applicable Prospectus Supplement. If dividends on a series of Preferred Stock
are noncumulative and if the Board of Directors fails to declare a dividend in
respect of a dividend period with respect to such series, then holders of such
Preferred Stock will have no right to receive a dividend in respect of such
dividend period, and the Company will have no obligation to pay the dividend for
such period, whether or not dividends are declared payable on any future
dividend payment dates. If dividends of a series of Preferred Stock are
cumulative, the dividends on such shares will accrue from and after the date set
forth in the applicable Prospectus Supplement.
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No full dividends shall be declared or paid or set apart for payment on
Preferred Stock of any series ranking, as to dividends, on a parity with or
junior to the series of Preferred Stock offered by the applicable Prospectus
Supplement for any period unless full dividends for the immediately preceding
dividend period on such Preferred Stock (including any accumulation in respect
of unpaid dividends for prior dividend periods, if dividends on such Preferred
Stock are cumulative) have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment. When dividends are not so paid in full (or a sum sufficient for such
full payment is not so set apart) upon such Preferred Stock and any other
Preferred Stock of the Company ranking on a parity as to dividends with the
Preferred Stock, dividends upon such Preferred Stock and dividends on such other
Preferred Stock ranking on a parity with the Preferred Stock shall be declared
pro rata so that the amount of dividends declared per share on such Preferred
Stock and such other Preferred Stock ranking on a parity with the Preferred
Stock shall in all cases bear to each other the same ratio that accrued
dividends for the then-current dividend period per share on such Preferred Stock
(including any accumulation in respect of unpaid dividends for prior dividend
periods, if dividends on such Preferred Stock are cumulative) and accrued
dividends, including required or permitted accumulations, if any, on shares of
such other Preferred Stock, bear to each other. No interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment(s) on
Preferred Stock which may be in arrears. Unless full dividends on the series of
Preferred Stock offered by the applicable Prospectus Supplement have been
declared and paid or set apart for payment for the immediately preceding
dividend period (including any accumulation in respect of unpaid dividends for
prior dividend periods, if dividends on such Preferred Stock are cumulative),
(a) no cash dividend or distribution (other than in shares of Junior Stock) may
be declared, set aside or paid on the Junior Stock, (b) the Company may not,
directly or indirectly, repurchase, redeem or otherwise acquire any shares of
its Junior Stock (or pay any monies into a sinking fund for the redemption of
any shares) except by conversion into or exchange for Junior Stock, and (c) the
Company may not, directly or indirectly, repurchase, redeem or otherwise acquire
any Preferred Stock or Parity Stock (or pay any monies into a sinking fund for
the redemption of any shares of any such stock) otherwise than pursuant to pro
rata offers to purchase or a concurrent redemption of all, or a pro rata
portion, of the outstanding Preferred Stock and shares of Parity Stock (except
by conversion into or exchange for Junior Stock).
Any dividend payment made on a series of Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series.
Redemption
The terms, if any, on which Preferred Stock of any series may be redeemed
will be set forth in the applicable Prospectus Supplement.
Liquidation
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Company, the holders of a series of Preferred
Stock will be entitled, subject to the rights of creditors, but before any
distribution or payment to the holders of Common Stock, or any Junior Stock on
liquidation, dissolution or winding up of the Company, to receive a liquidating
distribution in the amount of the liquidation preference per share as set forth
in the applicable Prospectus Supplement plus accrued and unpaid dividends for
the then-current dividend period (including any accumulation in respect of
unpaid dividends for prior dividend periods, if dividends on such series of
Preferred Stock are cumulative). If the amounts available for distribution with
respect to the Preferred Stock and all other outstanding Parity Stock are not
sufficient to satisfy the full liquidation rights of all the outstanding
Preferred Stock and Parity Stock, then the holders of each series of such stock
will share ratably in any such distribution of assets in proportion to the full
respective preferential amount (which in the case of Preferred Stock may include
accumulated dividends) to which they are entitled. After payment of the full
amount of the liquidation distribution, the holders of Preferred Stock will not
be entitled to any further participation in any distribution of assets by the
Company.
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Voting
The Preferred Stock of a series will not be entitled to vote, except as
described below or in the applicable Prospectus Supplement. Without the
affirmative vote of a majority of the Preferred Stock then outstanding (voting
separately as a class together with any Parity Stock), the Company may not (i)
increase or decrease the aggregate number of authorized shares of such class or
any security ranking prior to the Preferred Stock, (ii) increase or decrease the
par value of the shares of holders of such class, or (iii) alter or change the
voting or other powers, preferences or special rights of such class so as to
affect them adversely. An amendment which increases the number of authorized
shares of or authorizes the creation or issuance of other classes or series of
Junior Stock or Parity Stock, or substitutes the surviving entity in a merger,
consolidation, reorganization or other business combination for the Company,
shall not be considered to be such an adverse change.
No Other Rights
The shares of a series of Preferred Stock will not have any preferences,
voting powers or relative, participating, optional or other special rights
except as set forth above or in the applicable Prospectus Supplement, the
Charter and in the applicable Articles Supplementary or as otherwise required by
law.
Transfer Agent and Registrar
The transfer agent for each series of Preferred Stock will be described in
the related Prospectus Supplement.
COMMON STOCK
Subject to the preferential rights of any other shares or series of stock
and to the provisions of the Charter regarding Excess Shares, holders of shares
of Common Stock will be entitled to receive dividends on such stock as the Board
of Directors may declare out of assets legally available for the payment of
dividends. See "-- Restrictions on Ownership". Upon issuance against full
payment of the purchase price therefor, the Common Stock will be fully paid and
nonassessable and have no preferences or conversion, exchange or preemptive
rights. In the event of any liquidation, dissolution or winding-up of the
Company, the holders of shares of Common Stock are entitled to share ratably in
any of the Company's assets remaining after the satisfaction of all obligations
and liabilities of the company and after required distributions to holders of
Preferred Stock, if any. The Common Stock is subject to restrictions on transfer
under certain circumstances. See "-- Restrictions on Ownership."
Subject to the provisions of the Charter regarding Excess Shares, each
share of Common Stock will be entitled to one vote on all matters voted upon by
the holders of Common Stock. Holders of shares of Common Stock will have no
cumulative voting rights. The Company's Bylaws provide that the President, Chief
Executive Officer or a majority of the Board may call a special meeting and the
Secretary of the Company must call a special meeting of stockholders upon
written request of stockholders entitled to cast at least 25% of all votes
entitled to be cast at the meeting.
Pursuant to the Maryland General Corporation Law (the "MGCL"), a
corporation generally cannot dissolve, amend its charter, merger, sell or all
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the corporation's charter. The Charter of the Company contains no such
provision. As permitted by the MGCL, the Charter of the Company provides that
the affirmative vote of the holders of at least 90% of the "voting stock" of the
Company, voting together as a single class, shall be required to repeal or amend
any provision relating to removal of directors, the limit on ownership and
Excess Shares, amendment of the Charter and limitation of liability and
indemnification of directors and officers.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other series of stock and to establish the number of
shares in each series and to fix the designation, conversion
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or other rights, voting powers, restrictions, limitations as to distributions,
preferences, qualifications or terms or conditions of redemption of such shares
of each such series.
The Common Stock of the Company is listed on the NYSE under the symbol
"CCT." The transfer agent for the Common Stock is AmSouth Bank of Alabama,
Birmingham, Alabama.
RESTRICTIONS ON OWNERSHIP
The Charter contains a number of provisions which restrict the ownership
and transfer of shares and which are designed to safeguard the Company against
an inadvertent loss of REIT status. For the Company to qualify as a REIT under
the Code in any taxable year after the first year of its election to be treated
as a REIT, (i) not more than 50% in value of its outstanding Stock (as defined
below) may be owned, directly or indirectly (after application of certain
complex attribution rules), by five or fewer individuals at any time during the
last half of its taxable year, and (ii) its Stock must be beneficially owned by
100 or more persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year.
In connection with the foregoing, if the Board of Directors shall, at any
time and in good faith, believe that direct or indirect ownership (as determined
under applicable federal tax attribution rules) of at least 9.8% or more in
number or value of the outstanding Common Stock and/or Preferred Stock
(collectively, the "Stock") has or may become concentrated in the hands of one
beneficial owner, the Board of Directors has the power to refuse to transfer or
issue Stock to a person whose acquisition of such Stock would cause a beneficial
holder to hold in excess of 9.8% in number or value of the outstanding Stock.
Further, any transfer of Stock that would create a beneficial owner of more than
9.8% in number or value of the outstanding Stock shall be deemed null and void,
and the intended transferee shall be deemed never to have had an interest
therein.
If at any time there is a transfer in violation of such restrictions, the
shares of Stock held by such person in excess of the 9.8% limitation (the
"Excess Shares") shall be deemed automatically to have been converted into a
class separate and distinct from the class or series from which converted and
from any other class of Excess Shares, each such class being designated "Excess
Shares of [Name of Stockholder]." Excess Shares shall be issued and outstanding
but shall have no voting rights. No dividends shall be paid with respect to
Excess Shares. The Company shall have the right to redeem Excess Shares for the
lesser of the amount paid by the intended transferee for the Excess Shares or
the market price. The market price for any Stock so purchased shall be equal to
(i) the average daily per share closing sales price of a share of stock of the
class of the Company from which such Excess Share was converted, if then listed
on a national securities exchange or on the Nasdaq National Market or (ii) if
such shares are not so listed, the market price shall be the mean between the
average per share closing bid prices and asked prices, in each case during the
30-day period ending on the business day prior to the redemption date. If no
such closing sales prices or quotations are available, the purchase price shall
be the price determined by the Board of Directors in good faith.
The Board of Directors of the Company may exempt certain persons from these
restrictions, if evidence satisfactory to the Board of Directors is presented
showing that such exemption will not jeopardize the Company's status as a REIT
under the Code. As a condition of such exemption, the Board of Directors may
require a ruling from the Internal Revenue Service and/or an opinion of counsel
satisfactory to it and/or representations and undertakings from the applicant
with respect to preserving the REIT status of the Company.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in the best interests
of the Company to attempt to qualify, or to continue to qualify, as a REIT.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents a summary of the material U.S. federal
income tax consequences relating to the purchase, ownership and disposition of
the Securities. In addition, set forth below is a general discussion of the
material U.S. federal income tax considerations relating to the treatment of the
Company as a REIT and ownership of Securities therein. The discussion is based
on the Code, current and proposed Treasury Regulations promulgated thereunder,
administrative rulings and applicable judicial decisions, all of which are
subject to change, possibly with retroactive effect. The discussion does not
purport to deal with all aspects of federal income taxation that may be relevant
to particular holders of Securities in view of their personal circumstances and,
unless otherwise specifically indicated, is not addressed to certain types of
holders subject to special treatment under federal income tax law, such as
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers and foreign persons.
In the opinion of Sirote & Permutt, P.C., the Company was and is organized
in conformity with the requirements for qualification as a REIT and its proposed
method of operation as described in this Prospectus permits it to meet the
requirements for qualification and taxation as a REIT under the Code.
Qualification of the Company as a REIT will depend upon its ability to meet,
through actual annual and other operating results, the various qualification
tests imposed under the Code, as discussed below. Such opinion assumes, although
no assurance can be given, that the actual results of the Company's operations
for any one taxable year will satisfy such requirements. See "--Taxation of the
Company--Failure to Qualify" below.
PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY ARE URGED TO
CONSULT WITH THEIR TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES RELATING TO THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE SECURITIES.
TAXATION OF THE COMPANY
The Company has elected to and continues to conduct its operations so as
to, qualify as a REIT for federal income tax purposes under Sections 856 through
860 of the Code (the "REIT Provisions of the Code"). The Company believes that,
commencing with its taxable year ended December 31, 1994, it has been and will
continue to be organized and operated in such a manner as to qualify for
taxation as a REIT under the Code. No assurance can be given, however, that the
Company will continue to be operated in a manner so as to remain qualified as an
REIT.
In brief, if certain detailed conditions imposed by the REIT Provisions of
the Code are met, entities such as the Company that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations subject to regular corporate income tax are generally not taxed at
the corporate level on their "REIT taxable income" that is distributed to
stockholders. This treatment substantially eliminates the "double taxation" (at
both the corporate and stockholder level) that generally results from the use of
corporate investment vehicles.
If the Company were to fail to qualify as a REIT in any year, it would be
subject to federal income tax at regular corporate income tax rates as if it
were a domestic corporation, and its stockholders would be taxed in the same
manner as stockholders of regular corporations. In this event, the Company could
be subject to potentially significant tax liabilities, and, therefore, the
amount of cash available to make distributions to its stockholders would be
reduced.
General. Provided the Company qualifies for taxation as a REIT, it
generally will not be subject to federal income tax on that portion of its
ordinary income or capital gain that is currently distributed to stockholders.
The Company will be subject to federal income tax, however, as follows: First,
the Company will be taxed at regular corporate rates on any undistributed "REIT
taxable income," including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the "alternative minimum
tax" on its items of tax preference, if any. Third, if the Company has net
income from the sale or other
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disposition of foreclosure property that is held primarily for sale to customers
in the ordinary course of business or other nonqualifying income from
foreclosure property, it will be subject to tax on such income at the highest
corporate rate. Fourth, any net income that the Company has 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) will be subject to a 100% tax. Fifth, if the
Company was to fail to satisfy either the 75% or 95% gross income tests (as
discussed below), and nonetheless maintain its qualification as a REIT because
certain other requirements have been met, it would be subject to a 100% tax on
the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income tests, multiplied by a fraction intended to
reflect the Company's profitability. Sixth, if the Company fails to distribute
during 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 preceding periods, then the Company would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, provided certain federal tax
elections are made, if, during the 10-year period commencing on the day on which
assets having a net unrealized built-in gain are acquired by the Company from a
C corporation in a transaction in which the Company inherits the tax basis in
such assets from the C corporation, the Company recognizes a gain from the
disposition of all or a portion of such assets, then the Company will be subject
to tax at the highest regular corporate rate on the excess, if any, of the fair
market value over the adjusted basis of any such asset disposed of determined as
of the beginning of the relevant 10-year period.
Requirements for Qualification as a REIT. To qualify as a REIT for a
taxable year under the Code, the Company must elect or have in effect an
election to be so treated and must meet other requirements, all of which are
summarized below, including percentage tests relating to the sources of its
gross income, the nature of the Company's assets, and the distribution of its
income to stockholders. Such election, if properly made and assuming continuing
compliance with the qualification tests described herein, will continue in
effect for subsequent years.
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, but for the REIT Provisions of
the Code, as an association taxable as a domestic corporation, (4) which is
neither a financial institution nor an insurance company subject to certain
provisions of the Code, (5) the beneficial ownership of which is held by 100 or
more persons, determined without reference to any rules of attribution (the
share ownership test), (6) which is not closely held as determined under the
personal holding company stock ownership test of Section 542(a) (as applied with
certain modifications), and (7) which meets certain other tests, described
below, regarding the nature of its income and assets. The Code provides that
conditions (1) through (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 12 months, or during a proportionate part of a taxable year of less than
12 months. By reason of condition (6) above, the Company will fail to qualify as
a REIT for a taxable year if at any time during the last half of such year more
than 50% in value of its outstanding stock is owned directly or indirectly by
five or fewer individuals (the five or fewer test). For purposes of the five or
fewer test, any stock held by a qualified trust described in Section 401(a) of
the Code will be treated as if the stock is held directly by the beneficiaries
of the trust in proportion to their actual interest in the trust rather than as
held by the trust. The five or fewer test and the share ownership test do not
apply to the first taxable year for which an election is made to be treated as a
REIT. As previously described, the Company's Charter provides for restrictions
regarding the transfer of Common Stock that are intended to assist the Company
in continuing to satisfy the share ownership test and the five or fewer test
described in (5) and (6) above. See "Description of Capital
Stock -- Restrictions on Ownership."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company will have a calendar year taxable
year.
If a REIT owns a qualified REIT subsidiary, the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities, and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A
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qualified REIT subsidiary is a corporation of which all of the outstanding
capital stock has been owned by the REIT from the commencement of such
subsidiary corporation's existence.
Gross Income Tests. There are three separate percentage tests relating to
the sources of the Company's gross income that must be satisfied annually.
1. The 75% Test. At least 75% of the Company's gross income from the
taxable year must be "qualifying income." Qualifying income generally includes
(i) rents from real property (except as modified below), (ii) interest on
obligations collateralized by mortgages on, or interest in real property, (iii)
gains from the sale or other disposition of interests in real property and real
estate mortgages, other than gain from property held primarily for sale to
customers in the ordinary course of the Company's trade or business ("dealer
property"), (iv) dividends or other distributions on shares in other REITS, as
well as gain from the sale of such shares, (v) abatements and refunds of real
property taxes, (vi) income from the operation, and gain from the sale of
property reduced to possession following a lessee's default under the terms of a
lease or, of property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such property ("foreclosure property"), (vii) commitment fees
received for agreeing to make loans collateralized by mortgages on real property
or to purchase or lease real property, and (viii) certain qualified temporary
investment income attributable to the investment of new capital received by the
Company in exchange for its shares during the one-year period following the
receipt of such new capital.
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest or gains from the sale or disposition of stock or other
securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property are included for
purposes of the 95% test, but not for purposes of the 75% test. Similarly, any
payments made to the Company by a financial institution pursuant to a rate
protection agreement that hedges variable rate indebtedness incurred by the
Company to acquire or carry real estate assets will be included as qualifying
income for purposes of the 95% gross income test, but not for purposes of the
75% test.
For purposes of determining whether the Company complies with the 75% and
95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property, excluding
sales of foreclosure property and certain sales of dealer property exempted from
the prohibited transaction tax by virtue of a limited safe harbor rule.
In order to qualify as rents from real property, the amount of rent
received generally must not be determined on the income or profits of any
person, but may be based on a fixed percentage or percentages of receipts or
sales. The Code also provides that rents will not qualify as rents from real
property, in satisfying the gross income tests, if the REIT owns 10% or more of
the tenant, whether directly or pursuant to certain attribution rules. The
Company intends to lease property only under circumstances such that
substantially all rents from such property would qualify as rents from real
property. Although it is possible that a tenant could sublease space to a
sublessee in which the REIT is deemed to own directly or indirectly 10% or more
of the tenant, the Company believes that as a result of the provisions in the
Articles of Incorporation limiting ownership to 9.8% such occurrence would be
unlikely. Application of the 10% ownership rule is, however, dependent upon
complex attribution rules provided in the Code and circumstances beyond the
control of the Company. Ownership, directly or by attribution, by an
unaffiliated third party of more than 10% of the Company's Common Stock and more
than 10% of the stock of any lessee or sublessee would result in a violation of
the rule.
In order to qualify as interest on obligations secured by mortgages on real
property, the amount of interest received generally must not be determined on
the income or profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.
In addition, the Company must not manage its properties or furnish or
render services to the tenants of its properties, except through an independent
contractor from whom the Company derives no income. There is an exception to
this rule permitting a REIT to perform directly certain customary tenant
services which are
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"reasonable and customary" in the geographic area in which the services are
performed. The Company anticipates that any services provided for tenants will
meet this requirement.
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. Generally, this 15% test is applied separately to
each lease. The portion of rental income treated as attributable to personal
property is determined according to the ratio of the tax basis of the personal
property to the total tax basis of the property which is rented. The
determination of what fixtures and other property constitute personal property
for federal tax purposes is difficult and imprecise. The Company does not
believe that it will have 15% in value of any of its real properties classified
as personalty. If however, rent payments do not qualify, for reasons discussed
above, as rents from real property for purposes of Section 856 of the Code, it
will be more difficult for the Company to meet the 95% or 75% gross income
tests.
The Company may temporarily invest its working capital in short-term
investments, including shares in other REITs or interests in real estate
mortgage investment conduits. Although the Company will use its best efforts to
ensure that its income generated by these investments will be of a type which
satisfies the 75% and 95% gross income tests, there can be no assurance in this
regard (see the discussion above of the new capital rule under the 75% gross
income test). Moreover, the Company may realize short-term capital gain upon
sale or exchange of such investments, and such short-term capital gain would be
subject to the limitations imposed by the 30% gross income test. The Company
generally expects to meet the 75% and 95% gross income tests through the rental
of the property it acquires.
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. It is not
possible, however, to know whether the Company would be entitled to the benefit
of these relief provisions as the application of the relief provisions is
dependent on future facts and circumstances. If these relief provisions apply, a
special tax generally equal to 100% is imposed upon the net income attributable
to the greater of the amount by which the Company failed the 75% or 95% gross
income tests, multiplied by a fraction intended to reflect the Company's
profitability.
3. The 30% test. Not more than 30% of the Company's gross income for each
taxable year may be derived from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) real property held for fewer than four years
(apart from involuntary conversions and sales of foreclosure property).
Asset Tests. At the close of each quarter of the Company's taxable year,
it 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 consist of real estate
assets (including interests in real property and interests in mortgages on real
property as well as its allocable share of real estate assets held by joint
ventures or partnerships in which the Company participates, if any), 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 includible in the
75% asset class. Finally, 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. The Company may own
100% of another corporation, provided such other corporation constitutes a
qualified REIT subsidiary under the REIT Provisions of the Code. As noted above,
in that case, the separate existence of the qualified REIT subsidiary is ignored
for federal income tax purposes and the assets, income, gain, loss and other
attributes of such entity are treated as being owned or generated directly by
the Company. The Company has five qualified REIT subsidiaries.
The Company will not fail to meet the Asset Tests described above at the
close of any quarter merely because of a change in the value of its assets in a
subsequent quarter unless, subject to a 30 day grace period ending after the
close of such subsequent quarter, such change exists immediately after the
acquisition of any security or other property and is wholly or partly the result
of such an acquisition during such quarter. The Company intends to maintain
adequate records as to the value of its assets in order to maintain compliance
with the Asset Tests.
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Annual Distribution Requirements. The Company, in order to continue to
qualify as a REIT, is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount equal to or greater than the excess
of (A) the sum of (i) 95% of the Company's real estate investment trust taxable
income (computed without regard to the dividends paid deduction and the
Company's net capital gain) and (ii) 95% of the net income, if any, (after tax)
from foreclosure property, over (B) the sum of certain non-cash income (from
certain imputed rental income and income from transactions inadvertently failing
to qualify as like-kind exchanges). To the extent that the Company does not
distribute all of its net long-term capital gain and all of its real estate
investment trust taxable income, it will be subject to tax thereon. In addition,
the Company will be subject to a 4% excise tax to the extent it fails within a
calendar year to make required distributions to its stockholders of 85% of its
ordinary income and 95% of its capital gain net income plus the excess, if any,
of the grossed up required distribution for the preceding calendar year over the
amount treated as distributed for such preceding calendar year. For this
purpose, "grossed up required distribution" for any calendar year is the sum of
the taxable income of the Company for the taxable year (without regard to the
deduction for dividends paid) and all amounts from earlier years that are not
treated as having been distributed under the provision. Dividends declared in
the last quarter of the year (October, November or December) and paid during the
following January, will be treated as having been paid and received on December
31.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirements due to
timing differences between actual receipt of income and actual payment of
deductible expenses or dividends on the one hand and the inclusion of such
income and deduction of such expenses or dividends in arriving at real estate
investment trust taxable income of the Company on the other hand. The problem of
inadequate cash to make required distributions could also occur as a result of
the repayment in cash of principal amounts due on the Company's outstanding
debt, particularly in the case of balloon repayments or as a result of capital
losses on short-term investments of working capital. Therefore, the Company
might find it necessary to arrange for short-term, or possibly long-term,
borrowing or new equity financing. If the Company were unable to arrange such
borrowing or financing as might be necessary to provide funds for required
distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a failure
to meet the annual REIT distribution requirements for a taxable year by paying
deficiency dividends to stockholders within a specified period.
Share Ownership Test. As described above, the Company's stock must be held
by a minimum of 100 persons for at least approximately 92% of the days in each
taxable year subsequent to 1994. In addition, at all times during the second
half of each taxable year subsequent to 1994, no more than 50% in value of the
shares of beneficial interest of the Company may be owned, directly or
indirectly, and by applying certain constructive ownership rules, by five or
fewer individuals. In order to assist in complying with this test, the Company
has placed certain restrictions on the transfer of the stock to prevent further
concentration of share ownership. Moreover, to evidence compliance with these
requirements, the Company must maintain records which disclose the actual
ownership of its outstanding stock. In fulfilling its obligations to maintain
records, the Company must and will demand written statements each year from the
record holders of designated percentages of its Common Stock disclosing the
actual owners of such stock. A list of those persons failing or refusing to
comply with such demand must be maintained as a part of the Company's records. A
stockholder failing or refusing to comply with the Company's written demand must
submit with his tax returns a similar statement disclosing the actual ownership
of stock and certain other information. In addition, the Company's Charter
provides restrictions regarding the transfer of its shares that are intended to
assist the Company in continuing to satisfy the share ownership requirements.
Other REIT Issues. With respect to property acquired from and leased back
to the same or an affiliated party of a lessee, the IRS could assert that the
Company realized prepaid rental income in the year of purchase to the extent
that the value of the leased property exceeds the purchase price paid by the
Company for that property. In litigated cases involving sale-leasebacks which
have considered this issue, courts have concluded that buyers have realized
prepaid rent where both parties acknowledged that the purported purchase price
for the property was substantially less than fair market value and the purported
rents were substantially less than the fair market rentals. Because of the lack
of clear precedent and the inherently factual
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nature of the inquiry, complete assurance cannot be given that IRS could not
successfully assert the existence of prepaid rental income. The value of and
fair market rent for properties involved in sale-leasebacks are inherently
factual matters and always subject to challenge.
Subject to a safe harbor exception for annual sales of up to seven
properties (or properties with a basis of up to 10% of the REIT's assets) that
have been held for four years, gain from the sale of a property held for sale to
customers in the ordinary course of business is subject to a 100% tax. The
simultaneous exercise of rights of first refusal granted to certain Lessees or
other events could result in sales of properties by the Company that exceed this
safe harbor. However, the Company believes that in such event, it will not have
held such properties for sale to customers in the ordinary course of business.
Depreciation of Properties. For tax purposes, the Company's real property
generally is expected to be depreciated over 40 years and 20 years for buildings
and land improvements, respectively, utilizing the straight-line method of
depreciation. Personal property is expected to be depreciated over seven years
utilizing the straight-line method of depreciation.
Failure to Qualify. If the Company fails to qualify for taxation as an
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 stockholders in any
year in which the Company fails to qualify will not be deductible by the
Company, nor will they be required to be made. In such event, to the extent of
current or accumulated earnings and profits, all distributions to stockholders
will be taxable as ordinary income, and, subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends received
deduction. Failure to qualify and to maintain qualification as a REIT would
force the Company to significantly reduce its distributions and possibly incur
substantial indebtedness or liquidate substantial investments in order to pay
the resulting corporate taxes. In addition, the Company, once having obtained
REIT status and having lost such status, would not be eligible to elect REIT
status for the four subsequent taxable years, unless its failure to maintain its
qualification was due to reasonable cause and not willful neglect, and certain
other requirements were satisfied. In order to elect again to be taxed as a
REIT, the Company would be required to distribute all of its earnings and
profits accumulated in any non-REIT taxable year.
TAXATION OF HOLDERS OF DEBT SECURITIES
As used herein, the term "U.S. Holder" means a holder of a Debt Security
who (for U.S. federal income tax purposes) is (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized under the
laws of the United States or any state thereof, or (iii) an estate or trust the
income of which is includable in gross income for federal income tax purposes
regardless of source. "Non-U.S. Holder" means a holder of a Debt Security other
than a U.S. holder.
U.S. Holders
Payments of Interest. Interest on a Debt Security will be taxable to a
U.S. Holder as ordinary income at the time it is received or accrued, depending
on the holder's method of accounting for tax purposes.
Purchase, Sale and Retirement of the Debt Securities. A U.S. Holder's tax
basis in a Debt Security will generally be its U.S. dollar cost. A U.S. Holder
will generally recognize gain or loss on the sale or retirement of a Debt
Security equal to the difference, if any, between the amount realized on the
sale or retirement and the U.S. Holder's tax basis in the Debt Security. Except
to the extent attributable to accrued but unpaid interest, gain or loss
recognized on the sale or retirement of a Debt Security will be capital gain or
loss and will be long-term capital gain or loss if the Debt Security was held
for more than one year.
Non-U.S. Holders
This discussion assumes that the Debt Security is not subject to the rules
of Section 871(h)(4)(A) of the Code (relating to interest payments that are
determined by reference to the income, profits, changes in the value of property
or other attributes of the debtor or a related party).
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<PAGE> 35
Under present U.S. federal income and estate tax law, and subject to the
discussion of backup withholding below:
(i) payments of principal, premium (if any) and interest by the
Company or any of its paying agents to any holder of a Debt Security that
is a Non-U.S. Holder will not be subject to U.S. federal withholding tax
if, in the case of interest (a) the beneficial owner of the Debt Security
does not actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote, (b)
the beneficial owner of the Debt Security is not a controlled foreign
corporation that is related to the Company through stock ownership, and (c)
either (A) the beneficial owner of the Debt Security certifies to the
Company or its agent, under penalties of perjury, that it is not a U.S.
person and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") and holds the Debt Security certifies to the Company or its
agent under penalties of perjury that such statement has been received from
the beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payor with a copy thereof;
(ii) a Non-U.S. Holder of a Debt Security will not be subject to U.S.
federal withholding tax on any gain realized on the sale or exchange of a
Debt Security; and
(iii) a Debt Security held by an individual who at death is not a
citizen or resident of the United States will not be includible in the
individual's gross estate for purposes of the U.S. federal estate tax as a
result of the individual's death if (a) the individual did not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote and (b) the income on the
Debt Security would not have been effectively connected with a United
States trade or business of the individual at the time of the individual's
death.
Information Reporting and Backup Withholding
U.S. Holders. In general, information reporting requirements will apply to
payments of principal, any premium and interest on a Debt Security and the
proceeds of the sale of a Debt Security before maturity within the United States
to non-corporate U.S. Holders, and "backup withholding" at a rate of 31% will
apply to such payments if the U.S. Holder fails to provide an accurate taxpayer
identification number or to report all interest and dividends required to be
shown on its federal income tax returns.
Non-U.S. Holders. Information reporting and backup withholding will not
apply to payments of principal, premium (if any) and interest made by the
Company or a paying agent to a Non-U.S. Holder on a Debt Security if the
certification described in clause (i)(c) under "Non-U.S. Holders" above is
received, provided that the payor does not have actual knowledge that the holder
is a U.S. person.
Payments of the proceeds from the sale by a Non-U.S. Holder of a Debt
Security made to or through a foreign office of a broker will not be subject to
information reporting or backup withholding, except that if the broker is a U.S.
person, a controlled foreign corporation for U.S. federal income tax purposes or
a foreign person 50% or more of whose gross income is effectively connected with
a United States trade or business for a specified three-year period, information
reporting may apply to such payments. Payments of the proceeds from the sale of
a Debt Security to or through the United States office of a broker is subject to
information reporting and backup withholding unless the holder or beneficial
owner certifies as to its non-United States status or otherwise establishes an
exemption from information reporting and backup withholding.
The applicable Prospectus Supplement will contain a discussion of any
special U.S. federal income tax rules with respect to Debt Securities that are
issued at a discount or premium or as a unit with other Securities, have a
maturity of one year or less, provide for conversion rights, contingent
payments, early redemption or payments that are denominated in or determined by
reference to a currency other than the U.S. dollar or otherwise subject to
special U.S. federal income tax rules.
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TAXATION OF DOMESTIC STOCKHOLDERS
Taxation of Taxable Domestic Stockholders. As long as the Company
qualifies as a REIT, distributions other than capital gain dividends (including
reinvestments pursuant to the Company's dividend reinvestment plan, if any) made
to the Company's taxable domestic stockholders out of current and accumulated
earnings and profits will be taken into account by them as ordinary income, and
corporate stockholders will not be eligible for the dividends received
deduction. Distributions that are 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, although corporate stockholders
may be required to treat up to 20% of any such capital gain dividend as ordinary
income. Distributions in excess of the Company's current and accumulated
earnings and profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of a stockholder's shares of stock. To the
extent that such distributions exceed the adjusted basis of a stockholder's
shares of stock, they will be included in income as long-term capital gain (or
short-term capital gain if the shares of stock have been held for not more than
one year) assuming the shares of stock are a capital asset in the hands of the
stockholder. Stockholders may not include, in their respective income tax
returns, any net operating losses or capital losses of the Company.
Dividends declared by the Company in the last quarter of the calendar year
(October through December) to stockholders of record on a date in such quarter
shall be treated as both paid by the Company and received by such stockholders
on December 31 of such year, provided that the Company actually pays such
dividends during January of the following calendar year.
In general, any gain or loss recognized by a stockholder on the sale or
other taxable disposition of shares of stock will be treated as capital gain or
loss, provided the shares are a capital asset in the hands of the seller. In
general, any loss upon a sale or exchange of shares of stock by a stockholder
who has held such shares for not more than six months (after applying certain
rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such stockholder as
long-term gain.
Tax preference and other items which are treated differently for regular
and alternative minimum tax purposes are to be allocated between a REIT and its
stockholders under regulations which are to be prescribed. It is likely that
these regulations would require tax preference items to be allocated to the
Company's stockholders with respect to any accelerated depreciation claimed by
the Company.
Taxation of Tax-Exempt Domestic Stockholders. As a general rule, amounts
distributed by a REIT to a tax-exempt entity do not constitute unrelated
business taxable income ("UBTI") and thus distributions by the Company to a
stockholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of stock with
"acquisition indebtedness" within the meaning of the Code and the tax-exempt
entity's shares of stock are not otherwise used in an unrelated trade or
business of the tax-exempt entity. If a REIT constitutes a "pension-held REIT"
in a taxable year, distributions by such REIT to a tax-exempt employee's pension
trust that owns more than 10% of the REIT may be treated as UBTI in an amount
equal to the percentage of gross income of the REIT that is derived from an
"unrelated trade or business" (determined as if the REIT were a pension trust
and subject to certain de minimis rules) divided by the gross income of the REIT
for the year in which the dividends are paid. This rule only applies, however,
if (i) the percentage of the gross income derived from the REIT for the year in
which the dividends are paid is at least five percent, (ii) the REIT qualifies
as a REIT only because the pension trust is not treated as a single individual
for purposes of the "five-or-fewer" rule (see "--Taxation of the Company --
Requirements for Qualification as a REIT") and (iii) (A) one pension trust owns
more than 25% of the value of the REIT, or, (B) a group of pension trusts
individually holding more than 10 percent of the value of the REIT collectively
own more than 50 percent of the value of the REIT. The Company does not expect
that it will constitute a "pension-held REIT" in part because the ownership
limits in the Company's Charter (assuming no waiver of such limits by the Board
of Directors) would prevent such a pension trust from acquiring stock in excess
of the Ownership Limit.
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TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income
and estate tax consequences of the ownership and disposition of stock applicable
to Non-U.S. Holders of such shares. A "Non-U.S. Holder" is any person other than
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state thereof, or (iii) an estate or trust whose income
is includible in gross income for U.S. federal income tax purposes regardless of
its source. The discussion is based on current law and is for general
information only. The discussion addresses only certain and not all aspects of
U.S. federal income and estate taxation.
Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable to
capital gains of the Company and which are not effectively connected with a U.S.
trade or business of the Non-U.S. Holder will be subject to U.S. withholding tax
at the rate of 30% (unless reduced by treaty). In general, and subject to the
discussion below, Non-U.S. Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of stock. In cases where
the dividend income from a Non-U.S. Holder's investment in stock is (or is
treated as) effectively connected with the Non-U.S. Holder's conduct of a U.S.
trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to such dividends (and may also be subject to the 30% branch profits tax in the
case of a Non-U.S. Holder that is a foreign corporation).
To determine the applicability of a tax treaty providing for a lower rate
of withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country.
Treasury regulations proposed in 1984 which have not been finally adopted,
however, would require Non-U.S. Holders to file certain forms to obtain the
benefit of any applicable tax treaty providing for a lower rate of withholding
tax on dividends. Such forms would contain the holder's name and address and
other pertinent information, to be certified by such holder under penalties of
perjury, and an official statement by the competent authority (as defined in the
applicable treaty) in the foreign country attesting to the holder's status a
resident thereof.
Non-Dividend Distributions. Distributions by the Company which exceed its
current and accumulated earnings and profits will not be taxable to the extent
such distributions are not in excess of the Non-U.S. Holder's adjusted basis in
its shares, but rather will reduce (but not below zero) the adjusted basis for
such shares. To the extent such distributions exceed the adjusted basis of a
Non-U.S. Holder's shares of stock, the distributions will give rise to U.S. tax
liability if the Non-U.S. Holder would otherwise be subject to tax on gain from
the sale or disposition of shares in the Company, as 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 and accumulated earnings and profits,
the distribution will be subject to withholding at the rate applicable to
dividends. The Non-U.S. Holder may seek a refund of such amounts from the IRS,
however, if it is subsequently determined that such distribution was, in fact,
in excess of current and accumulated earnings and profits of the Company.
Capital Gain Dividends. Under FIRPTA, a distribution made by the Company
to a Non-U.S. Holder, to the extent attributable to gains from dispositions of
United States Real Property Interests ("USRPIs") will be considered effectively
connected with a U.S. trade or business of the Non-U.S. Holder and subject to
U.S. income tax at the rate applicable to U.S. individuals or corporations,
without regard to whether such distribution is designated as a capital gain
dividend. In addition, the Company will be required to withhold tax equal to 35%
of the amount of dividends to the extent such dividends constitute USRPI capital
gains. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder that is not entitled
to treaty exemption.
Dispositions of Stock. Unless the stock constitutes a USRPI, a sale of
stock by a Non-U.S. Holder will generally not be subject to U.S. taxation under
FIRPTA. The stock will not constitute a USRPI in the hands of a Non-U.S. Holder
if the Company constitutes a "domestically controlled REIT." A domestically
controlled REIT means a REIT in which, at all times during a specified testing
period, less than 50% in value of its shares is held directly or indirectly by
Non-U.S. Holders. At present, the Company believes that it is and will continue
to be a domestically controlled REIT, and therefore that the sale of Common
Stock will not be
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subject to taxation under FIRPTA. Because the stock is publicly traded, however,
no assurance can be given the Company will in fact be a domestically controlled
REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-U.S. Holder's sale of stock will generally not be subject to tax under
FIRPTA as a sale of a USRPI, provided that (i) the Company's stock are
"regularly traded" (as defined by applicable Treasury Regulations) on an
established securities market (e.g., the NYSE, on which the Common Stock is
listed) and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
outstanding stock at all times during a specified testing period.
If gain on the sale of stock were subject to taxation under FIRPTA, the
Non-U.S. Holder would generally be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals) and the purchaser of stock could be required to withhold 10% of the
purchase price and remit such amount to the IRS.
Capital gains recognized by a Non-U.S. Holder that are not subject to
FIRPTA nonetheless will generally be subject to current U.S. federal income
taxation if: (i) the Non-U.S. Holder's investment in stock is effectively
connected with a U.S. trade or business conducted by such Non-U.S. Holder or
(ii) the Non-U.S. Holder is a nonresident alien individual who was present in
the United States for 183 days or more during the taxable year and has a "tax
home" in the United States.
Estate Tax. Stock owned or treated as owned by an individual who is not a
citizen or resident of the United States (as specially defined for U.S. federal
estate tax purposes) at the time of death will be includible in the individual's
gross estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise. Such individual's estate may be subject to U.S.
federal estate tax on the property includible in the estate for U.S. federal
estate tax purposes.
OTHER TAX CONSEQUENCES
The Company and its stockholders 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. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the stock of the Company.
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
There may be other federal, state, local or foreign income, or estate and
gift tax considerations applicable to the circumstances of a particular
investor. Stockholders should consult their own tax advisors with respect to
such matters.
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
the Securities will be named in the applicable Prospectus Supplement. The
Company has reserved the right to sell the Securities directly to investors on
its own behalf in those jurisdictions where it is authorized to do so.
Underwriters may offer and sell the Securities at a fixed price or prices
that 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 dealers, acting as the Company's agents,
to offer and sell the Securities upon such terms and conditions as set forth in
the related Prospectus Supplement. In connection with the sale of the
Securities, underwriters may receive 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 the Securities to or through dealers, and
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<PAGE> 39
such dealers may receive compensation in the form of discounts, concession or
commissions from the underwriters and/or commissions (which may be changed from
time to time) from the purchasers for whom they may act as agents.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of the 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 the 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 under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution towards certain civil liabilities,
including any liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit agreements by
certain institutions to purchase the Securities from the Company at the public
offering price set forth in the related Prospectus Supplement pursuant to
delayed delivery contracts ("Contracts") providing for payment and delivery on
the date or dates stated in a Prospectus Supplement. Each Contract will be for
an amount specified in the applicable Prospectus Supplement. Institutions with
whom Contracts, when authorized, may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions and other institutions, but will in all cases be subject
to the approval of the Company. Contracts will not be subject to any conditions
except that (i) the purchase by an institution of the Securities covered by
Contracts will not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
if the Securities are being sold to Underwriters, the Company shall have sold to
such Underwriters such amount specified in the applicable Prospectus Supplement.
Any Securities issued hereunder (other than Common Stock) will be new
issues of securities with no established trading market. Any underwriters or
agents to or through whom such Securities are sold by the Company for public
offering and sale may make a market in such Securities, but such underwriters or
agents will not be obligated to do so and may discontinue any market at any time
without notice. No assurance can be given as to the liquidity of the trading
market for any such Securities.
Certain of the underwriters, dealers or agents and their associates may
engage in transactions with, and perform services for, the Company and certain
of its affiliates in the ordinary course of business.
LEGAL MATTERS
Sirote & Permutt, P.C., Birmingham, Alabama, counsel to the Company, will
pass upon certain legal matters in connection with the Securities offered
hereby. In rendering such opinion, Sirote & Permutt, P.C., will rely upon the
opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, as to certain
matters of Maryland law.
EXPERTS
The Consolidated Financial Statements and schedules of Capstone Capital
Corporation as of December 31, 1994, and for the period from June 30, 1994
(inception) to December 31, 1994, have been incorporated by reference herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing. To
the extent that KPMG Peat Marwick LLP, audits and reports on financial
statements of Capstone Capital Corporation issued at future dates, and consents
to the use of their report thereon, such financial statements also will be
incorporated by reference in the registration statement in reliance upon their
report and said authority.
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======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.............. S-3
Use of Proceeds............................ S-6
Price Range of Common Stock and
Distributions............................ S-6
Capitalization............................. S-7
Underwriting............................... S-8
Legal Matters.............................. S-8
PROSPECTUS
Available Information...................... 2
Incorporation of Certain Documents by
Reference................................ 2
The Company................................ 3
Risk Factors............................... 3
Use of Proceeds............................ 8
Consolidated Ratios of Earnings to Fixed
Charges and Combined Fixed Charges
and Preferred Stock Dividend
Requirements............................. 8
Description of Debt Securities............. 8
Description of Capital Stock............... 16
Federal Income Tax Considerations.......... 21
Plan of Distribution....................... 30
Legal Matters.............................. 31
Experts.................................... 31
</TABLE>
======================================================
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1,300,000 SHARES
[CAPSTONE LOGO]
CAPSTONE CAPITAL
CORPORATION
COMMON STOCK
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PROSPECTUS SUPPLEMENT
JUNE 25, 1997
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SMITH BARNEY INC.
======================================================
