<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-31639
PROSPECTUS SUPPLEMENT
(To Prospectus dated September 26, 1997)
[CAPSTONE CAPITAL LOGO]
5,000,000 SHARES
CAPSTONE CAPITAL CORPORATION
COMMON STOCK
------------------
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 23 states.
Substantially all of the Investments are in the form of sale leaseback
arrangements and mortgage loans.
All of the shares (the "Shares") of common stock, par value $.001 per share
(the "Common Stock"), of the Company offered hereby (the "Offering") are being
offered by the Company. The Common Stock is listed on the New York Stock
Exchange (the "NYSE") under the symbol "CCT." On February 3, 1998, the last
reported sale price of the Common Stock on the NYSE was $24 7/16 per share. See
"Price Range of Common Stock and Distributions." To ensure that the Company
qualifies as a REIT, ownership of the Common Stock by any single shareholder is
limited to 9.8% of the number of shares of Common Stock outstanding. See
"Description of Common Stock" in the accompanying Prospectus.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 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 $24.4375 $1.28 $23.1575
- -----------------------------------------------------------------------------------------------------------------
Total(3) $122,187,500 $6,400,000 $115,787,500
=================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
approximately $650,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
750,000 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 $140,515,625,
$7,360,000 and $133,155,625, respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
February 9, 1998 at the offices of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
SALOMON SMITH BARNEY
LEGG MASON WOOD WALKER
INCORPORATED
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
J.C. BRADFORD & CO.
The date of this Prospectus Supplement is February 3, 1998.
<PAGE> 2
[DESCRIPTION OF CHARTS]
[INSIDE FRONT COVER]
Pie chart referencing percentage of Company's investments by operator.
Pie chart referencing percentage of Company's investments by type of facility.
Bar graph referencing amount of actual investments by Company from June 30,
1994 through September 30, 1997.
Bar graph referencing distributions with respect to Company's common stock from
third quarter 1994 through third quarter 1997.
[INSIDE BACK COVER]
Map reflecting locations of Company's investments as of September 30, 1997.
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."
This Prospectus Supplement may contain statements that may be deemed to be
"forward-looking" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company's actual
results or experiences could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
are discussed in the section entitled "Risk Factors" beginning on page 4 of the
accompanying Prospectus.
<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 Underwriters'
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 (the "Investments").
As of September 30, 1997, the Investments consisted of (i) 92 healthcare
properties, including construction in progress, leased to 18 healthcare
operators (the "Leased Properties") and (ii) 45 mortgage loans on healthcare
properties, including loans related to construction in progress, made to 26
healthcare operators (the "Mortgage Loans"). The Investments are located in 23
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 Company's aggregate Investments and commitments to invest not yet
funded have grown from approximately $115 million in Investments at inception on
June 30, 1994 to approximately $593 million in Investments and approximately
$117 million in commitments to invest not yet funded on September 30, 1997. As
of December 31, 1997, the Company had aggregate Investments of approximately
$716 million and commitments to invest not yet funded of approximately $124
million.
The Company intends to use the net proceeds of the Offering to repay the
outstanding balance of a $40 million short-term credit facility (the "Short-Term
Credit Facility") from NationsBank, National Association ("NationsBank"), and to
reduce outstanding borrowings under the Company's $180 million unsecured line of
credit (the "Bank Credit Facility") provided by a consortium of banks led by
NationsBank. Borrowings under these facilities were 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, in addition to base rent,
any additional rent and all additional charges, including any fines, penalties,
interest and costs which may be levied for nonpayment or late payment thereof,
all operating expenses, taxes, environmental clean-up costs, association dues,
insurance premiums, assessments, levies, fees, water and sewer rents and charges
and all governmental charges with respect to the applicable Leased Property. 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 at a fair market value. Mortgage Loans for completed projects generally
have initial maturities of between five and 15 years, require monthly
installments of principal and interest and bear interest at rates ranging from
10.0% to 13.39% that increase annually at either a negotiated fixed rate or a
rate based on the consumer price index. Approximately 55.0% of the Company's
Investments as of September 30, 1997 are operated by public healthcare companies
or their subsidiaries, including HEALTHSOUTH Corporation ("HEALTHSOUTH"),
Columbia/HCA Healthcare Corporation ("Columbia"), MedPartners, Inc.
("MedPartners"), Integrated Health Services, Inc. ("Integrated Health"), and
Tenet Healthcare Corporation. For the nine months ended September 30, 1997, the
Company derived approximately 26.2% and 16.2% of its revenues from HEALTHSOUTH
and Columbia, respectively.
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 assisted living,
ancillary hospital, skilled nursing, inpatient rehabilitation and physician
clinic facilities. The Company diversifies its portfolio by operator, geography,
facility type and healthcare industry segment. The Company identifies potential
investment opportunities through (i) the relationship of certain members of its
Board of Directors with HEALTHSOUTH, MedPartners and Integrated Health (Richard
M. Scrushy, Michael D. Martin and Larry R. House are also directors of
HEALTHSOUTH, Richard M. Scrushy, Michael D. Martin and Larry D. Striplin, Jr.
are also directors of MedPartners and Robert N. Elkins is also a director of
Integrated Health), (ii) relationships of its management and Board of Directors
with other healthcare operators and developers, and (iii) brokers and other
industry contacts. Leases with HEALTHSOUTH, MedPartners and Integrated Health
are entered into on terms which the Company believes to be no less favorable
than its Leases with unrelated lessees with similar credit characteristics.
From the Company's initial public offering on June 30, 1994 to January 15,
1998, an investment in the shares of Common Stock of the Company has provided
shareholders a total return, assuming reinvestment of dividends when paid and
including share price appreciation, of approximately 20.4% per annum.
S-3
<PAGE> 4
INVESTMENTS AND COMMITMENTS
The Company's Investments and commitments to invest as of September 30,
1997, are summarized in the following tables by operator and by type of
facility:
<TABLE>
<CAPTION>
NO. OF INVESTMENTS AND % OF
FACILITIES(#) COMMITMENTS($)(1) PORTFOLIO
------------- ----------------- ---------
<S> <C> <C> <C>
OPERATOR(2)
HEALTHSOUTH............................................. 20 $141,588,726 19.9%
Columbia................................................ 9 80,626,875 11.4
MedPartners............................................. 12 65,843,072 9.3
Balanced Care........................................... 18 59,500,686 8.4
Senior Lifestyles....................................... 8 40,357,238 5.7
Grand Court............................................. 4 37,764,400 5.3
Integrated Health....................................... 3 28,651,435 4.0
Tenet................................................... 2 28,497,444 4.0
Quality Link............................................ 6 23,376,807 3.3
Arcon................................................... 5 21,887,829 3.1
Emeritus................................................ 3 20,555,000 2.9
MedCath................................................. 1 17,800,000 2.5
Quorum.................................................. 4 16,658,671 2.3
Ramsay.................................................. 2 12,500,000 1.8
ACMC.................................................... 2 12,150,000 1.7
New Vista............................................... 4 11,338,948 1.6
Other Operators......................................... 34 91,064,177 12.8
--- ------------ ------
137 $710,161,308 100.0%
=== ============ ======
TYPE OF FACILITY
Assisted Living......................................... 47 $195,487,902 27.5%
Ancillary Hospital...................................... 20 157,310,602 22.2
Skilled Nursing......................................... 29 96,550,962 13.6
Inpatient Rehabilitation................................ 5 69,717,287 9.8
Physician Clinic........................................ 14 64,321,741 9.1
Ambulatory Surgery...................................... 7 33,051,312 4.7
Integrated Delivery..................................... 6 30,887,829 4.3
Sub-Acute Care.......................................... 2 18,787,809 2.6
Specialty Hospital...................................... 1 17,800,000 2.5
Comp. Mental Health Hospital............................ 2 12,500,000 1.8
Acute Care Hospital..................................... 1 7,880,875 1.1
Outpatient Rehabilitation............................... 3 5,864,989 0.8
--- ------------ ------
137 $710,161,308 100.0%
=== ============ ======
</TABLE>
- ---------------
(1) Consists of the Company's aggregate Investments of approximately $593
million and commitments to invest not yet funded of approximately $117
million on September 30, 1997. As of December 31, 1997, the Company had
aggregate Investments of approximately $716 million and commitments to
invest not yet funded of approximately $124 million.
(2) Operators are lessees under Leases ("Lessees"), borrowers under Mortgage
Loans ("Borrowers"), guarantors of certain Leases and Mortgage Loans
("Guarantors") or primary sublessees of the healthcare facilities
("Sublessees").
S-4
<PAGE> 5
Assisted living facilities generally provide extended care and a variety of
healthcare services to the elderly in a more residential setting. Ancillary
hospital facilities, which are contiguous or adjacent to a hospital, contain
physician offices and provide a variety of medical services such as diagnostic,
outpatient surgery and rehabilitation services, selected hospital support
services and educational and research activities. Skilled nursing facilities
provide extended care and a variety of acute-care healthcare services to the
elderly. Inpatient rehabilitation facilities provide a full range of inpatient
rehabilitation services to patients experiencing significant physical
disabilities due to various conditions, such as head injury, spinal cord injury,
stroke, certain orthopedic problems and neuromuscular disease. Physician clinics
provide a variety of outpatient diagnostic and therapeutic healthcare services.
Ambulatory surgery facilities provide various surgical procedures, typically on
an outpatient basis. Integrated delivery facilities provide a variety of medical
services such as primary care, laboratory and diagnostic services, outpatient
surgery and emergency care. Sub-acute care facilities provide monitoring,
specialized care and comprehensive rehabilitative therapy required by sub-acute
and medically complex patients. Specialty hospitals are designed to provide
specialized acute care procedures related to specific health problems.
Comprehensive mental health hospitals provide a full range of treatment for
psychiatric and chemical dependency disorders. Acute-care hospitals provide a
full range of inpatient, acute healthcare services. Outpatient rehabilitation
facilities offer a comprehensive range of rehabilitative healthcare services,
including physical and occupational therapy, and focus predominantly on
orthopedic injuries, sports injuries, work injuries, hand and upper extremity
injuries, back injuries and various neurological/neuromuscular conditions.
DISTRIBUTIONS TO STOCKHOLDERS
The Company's primary objective is to provide current income for
distribution to stockholders. The Company has increased or maintained its
quarterly distributions to common stockholders in every quarter in which it has
operated since its initial public offering on June 30, 1994.
<TABLE>
<CAPTION>
DISTRIBUTIONS
PER SHARE
-------------
<S> <C>
1995:
First Quarter............................................. $ .425
Second Quarter............................................ .445
Third Quarter............................................. .445
Fourth Quarter............................................ .445
------
Total............................................. $1.760
1996:
First Quarter............................................. $ .445
Second Quarter............................................ .455
Third Quarter............................................. .460
Fourth Quarter............................................ .465
------
Total............................................. $1.825
1997:
First Quarter............................................. $ .470
Second Quarter............................................ .475
Third Quarter............................................. .480
Fourth Quarter............................................ .485(1)
------
Total............................................. $1.910
</TABLE>
- ---------------
(1) Declared by the Board of Directors on January 21, 1998, and payable on
February 16, 1998 to shareholders of record on February 2, 1998. Purchasers
of the Shares will not be eligible to receive this dividend.
S-5
<PAGE> 6
THE OFFERING
Common Stock to be
offered.................. 5,000,000 shares
Common Stock to be
outstanding after the
Offering(1).............. 21,494,861 shares
Use of Proceeds............ To repay the Short-Term Credit Facility and to
reduce outstanding borrowings under the Bank Credit
Facility.
NYSE Common Stock
Symbol................... CCT
- ---------------
(1) Based on the number of shares outstanding as of September 30, 1997. Excludes
(a) 308,465 shares of Common Stock reserved for issuance upon conversion of
$4,974,000 aggregate principal amount of the Company's 10.50% convertible
subordinated debentures due 2002 (the "10.50% 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) 1,577,900 shares
of Common Stock reserved for issuance pursuant to the Company's 1994 Stock
Incentive Plan, (d) 991,484 shares of Common Stock reserved for issuance
pursuant to the Company's Dividend Reinvestment Plan and (e) 615,385 shares
of Common Stock purchased by Legg Mason REIT Trust, December 1997 Series, a
registered unit investment, on December 23, 1997.
S-6
<PAGE> 7
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
JUNE 30,
1994
(INCEPTION) YEAR ENDED NINE MONTHS
TO DECEMBER 31, ENDED SEPTEMBER 30,
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 $26,000 $ 39,617
Expenses:
Interest........................................ 1,439 8,787 8,812 6,602 10,387
Depreciation and amortization................... 1,502 4,697 6,315 4,618 6,644
Other operating................................. 536 1,515 1,911 1,322 2,589
-------- ------- ------- ------- --------
Total expenses........................... 3,477 14,999 17,038 12,542 19,620
-------- ------- ------- ------- --------
Net income........................................ $ 4,763 $ 9,708 $18,914 $13,458 $ 19,997
======== ======= ======= ======= ========
Net income per share.............................. $ 0.80 $ 1.55 $ 1.71 $ 1.28 $ 1.29
======== ======= ======= ======= ========
OTHER DATA:
Funds from operations(2).......................... $ 5,628 $12,523 $22,633 $16,114 $ 24,455
Weighted average shares outstanding............... 5,980 6,271 11,086 10,529 15,432
Weighted average shares outstanding (fully
diluted)........................................ -- 8,597 13,159 12,820 18,267
Dividends distributed............................. 5,083 12,519 12,431 14,788 22,780
Dividends distributed per share................... 0.85 1.76 1.825 1.36 1.43
Net cash provided by operating activities......... 5,168 14,041 22,425 15,705 29,172
Net cash used in investing activities............. 165,964 74,753 114,399 83,371 238,046
Net cash provided by financing activities......... 161,126 61,056 92,421 67,556 208,566
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate properties, net......................... $151,328 $207,257 $303,997 $467,263
Mortgage notes receivable........................... 13,224 24,989 39,326 108,006
Total assets........................................ 166,364 240,625 356,695 597,205
Bank credit facility................................ 67,500 30,225 68,500 92,400
Mortgage notes payable(3)........................... -- -- 23,228 57,129
10.50% Convertible subordinated debentures.......... -- 43,947 17,657 4,974
6.55% Convertible subordinated debentures........... -- -- -- 68,297
Total stockholders' equity.......................... 98,389 163,747 241,556 357,997
</TABLE>
- ---------------
(1) The Company commenced operations on June 30, 1994.
(2) Funds from operations ("FFO") represents net income (computed in accordance
with generally accepted accounting principles), less gains from sales of
property and rental income recognized on a straight-line basis on those
leases with scheduled rent increases, plus depreciation and amortization.
FFO should not be considered as an alternative to net income or any other
generally accepted accounting principle measurement of performance as an
indicator of operating performance or as an alternative to cash flows from
operations, investing and financing activities as a measure of liquidity.
The Company believes that FFO is an important supplemental measure of the
operating performance of a REIT's portfolio considering the fact that
historical cost accounting implicitly assumes that the value of real estate
assets diminishes predictably over time. FFO provides an alternative
measurement criteria, exclusive of certain non-cash items included in GAAP
income, by which to evaluate the performance of such investments.
Additionally, FFO is consistent with measures used by analysts to evaluate
the Company and other REITs. The Company therefore discloses FFO, although
it is a measurement that is not defined by generally accepted accounting
principles. The Company's measure may not be comparable to similarly titled
measures used by other REITs. Consequently, the Company's FFO may not
provide a
S-7
<PAGE> 8
meaningful measure of the Company's performance as compared to that of other
REITs. FFO is computed as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR PERIOD FROM YEAR ENDED DECEMBER 31, SEPTEMBER 30,
INCEPTION TO --------------------------- -----------------------------
DECEMBER 31, 1994 1995 1996 1996 1997
----------------- ------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income......................... $ 4,763 $ 9,708 $ 18,914 $ 13,458 $ 19,997
Add: depreciation and
amortization................... 1,502 4,697 6,315 4,618 6,644
Add: stock-based compensation.... -- -- -- -- 47
Less: gain on sale of asset...... -- -- (197) (197) --
Less: straight-line rental
income......................... (636) (1,882) (2,399) (1,765) (2,333)
---------- ----------- ----------- ----------- -----------
Funds from operations.............. $ 5,629 $ 12,523 $ 22,633 $ 16,114 $ 24,355
========== =========== =========== =========== ===========
</TABLE>
(3) Nonrecourse indebtedness of (i) 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, (ii) Capstone of Virginia, Ltd., an Alabama limited partnership of
which Capstone Capital of Virginia, Inc., an Alabama corporation and a
wholly owned subsidiary of the Company, is the general partner, (iii)
Capstone of Cape Coral, Ltd., an Alabama limited partnership of which
Capstone Capital of Cape Coral, Inc., an Alabama corporation and wholly
owned subsidiary of the Company, is the general partner, (iv) Capstone of
Sarasota, Ltd., an Alabama limited partnership of which Capstone Capital of
Sarasota, Inc., an Alabama corporation and wholly owned subsidiary of the
Company, is the general partner, and (v) Capstone of Bonita Bay, Ltd., an
Alabama limited partnership of which Capstone Capital of Bonita Bay, Inc.,
an Alabama corporation and wholly owned subsidiary of the Company, is the
general partner.
---------------------
For information regarding certain recent developments related to the
Company, see "Recent Developments."
S-8
<PAGE> 9
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 $115.1 million, after deduction
of underwriting discounts and commissions and estimated Offering expenses
payable by the Company (approximately $132.5 million assuming the Underwriters'
over-allotment option is exercised in full). The Company intends to use the net
proceeds to repay the outstanding balance under the Short-Term Credit Facility,
which was approximately $27.5 million as of December 31, 1997, and to reduce the
outstanding balance under its Bank Credit Facility, which was approximately
$172.9 million as of December 31, 1997, to approximately $85.3 million.
Borrowings under the Short-Term Credit Facility bear interest at the
Eurodollar rate plus a percentage that varies from 1.00% to 1.625% and are
payable on or before April 3, 1998. At December 31, 1997, the weighted average
interest rate under the Short-Term Credit Facility was 8.18%.
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 December 31, 1997, the
weighted average interest rate under the Bank Credit Facility was 7.07%. The
Company has used borrowings under the Bank Credit Facility primarily to fund
Investments. The Company expects to borrow under the Bank Credit Facility in the
future to fund Investments. The Bank Credit Facility will be available until
June 24, 2000, and the principal balance outstanding thereunder will mature on
that date.
S-9
<PAGE> 10
CAPITALIZATION
The following sets forth the capitalization of the Company as of September
30, 1997, (i) on an actual basis, (ii) on a pro forma basis to give effect to
additional borrowings under the Bank Credit Facility and the Short-Term Credit
Facility between September 30, 1997 and December 31, 1997, and the issuance and
sale of 615,385 shares of Common Stock of the Company on December 23, 1997, and
(iii) on a pro forma as adjusted basis to modify such pro forma information 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 repay the
outstanding balance under the Short-Term Credit Facility and 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>
SEPTEMBER 30, 1997
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Indebtedness:
Bank credit facility............................... $ 92,400,000 $172,950,000 $ 85,312,500
Short-term credit facility......................... -- 27,500,000 --
Mortgage loans..................................... 57,129,060 57,129,060 57,129,060
10.50% Convertible subordinated debentures......... 4,974,000 4,974,000 4,974,000
6.55% Convertible subordinated debentures.......... 68,296,832 68,296,832 68,296,832
------------ ------------ ------------
Total Indebtedness......................... 222,799,892 330,849,892 215,712,392
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 3,000,000 shares issued and outstanding
(aggregate liquidation preference $75,000,000)..... 3,000 3,000 3,000
Common Stock, $.001 par value; 50,000,000 authorized;
16,494,861 shares issued and outstanding, actual;
17,110,246 shares issued and outstanding, pro
forma; and 22,110,246 shares issued and
outstanding, pro forma as adjusted(1).............. 16,495 17,110 22,110
Additional paid-in capital........................... 358,690,159 373,014,476 488,146,976
Loans to officers to finance stock purchases......... (286,944) (286,944) (286,944)
Retained earnings.................................... (425,346) (425,346) (425,346)
------------ ------------ ------------
Total stockholders' equity................. 357,997,364 372,322,296 487,459,796
------------ ------------ ------------
Total capitalization....................... $580,797,256 $703,172,188 $703,172,188
============ ============ ============
</TABLE>
- ---------------
(1) Does not include (a) 308,465 shares of Common Stock reserved for issuance
upon conversion of $4,974,000 aggregate principal amount of the 10.50%
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% Debentures, subject to adjustment in
certain events, (c) 1,577,900 shares of Common Stock reserved for issuance
pursuant to the Company's 1994 Stock Incentive Plan, or (d) 991,484 shares
of Common Stock reserved for issuance pursuant to the Company's Dividend
Reinvestment Plan.
S-10
<PAGE> 11
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock is listed on the NYSE under the symbol "CCT." As
of February 3, 1998, there were 568 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> <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
------
Total............................................. 1.760
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 .460
Fourth Quarter............................................ 21 7/8 20 3/4 .465
------
Total............................................. 1.825
1997:
First Quarter............................................. 24 1/8 22 3/8 .470
Second Quarter............................................ 24 3/8 21 3/8 .475
Third Quarter............................................. 24 1/2 22 7/8 .480
Fourth Quarter............................................ 25 9/16 23 3/8 .485(1)
------
Total............................................. 1.910
1998:
First Quarter (through February 3, 1998).................. 25 15/16 24 7/16 --
</TABLE>
- ---------------
(1) Declared by the Board of Directors on January 21, 1998, and payable on
February 16, 1998 to shareholders of record on February 2, 1998. Purchasers
of the Shares will not be eligible to receive this dividend.
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.
INVESTMENTS AND COMMITMENTS
INVESTMENT POLICY
The Company's investment objectives are to (i) generate current income for
stockholders; (ii) provide the opportunity for additional returns to
stockholders through the acquisition and development of additional properties
and the acquisition of additional mortgages, which may require the use of
additional debt or equity financing; (iii) provide stockholders with the
opportunity to realize capital growth resulting from appreciation,
S-11
<PAGE> 12
if any, in the residual values of any properties acquired; and (iv) preserve and
protect stockholders' capital. There can be no assurance that any of these
objectives will be realized.
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 primary factor in determining whether to make an investment as a lease
or mortgage loan is the financing structure proposed by the owner or developer.
In evaluating whether to purchase a property for lease or to make a mortgage
loan, the Company considers such factors as (i) the geographic area, type of
property and demographic profile; (ii) the location, construction quality,
condition and design of the property; (iii) the current and anticipated cash
available for distribution and its adequacy to meet operational needs and lease
obligations and to provide a competitive market return on equity to the
Company's investors; (iv) the potential for capital appreciation, if any; (v)
the growth, tax and regulatory environment of the communities in which the
properties are located; (vi) the occupancy and demand for similar health
facilities in the same or nearby communities; (vii) the mix of private and
government sponsored patients; (viii) any potential alternative uses of the
facilities; (ix) prospects for liquidity through financing or refinancing; (x)
industry segment and operator diversification; and (xi) the suitability of the
potential investments in light of maintaining REIT status.
In making future investments, the Company intends to focus on established,
creditworthy potential lessees, borrowers and developers which meet the
Company's standards for quality and experience of management. In order to
determine creditworthiness of potential lessees, borrowers and developers, the
Company reviews historical and prospective financial information of lessees,
borrowers and developers, together with appropriate financial information of any
guarantor. Factors considered in connection with such financial reviews include
the net worth, profitability and cash flow, debt position, and the ability to
provide additional credit enhancements.
LEASES
Each Lease relates to a healthcare facility, comprised generally of the
land, buildings, other improvements and certain fixtures, for a use, in most
cases, restricted to the intended healthcare related use and for such other uses
as may be necessary in connection with or incidental to such use (the "Primary
Intended Use"). Generally, personal property is not being purchased or leased,
although the Company has been granted an option to purchase any personal
property necessary or appropriate for the operation of the Leased Properties for
an amount equal to the then-current book value (original cost less accumulated
depreciation on the books of the lessee). The Leases have initial terms ranging
from 10 to 15 years with the majority having one or more renewal terms providing
in total at least 10 additional years exercisable by the lessee. The Leases are
subject to earlier termination upon the occurrence of an event of default under
the Lease by the lessee. Base rent varies by Lease, taking into consideration
many factors, including the credit of the lessee, purchase price of the
property, operating performance of the facility, location, type and physical
condition of the facility. The Leases generally provide for additional rent
commencing after the first year based on either a set percentage increase on a
rate based on the consumer price index, with annual increases generally limited
to a maximum of 5%.
Substantially all of the Leases are triple net leases which require the
lessees to pay, in addition to base rent, any additional rent and all additional
charges, including any fines, penalties, interest and costs which may be levied
for nonpayment or late payment thereof, all operating expenses, taxes,
environmental clean up costs, association dues, insurance premiums, assessments,
levies, fees, water and sewer rents and charges, all governmental charges with
respect to the applicable Leased Property and ground rent in certain cases.
S-12
<PAGE> 13
Each lessee is required, at its expense, to maintain its leased property in
good order and repair. The Company is not required to repair, rebuild or
maintain the Leased Properties. Under certain Leases, the Company must purchase
from the lessees certain structural capital improvements and replacements made
by such lessees or otherwise compensate the lessees.
Generally, the Leases also contain provisions which generally permit the
lessees, under certain circumstances, to terminate the Leases and to repurchase
the applicable Leased Property for a price equal to the Minimum Repurchase Price
(as defined in the Leases) or to substitute another property or properties for
the applicable Leased Property. These circumstances include (i) the occurrence
of certain damage to or destruction of the Leased Properties, (ii) condemnation
and (iii) mutual agreement of the parties. The Integrated Health Leases contain
an option, commencing at the end of the fifth year, to repurchase the Leased
Property for a purchase price equal to the Minimum Repurchase Price (as defined
in the Leases). Each of the lessees has a right of first refusal to purchase the
Leased Property during the terms of the Leases and for a short period of time
following the expiration of the terms of the Leases on the same terms and
conditions as the Company may propose to sell such Leased Property to an
unrelated third party.
MORTGAGE LOANS
The Company's permanent mortgage loans are comprised of secured loans which
are structured to provide the Company with interest income, additional interest
based on fixed rate increases or increases in the consumer price index,
principal amortization and commitment fees. While from time to time the Company
may invest in loan participations or secondary mortgages, substantially all of
the approximately $108 million of permanent mortgage loans as of September 30,
1997 are first mortgage loans.
The interest rates on the Company's investments in permanent mortgage loans
for operating facilities range from approximately 10.0% to 13.39% per annum on
the outstanding balances. The yield to the Company on permanent mortgage loans
depends upon a number of factors, including the stated interest rate, average
principal amount outstanding during the term of the loan, the amount of the
commitment fee charged at the inception of the loan and the interest rate
adjustments.
The permanent mortgage loans for operating facilities made through
September 30, 1997 generally have initial maturities of between five and 15
years, require monthly installments of principal and interest, and provide for a
balloon payment of the outstanding principal balance at maturity.
The Company generally requires a variety of additional forms of security
and collateral beyond that which is provided by the lien of the mortgage. For
example, the Company generally requires one or more of the following items: (a)
a guaranty of the complete payment and performance of all obligations associated
with each mortgage loan from the borrower's parent corporation, if any, other
affiliates of the borrower and/or one or more of the individual principals
controlling such borrower; (b) a collateral assignment from the borrower of the
leases and the rents relating to the mortgaged property; (c) a collateral
assignment from the borrower of all permits, licenses, approvals and contracts
relating to the operation of the mortgages property; (d) letter of credit or
cash collateral for a negotiated dollar amount typically equal to three months
to six months principal and interest on the loan; and (e) a security interest in
all of the borrower's personal property, including, in most instances, the
borrower's accounts receivable. In addition, the mortgage loans are generally
cross-defaulted and cross-collateralized with any other mortgage loans between
the borrower or any affiliate of the borrower and the Company.
Certain of the Company's Mortgage Loans are comprised of loan
participations in which the Company subordinates its right to repayment to
another lender but retains the right to repay the outstanding indebtedness owed
to the senior lender at any time. The Company also provides mezzanine financing
secured by second mortgages on healthcare properties in which it has, in certain
events, the right to repay the outstanding indebtedness owed to the first
mortgage lender.
DEVELOPMENT ARRANGEMENTS
The Company has entered into certain development funding arrangements to
provide the funding to enable healthcare operators to build facilities on
property owned or leased by the Company or securing a
S-13
<PAGE> 14
Mortgage Loan. The Company views development funding as an effective way to
acquire prime investments and to meet the significant demand on the part of
qualified operators for funds for development of healthcare facilities.
Providing such capital will, management believes, enhance the Company's position
as a provider of funds for the healthcare industry.
The Company contracts with a qualified third party developer to construct a
facility. Prior to making any funding advance for a development, the Company
will acquire or ground lease the real estate, will enter into a triple net lease
with the third party developer and will have approval authority with regard to
plans, specifications, budgets and time schedules for the completion of the
development of the property. Under the terms of the development funding
agreements, the Company will receive funding fees (the economic equivalent of
construction period interest) on all funds advanced. Timely completion of the
development in compliance with the plans, specifications, budgets and time
schedules will be the contractual responsibility of the third party developer.
All construction and service contracts relating to the development will be
assigned to the Company. During the term of the development of a facility, funds
will be advanced pursuant to requests made by the third party developer in
accordance with the terms and conditions of the applicable funding agreement
based on costs incurred prior to the date of such requests. As construction
progresses, the Company will receive monthly reports evidencing the third party
developer's compliance with the plans, specifications, budgets and time
schedules, certified by appropriate architects and engineers. Change orders, if
any, to the plans, specifications, budgets and time schedules will be permitted
only with the approval of the Company.
Failure by the third party developer to comply with the terms of the
funding agreements, including inability to meet budgets and time schedules, will
constitute a default on the part of the third party developer. Depending on the
nature of the default, the Company will have remedies available to it, including
the authority to remove the third party developer and undertake completion of
the development at the expense of the third party developer or the right to
require completion of the development property or repayment of the funds
invested by the Company pursuant to guarantees of the parent company of the
developer. The Company believes that it has the requisite development and
construction management oversight experience to complete, if necessary, a
development. Upon completion of the development, the applicable Operator will
have the obligation to undertake its responsibilities under the applicable
Lease.
RECENT DEVELOPMENTS
RECENT OPERATING RESULTS
On January 21, 1998, the Company announced operating results for the fourth
quarter and the year ended December 31, 1997. The Company also announced that
its investment portfolio had grown 102% from $354.5 million to $716.0 million
during 1997. Those operating results, which are subject to year-end audit
adjustments, are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- -----------------
1996 1997 1996 1997
------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Revenues................................................... $9,952 $17,549 $35,952 $57,179
Net income available to common stockholders................ 5,456 7,763 18,914 27,772
Net income per share....................................... $ 0.43 $ 0.47 $ 1.71 $ 1.76
</TABLE>
SHORT-TERM CREDIT FACILITY
On December 4, 1997, the Company obtained the $40 million Short-Term Credit
Facility from NationsBank primarily for purposes of funding Investments.
Borrowings under the Short-Term Credit Facility bear interest at the Eurodollar
rate plus a percentage that varies from 1.00% to 1.625% and are payable on or
before April 3, 1998. At December 31, 1997, the weighted average interest rate
under the Short-Term Credit Facility was 8.18%. The outstanding balance under
the Short-Term Credit Facility was approximately $27.5 million as of December
31, 1997.
S-14
<PAGE> 15
RECENT SALE OF COMMON STOCK
On December 23, 1997, the Company sold 615,385 shares of Common Stock to
Legg Mason Wood Walker, Incorporated for $24 3/8 per share. Such shares were
deposited with the trustee of the Legg Mason REIT Trust, December 1997 Series
("Trust"), a registered unit investment trust under the Investment Company Act
of 1940, as amended, in exchange for units of the Trust.
RECENT EVENTS WITH RESPECT TO CERTAIN OPERATORS
According to its public filings, Columbia recently has been the subject of
various significant government investigations regarding its compliance with
Medicare, Medicaid and similar programs. The following is derived from public
reports distributed by Columbia: While it is too early to predict the outcome of
any of the on-going investigations or the initiation of any additional
investigations, were Columbia to be found in violation of federal or state laws
relating to Medicare, Medicaid or similar programs, Columbia could be subject to
substantial monetary fines, civil and criminal penalties, and exclusion from
participation in the Medicare and Medicaid programs.
According to a joint press release issued on January 7, 1998, MedPartners
and PhyCor, Inc. have mutually agreed to terminate the plan to merge the two
companies previously approved by the boards of directors of both companies in
October 1997. In a separate press release issued on January 7, 1998, MedPartners
announced that it expects to record pre-tax charges to earnings in the fourth
quarter of approximately $145 million related to restructuring of certain of its
operating units and to certain discontinued operations and that, due to greater
than anticipated costs, it expects to report a loss from continuing operations
in the fourth quarter of between $0.20 and $0.25 per share. On January 16, 1998,
MedPartners announced that Richard M. Scrushy would become its Chairman and
acting Chief Executive Officer, replacing Larry R. House who resigned. Mr.
Scrushy will also remain Chairman and Chief Executive Officer of HEALTHSOUTH and
Chairman of the Company. Following the January 7, 1998 press releases, a number
of purported class action lawsuits have been filed against MedPartners alleging
violations of the Federal securities laws and other claims.
As of the date of this Prospectus Supplement, the Company does not believe
that these events will affect the ability of Columbia or MedPartners to make
required payments when due under the Company's leases with them.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." In the opinion
of Sirote & Permutt, P.C., the Company qualified to be taxed as a REIT pursuant
to sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"), for its taxable year ended December 31, 1997, and the Company's
organization and proposed method of operation will enable it to qualify to be
taxed as a REIT for its taxable year ending December 31, 1998, and future
taxable years. Investors should be aware, however, that opinions of counsel are
not binding upon the Internal Revenue Service or any court. It must be
emphasized that Sirote & Permutt, P.C.'s opinion is based on various assumptions
and is conditioned upon certain representations made by the Company as to
factual matters, including representations regarding the nature of the Company's
properties and the future conduct of its business. Such factual assumptions and
representations are set out in the federal income tax opinion that will be
delivered by Sirote & Permutt, P.C. at the closing of the Offering. Moreover,
such qualification and taxation as a REIT depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution levels, and stock ownership, the various qualification tests
imposed under the Code. Sirote & Permutt, P.C. will not review the Company's
compliance with those tests on a continuing basis. Accordingly, no assurance can
be given that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of the failure to qualify as a REIT, see "Federal Income Tax
Considerations -- Failure to Qualify" in the accompanying Prospectus.
S-15
<PAGE> 16
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief
Act of 1997 (H.R. 2014) (the "Act"). Certain provisions of the Act are
summarized in the accompanying Prospectus under "Federal Income Tax
Considerations." Those provisions apply to the Company in taxable years
beginning on and after January 1, 1998.
One provision of the Act allows a REIT to elect to retain, rather than
distribute, its net long-term capital gains and to pay the tax on such gains. If
a REIT makes such an election, its stockholders would include their
proportionate share of any such undistributed long-term capital gain in income
and receive a refund or credit for their share of the corresponding tax paid by
the REIT. In addition, a shareholder's tax basis in the Common Stock will be
increased by the amount of the undistributed long-term capital gains included in
the shareholder's long-term capital gains for federal income tax purposes, minus
the shareholder's share of the capital gains tax paid by the REIT. See "Federal
Income Tax Considerations -- Taxation of Domestic Stockholders" and "-- Taxation
of Foreign Stockholders -- Non-Dividend Distributions" in the accompanying
Prospectus.
Another provision of the Act provides new lower capital gains rates for
capital gains recognized by noncorporate taxpayers with respect to assets that
have a holding period of more than 18 months. With respect to distributions
designated by the Company as capital gain dividends and any retained capital
gains that the Company is deemed to distribute, in taxable years beginning on
and after January 1, 1998, the Company may designate (subject to certain limits)
whether a distribution is taxable to its noncorporate shareholders at a 20%, 25%
or 28% rate. Investors are urged to consult their own tax advisors with respect
to the new rules contained in the Act.
TAXATION OF FOREIGN STOCKHOLDERS
Ordinary Dividends. Dividends paid to a Non-U.S. Holder of Common Stock
generally will be subject to United States withholding tax at a rate of 30% of
the gross amount of the dividend or such lower rate as may be specified by an
applicable income tax treaty. See "Taxation of Foreign Stockholders -- Ordinary
Dividends" in the accompanying Prospectus.
Under recently issued Treasury Regulations, Non-U.S. Holders (and in the
case of Non-U.S. Holders that are treated as partnerships or other fiscally
transparent entities, partners, shareholders or other beneficiaries of such
Non-U.S. Holders) may be required to satisfy certain certification requirements
and provide certain information to the Company's withholding agent in order to
claim treaty benefits with respect to dividends paid after December 31, 1998,
subject to certain transitional rules. Such "withholding certificates" would
contain the certifying holder's name and address and other pertinent information
and the basis for any reduced rate claimed. Special rules regarding the
availability of treaty benefits apply with respect to entities that are treated
as partnerships or other fiscally transparent entities for U.S. federal income
tax purposes but treated as corporations for purposes of the tax laws of an
applicable treaty country (or, conversely, treated as corporations for U.S.
federal income tax purposes but treated as partnerships or other fiscally
transparent entities for purposes of the tax laws of an applicable treaty
country). Any such entities that hold stock of the Company, and partners,
beneficiaries and shareholders of such entities, should consult their tax
advisors as to the applicability of such rules to their particular
circumstances.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Domestic Stockholders. In general, information reporting requirements will
apply to distributions of dividends or the proceeds of a sale, exchange, or
redemption made by the Company with respect to the Company's Common Stock within
the United States to non-corporate domestic stockholders, and "backup
withholding" at a rate of 31% will apply to such payments if the domestic
stockholder 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.
S-16
<PAGE> 17
Non-U.S. Holders Generally, the Company must report annually to the
Internal Revenue Service the amount of dividends paid to a Non-U.S. Holder and
the amount, if any, of tax withheld with respect to, such Non-U.S. Holder. A
similar report is sent to the Non-U.S. Holder. Pursuant to tax treaties or
certain other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.
Currently, United States backup withholding tax (which generally is a
withholding tax imposed at a rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting requirements) will generally not apply to dividends paid on Common
Stock to a Non-U.S. Holder at an address outside the United States, unless the
payor has actual knowledge that the payee is a U.S. Holder. Backup withholding
tax generally will apply to dividends paid on Common Stock at addresses inside
the United States to Non-U.S. Holders who fail to provide certain identifying
information in the manner required.
In addition, information reporting and backup withholding imposed at a rate
of 31% will apply to the proceeds of a disposition of Common Stock paid to or
through a U.S. office of a broker unless the disposing holder, under penalties
of perjury, certifies as to its non-U.S. status or otherwise establishes an
exemption. Generally, U.S. information reporting and backup withholding will not
apply to a payment of disposition proceeds if the payment is made outside the
United States through a non-U.S. office of a non-U.S. broker. However, U.S.
information reporting requirements (but not backup withholding) will apply to a
payment of disposition proceeds outside the United States if the payment is made
through an office outside the United States of a broker that is (i) a U.S.
person, (ii) a foreign person which derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States or
(iii) a "controlled foreign corporation" for U.S. federal income tax purposes,
unless the broker maintains documentary evidence that the holder is a Non-U.S.
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Recently adopted Treasury regulations, which generally are effective for
payments made after December 31, 1998, subject to certain transition rules,
alter the backup withholding rules in certain respects. Among other things, such
regulations provide certain presumptions under which a Non-U.S. Holder is
subject to backup withholding at the rate of 31% and information reporting
unless the Company receives certification from the holder of non-U.S. status.
Depending on the circumstances, this certification will need to be provided (i)
directly by the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder that is
treated as a partnership or other fiscally transparent entity, by the partners,
shareholders or other beneficiaries of such entity, or (iii) by certain
qualified financial institutions or other qualified entities on behalf of the
Non-U.S. Holder. Further after December 31, 1998, under the newly issued
Treasury regulations, information reporting and backup withholding may apply to
payments of the gross proceeds from the sale or redemption of Common Stock
effected through foreign offices of brokers having any of a broader class of
connections with the United States unless certain IRS certification requirements
are complied with. Prospective investors should consult with their own tax
advisers regarding these Treasury regulations, and in particular with respect to
whether the use of a particular broker would subject the investor to these
rules.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
S-17
<PAGE> 18
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement, each of the Underwriters named below (each, an "Underwriter," and,
together, the "Underwriters") has agreed to purchase, and the Company has agreed
to sell to each Underwriter, the number of shares of Common Stock set forth
opposite the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Smith Barney Inc............................................ 1,000,000
Legg Mason Wood Walker, Incorporated........................ 1,000,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 1,000,000
Morgan Stanley & Co. Incorporated........................... 1,000,000
J.C. Bradford & Co. ........................................ 1,000,000
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters 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 Underwriters are 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 Underwriters that the Underwriters
propose 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 $0.77 per share. The Underwriters may allow,
and such dealers may re-allow, a concession not in excess of $0.10 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 Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 calendar days from the date of this Prospectus Supplement, to
purchase up to 750,000 additional Shares at the same price per share as the
Company receives for the Shares that the Underwriters have agreed to purchase.
The Underwriters may exercise such option only to cover overallotments made in
connection with the sale of the Shares offered hereby. If purchased, the
Underwriters will sell such additional 750,000 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
Underwriters 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 Underwriters
purchase Shares in the open market and the securities purchased can be traced to
a particular member of the selling group, the Underwriters may require the
selling group member in question to purchase the Shares in question at the cost
price to the Underwriters 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 Underwriters are 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
Underwriters 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
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<PAGE> 19
Common Stock issuable upon conversion of the Company's 10.50% 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.
Smith Barney Inc., Legg Mason Wood Walker, Incorporated and J.C. Bradford &
Co. have 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 LLP, New York, New York. As to matters of Maryland law,
Sirote & Permutt, P.C. and Dewey Ballantine LLP will rely upon an opinion of
Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland.
S-19
<PAGE> 20
$450,000,000
CAPSTONE CAPITAL CORPORATION
[CAPTSONE CAPITAL CORPORATION LOGO]
DEBT SECURITIES, PREFERRED STOCK, COMMON STOCK AND WARRANTS
------------------------
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"),
(iii) shares of Common Stock of the Company ("Common Stock"), and (iv) Warrants
to purchase shares of Preferred Stock, Common Stock or Debt Securities (the
"Warrants") (the Debt Securities, Preferred Stock, Common Stock and Warrants are
collectively referred to as the "Securities"), at an aggregate initial offering
price not to exceed U.S. $450,000,000, in amounts, at prices and on terms to be
determined at the time of sale. The Debt Securities, Preferred Stock, Common
Stock and Warrants 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 (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, and (iv) in the case of Warrants, the
duration, offering price, exercise price and detachability. 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. There is no guarantee that a
public market will develop or be sustained with respect to the Debt Securities,
Preferred Stock or Warrants.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 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 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 September 26, 1997
<PAGE> 21
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, NW, Room 1024,
Washington, DC 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, NW,
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. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission (http://www.sec.gov).
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 (i) Current Report on Form 8-K (filed on March 4, 1997), (ii)
Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (filed on
March 31, 1997) and Forms 10-K/A (filed on August 29, 1997 and September 16,
1997), (iii) Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1997 (filed on May 15, 1997) and Form 10-Q/A (filed on August 29, 1997),
(iv) Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997
(filed on August 14, 1997) and Form 10-Q/A (filed on August 29, 1997) and (v)
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
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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. Malcolm E. McVay, Chief Financial Officer of the Company,
1000 Urban Center Drive, Suite 630, Birmingham, Alabama 35242 (telephone number:
(205) 967-2092).
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THE COMPANY
The Company is a real estate investment trust ("REIT") 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 $697 million on July 31, 1997.
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
The following section and the "Risk Factors" section, if any, of the
accompanying Prospectus Supplement summarize the material risks related to an
investment in the Securities. Prospective purchasers of any of the Securities
offered hereby should consider carefully, in addition to the other information
contained or incorporated by reference in this Prospectus, the following risk
factors in evaluating the Company and its business and an investment in such
Securities. This Prospectus (including the documents incorporated by reference
herein) and the accompanying Prospectus Supplement contain, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed below, as well as those discussed elsewhere in this
Prospectus.
DEPENDENCE ON LESSEES, BORROWERS AND GUARANTORS FOR REVENUE
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. For the year ended December 31, 1996, the Company
derived approximately 33.4% and 19.5% of its revenues from HEALTHSOUTH
Corporation ("HEALTHSOUTH") and Columbia/HCA Healthcare Corporation,
respectively. 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.
Leases representing approximately 95% of the Company's total Leased
Properties as of June 30, 1997, expire at various times between 2004 and 2012.
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.
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, compliance with
development agreements and funding arrangements and ability of the completed
facility to generate the
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cash flow necessary to make payments to the Company under the leases or Mortgage
Loans, as applicable. Because development projects relate to properties under
construction and which have no operating history, these investments generally
involve greater risks than the sale and leaseback of operating properties.
The Company also from time to time makes Mortgage Loans for the
construction of, and funds the development of, certain healthcare facilities. In
addition to the risks applicable to development projects generally as discussed
in the preceding paragraph, Mortgage Loans made in connection with the
development projects subject the Company to the risk of default by the borrower
during construction, which could require the Company to incur additional costs
to foreclose its mortgage and/or advance additional funds to complete
construction.
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, such as irrevocable letters of credit from financial institutions,
payment and performance completion bonds or completion guarantees and corporate
and personal loan guarantees. No assurance, however, 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.
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. The Company derives all of its
operating income from investments 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. An economic downturn in the healthcare industry, significant decreases
in Medicare and Medicaid or other payor reimbursements or adoption of adverse
federal or state regulation could adversely affect the ability of the lessees,
borrowers and guarantors to generate the cash flow necessary to make payments to
the Company under the leases or Mortgage Loans, as applicable.
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. In addition,
in recent years both the Medicare and Medicaid programs have made substantial
efforts to increase the proportion of beneficiaries participating in managed
care plans. These plans receive a flat annual fee for each enrollee and
negotiate reimbursement rates with selected healthcare providers. Increased
reliance on such plans by Medicare and Medicaid could lead to reduced payment
rates for providers and reduced utilization of
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healthcare resources regardless of other reimbursement policies adopted by these
programs. 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 within a short period of time, 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 generate
the cash flow necessary to make payments to the Company under the leases and
Mortgage Loans, as applicable.
HEALTHCARE COST CONTROL EFFORTS
The healthcare industry is undergoing significant changes as government and
third party payors adopt techniques, including managed care, 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
increased use of managed care, if adopted, could adversely affect the Company by
reducing the lessees', borrowers' or guarantors' ability to generate the cash
flow necessary to make payments to the Company under the leases and Mortgage
Loans, as applicable. 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 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 generate the cash flow necessary to make
payments to the Company under the leases or Mortgage Loans, as applicable, or to
renew leases.
POTENTIAL ADVERSE IMPACT OF 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 and thereby
adversely affect their ability to generate the cash flow necessary to make
payments to the Company under the leases or Mortgage Loans, as applicable.
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, any of which could
adversely affect the ability of an operator to generate the cash flow necessary
to make payments to the Company under the leases or Mortgage Loans, as
applicable.
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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.
POTENTIAL 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 less than fully occupied on an
inpatient basis. The increased use of managed care by both government and
private third party payors has and is expected to continue to constrain
utilization of healthcare facilities. 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 payments to the Company under
leases and Mortgage Loans, as applicable, with respect to such ancillary
hospital facility the Company would have to rely upon the general credit of the
lessee, borrower, or related guarantor. 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, compliance with development agreements and funding
arrangements. Development projects and construction loans generally involve
greater risks than the sale and leaseback.
PROXIMITY TO HOSPITALS
A significant number 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.
ABILITY TO INCUR ADDITIONAL DEBT
As of June 30, 1997, the Company had outstanding indebtedness of
approximately $110.6 million under its $170 million line of credit from
NationsBank of Georgia, N.A., as agent for a consortium of bank lenders (the
"Bank Credit Facility"), approximately $7.1 million of 10.5% Convertible
Subordinated Debentures due 2002 (the "10.5% Debentures"), approximately $67.9
million of 6.55% Convertible Subordinated Debentures due 2002 (the "6.55%
Debentures"), and approximately $40.1 million in mortgage notes payable. The
Bank Credit Facility, 10.5% Debentures and 6.55% Debentures are unsecured.
Approximately 10.2% of the Company's Investments were encumbered by mortgages as
of June 30, 1997. The Company's total debt to capital ratio at June 30, 1997,
was 44.2%. The Bank Credit Facility contains customary negative covenants,
including (i) maintenance of minimum consolidated tangible net worth; (ii)
maintenance of minimum financial ratios; (iii) limitations on the ability to
incur additional indebtedness except as permitted therein; (iv) prohibitions on
the sale, lease or transfer of assets in excess of $5 million unless such sale,
lease or transfer does not create a default thereunder; (v) prohibitions on
capital expenditures in excess of $3 million with respect to any one property
and $20 million in the aggregate during each fiscal year, excluding acquisitions
of new facilities and (vi) prohibitions on any merger, consolidation or
liquidation of the Company except in the
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case of the merger of subsidiaries of the Company or a merger in which the
Company is the survivor, provided such merger does not cause a default
thereunder.
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
Failure to Continue 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. Moreover, 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 to which
the Company is leveraged could have important consequences to holders of the
Securities, including, but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations must be dedicated to debt
service and will not be available for operations and other purposes and (ii) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate purposes may be
impaired.
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 rate chosen by the Company from either the base rate of
NationsBank or the Eurodollar rate plus a percentage that varies from 1% to
1.625%. At June 30, 1997, the Company had variable interest rate indebtedness
aggregating approximately $110.6 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 24, 2000. 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.
The Indentures (as defined herein) with respect to the Debt Securities 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 "Description of Debt
Securities -- 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 "Description of Debt Securities -- Modification and Waiver."
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 injuries to persons and adjacent
property as well as fines). Most, if not all, of these laws, ordinances and
regulations contain stringent enforcement provisions including, but not limited
to, the authority to impose substantial administrative, civil and criminal fines
and penalties upon violators. 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 or affect an operator's ability to satisfy its financial obligations
to the Company under the Leased
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Properties or Mortgage Loans. 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 lease such property or to borrow using
such property as collateral. In addition, under the laws of some states and
under the Comprehensive Environmental Response, Compensation and Liability Act,
a lender may be held liable under certain circumstances as an "owner" or
"operator" for costs of addressing releases or threatened releases of hazardous
substances at a property in which the lender holds a security interest.
Operations at the healthcare facilities underlying the Investments have
been and will continue to be subject to numerous federal, state and local
environmental laws, ordinances and regulations, including those relating to the
generation, segregation, handling, packaging and disposal of radioactive
materials and other medical wastes as well as facility siting, construction,
occupational training and safety, disposal of non-medical wastes, underground
storage tanks and ash emissions from incinerators. In addition, certain of the
Investments were built prior to the time prohibitions on the use of asbestos in
building construction were enacted and other such facilities may be acquired by
the Company in the future.
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 environmental liabilities that may exist in
connection with the healthcare facilities underlying the Investments.
DEPENDENCE ON KEY PERSONNEL AND BOARD OF DIRECTORS
The Company is dependent on the efforts of its executive officers, John W.
McRoberts, William C. Harlan and Malcolm E. McVay. 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 entered into an employment agreement
with John W. McRoberts. In addition, the Company identifies potential investment
opportunities, in part, through the relationships of certain members of its
Board of Directors with HEALTHSOUTH, MedPartners, Inc. ("MedPartners") and
Integrated Health Systems, Inc. ("Integrated Health") (Richard M. Scrushy,
Michael D. Martin and Larry R. House are also directors of HEALTHSOUTH, Larry R.
House, Richard M. Scrushy and Larry D. Striplin, Jr. are also directors of
MedPartners and Robert N. Elkins is also a director of Integrated Health).
Leases with HEALTHSOUTH, MedPartners and Integrated Health are entered into on
terms no less favorable than leases from unrelated lessees with similar credit
criteria. Accordingly, while there is no assurance that the Company would be
able to obtain additional investments from such entities, the Company believes
that it would continue to maintain such relationships if such individuals no
longer served as directors of the Company.
CONFLICTS OF INTEREST
Five of the Company's nine directors, Richard M. Scrushy, Michael D.
Martin, Robert N. Elkins, Larry R. House and Larry D. Striplin, Jr., are
executive officers and/or directors of certain existing lessees and guarantors
(the "Interested Directors") including HEALTHSOUTH, Integrated Health and
MedPartners (collectively the "Interested Lessees"). The Company paid
HEALTHSOUTH $31.5 million in 1996 to acquire Leased Properties. The Company
received rental income during the period from January 1 through June 30, 1997 of
$6.5 million, $1.6 million, and $2.2 million 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. All of the nonemployee
directors of the Company are engaged, and may engage in the future, in the
ownership, management or operation of other companies for their own accounts.
9
<PAGE> 29
Accordingly, certain conflicts of interest may arise with respect to the
allocation of the time and efforts of such persons between their own activities
and the activities of the Company. All of the nonemployee directors are involved
with healthcare companies which own or operate 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.
COMPETITION
The Company believes that it is one of 13 publicly traded real estate
investment trusts (REITs) currently investing primarily in income-producing real
estate with an emphasis on healthcare-related facilities, many of which have
greater financial resources than the Company. The Company competes with each of
these REITs in seeking attractive investment opportunities in healthcare-related
facilities throughout the United States.
The Company also competes with real estate partnerships, healthcare
providers and other lenders, including, but not limited to, banks and insurance
companies, many of which have greater financial resources than the Company, in
the acquisition, leasing and financing of healthcare facilities located
throughout the United States. There can be no assurance that suitable
investments will be identified or that investments can be consummated on
commercially reasonable terms.
CONSEQUENCES OF FAILURE TO CONTINUE TO QUALIFY AS A REIT
The Company was organized and has elected, and believes that it has been
operated and intends to operate, so as to qualify as a REIT for U.S. federal
income tax purposes under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended to the date hereof (the "Code"). See "Federal Income Tax
Considerations." 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 does not
qualify as a REIT under the Code, it will be taxed as a corporation and
distributions to stockholders will not be deductible by the Company in computing
taxable income. In addition, unless the Company is entitled to relief under
certain statutory provisions, the Company will be disqualified from electing
treatment as a REIT for the four succeeding years following the year in which
qualification was lost. Failure to qualify as a REIT under the Code, 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 under the Code, the Company is required, among other
things, to distribute at least 95% of its "REIT taxable income" to stockholders
each year and to 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 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.
ANTITAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL SHARES
For the Company to qualify as a REIT under the Code in any taxable year, no
more than 50% in value of its outstanding stock may be owned directly, or
indirectly by attribution, by five or fewer individuals (as defined in the Code
to include certain entities) at any time during the second half of the Company's
taxable year (other than during the first year for which the Company elects to
be treated as a REIT). In addition, the outstanding stock must be owned by 100
or more persons during at least 335 days of a taxable year of 12 months or
during a proportional part of a shorter taxable year (other than during the
first year for which the Company elects to be treated as a REIT). See "Federal
Income Tax Considerations."
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<PAGE> 30
Because of the stock ownership requirements applicable to REITs, the
Company's Charter contains restrictions on transfer of its stock. Such
restrictions authorize the Company to refuse to transfer stock to any person, if
as a result of such transfer such person or entity would beneficially own stock
in excess of 9.8% in number or value of the outstanding stock of the Company.
Such provisions may inhibit market activity and the resulting opportunity for
stockholders to realize a premium for their Securities that might otherwise
exist if a stockholder were attempting to assemble a block of stock in excess of
9.8% in number or value of the outstanding stock. Also, there can be no
assurance that such provisions will in fact enable the Company to meet the
relevant REIT stock ownership requirements.
The Company's Charter authorizes the Board of Directors to cause the
Company to issue additional authorized but unissued shares of Common Stock or
Preferred Stock and to classify or reclassify any unissued shares of Common
Stock or Preferred Stock and to set the preferences, rights and other terms of
such classified or unclassified shares. See "Description of Capital Stock."
Although the Board of Directors has no such intention at the present time, it
could establish a series of Preferred Stock that could, depending on the terms
of such series, delay or impede a transaction or a change of control of the
Company that might involve a premium price for the Common Stock or otherwise be
in the best interest of the stockholders. The Charter and Bylaws of the Company
also contain other provisions that may delay or impede a transaction or a change
of control of the Company that might involve a premium price for the Common
Stock or otherwise be in the best interest of the stockholder.
MARYLAND BUSINESS COMBINATION LAW
Under the Maryland General Corporation Law ("MGCL"), certain "business
combinations" (including certain issuances of equity securities) between a
Maryland corporation and any person who beneficially owns ten percent or more of
the voting power of the corporation's shares or an affiliate of the corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate thereof are prohibited for five years after the most recent date
on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be approved by two super-majority
stockholder votes unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its shares.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Securities
for acquisitions and repayment, reduction and/or refinancing of other
indebtedness, including acquisition indebtedness, working capital, capital
expenditures and for general corporate purposes.
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>
SIX MONTHS YEAR ENDED FROM JUNE 30, 1994
ENDED DECEMBER 31, (INCEPTION)
JUNE 30, ------------- THROUGH
1997 1996 1995 DECEMBER 31, 1994
------------- ----- ----- ------------------
<S> <C> <C> <C> <C>
Ratio of earnings to fixed charges............... 2.7x 3.0x 2.0x 4.0x
</TABLE>
11
<PAGE> 31
DESCRIPTION OF DEBT SECURITIES
The following description summarizes the material terms and provisions of
the Debt Securities, other than pricing information, to which this Prospectus
and any applicable Prospectus Supplement may relate. The particular terms of the
Debt Securities being offered and the extent to which such general provisions
may apply will be set forth in the applicable Indenture or in one or more
indentures supplemental thereto and described in a Prospectus Supplement
relating to such Debt Securities. The Forms of the Senior Indenture (as defined
herein) and the Subordinated Indenture (as defined herein) have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
The Debt Securities may be either senior Debt Securities ("Senior Debt
Securities") or subordinated Debt Securities ("Subordinated Debt Securities").
The Debt Securities will be issued under one or more indentures (the
"Indentures"). Senior Securities and Subordinated Securities will be issued
pursuant to separate indentures (respectively, a "Senior Indenture" and a
"Subordinated Indenture"), in each case between the Company and a trustee (a
"Trustee"). The Indentures will be subject to and governed by the Trust
Indenture Act of 1939, as amended (the "TIA"). The statements made under this
heading relating to the Debt Securities and the Indentures are summaries of the
anticipated provisions thereof, do not purport to be complete and are qualified
in their entirety by reference to the Indentures and such Debt Securities. All
section references appearing herein are to sections of each Indenture unless
otherwise indicated and capitalized terms used but not defined below shall have
the respective meanings set forth in each Indenture.
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 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
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<PAGE> 32
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; (20) any change in the subordination
provisions contained en of the Subordinated Indenture with respect to such Debt
Securities; and (21) 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.
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 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 in the Subordinated Indenture and in such Prospectus
Supplement. 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
13
<PAGE> 33
according to the market price of the Common Stock or other securities of the
Company as of a time stated in the Prospectus Supplement. Certain restrictions
on ownership may apply in the event of a conversion or exchange. Such
restrictions will be indicated in any Prospectus Supplement with respect to the
Debt Securities to which such restrictions relate. 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 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
14
<PAGE> 34
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 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
The Company will be subject to certain covenants respecting (i) payment of
principal of, premium, if any and interest on the Debt Securities, (ii)
maintenance of an office or agency where Debt Securities may be surrendered for
registration of transfer or exchange or surrendered for conversion and where
notices and demands to or upon the Company in respect of the Debt Securities,
and the Indenture may be served, (iii) the holding of monies for Debt Securities
payments in trust, (iv) delivery of certificates to the Trustee by the Company
regarding defaults, (v) maintenance of the Company's corporate existence, (vi)
maintenance of the Company's properties and (vii) payment of taxes and other
claims by 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 additional covenants described therein.
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<PAGE> 35
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
respecting the Company or its Subsidiaries. (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.
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
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(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 902)
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 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).
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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 monies 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.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
Unless otherwise indicated in the Prospectus Supplement, the following
provisions will apply to the Subordinated Debt Securities.
Payment of principal of, premium, if any, and interest on the Subordinated
Debt Securities will, to the extent set forth in the Subordinated Indenture, be
subordinate in right of payment to 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)
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or interest, if any, on the Subordinated Debt Securities. (Section 1502). By
reason of such subordination, in the event of liquidation or insolvency of the
Company, holders of Subordinated Debt Securities may recover less, ratably, than
holders of Senior Debt.
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 be entitled to receive payment in full of all amounts due or
to become due in respect of all Senior Debt, or provision shall have been made
for such payment in cash, 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. In addition, during the continuance of any non-payment default or event of
default with respect to Senior Debt in an aggregate principal amount of at least
$10 million pursuant to which the maturity thereof is or may be accelerated, or
in the event any judicial proceeding shall be pending with respect to any such
default, then upon receipt by the Trustee of notice thereof from the holder of
such Senior Debt, unless and until (i) such default or event of default shall
have been cured or waived or shall have ceased to exist, or (ii) certain events
of bankruptcy or insolvency or reorganization involving the Company or any
subsidiary of the Company shall have occurred and be continuing, or (iii) such
Senior Debt shall have been paid in full (each of clauses (i), (ii) and (iii)
being a "Termination Event"), no payment or distribution will be made by or on
behalf of the Company on account of or with respect to the Subordinated Debt
Securities (except for those funds held in trust for the benefit of the holders
of any Subordinated Debt Securities to such holders) during a period (a
"Blockage Period") commencing on the date of receipt of such notice by the
Trustee and ending 179 days thereafter. In addition, so long as no Termination
Event shall have occurred, upon the occurrence of either such a payment or a
non-payment default, neither the Trustee nor any holder of the Subordinated Debt
Securities may take any action to accelerate the maturity of the Subordinated
Debt Securities during any Blockage Period (with respect to a payment default,
the Blockage Period shall be deemed to commence on the date which is the first
date payment should have been made). Notwithstanding anything herein to the
contrary, (a) in no event will a Blockage Period extend beyond 179 days from the
date the payment on the Subordinated Debt Securities was due and (b) there must
be 180 days in any 365 day period during which no Blockage Period is in effect.
Not more than one Blockage Period may have commenced with respect to the
Subordinated Debt Securities during any period of 365 consecutive days. No
default or event of default that existed or was continuing on the date of
commencement of any Blockage period with respect to the Senior Debt initiating
such Blockage Period may be, or be made, the basis of the commencement of any
other Blockage period by the holders of such Senior Debt, whether or not within
a period of 365 consecutive days, unless such default or event of default has
been cured or waived for a period of not less than 90 consecutive days. (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. By reason of these provisions, in the event of
a default on any Senior Debt, whether now outstanding or hereafter issued,
payments of principal of, premium, if any and interest on Subordinated Debt
Securities may not be permitted to be made, and the obligations thereunder may
not be able to be accelerated, until such Senior Debt is paid in full or such
event of default is cured or waived. (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
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Debt Security, (ii) Indebtedness owed to a subsidiary or partnership of the
Company, and (iii) Indebtedness owing in respect of the Company's 10.5%
Debentures and the Company's 6.55% Debentures. (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 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)
STRUCTURAL SUBORDINATION
The Indentures do not limit or prohibit the incurrence of indebtedness or
liabilities by any of the Company's subsidiaries or partnerships. Certain of the
Company's operations are conducted through subsidiaries or partnerships, which
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Debt Securities or to make any
funds available therefor, whether by dividends, loans or other payments. The
Debt Securities will be structurally subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's subsidiaries and partnerships. Any right of the Company to receive
assets of any such subsidiary or partnership upon the liquidation or
reorganization of any such subsidiary or partnership (and the consequent rights
of the holders of Debt Securities to participate in those assets) will be
structurally subordinated to the claims of that subsidiary's or partnership's
creditors.
DESCRIPTION OF CAPITAL STOCK
The following descriptions summarize the material terms and provisions of
the Company's capital stock. Complete descriptions of the Company's
capitalization are set forth in the Company's Charter and Bylaws, which
documents have been incorporated by reference as exhibits to the 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
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value $.001 per share ("Preferred Stock"). As of June 30, 1997, the Company had
16,205,672 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. 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.
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
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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.
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.
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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.
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 (as defined
herein), 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
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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 MGCL, a corporation generally cannot dissolve, amend its
charter, merger, sell all or 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 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, 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
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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.
ANTITAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL SHARES
For the Company to qualify as a REIT under the Code in any taxable year, no
more than 50% in value of its outstanding stock may be owned directly, or
indirectly by attribution, by five or fewer individuals (as defined in the Code
to include certain entities) at any time during the second half of the Company's
taxable year (other than during the first year for which the Company elects to
be treated as a REIT). In addition, the outstanding stock must be owned by 100
or more persons during at least 335 days of a taxable year of 12 months or
during a proportional part of a shorter taxable year (other than during the
first year for which the Company elects to be treated as a REIT). See "Federal
Income Tax Considerations."
Because of the stock ownership requirements applicable to REITs, the
Company's Charter contains restrictions on transfer of its stock. Such
restrictions authorize the Company to refuse to transfer stock to any person, if
as a result of such transfer such person or entity would beneficially own stock
in excess of 9.8% in number or value of the outstanding stock of the Company.
Such provisions may inhibit market activity and the resulting opportunity for
stockholders to realize a premium for their Securities that might otherwise
exist if a stockholder were attempting to assemble a block of stock in excess of
9.8% in number or value of the outstanding stock. Also, there can be no
assurance that such provisions will in fact enable the Company to meet the
relevant REIT stock ownership requirements.
The Company's Charter authorizes the Board of Directors to cause the
Company to issue additional authorized but unissued shares of Common Stock or
Preferred Stock and to classify or reclassify any unissued shares of Common
Stock or Preferred Stock and to set the preferences, rights and other terms of
such classified or unclassified shares. Although the Board of Directors has no
such intention at the present time, it could establish a series of Preferred
Stock that could, depending on the terms of such series, delay or impede a
transaction or a change of control of the Company that might involve a premium
price for the Common Stock or otherwise be in the best interest of the
stockholders. The Charter and Bylaws of the Company also contain other
provisions that may delay or impede a transaction or a change of control of the
Company that might involve a premium price for the Common Stock or otherwise be
in the best interest of the stockholder.
MARYLAND BUSINESS COMBINATION LAW
Under the MGCL, certain "business combinations" (including certain
issuances of equity securities) between a Maryland corporation and any
Interested Stockholder or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be
approved by two super-majority stockholder votes unless, among other conditions,
the corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares.
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DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under
the Company's 1994 Stock Incentive Plan), as of July 18, 1997. The Company may
issue Warrants for the purchase of Preferred Stock, Common Stock or Debt
Securities. Warrants may be issued independently or together with any other
Securities offered by any Prospectus Supplement and may be attached to or
separate from such Securities. Each series of Warrants will be issued under a
separate warrant agreement (each, a "Warrant Agreement") to be entered into
between the Company and a warrant agent specified in the applicable Prospectus
Supplement (the "Warrant Agent"). The Warrant Agent will act solely as an agent
of the Company in connection with the Warrants of such series and will not
assume any obligation or relationship of agency or trust for or with any
provisions of the Warrants offered hereby. Further terms of the Warrants and the
applicable Warrant Agreements will be set forth in the applicable Prospectus
Supplement.
The applicable Prospectus Supplement will describe the terms of the
Warrants in respect of which this Prospectus is being delivered, and shall set
forth the following: (1) The title of such Warrants; (2) The aggregate number of
such Warrants; (3) The price or prices at which such Warrants will be issued;
(4) The designation, number of terms of the shares of Preferred Stock, Common
Stock or Debt Securities purchasable upon exercise of such Warrants; (5) The
designation and terms of the Securities, if any, with which such Warrants are
issued and the number of such Warrants issued with each such Security; (6) The
date, if any, on and after which such Warrants and the related Preferred Stock,
Common Stock or Debt Securities will be separately transferable; (7) The price
at which each share of Preferred Stock, Common Stock or Debt Securities
purchasable upon exercise of such Warrants may be purchased; (8) The date on
which the right to exercise such Warrants shall commence and the date on which
such right shall expire; (9) The minimum or maximum amount of such Warrants
which may be exercised at any one time; (10) Information with respect to
book-entry procedures, if any; (11) A discussion of certain federal income tax
consequences; and (12) Any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
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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,
except as 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, persons that hold Securities that are a hedge or that are hedged
against currency risks or that are part of a "straddle" or "conversion"
transaction, 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 OWN 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 was organized and has elected, and believes that it has been
operated and intends to operate 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"). 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 levels) 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 regular 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 under the
Code, the Company, generally will not be subject to federal income tax on that
portion of its ordinary income or capital gain that is currently distributed to
its 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 disposition of foreclosure
property that is held primarily for sale to customers in
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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 maintains 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 certain other requirements, as
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 taxable 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 (including under
certain complex ownership attribution rules) 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 has 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
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credit of the qualified REIT subsidiary are treated as assets, liabilities and
such items of the REIT itself. A qualified REIT subsidiary is a corporation of
which all of the outstanding capital stock is owned by the REIT.
Gross Income Tests. There are two separate percentage tests relating to
the sources of the Company's gross income which 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 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 based 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 based
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
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which are "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. Moreover, the Company may realize short-term
capital gain upon sale or exchange of such investments. 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, the Company 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.
Asset Tests. At the close of each quarter of the Company's taxable year,
the Company must also satisfy three tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets 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 such as 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 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.
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 "REIT taxable income" (computed
without regard to the dividends paid deduction and the Company's net capital
gain) and (ii) 95% of the net income, 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).
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To the extent that the Company does not distribute all of its net long-term
capital gain and all of its REIT 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 REIT 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 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
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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.
TAXPAYER RELIEF ACT OF 1997
On August 5, 1997, President Clinton signed into law the Taxpayer Relief
Act of 1997 (H.R. 2014), which will have the effect of modifying certain
REIT-related Code provisions for tax years of the Company beginning on or after
January 1, 1998. Some of the potentially significant REIT-related changes
contained in this legislation include: (i) the rule disqualifying a REIT for any
year in which it fails to comply with certain regulations requiring the REIT to
monitor its stock ownership is replaced with an intermediate financial penalty;
(ii) the rule disqualifying a REIT in any year that it is "closely held" does
not apply if during such year the REIT complied with certain regulations which
require the REIT to monitor its stock ownership, and the REIT did not know or
have reason to know that it was closely held; (iii) a REIT is permitted to
render a de minimis amount of impermissible services to tenants in connection
with the management of property and still treat amounts received with respect to
such property (other than certain amounts relating to such services) as
qualified rent; (iv) the rules regarding attribution to partnerships for
purposes of defining qualified rent and independent contractors are modified so
that attribution occurs only when a partner owns a 25% or greater interest in
the partnership; (v) the 30% gross income test is repealed; (vi) any corporation
wholly-owned by a REIT is permitted to be treated as a qualified REIT subsidiary
regardless of whether such subsidiary has always been owned by the REIT; (vii) a
REIT may elect to retain, rather than distribute, its net long-term capital
gains and pay the tax on such gains, while its shareholders include their
proportionate share of the undistributed long-term capital gains in income and
receive a credit for their share of the tax paid by the REIT; (viii) the class
of excess noncash items for purposes of the REIT distribution requirements is
expanded; and (ix) certain other Code provisions relating to REITs are amended.
Some or all of the provisions could affect both the Company's operations and its
ability to maintain its REIT status for its taxable years beginning in 1998.
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, if certain
conditions are met, a former 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, (iii) an estate the income of which is includable
in gross income for federal income tax purposes
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regardless of source or (iv) a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. fiduciaries has the authority to control all substantial decisions of
the trust. "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 adjusted tax basis in the Debt
Security. Except to the extent attributable to accrued but unpaid interest and
assuming that the Debt Security is held as capital asset at all relevant times,
gain or loss recognized on the sale or retirement of a Debt Security generally
will be capital gain or loss and generally 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).
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 income or withholding tax on any gain realized on the sale or
exchange of a Debt Security unless such holder is an individual who is
present in the United States for 183 days or more in the taxable year of
disposition and certain conditions are met; 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.
Recently proposed Internal Revenue Service Treasury regulations (the
"Proposed Regulations") would provide alternative methods for satisfying the
certification requirement described in clause (i)(c) above. The Proposed
Regulations also would require, in the case of Debt Securities held by a foreign
partnership, that (x) the certification described in clause (i)(c) above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. The Proposed
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Regulations are proposed to be effective for payments made after December 31,
1997. There can be no assurance that the Proposed Regulations will be adopted or
as to the provisions that they will include if and when adopted in temporary or
final form.
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.
Original Issue Discount and Other Special Federal Tax Rules Applicable to Debt
Securities
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.
TAXATION OF DOMESTIC STOCKHOLDERS
Taxation of Taxable Domestic Stockholders. As used herein, the term
"domestic stockholder" means a stockholder of the Company who, for U.S. federal
income tax purposes, is (i) a citizen (or, if certain conditions are met, a
former 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, (iii) an estate the income of which is includable in gross income
for federal income tax purposes regardless of source or (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. fiduciaries has the authority
to control all substantial decisions of the trust. 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
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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.
The Taxpayer Relief Act of 1997 (the "Act") alters the taxation of capital
gain income. Under the Act, individuals who hold certain investments for more
than 18 months may be taxed at a maximum long-term capital gain rate of 20% on
the sale or exchange of those investments. Individuals who hold certain assets
for more than 12 months but less than 18 months may be taxed at a maximum
mid-term capital gain rate of 28% on the sale or exchange of those investments.
The Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain"
for individuals, special rules for "qualified 5-year gain," as well as other
changes to prior law. The Act allows the IRS to prescribe regulations on how the
Act's new capital gain rates will apply to sales of capital assets by "pass-thru
entities," which include REITs such as the Company. To date regulations have not
yet been prescribed, and it remains unclear how the Act's new rates will apply
to capital gain dividends or undistributed capital gains, including for example
the extent, if any, to which capital gain dividends or undistributed capital
gains from the Company will be taxed to individuals at the new rates for
mid-term capital gains and unrealized section 1250 recapture, rather than the
long-term capital gain rates. Investors are urged to consult their own tax
advisors with respect to the new rules contained in the Act.
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. Similarly, gain from the sale of stock by a
stockholder that is a tax-exempt entity should not generally constitute UBTI
unless the tax-exempt stockholder has held such stock as a "dealer" under the
Code or has financed the acquisition of such stock with "acquisition
indebtedness." 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, (iii) an estate whose income is
includible in gross income for U.S. federal income tax purposes regardless of
its source or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. fiduciaries has the authority to control all substantial decisions of
the trust. 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 an applicable 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
absent knowledge that the presumption is not warranted. Treasury regulations
proposed in April 1996 would require non-U.S. Holders to file a "withholding
certificate" with the Company's withholding agent certifying such holder's
entitlement to benefits under a treaty. Such certificates would contain the
holder's name and address and other pertinent information and the basis for any
reduced rate claimed. These withholding certificates would be required in the
case of dividends paid after December 31, 1997 (December 31, 1999, in the case
of dividends paid to accounts in existence on or before the date that is 60 days
after the proposed regulations are published as final regulations.) Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends distributed by a REIT, such as the Company.
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 the Foreign Investment in Real Property Tax
Act of 1980 ("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.
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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 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 is "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.
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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 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
render an opinion with respect to the validity of 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.
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EXPERTS
The Consolidated Financial Statements and schedules of Capstone Capital
Corporation as of December 31, 1996 and 1995 and for the years ended December
31, 1996 and 1995, 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 reports 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 reports and said authority.
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======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE 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 ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary......... S-3
Use of Proceeds....................... S-9
Capitalization........................ S-10
Price Range of Common Stock and
Distributions....................... S-11
Investments and Commitments........... S-11
Recent Developments................... S-14
Certain Federal Income Tax
Considerations...................... S-15
Underwriting.......................... S-18
Legal Matters......................... S-19
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 4
Risk Factors.......................... 4
Use of Proceeds....................... 11
Consolidated Ratios of Earnings to
Fixed Charges and Combined Fixed
Charges and Preferred Stock Dividend
Requirements........................ 11
Description of Debt Securities........ 12
Description of Capital Stock.......... 20
Description of Warrants............... 26
Federal Income Tax Considerations..... 27
Plan of Distribution.................. 37
Legal Matters......................... 38
Experts............................... 39
</TABLE>
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5,000,000 SHARES
[CAPSTONE LOGO]
CAPSTONE CAPITAL
CORPORATION
COMMON STOCK
------------
PROSPECTUS SUPPLEMENT
FEBRUARY 3, 1998
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SALOMON SMITH BARNEY
LEGG MASON WOOD WALKER
INCORPORATED
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
J.C. BRADFORD & CO.
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