-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, tMspv+Ea2Xot/uEzGI8DfK4W21mv5vRFwIBqBkaWV6eGShlsL6LyvE3sDBfwlG06 UnvmmU1HedrNiCbliTEM5w== 0000950135-94-000434.txt : 19940705 0000950135-94-000434.hdr.sgml : 19940705 ACCESSION NUMBER: 0000950135-94-000434 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19940701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH & REHABILITATION PROPERTIES TRUST CENTRAL INDEX KEY: 0000803649 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 046558834 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 033-53173 FILM NUMBER: 94537556 BUSINESS ADDRESS: STREET 1: 400 CENTRE ST CITY: NEWTON STATE: MA ZIP: 02158 BUSINESS PHONE: 6173323990 MAIL ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02158 424B5 1 PROSPECTUS SUPPLEMENT PURSUANT TO RULE 424(B)(5) 1 Filed Pursuant to Rule 424(b)(5) Registration No. 33-53173 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED JUNE 6, 1994) HEALTH AND REHABILITATION PROPERTIES TRUST $75,000,000 FLOATING RATE SENIOR NOTES, SERIES A, DUE 1999 $125,000,000 FLOATING RATE SENIOR NOTES, SERIES B, DUE 1999 ------------------------ The Floating Rate Senior Notes, Series A, Due 1999 (the "Series A Notes") and the Floating Rate Senior Notes, Series B, Due 1999 (the "Series B Notes", and together with the Series A Notes, the "Notes") offered hereby (collectively, the "Offering") are being issued by Health and Rehabilitation Properties Trust, a Maryland real estate investment trust ("HRP" or the "Company"), in an aggregate principal amount equal to $75,000,000 and $125,000,000, respectively. Interest on the Notes will be payable in U.S. dollars quarterly in arrears on each January 13, April 13, July 13 and October 13, commencing October 13, 1994, and at maturity or earlier redemption, as the case may be. The interest rate for each Interest Period (as defined herein) will be subject to quarterly adjustment effective on the thirteenth day of each January, April, July and October. The Series A Notes will bear interest at a per annum rate equal to LIBOR (determined as described herein) plus 1.05% (105 basis points), while the Series B Notes will bear interest at a per annum rate equal to LIBOR (determined as described herein) plus .72% (72 basis points). As more fully described herein, LIBOR will be the rate for deposits in U.S. dollars for a three-month period that appears on Telerate Page 3750 as of the second London Banking Day (as defined herein) preceding the first day of the applicable Interest Period, subject to alternative methods of determining LIBOR described herein. See "Description of the Notes -- Payments of Principal and Interest on the Notes" herein. The Notes will mature on July 13, 1999, but are subject to redemption at the option of the Company, as a whole or from time to time in part, prior to maturity on any Interest Payment Date (as defined herein) on and after April 13, 1995, in the case of the Series A Notes, or on and after July 13, 1996, in the case of the Series B Notes, upon not less than 30 nor more than 60 days' prior written notice, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. See "Description of the Notes -- Maturity and Optional Redemption" herein. Each series of Notes will be represented by a single fully-registered Note in book-entry form (each, a "Global Note") registered in the name of the nominee of The Depository Trust Company ("DTC"). Beneficial interests in a Global Note will be shown on, and transfers thereof will be effected only through, records maintained by DTC (with respect to beneficial interests of participants) or by participants or persons that hold interests through participants (with respect to beneficial interests of beneficial owners). Owners of beneficial interests in a Global Note will be entitled to physical delivery of Notes of the same series in certificated form equal in principal amount to their respective beneficial interests only under the limited circumstances described under "Description of the Notes -- Book-Entry System." Settlement for each series of the Notes will be made in immediately available funds. The Notes will trade in DTC's Same-Day Funds Settlement System until maturity or earlier redemption, as the case may be, or until the Notes are issued in certificated form, and secondary market trading activity in the Notes will therefore settle in immediately available funds. All payments of principal and interest in respect of the Notes will be made by the Company in immediately available funds. See "Description of the Notes -- Same-Day Settlement and Payment." Application has been made to list each series of Notes for trading on the New York Stock Exchange. ------------------------ 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 ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. =============================================================================================================== PRICE TO UNDERWRITING PROCEEDS TO PUBLIC(1) DISCOUNT(2) COMPANY(1)(3) - --------------------------------------------------------------------------------------------------------------- Per Series A Note........................................ 100% .75% 99.25% - --------------------------------------------------------------------------------------------------------------- Total.................................................... $75,000,000 $562,500 $74,437,500 - --------------------------------------------------------------------------------------------------------------- Per Series B Note........................................ 99.0159% .75% 98.2659% - --------------------------------------------------------------------------------------------------------------- Total.................................................... $123,769,875 $937,500 $122,832,375 =============================================================================================================== (1) Plus accrued interest, if any, from July 13, 1994. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Company estimated at $370,000.
------------------------ The Notes are offered by the Underwriters, subject to prior sale, when, as and if issued by the Company and delivered to and accepted by the Underwriters, to approval of certain legal matters by counsel for the Underwriters and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Global Notes will be made in New York, New York on or about July 13, 1994. ------------------------ MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. PAINEWEBBER INCORPORATED ------------------------ The date of this Prospectus Supplement is June 29, 1994. 2 ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. S-2 3 PROSPECTUS SUPPLEMENT SUMMARY The following summary is qualified in its entirety by the detailed information appearing elsewhere in this Prospectus Supplement or the accompanying Prospectus or incorporated herein by reference. Unless otherwise noted, all information presented herein assumes completion of the transaction described in "Business -- Recent Developments -- The Marriott Transaction". THE COMPANY The Company is a real estate investment trust ("REIT") which invests primarily in retirement communities, assisted living centers, nursing homes and other long term care facilities. In terms of equity capitalization, the Company is one of the largest REITs in the United States; the Company has over 57 million common shares of beneficial interest outstanding, book equity of $626 million and an equity market capitalization of over $839 million. After this Offering, the Company will have total debt of approximately $218 million, or 26% of the Company's total capitalization. The Company has real estate investments and commitments in 152 properties, located in 29 states and operated by 36 separate companies. Upon completion of the Marriott Transaction (as defined herein), approximately 70% of the Company's total investments will be in properties operated by seven NYSE listed companies. HRP CAPITALIZATION (BOOK BASIS, DOLLARS IN THOUSANDS) HRP LESSEES AND MORTGAGORS [INSERT PIE CHARTS HERE -- see appendix to electronic format document] The population of the United States is aging. According to information from the U.S. Census Bureau, the segment of the U.S. population age 65 and over is increasing and will increase sharply through the year 2020. The Company believes that the demand for services provided at retirement communities, assisted living centers and nursing homes should increase as the population ages. Moreover, during the past ten years the intensity of medical services offered in nursing homes has become an important factor increasing nursing facility revenues and the value of facilities. Recently proposed federal healthcare reform legislation seeks, in part, to control future expenditures for acute care hospitals by providing increased funding for subacute care in nursing homes. Although the Company has and will in the future invest in other types of health care real estate, the Company expects to continue its focus on retirement communities, assisted living centers and nursing homes. The Company's principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02158, and its telephone number is (617) 332-3990. S-3 4 THE OFFERING SECURITIES OFFERED $75,000,000 aggregate principal amount of the Company's Floating Rate Senior Notes, Series A, Due 1999 (the "Series A Notes") and $125,000,000 aggregate principal amount of the Company's Floating Rate Senior Notes, Series B, Due 1999 (the "Series B Notes", and together with the Series A Notes, the "Notes"). MATURITY..................... July 13, 1999. OPTIONAL REDEMPTION.......... The Notes may be redeemed by the Company on any Interest Payment Date on and after April 13, 1995, in the case of the Series A Notes, or July 13, 1996, in the case of the Series B Notes, upon not less than 30 nor more than 60 days prior written notice, at a redemption price equal to 100% of principal plus accrued and unpaid interest. INTEREST..................... The Series A Notes will bear interest at a per annum rate equal to LIBOR plus 1.05% (105 basis points), while the Series B Notes will bear interest at a per annum rate equal to LIBOR plus .72% (72 basis points), subject, in each case, to quarterly adjustment effective each January 13, April 13, July 13 and October 13. INTEREST PAYMENT DATES....... January 13, April 13, July 13 and October 13 commencing October 13, 1994 and at maturity or upon earlier redemption, as the case may be. RANKING...................... The Notes will be senior unsecured obligations of the Company and will rank equally with other unsecured and unsubordinated indebtedness of the Company. USE OF PROCEEDS.............. The net proceeds to the Company from this Offering will be used to fund the balance of the Marriott Transaction, or to reduce amounts outstanding under the Company's revolving credit facility. LISTING...................... Application has been made to list each series of Notes for trading on the New York Stock Exchange. COVENANTS:* LIMITATION ON UNSECURED DEBT....................... The Company has agreed, for so long as any Notes remain outstanding, at the end of each fiscal year of the Company, to maintain a ratio of (a) Total Unencumbered Assets to (b) total Unsecured Debt, of not less than 1.4:1. LIMITATION ON DEBT The Company has agreed, for so long as any Notes remain outstanding, at the end of each fiscal year of the Company, to maintain a ratio of (a) total consolidated Debt of the Company to (b) Total Adjusted Net Worth, of not more than 1.5:1. INTEREST EXPENSE COVERAGE The Company has agreed, for any fiscal year at the end of which any Notes remain outstanding, to maintain a ratio of (a) Total Cash Flow to (b) Total Interest Expense, of not less than 2:1. INTEREST RATE PROTECTION Beginning 75 days after the date on which the Notes are issued, and for as long as any Notes remain outstanding, the Company will have in effect Interest Rate Protection Arrangements with respect to a principal amount at least equal to the Unhedged Balance, such that, at any time, Pro Forma Annualized Interest Charges shall not exceed an amount equal to 9% of the Unhedged Balance. * For a more complete description of the terms and definitions used in the foregoing covenants, see "Description of the Notes -- Additional Covenants of the Company" herein. S-4 5 BUSINESS PROPERTIES At June 1, 1994, including the Marriott Transaction, the Company had total real estate investments of approximately $831 million in 152 properties ("Properties") located in 29 states operated by 36 separate companies. LOCATION OF HRP PROPERTIES (DOLLARS IN THOUSANDS) [INSERT MAP HERE -- SEE APPENDIX TO ELECTRONIC FORMAT DOCUMENT]
PERCENTAGE PERCENTAGE NO. OF TOTAL OF TOTAL NO. OF TOTAL OF TOTAL STATE PROPERTIES INVESTMENT INVESTMENTS STATE PROPERTIES INVESTMENT INVESTMENTS - ---------------- ---------- ---------- ----------- ---------------- ---------- ---------- ----------- Florida......... 6 $ 130,623 15.72% Pennsylvania.... 2 $ 18,379 2.21% Connecticut..... 9 86,553 10.41 Nebraska........ 12 16,768 2.02 Massachusetts... 5 82,058 9.87 Indiana......... 5 14,457 1.74 California...... 16 73,191 8.81 Iowa............ 10 14,175 1.71 Virginia........ 3 56,758 6.83 Michigan........ 2 9,400 1.13 Illinois........ 2 38,919 4.68 Kansas.......... 4 8,540 1.03 Wisconsin....... 9 33,983 4.09 Georgia......... 5 8,053 0.97 Colorado........ 10 32,990 3.97 South Dakota.... 3 7,589 0.91 Louisiana....... 5 32,490 3.91 Wyoming......... 3 6,459 0.78 Maryland........ 1 32,294 3.89 Washington...... 1 5,175 0.62 Arizona......... 5 27,748 3.34 Alabama......... 2 3,603 0.43 Ohio............ 9 26,654 3.21 Missouri........ 2 3,178 0.38 North Carolina.. 9 20,314 2.44 Tennessee....... 1 1,035 0.12 Kentucky........ 2 19,728 2.37 South Carolina.. 1 887 0.11 Texas........... 8 19,178 2.31 --- --------- 152 $ 831,179 === =========
S-5 6 Ninety-seven percent of the Company's investments are in 150 retirement communities, assisted living centers, nursing homes and other long term care facilities. Approximately 81% of the investments are in Properties owned by the Company and leased to operators. TYPE OF PROPERTY TYPE OF INVESTMENTS [INSERT PIE CHARTS -- SEE APPENDIX TO ELECTRONIC FORMAT DOCUMENT] FINANCING POLICY The Company utilizes short term and long term borrowings and equity offerings to finance investments and to pay operating expenses. When variable rate debt is utilized the Company regularly purchases interest rate futures contracts to hedge against changes in interest rates. At March 31, 1994, the Company had outstanding revolving debt totalling $73 million, which was subsequently repaid from the proceeds of the Equity Offering (as hereinafter defined). After this Offering and assuming the use of proceeds from this Offering, the Company's total debt outstanding will be approximately $217.6 million. The supplemental indenture covering the Notes issued in this Offering includes a covenant prohibiting the Company from maintaining a debt to equity ratio of greater than 1.5 to 1. However, the Company's borrowing guidelines established in its bank credit facility and by its Board of Trustees prohibit the Company from maintaining a debt to equity ratio of greater than 1 to 1, except in certain limited circumstances. As of March 31, 1994, the Company's debt to equity ratio was .16 to 1. After this Offering, and assuming the use of proceeds described herein, the Company's debt to equity ratio on a pro forma basis will be approximately .35 to 1. The present debt to equity limitations in the bank credit facility and in Company policy may be changed in the future. There can be no assurance that equity or debt capital will be available in the future on reasonable terms to fund the Company's operations or growth. HRP CAPITAL STRUCTURE (BOOK VALUES) AFTER SALE OF NOTES BEFORE SALE OF NOTES AND COMPLETION OF MARRIOTT TRANSACTION [INSERT PIE CHARTS HERE -- SEE APPENDIX TO ELECTRONIC FORMAT DOCUMENT] S-6 7 THE LESSEES AND THE MORTGAGORS The Company's financial condition depends in part upon the financial condition of the operators of the Company's Properties. After completion of the Marriott Transaction, approximately 70% of the Company's total investments will be in Properties operated by seven NYSE listed companies. Certain information about publicly owned operators of the Company's Properties contained in their filings with the Commission or other public sources, or provided by these companies is set forth in the chart below. HRP PUBLIC COMPANY FACILITY OPERATORS (DOLLARS IN THOUSANDS)
OPERATOR DATA ---------------------------------------------------- TOTAL TOTAL HRP HRP HRP OPERATOR FACILITIES ANNUAL SHAREHOLDERS' NET FACILITIES FACILITIES INVESTMENT (STOCK SYMBOL) (BEDS) REVENUES EQUITY INCOME (BEDS) OCCUPANCY (% OF TOTAL) - ---------------------- ---------- ---------- ------------- -------- ---------- --------- ------------ Marriott International....... 787 $7,430,000 $ 696,000 $126,000 14 92%(3) $320,000 (NYSE:MAR) (174,951)(2) (3,952) (38.5%) Horizon Healthcare(1)....... 104 232,199 217,994 7,716 12 91% 140,619 (NYSE:HHC) (11,883) (1,738) (16.9%) GranCare.............. 83 507,970 70,757 10,884 27 91% 87,676 (NYSE:GC) (11,300) (3,908) (10.5%) Sun Healthcare Group............... 47 191,711 69,586 9,749 4 95% 20,667 (NYSE:SHG) (5,272) (605) (2.5%) Beverly Enterprises... 817 2,885,881 739,009 57,924 2 92% 5,034 (NYSE:BEV) (86,865) (201) (.6%) Integrated Health Services............ 67 282,160 176,133 15,471 1 96% 2,781 (NYSE:IHS) (8,731) (120) (.3%) Hillhaven(1).......... 284 1,248,106 348,174 39,079 1 98% 1,282 (NYSE:HIL) (35,149) (120) (.2%) - --------------- (1) All operators have fiscal years ended December 31 except Horizon Healthcare and Hillhaven which have fiscal years ended May 31. Annual revenues and net income for Horizon Healthcare and Hillhaven are for the year ended May 31, 1993 and may not be indicative of the results which can be expected for the year ended May 31, 1994; moreover, annual revenues and net income shown for Horizon Healthcare do not reflect the merger of Greenery Rehabilitation Group, Inc. ("Greenery") into Horizon Healthcare, consummated in February 1994. (2) Includes approximately 770 operated or franchised hotels with more than 170,000 rooms and 17 retirement complexes with 4,951 units, including independent and assisted living apartments and beds for nursing homes. (3) Occupancy is aggregate average occupancy for facilities opened for more than one year.
The remaining 30% of HRP's portfolio is operated by a diverse group of 29 privately held companies. Based upon the most current financial reports available to the Company, the ratio of earnings before depreciation, amortization, interest, rent and charges subordinated to amounts due the Company, derived by these 29 operators from the Properties in HRP's portfolio, is on average, 1.7 to 1. Additional Security. In addition to fee ownership of the leased properties and mortgage liens on the mortgaged properties, certain of the Company's leases and mortgages contain additional security features. Generally, with respect to investments originated by the Company, each obligation of an operator to HRP is subject to cross default provisions with respect to all other obligations of that operator to HRP, and any collateral pledged by an operator to HRP constitutes collateral for all obligations of that operator. Certain operators have pledged additional collateral or provided corporate guarantees, security deposits, or, in some cases, personal guarantees. S-7 8 RECENT DEVELOPMENTS The Marriott Transaction. On March 17, 1994, the Company agreed to acquire 14 retirement communities for $320 million, subject to adjustment. As of June 29, 1994, the Company had acquired 9 of these properties for $178.1 million. These 14 communities (the "Marriott Properties") are presently leased to and operated by a subsidiary of Marriott International Inc. (together with its subsidiaries, "Marriott") and have been or will be acquired by the Company subject to the existing leases. The Marriott Properties are located in the following seven states: Florida -- five; Virginia -- three; Arizona -- two; California -- one; Illinois -- one; Maryland -- one; and Texas -- one. The retirement communities offer a continuum of services including independent living residences, assisted living and on-site skilled nursing facilities. The Marriott Properties contain a total of 3,952 residences or beds and are triple net leased to Marriott for initial terms expiring on December 31, 2013, with renewal options extending for an additional 20 years. The leases provide for fixed rent aggregating approximately $28 million per year and additional rents equal to 4.5% of annual revenues from operations in excess of base amounts determined on a facility by facility basis. All of the leases are subject to cross default provisions and all of the leases are fully guaranteed by the parent corporation, a public corporation with a current senior debt rating of Baa-1 from Moody's Investors Service, Inc. and A- from Standard and Poor's Corporation. Upon completion of the Marriott Transaction, Marriott will become the Company's largest single tenant. The consummation of the Marriott Transaction is subject to conditions and contingencies customary in transactions of this type, including health care and other regulatory approvals, and although no assurance can be given that the remainder of the Marriott Transaction will be consummated, the Company expects that the acquisition of the remaining 5 properties will close in July 1994. The Company intends to fund the Marriott Transaction with the net proceeds of this Offering, available cash, funds available to be drawn under credit facilities, and the assumption of $17.6 million of industrial revenue bonds. See "Business - -- Recent Developments -- New Revolving Credit Facility". New Revolving Credit Facility. In February 1994, the Company closed a $110 million revolving credit facility from a syndicate of banks (the "New Credit Facility"). The New Credit Facility replaced the Company's $40 million revolving credit facility which was scheduled to mature in January 1995. The New Credit Facility will mature in 1997, unless extended by the parties. Borrowings under the New Credit Facility bear interest, at the Company's option, at prime or a spread over LIBOR. On June 15, 1994, the New Credit Facility was revised to increase the amount available thereunder, lower the interest rate charged on borrowings and make the facility unsecured. Equity Offering. In May 1994, the Company consummated an offering (the "Equity Offering") of 12,650,000 common shares of beneficial interest from which the Company received net proceeds of $174.5 million. The proceeds of the Equity Offering were utilized, in part, to fund the Marriott Transaction and, in part, to reduce amounts then outstanding under the New Credit Facility. Change of Name. On May 17, 1994, the shareholders of the Company approved an amendment to the Company's Declaration of Trust which will change the Company's name to "Health and Retirement Properties Trust." The Company expects that the amendment will become effective on or about July 1, 1994. The Company's common shares of beneficial interest will continue to be traded on the New York Stock Exchange under the symbol "HRP." Other Pending Transactions. In the ordinary course of its business, the Company regularly evaluates investment opportunities and enters into contracts to purchase and lease or mortgage finance health care related real estate. Several such possible investments are currently under consideration and at various stages of the contractual process. Similarly, since January 1, 1994, the Company has received principal prepayments of outstanding mortgages totalling approximately $16.7 million, and the Company is now engaged in proceedings relating to the appraisal for a sale of two properties subject to leases scheduled to expire during 1994. The Company does not believe that consummation of any one or all of these various pending transactions would have a material impact upon its financial condition or operations. S-8 9 USE OF PROCEEDS The net proceeds to the Company from the sale of the Notes offered hereby is estimated to be approximately $196.9 million. If the Notes are sold prior to the consummation of the balance of the Marriott Transaction, the net proceeds from the sale of the Notes will be used to fund the Marriott Transaction. If any portion of the balance of the Marriott Transaction is consummated prior to the sale of the Notes and the Company utilizes other borrowings to fund such acquisition, all or a portion of the net proceeds from the sale of the Notes will be used to repay amounts outstanding under such borrowings, and/or to reduce amounts outstanding under the Company's credit facilities. In the event that the balance of the Marriott Transaction is not consummated by the Company, net proceeds from the sale of the Notes will be used to reduce amounts outstanding under the Company's revolving credit facility or for working capital or other general corporate purposes. Pending utilization as set forth above, the proceeds from the sale of the Notes will be invested in short term investments, including repurchase agreements. S-9 10 CAPITALIZATION The capitalization of the Company as of March 31, 1994 and as adjusted to give effect to the consummation of: (a) the Marriott Transaction, (b) the Equity Offering, and (c) this Offering and the use of the net proceeds therefrom, is as follows:
MARCH 31, 1994 ------------------------- ACTUAL AS ADJUSTED --------- ----------- (DOLLARS IN THOUSANDS) DEBT: Secured debt............................................. -- $ 17,600 Bank borrowings.......................................... $ 73,000 -- Senior notes............................................. -- 200,000 SHAREHOLDERS' EQUITY: Preferred Shares of Beneficial Interest, par value $.01 per Share; 50,000,000 authorized, none issued......... -- -- Common Shares of Beneficial Interest, par value $.01 per Share; 100,000,000 Shares authorized; 44,722,500 Shares and 57,372,500 Shares, as adjusted, issued and outstanding........................................... 447 574 Additional paid-in capital............................... 478,807 653,221 Cumulative net income.................................... 135,533 135,533 Distributions of funds from operations................... (163,525) (163,525) --------- ----------- Total shareholders' equity............................ 451,262 625,803 --------- ----------- Total capitalization............................. $ 524,262 $ 843,403 ========= =========
S-10 11 SELECTED FINANCIAL DATA Set forth below are selected financial data for the Company for the five years ended December 31, 1993, derived from the audited financial statements of the Company. The financial data for the three month periods ended March 31, 1993 and 1994 are derived from unaudited financial statements. This data should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and accompanying notes incorporated by reference herein and in the accompanying Prospectus and with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the Company incorporated by reference herein and in the accompanying Prospectus. Amounts are in thousands, except per Share information.
QUARTER ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- -------- -------- OPERATING STATEMENT DATA: Total revenues................... $ 23,233 $ 32,872 $ 43,835 $ 48,735 $ 56,485 $ 12,650 $ 17,547 Interest expense................. 9,554 9,511 11,741 9,466 6,217 1,269 1,259 Income before gain on sale of properties and extraordinary item........................... 7,900 14,280 22,079 27,243 37,738 8,409 12,650 Net income....................... 7,900 14,280 22,079 27,243 33,417(1) 5,017 16,644 Dividends(2)..................... 13,137 18,927 27,179 33,079 44,869 11,236 18,933 Per Share: Income before gain on sale of properties and extraordinary item......................... .76 .89 1.01 1.02 1.10 .27 .28 Net income..................... .76 .89 1.01 1.02 .97(1) .16 .37 Dividends(2)................... 1.14 1.17 1.23 1.26 1.30 .32 .33 Average Shares outstanding....... 10,425 16,088 21,834 26,760 34,407 31,731 44,596
DECEMBER 31, ---------------------------------------------------- MARCH 31, 1989 1990 1991 1992 1993 1994 -------- -------- -------- -------- -------- --------- BALANCE SHEET DATA: Real estate properties, net....... $144,347 $188,352 $262,557 $310,882 $349,842 $324,432 Real estate mortgages and notes, net............................. 45,304 87,061 31,760 47,173 157,281 153,795 Total assets...................... 205,638 290,099 340,718 374,468 527,662 529,718 Total borrowings.................. 70,000 125,500 103,000 138,500 73,000 73,000 Total shareholders' equity........ 131,851 147,760 234,427 228,301 441,135 451,262
QUARTER ENDED MARCH YEAR ENDED DECEMBER 31, 31, ---------------------------------------------------- ------------------- 1989 1990 1991 1992 1993 1993 1994 -------- -------- -------- -------- -------- -------- -------- OTHER DATA: Funds from Operations(3)......... $ 12,561 $ 19,467 $ 30,059 $ 36,853 $ 47,578 $ 10,743 $ 15,458 EBIT(4).......................... 17,830 24,277 34,384 37,662 44,267 9,735 14,124 EBITDA(5)........................ 21,568 28,309 41,106 45,785 53,042 11,891 16,527 Ratio of EBIT to fixed charges... 1.8x 2.4x 2.8x 3.6x 6.8x 7.3x 9.6x - --------------- (1) Includes, as an extraordinary item, the write-off of $4.3 million in deferred finance charges (approximately $.13 per Share) resulting from prepayment of debt. (2) Amounts shown represent dividends declared with respect to the periods shown. The Company regularly determines and pays dividends based upon Funds from Operations (see note 3 below). Because dividends were paid on new shares issued prior to the record date for regular quarterly dividends, dividends exceeded Funds from Operations during the first quarter of 1994 and on similar occasions in the past. (3) Industry analysts generally consider Funds from Operations to be an appropriate measure of the performance of an equity REIT. Funds from Operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flow as a measure of liquidity. Funds from Operations means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. The Company has no partnership or joint venture interests. (4) EBIT means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus interest expense, taxes and amortization of deferred finance costs included in depreciation and amortization. (5) EBITDA means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation, amortization, interest expense and taxes.
S-11 12 RATIO OF EBITDA TO INTEREST EXPENSE Management believes that, as the Company is a REIT which is engaged principally in the business of net leasing properties on long term bases, the best measure of funds available for debt service is the ratio of EBITDA to interest expense. The following table summarizes the Company's ratio of EBITDA to interest expense on a historic basis and as adjusted for the Marriott Transaction, the Equity Offering and this Offering. HRP EBITDA TO INTEREST COVERAGE (DOLLARS IN THOUSANDS) [Insert Coverage chart here -- see appendix to electronic format document] EBITDA $21,568 $28,309 $41,106 $45,785 $53,042 $89,470 Interest $9,554 $9,511 $11,741 $9,466 $6,217 $11,830
S-12 13 MANAGEMENT The Trustees and executive officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- Mark J. Finkelstein............ 47 President and Chief Executive Officer John L. Harrington............. 57 Trustee David J. Hegarty............... 37 Executive Vice President, Chief Financial Officer and Secretary Arthur G. Koumantzelis......... 63 Trustee Rev. Justinian Manning, C.P.... 68 Trustee Gerard M. Martin............... 59 Managing Trustee John G. Murray................. 33 Treasurer Barry M. Portnoy............... 48 Managing Trustee
Mark J. Finkelstein has been President and Chief Executive Officer of the Company since its organization. Mr. Finkelstein is a past President of the American College of Health Care Administrators. John L. Harrington is the Chief Executive Officer and limited partner of the Boston Red Sox baseball club and is Executive Director and Trustee of the Yawkey Foundation and a trustee of the JRY Trust. Mr. Harrington is also a Director of Shawmut Bank, N.A. David J. Hegarty, a certified public accountant, became Executive Vice President of the Company in July 1993. He has been the Chief Financial Officer of the Company since July 1987, when he joined the Company as Treasurer and Secretary. Arthur G. Koumantzelis is the Senior Vice President and Chief Financial Officer of Cumberland Farms, Inc., a private company engaged in the convenience store business in the northeastern United States and Florida and, through its interest in the partnership operating its Gulf Oil Division, in the distribution and retail sale of gasoline in the northeastern United States. The Reverend Justinian Manning, C.P., is the pastor of St. Gabriel's Parish in Brighton, Massachusetts. He is also on the Board of Directors of Charlesview, a low and moderate income housing program, and St. Elizabeth's Hospital Foundation. He belongs to the Provincial Council of the Passionist Provincialate and is the former Director of Consolidation for the Community. Gerard M. Martin is a real estate investor. Prior to the merger of Horizon Healthcare Corporation and Greenery in February 1994, he had been the Chairman and Chief Executive Officer of Greenery and its predecessors since 1975. Mr. Martin is a Director of Horizon. John G. Murray, a certified public accountant, joined the Company in July 1993 as Treasurer. Mr. Murray was employed by Fidelity Brokerage Services, Inc. prior to joining the Company, most recently as Director of Finance, Business Analysis and Planning. Barry M. Portnoy has been a partner in the law firm of Sullivan & Worcester, counsel to the Company, since 1978. Mr. Portnoy was a Director of Greenery until February 1994 and is a Director of Horizon. Mr. Harrington, Mr. Koumantzelis and Fr. Manning are the Company's Independent Trustees, that is Trustees who are not affiliated with any of the Company's lessees or mortgagors or with HRPT Advisors, Inc. (the "Advisor"). Under the Company's Declaration of Trust, a majority of the Company's Trustees will at all times consist of Independent Trustees. All investment and policy decisions affecting the Company are made by its Board of Trustees. All day to day operations of the Company are conducted by the Advisor pursuant to an investment advisory contract. The Advisor is owned by Messrs. Martin and Portnoy. Messrs. Finkelstein, Hegarty and Murray, as well as all other personnel involved in the Company's operations are employees of the Advisor. The Advisor is paid an annual advisory fee calculated on the basis of total assets under management (.7% of the first $250 million, plus .5% of additional assets) and an annual incentive fee calculated on the basis of increases in operating cash flow per Share above threshold amounts (15% of cash flow above the threshold S-13 14 amount of $1.37/Share in 1994, which threshold increases by $.05/Share annually thereafter), but no more than $.01/Share. The Advisor currently owns approximately one million Shares which were purchased in 1989. All incentive fees which may be earned by the Advisor will be paid in Shares. The Company believes that its total administrative costs, measured as a percentage of assets under management, are below the average for its industry. DESCRIPTION OF THE NOTES GENERAL The Series A Notes and the Series B Notes each constitute a separate series of Debt Securities (which are more fully described in the accompanying Prospectus) to be issued pursuant to an Indenture, dated as of June 1, 1994 (the "Indenture") and a supplemental indenture (the "Supplemental Indenture") dated as of June 29, 1994, between the Company and Shawmut Bank, N.A., as trustee (the "Trustee"). The Series A Notes will be limited to $75,000,000 in aggregate principal amount, while the Series B Notes will be limited to $125,000,000 in aggregate principal amount. The terms of the Notes include those provisions contained in the Indenture, the Supplemental Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "TIA"). The Notes are subject to all such terms, and holders of Notes are referred to the Indenture, the Supplement Indenture and the TIA for a statement thereof. The following summary of certain provisions of the Indenture and the Supplemental Indenture does not purport to be complete and is subject to and qualified in its entirety by reference to the Indenture and the Supplemental Indenture, including the definitions therein of certain terms used below. Copies of the Indenture, the Supplemental Indenture and the Notes are available for inspection at the office of the Trustee located at One Federal Street, Boston, Massachusetts 02211. The Notes will be direct, unsecured and unsubordinated obligations of the Company and will rank equally with all other unsecured and unsubordinated indebtedness of the Company from time to time outstanding. However, the Notes will be effectively subordinated to mortgages and other secured indebtedness of the Company. Upon consummation of this Offering and the Marriott Transaction, the only secured indebtedness of the Company will be approximately $17.6 million assumed by the Company in the Marriott Transaction in connection with certain industrial revenue bonds. Adjusting on a pro forma basis for this Offering and the consummation of the Marriott Transaction, the total outstanding indebtedness of the Company as of June 29, 1994 was approximately $217.6 million. Subject to certain limitations set forth in the Supplemental Indenture described below under the caption "Description of the Notes -- Additional Covenants of the Company", the Indenture and the Supplemental Indenture will permit the Company to incur additional indebtedness and additional secured indebtedness. Each series of Notes will be issued only in fully registered, book-entry form, in denominations of $1,000 and integral multiples thereof, except under the limited circumstances described below under "Description of the Notes -- Book-Entry System." Except as described under "Certain Covenants -- Existence", "Merger, Consolidation or Sale" and "Events of Default; Notice and Waiver" in the accompanying Prospectus and under "Description of the Notes -- Additional Covenants of the Company" below, the Indenture and the Supplemental Indenture do not contain any other provisions that would afford Holders of the Notes protection in the event of (i) a highly leveraged or similar transaction involving the Company, the management of the Company, or any Affiliate of either such party, (ii) a change of control, or (iii) a reorganization, restructuring, merger or similar transaction involving the Company that may adversely affect the Holders of the Notes. In addition, subject to the limitations set forth under "Description of Debt Securities -- Merger, Consolidation or Sale" in the accompanying Prospectus, the Company may, in the future, enter into certain transactions such as the sale of all or substantially all of its assets or the merger or consolidation of the Company that would increase the amount of the Company's indebtedness or substantially reduce or eliminate the Company's assets, and which may have an adverse effect on the Company's ability to service its indebtedness, including the Notes. S-14 15 The Company has no present intention of engaging in a highly leveraged or similar transaction involving the Company. In addition, certain restrictions on ownership and transfers of the Company's Shares designed to preserve its status as a REIT may act to prevent or hinder any such transaction or a change of control. PAYMENT OF PRINCIPAL AND INTEREST ON THE NOTES Interest on the Notes will be payable in U.S. dollars quarterly in arrears on January 13, April 13, July 13 and October 13 of each year (each, an "Interest Payment Date"), commencing October 13, 1994, and on the date of maturity or earlier redemption, as the case may be (such date of maturity or earlier redemption, as the case may be, is herein referred to as the "Maturity Date" with respect to the principal repayable on such date). The interest so payable will be paid to the person (the "Holder") in whose name the applicable Note is registered at the close of business on the date (whether or not a Business Day, as defined below) fifteen calendar days preceding the applicable Interest Payment Date or the Maturity Date (each, a "Regular Record Date"). The principal of each Note payable on the Maturity Date will be paid against presentation and surrender thereof at the corporate trust office of the Trustee, located initially at 777 Main Street, Hartford, Connecticut 06115, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public or private debts. Interest payable on an Interest Payment Date or the Maturity Date, as the case may be, will be the amount of interest accrued during the applicable Interest Period (as defined below). Accrued interest in respect of a Note will be calculated by multiplying the principal amount thereof by an accrued interest factor. Such accrued interest factor is computed by adding the interest factor calculated for each day in the applicable Interest Period. The interest factor for each day will be computed by dividing the interest rate applicable to such day by 360. An "Interest Period" with respect to the Notes is each successive period from and including the preceding Interest Payment Date (or July 13, 1994 in the case of the initial Interest Period) to but excluding the applicable Interest Payment Date or the Maturity Date, as the case may be. If an Interest Payment Date other than the Maturity Date would otherwise be a day that is not a Business Day, such Interest Payment Date will be postponed to the succeeding Business Day, unless such succeeding Business Day is in the succeeding calendar month, in which case such Interest Payment Date will be advanced to the preceding Business Day. If the Maturity Date falls on a day that is not a Business Day, the required payment will be made on the succeeding Business Day as if it were made on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after the Maturity Date. A "Business Day" is any day, other than a Saturday or Sunday, (i) on which banks in The City of New York are not required or authorized by law or executive order to close and (ii) which is also a London Banking Day. A "London Banking Day" is any day on which dealings in United States dollars are transacted in the London interbank market. Interest on the Notes will be payable at a floating rate that will be subject to quarterly adjustment effective as of the thirteenth day of January, April, July and October (each, a "Reset Date"); provided, however, that if a Reset Date would otherwise be a day that is not a Business Day, such Reset Date will be postponed to the succeeding Business Day, unless such succeeding Business Day is in the succeeding calendar month, in which case such Reset Date will be advanced to the preceding Business Day. The "Determination Date" pertaining to a Reset Date will be the second London Banking Day preceding such Reset Date. The interest rate on the Series A Notes in respect of an Interest Period will be a per annum rate equal to LIBOR (determined by the Calculation Agent (as defined below) as of the applicable Determination Date), plus 1.05% (105 basis points), while the interest rate on the Series B Notes in respect of an Interest Period will be a per annum rate equal to LIBOR (determined by the Calculation Agent as of the applicable Determination Date), plus .72% (72 basis points); provided, however, that the interest rate on the Notes in respect of an Interest Period may not be higher than the maximum rate permitted by Massachusetts law, as the same may be modified by United States law of general application. "LIBOR" means, with respect to any Reset Date, the rate (expressed as a percentage per annum) for deposits in U.S. dollars for a three-month period that appears on Telerate Page 3750 (as defined below) as of S-15 16 11:00 a.m., London time, on the applicable Determination Date for such Reset Date. If such rate does not appear on Telerate Page 3750 as of 11:00 a.m., London time, on the applicable Determination Date, the Calculation Agent will request the principal London office of each of four major reference banks in the London interbank market selected by the Calculation Agent to provide such bank's offered quotation (expressed as a percentage per annum) to prime banks in the London interbank market for deposits in U.S. dollars for a three-month period as of 11:00 a.m., London time, on such Determination Date and in a Representative Amount (as defined below). If at least two such offered quotations are so provided, LIBOR will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, the Calculation Agent will request each of three major banks in New York City selected by the Calculation Agent to provide such bank's rate (expressed as a percentage per annum) for loans in U.S. dollars to leading European banks for a three-month period as of approximately 11:00 a.m., New York City time, on the applicable Determination Date and in a Representative Amount. If at least two such rates are so provided, LIBOR will be the arithmetic mean of such rates. If fewer than two such rates are so provided, then LIBOR will be LIBOR in effect on the preceding Reset Date. "Representative Amount" means a principal amount of not less than U.S. $1,000,000 that is representative for a single transaction in the relevant market at the relevant time. "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service, or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. dollar deposits. Unless the Company shall have otherwise provided 30 days' prior written notice to the Holders of a series of Notes, the "Calculation Agent" with respect to such series of Notes will be Shawmut Bank, N.A. Upon the request of any Holder of a Note, the Calculation Agent will disclose the interest rate then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the succeeding Reset Date. All percentages resulting from any calculation in respect of a Note will be rounded to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation in respect of a Note will be rounded to the nearest cent (with one-half cent rounded upwards). MATURITY AND OPTIONAL REDEMPTION The Notes will mature on July 13, 1999. However, the Notes are subject to redemption at the option of the Company, as a whole or from time to time in part, prior to maturity on any Interest Payment Date on and after April 13, 1995, in the case of the Series A Notes, or on and after July 13, 1996, in the case of the Series B Notes, upon not less than 30, nor more than 60 days' prior written notice given to the Holders of the applicable series of Notes as provided in the Indenture, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; provided, however, that interest payments due on an Interest Payment Date which is on or prior to the date fixed for redemption will be payable to the Holders of such Notes (or one or more predecessor Notes) on the Regular Record Date related to such Interest Payment Date. If less than all of the Notes are to be redeemed, the particular Notes to be redeemed shall be selected by such method as the Trustee deems fair and appropriate. The Notes are not subject to repayment at the option of the Holders thereof. In addition, the Notes will not be entitled to the benefit of any sinking fund. ADDITIONAL COVENANTS OF THE COMPANY Reference is made to the section entitled "Description of Debt Securities" in the accompanying Prospectus for a description of the covenants applicable to each series of Notes. Compliance with such covenants, and those described herein, generally may not be waived by the Company's Board of Trustees or the Trustee unless the Holders of at least a majority in principal amount of all outstanding Notes of such series S-16 17 consent to such waiver; provided, however, that the defeasance and covenant defeasance provisions of the Indenture described under "Description of Debt Securities -- Discharge, Defeasance and Covenant Defeasance" in the accompanying Prospectus will apply to each series of Notes. In addition to the foregoing, the Supplemental Indenture contains the following additional covenants of the Company for the benefit of the Holders of each series of Notes: Limitation on Debt. The Company covenants and agrees that, so long as any Notes remain outstanding, at the end of each fiscal year of the Company, it shall maintain a ratio of (a) total consolidated Debt of the Company to (b) Total Adjusted Net Worth, of not more than 1.5:1. Interest Expense Coverage. The Company covenants and agrees that, for any fiscal year at the end of which any Notes remain outstanding, it will maintain a ratio of (a) Total Cash Flow to (b) Total Interest Expense, of not less than 2:1. Limitation on Unsecured Debt. The Company covenants and agrees that, so long as any Notes remain outstanding, at the end of each fiscal year of the Company, it shall maintain a ratio of (a) Total Unencumbered Assets to (b) total Unsecured Debt, of not less than 1.4:1. Interest Rate Protection. The Company covenants and agrees that, beginning 75 days after the date on which Notes are issued, and for so long thereafter as any Notes remain outstanding, the Company shall have in effect Interest Rate Protection Arrangements with respect to a principal amount at least equal to the Unhedged Balance, such that, at any time, Pro Forma Annualized Interest Charges shall not exceed an amount equal to nine percent (9%) of the Unhedged Balance. As used in the Supplemental Indenture, the following terms have the meanings set forth below: "Debt" means any indebtedness of the Company or any subsidiary, in respect of (i) borrowed money evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or any security interest existing on property owned by the Company or any subsidiary, (iii) letters of credit or amounts representing the balance deferred and unpaid of the purchase price of any property except any such balance that constitutes an accrued expense or trade payable or (iv) Capitalized Leases, in the case of items of indebtedness under (i) through (iii) above to the extent that any such items (other than letters of credit) would appear as a liability on the Company's Consolidated Balance Sheet in accordance with generally accepted accounting principles applied on a consistent basis ("GAAP"), and also includes, to the extent not otherwise included, any obligation by the Company or any subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), indebtedness of another person (other than the Company or any subsidiary). "Floating Rate Investments" means real estate investments owned by the Company or any subsidiary, valued on the basis of cost of each such asset to the Company or any subsidiary (less principal amortization, if any) without reduction for depreciation or adjustments due to asset reappraisals or otherwise, under which the rental or interest payments to be received by the Company or such subsidiary are based on fluctuating interest rates, which have been designated from time to time by the Company to relate to the Notes. "Interest Rate Protection Arrangements" means interest rate caps, collars, swaps or similar agreements, the effect of which is to protect the Company from fluctuations in interest rates, which have been designated from time to time by the Company to relate to the Notes. "Pro Forma Annualized Interest Charges" means, at any date, (i) the weighted average annualized interest rate applicable to the Notes as of that date multiplied by the Unhedged Balance, less (ii) the annualized amounts which should be received by the Company under the Interest Rate Protection Arrangements in effect at that date. "Total Adjusted Net Worth" means the excess of total assets over total liabilities of the Company on a consolidated basis, computed in accordance with GAAP, plus the aggregate amount of accumulated depreciation and adjustments due to asset reappraisals or otherwise with respect to any such assets since the acquisition thereof. S-17 18 "Total Cash Flow" means, for any period, consolidated net income of the Company, computed in accordance with GAAP, excluding gains (or losses) from debt restructuring or sales of property, plus (a) Total Interest Expense, (b) depreciation, amortization or adjustments due to asset reappraisals or otherwise, and (c) provisions for income taxes, all to the extent deducted in computing consolidated net income. "Total Interest Expense" means, for any period, the aggregate amount, computed in accordance with GAAP consistently applied, of interest payable during such period by the Company on a consolidated basis in respect of all Debt, less amortization of capitalized fees, costs and expenses incurred in connection with such Debt or in connection with interest rate caps, collars, swaps, or similar agreements in respect of any such Debt, all to the extent included in the computation of interest payable. "Total Unencumbered Assets" means the aggregate value of all assets of the Company and any subsidiary, determined on the basis of cost of each such asset to the Company or any subsidiary (less principal amortization, if any) without reduction for depreciation or adjustments due to asset reappraisals or otherwise, which have not been voluntarily pledged, mortgaged or otherwise encumbered by the owner thereof to secure Debt. "Unhedged Balance" means, at any date, the aggregate principal amount of outstanding Notes, less Floating Rate Investments as of that date; provided, that if a Floating Rate Investment is terminated, other than by virtue of its scheduled maturity, within 30 days or less of that date, such terminated Floating Rate Investment shall be deemed to remain in effect at that date. "Unsecured Debt" means any Debt of the Company or any subsidiary on a consolidated basis for which the obligations thereunder are not secured by a pledge of or other encumbrance on any assets of the Company or any subsidiary. ADDITIONAL EVENT OF DEFAULT Pursuant to the Supplemental Indenture, the Company has agreed that it shall also be an Event of Default for each series of Notes if any event of default under any bond, debenture, note or other evidence of indebtedness of the Company (including an event of default with respect to any other series of Securities), or under any mortgage, indenture or other instrument of the Company under which there may be issued or by which there may be secured or evidenced any indebtedness of the Company (or by any subsidiary, the repayment of which the Company has guaranteed or for which the Company is directly responsible or liable as obligor or guarantor), whether such indebtedness now exists or shall hereafter be created, shall happen and shall result in an aggregate principal amount exceeding $20,000,000 of such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 10 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the outstanding Notes of such series, a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder. BOOK-ENTRY SYSTEM Each series of Notes will be issued in the form of a single fully-registered Note in book-entry form (each, a "Global Note") which will be deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of DTC's nominee. Except as set forth below, a Global Note may not be transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee of such successor. So long as DTC or its nominee is the registered owner of a Global Note, DTC or its nominee, as the case may be, will be considered the sole Holder of the Notes represented by such Global Note for all purposes under the Indenture. Except as provided below, owners of beneficial interests in a Global Note will not be S-18 19 entitled to have Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of Notes of such series in certificated form and will not be considered the registered owners or Holders thereof under the Indenture or the Supplemental Indenture. If (i) DTC is at any time unwilling or unable to continue as depository or if any time DTC ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and a successor depository is not appointed by the Company within 90 days, (ii) an Event of Default under the Indenture or the Supplemental Indenture with respect to the Notes of either series has occurred and is continuing and the beneficial owners representing a majority in principal amount of the series of Notes represented by a Global Note advise DTC to cease acting as depository or (iii) the Company, in its sole discretion, determines at any time that all Notes of any series shall no longer be represented by a Global Note, the Company will issue individual Notes of the applicable series in certificated form in exchange for the related Global Note. In any such instance, an owner of a beneficial interest in such Global Note will be entitled to physical delivery of individual Notes in certificated form of like series and tenor, equal in principal amount to such beneficial interest and to have such Notes in certificated form registered in its name. Notes so issued in certificated form will be issued in denominations of $1,000 or any integral multiple thereof, and will be issued in registered form only, without coupons. The following is based on information furnished by DTC: DTC will act as securities depository for the Notes. The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee). One fully registered Note certificate is issued with respect to each $150 million of principal amount of the securities of the applicable series. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission. Purchases of Notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the Notes on DTC's records. The ownership interest of each actual purchaser of each Note ("Beneficial Owner") is in turn recorded on the Direct and Indirect Participants' records. A Beneficial Owner does not receive written confirmation from DTC of its purchase, but such Beneficial Owner is expected to receive a written confirmation providing details of the transaction, as well as periodic statements of its holdings, from the Direct or Indirect Participant through which such Beneficial Owner entered into the transaction. Transfers of ownership interests in Notes are accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners do not receive certificates representing their ownership interests in Notes, except in the event that use of the book-entry system for the Notes is discontinued. To facilitate subsequent transfers, the Notes are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of the Notes with DTC and their registration in the name of Cede & Co. effects no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Notes; DTC records reflect only the identity of the Direct Participants to whose accounts S-19 20 Notes are credited, which may or may not be the Beneficial Owners. The Participants remain responsible for keeping account of their holdings on behalf of their customers. Delivery of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners are governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to Cede & Co. If less than all of the Notes of any series represented by a Global Note are to be redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant to be redeemed. Neither DTC nor Cede & Co. will consent or vote with respect to the Notes. Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy") to the issuer as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co's consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified on a list attached to the Omnibus Proxy). Principal and interest payments on the Notes will be made by the Company to the Trustee and from the Trustee to DTC. DTC's practice is to credit Direct Participant's accounts on the payable date in accordance with their respective holdings as shown on DTC's records unless DTC has reason to believe that it will not receive payment on the payable date. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name", and will be the responsibility of such Participant and not of DTC, the Trustee or the Company subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to DTC is the responsibility of the Company or the Trustee, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to the Company or the Trustee. Under such circumstances, in the event that a successor securities depository is not appointed, Note certificates are required to be printed and delivered. The Company may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Note certificates will be printed and delivered. None of the Company, the Underwriters or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial interests in a Global Note, or for maintaining, supervising or reviewing any records relating to such beneficial interests. SAME-DAY SETTLEMENT AND PAYMENT Settlement for each series of Notes will be made by the Underwriters in immediately available funds. All payments of principal and interest in respect of the Notes will be made by the Company in immediately available funds. Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearing house or next-day funds. In contrast, the Notes will trade in DTC's Same-Day Funds Settlement System until maturity or earlier redemption, as the case may be, or until the Notes are issued in certificated form, and secondary market trading activity in the Notes will therefore be required by DTC to settle in immediately available funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Notes. S-20 21 UNDERWRITING Subject to the terms and conditions contained in a purchase agreement and related pricing agreement, each dated June 29, 1994 (the "Underwriting Agreement"), the Company has agreed to sell to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), Donaldson, Lufkin & Jenrette Securities Corporation, Smith Barney Inc. and PaineWebber Incorporated (the "Underwriters"), and the Underwriters have severally agreed to purchase from the Company, the principal amount of Notes set forth opposite their names below.
PRINCIPAL PRINCIPAL AMOUNT OF AMOUNT OF UNDERWRITER SERIES A NOTES SERIES B NOTES ----------- -------------- -------------- Merrill Lynch, Pierce, Fenner & Smith.............. $40,000,000 $ 60,000,000 Incorporated Donaldson, Lufkin & Jenrette Securities Corporation...................................... 15,000,000 30,000,000 Smith Barney Inc................................... 15,000,000 30,000,000 PaineWebber Incorporated........................... 5,000,000 5,000,000 ----------- ------------ Total................................. $75,000,000 $125,000,000 =========== ============
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, and that the Underwriters will be obligated to purchase all of the Notes if any are purchased. The Underwriters have advised the Company that they propose initially to offer the Notes to the public at the public offering price set forth on the cover page of this Prospectus Supplement, and to certain dealers at such price less a concession not in excess of .45% of principal amount thereof. The Underwriters may allow, and such dealers may reallow, a discount not in excess of .25% of principal amount to certain other dealers. After the initial public offering of the Notes, the public offering price, concession and discount may be changed. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the Underwriters may be required to make in respect thereof. MLPF&S has been paid, and will be entitled to additional, advisory fees from the Company upon consummation of the Marriott Transaction. The Company negotiated with Merrill Lynch Mortgage Capital, Inc. ("MLMCI"), a subsidiary of MLPF&S, for provision of an interim credit facility to be available in connection with the Company's consummation of the Marriott Transaction, and, as a result, MLMCI will be entitled to a fee upon consummation of the Marriott Transaction. In addition, MLPF&S and MLMCI are both presently entitled to reimbursement from the Company for their respective out-of-pocket expenses incurred in advising and assisting the Company in connection with the Marriott Transaction. LEGAL MATTERS Certain legal matters with respect to the Notes offered by the Company will be passed upon for the Company by Sullivan & Worcester, Boston, Massachusetts and for the Underwriters by Brown & Wood, New York, New York. Sullivan & Worcester and Brown & Wood will rely, as to all matters of Maryland law, upon the opinion of Piper & Marbury, Baltimore, Maryland. Barry M. Portnoy, a partner in the firm of Sullivan & Worcester, is a Trustee of the Company and a director and 50% shareholder of the Advisor. S-21 22 HEALTH AND REHABILITATION PROPERTIES TRUST UNAUDITED ADJUSTED BALANCE SHEET AND UNAUDITED ADJUSTED STATEMENT OF INCOME The following unaudited adjusted balance sheet at December 31, 1993 and the unaudited adjusted statement of income for the year ended December 31, 1993 are intended to present the financial position and results of operations of Health and Rehabilitation Properties Trust as if the transactions described in Note 1 were consummated on December 31, 1993 and January 1, 1993, respectively. The unaudited adjusted financial statements should be read in conjunction with the separate financial statements of Health and Rehabilitation Properties Trust for the year ended December 31, 1993 which are incorporated herein by reference. The unaudited adjusted financial statements are not necessarily indicative of the expected financial position and results of operations for any future period. Differences would result from, but not be limited to, changes in the Company's portfolio of real estate investments, changes in interest rates and changes in the debt and/or equity structure of the Company. F-1 23 HEALTH AND REHABILITATION PROPERTIES TRUST UNAUDITED ADJUSTED BALANCE SHEET DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)
HISTORICAL DECEMBER 31, ADJUSTMENTS 1993 (NOTES 1(A) TO (K), 2) AS ADJUSTED ------------ ---------------------- ------------ ASSETS Real estate properties, at cost: Land................................ $ 33,450 $ 30,694(a),(h) $ 64,144 Buildings and improvements.......... 330,988 250,682(a),(h) 581,670 Equipment........................... 20,373 14,805(a),(h) 35,178 --------- -------- --------- 384,811 296,181 680,992 Less accumulated depreciation....... 34,969 (4,325)(h) 30,644 --------- -------- --------- 349,842 300,506 650,348 Real estate mortgages and notes, net................................. 157,281 (6,163)(d),(h),(k) 151,118 Cash and cash equivalents............. 13,887 29,302(a),(b),(c), 43,189 (d),(h),(j),(k) Interest and rent receivable.......... 3,039 3,039 Deferred interest and finance costs, net, and other assets............... 3,613 3,100(c) 6,713 --------- -------- --------- $ 527,662 $326,745 $ 854,407 ========= ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Borrowings............................ $ 73,000 $144,600(a),(b),(c) $ 217,600 Security deposits..................... 8,300 (4,500)(h) 3,800 Due to affiliate...................... 709 -- 709 Accounts payable and accrued expenses............................ 4,518 -- 4,518 Shareholders' equity: Preferred shares of beneficial interest, $.01 par value, 50,000,000 shares authorized, none issued...................... -- -- -- Common shares of beneficial interest, $.01 par value; 100,000,000 Shares authorized; 44,121,000 and 57,372,500 Shares, as adjusted, issued and outstanding...................... 441 133(b),(j) 574 Additional paid-in capital.......... 470,572 182,606(b),(j) 653,178 Cumulative net income............... 118,889 3,906(h) 122,795 Distributions of funds from operations....................... (148,767) (148,767) --------- -------- --------- Total shareholders' equity.................... 441,135 186,645 627,780 --------- -------- --------- $ 527,662 $326,745 $ 854,407 ========= ======== =========
F-2 24 HEALTH AND REHABILITATION PROPERTIES TRUST UNAUDITED ADJUSTED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)
HISTORICAL DECEMBER 31, ADJUSTMENTS 1993 (NOTES 1(A) TO (K), 2) AS ADJUSTED ------------ ----------------------- ------------ REVENUES: Rental income........................... $ 46,069 $28,633(a),(e),(f), $ 74,702 (g),(h) Interest income......................... 10,416 9,867(c),(d),(e),(f), 20,283 (g),(h),(j),(k) --------- ------- -------- Total revenues.................. 56,485 38,500 94,985 --------- ------- -------- EXPENSES: Interest................................ 6,217 5,613(a),(b),(c),(d), 11,830 (g),(h),(i),(j),(k) Advisory fees........................... 2,591 2,072(a),(d),(e), 4,663 (f),(g),(h),(k) Depreciation and amortization........... 9,087 9,065(a),(c),(e),(f), 18,152 (g),(h),(k) General and administrative.............. 852 852 --------- ------- -------- Total expenses.................. 18,747 16,750 35,497 --------- ------- -------- Income before extraordinary item.......... $ 37,738 $21,750 $ 59,488 ========= ======= ======== Average shares outstanding................ 34,407 57,373 ========= ========
F-3 25 HEALTH AND REHABILITATION PROPERTIES TRUST NOTES TO UNAUDITED ADJUSTED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) NOTE 1 -- BASES OF RECORDING THE ADJUSTMENTS For the purposes of the unaudited adjusted balance sheet at December 31, 1993 and the unaudited adjusted statement of income for the year ended December 31, 1993, it has been assumed that the following transactions took place on December 31, 1993 and January 1, 1993, respectively. The adjustments shown on the face of the unaudited adjusted financial statements are the result of the cumulative adjustments described in Notes 1(a) through (k) and are summarized in Note 2. (a) Marriott Transaction. On March 17, 1994, the Company entered into an agreement with Host Marriott Corporation to acquire 14 retirement communities containing 3,952 residences or beds for $320,000, subject to adjustment. The communities are triple net leased through December 31, 2013 to a wholly owned subsidiary of Marriott International, Inc. (Marriott). For purposes of these unaudited adjusted financial statements, minimum annual rent of $27,645 is used, which represents a full year's rent for each facility whether or not the facility was in operation for a full year during 1993. No amount is included in these statements for additional rent, which pursuant to the leases will commence in 1994 at the rate of 4.5% of revenues in excess of base amounts determined on a facility by facility basis. The Company anticipates incurring $5,000 in fees and expenses related to the Marriott Transaction. The leases are cross-defaulted and guaranteed by Marriott. The acquisition is expected to close in June 1994. BALANCE SHEET: INCOME STATEMENT: Land............................ $ 32,500 Rental income..................... $27,645 Building and improvements....... 276,250 Interest expense.................. 1,540 Equipment....................... 16,250 Advisory fee...................... 1,625 Cash and cash equivalents....... (307,400) Depreciation and amortization..... 8,260 Borrowings...................... 17,600
(b) May 1994 Equity Offering. On May 13, 1994, the Company received net proceeds of approximately $174,541 from the public offering of 12,650,000 shares of the Company's stock. These proceeds were used to repay $73,000 in borrowings under the Company's revolving credit facility and to fund in part the Marriott Transaction. BALANCE SHEET: INCOME STATEMENT: Cash and cash equivalents....... $ 101,541 Interest expense.................. $(3,468) Borrowings...................... (73,000) Common Shares................... 127 Additional paid in capital...... 174,414
(c) Present Offering. The Company has filed a shelf registration statement with the Securities and Exchange Commission, which has been declared effective and from which this Offering of $75,000 Floating Rate Senior Notes, Series A, Due 1999 and $125,000 Floating Rate Senior Notes, Series B, Due 1999 will be drawn. Upon consummation of this Offering, the Company will receive approximately $196,900 net proceeds. The net proceeds have been applied in these statements as funding for the Marriott Transaction, at an assumed weighted average interest rate of 4.6%. Excess net proceeds are assumed to be invested in cash equivalents with an assumed yield of 3.5%. BALANCE SHEET: INCOME STATEMENT: Cash............................ $ 196,900 Interest income................... $ 875 Deferred interest and finance costs, Interest expense.................. 9,438 net, and other assets........ 3,100 Depreciation and amortization..... 370 Borrowings...................... 200,000
F-4 26 HEALTH AND REHABILITATION PROPERTIES TRUST NOTES TO UNAUDITED ADJUSTED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 1 -- BASES OF RECORDING THE ADJUSTMENTS -- (CONTINUED) (d) Mortgage Portfolios. On May 20, 1993, the Company acquired a portfolio of mortgage loans from the Resolution Trust Corporation (RTC) for $72,411. The loans, which are secured by first mortgages on 27 nursing homes, had a face value of approximately $79,883 and have maturities ranging from 1996 to 2001. The acquisition was funded using approximately $18,411 of cash with the balance from a $54,000 borrowing under a repurchase facility. The repurchase facility accrued interest at a floating rate based on LIBOR plus a premium and was repaid in full on December 27, 1993. During March 1994, four of these loans with a balance of $14,386 at March 1, 1994 and $14,458 at December 31, 1993 were paid in full. On September 27, 1993, the Company acquired a portfolio of mortgage loans from a group of institutional investors for $16,000. The loans, which are secured by first mortgages on six nursing homes, had a face value of approximately $18,200 and have maturities ranging from 1994 to 1997. The acquisition was funded using approximately $4,100 of cash with the balance borrowed under the repurchase facility referred to above. Adjustments to the unaudited adjusted financial statements in respect of these transactions are as follows: BALANCE SHEET: INCOME STATEMENT: Real estate mortgages and notes, net.......................... $ (14,458) Interest income................... $ 1,795 Cash and cash equivalents....... 14,458 Interest expense.................. 1,466 Advisory fee...................... 83
(e) SAFECO Portfolio. On June 4, 1993, the Company acquired for cash, three long-term care facilities and related improvement loans for $5,778. The facilities are subject to existing leases with terms expiring between 1995 and 2001. Adjustments to the unaudited adjusted financial statements in respect of these transactions are as follows: INCOME STATEMENT: Rental income..................... $ 313 Interest income................... (42) Advisory fee...................... 12 Depreciation and amortization..... 54
(f) Sun Healthcare. On November 1, 1993, the Company purchased a 143 bed long-term care facility in Seattle, Washington for $5,125 from Greenery Rehabilitation Group, Inc. (Greenery) and simultaneously leased it to Sun Healthcare Group, Inc. (Sun). In addition, the Company and Sun agreed to extend the lease arrangements on three nursing facilities that had been scheduled to expire in May, 1997, through December, 2005. Minimum annual rent under the new lease for the four properties is approximately $2,537. Adjustments to the unaudited adjusted financial statements in respect of this transaction are as follows: INCOME STATEMENT: Rental income..................... $ 200 Interest income................... (137) Advisory fee...................... 21 Depreciation and amortization..... 109
(g) Community Care of America. On December 30, 1993, the Company acquired 12 nursing homes and five retirement apartment complexes for $33,400 and leased them to subsidiaries of Community Care of America, Inc. (together with its subsidiaries, CCA). In addition, the Company has agreed to provide improvement financing of $7,300 to CCA. The acquired facilities have been leased on a triple net basis. The minimum annual rent from this transaction will be approximately $3,814. F-5 27 HEALTH AND REHABILITATION PROPERTIES TRUST NOTES TO UNAUDITED ADJUSTED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 1 -- BASES OF RECORDING THE ADJUSTMENTS -- (CONTINUED) Also, in connection with the CCA purchase-lease transaction described above, the Company provided first mortgage financing on 14 nursing homes and one retirement apartment complex for $19,600 and a $7,000 note secured by a first lien on substantially all of the assets of the borrower at a weighted average interest rate of 10.9%. The notes mature in December 2016. Minimum annual interest from this transaction will be $2,909. Adjustments to the unaudited adjusted financial statements in respect of these transactions are as follows: INCOME STATEMENT: Rental income..................... $ 3,814 Interest income................... 2,909 Interest expense.................. 3,243 Advisory fee...................... 300 Depreciation and amortization..... 988
(h) Horizon/Greenery Merger. On February 11, 1994, in connection with the merger of Greenery into Horizon Healthcare Corporation (Horizon) the Company sold to Horizon for $28,400, three facilities that had been leased to Greenery. The Company realized a capital gain of approximately $3,906 on the sale of these properties. Cumulative net income has been adjusted on the unaudited adjusted balance sheet by the $3,906 gain on the sale of these properties to exclude this gain so that the unaudited adjusted statement of income will reflect only normal results of operations. In addition, Horizon has leased seven facilities previously leased to Greenery, on substantially similar terms except the leases were extended through 2005. The Company has also granted Horizon a ten year option to buy, at the rate of no more than one facility per year, the seven leased facilities. Also, the Company leased the three remaining Greenery facilities to a newly formed corporation, Connecticut Subacute Corporation II (CSCII), an affiliate of HRPT Advisors, Inc. (Advisor). These facilities are being managed by and the lease payments are guaranteed by Horizon for a term of up to five years. The terms of these lease arrangements are substantially similar to the original lease arrangements. In addition, the Company provided Horizon with $9,400 first mortgage financing for two facilities. One of the facilities previously was owned by the Company and leased to Greenery. The mortgage notes bear interest at 11.5% per annum and will mature on December 31, 2000. Adjustments to the unaudited adjusted financial statements in respect of these transactions are as follows: BALANCE SHEET: INCOME STATEMENT: Land............................ $ (1,806) Rental income..................... $(3,339) Building and improvements....... (25,568) Interest income................... 1,082 Equipment....................... (1,445) Interest expense.................. (270) Accumulated depreciation........ (4,325) Advisory fee...................... (97) Real estate mortgages and notes, net.......................... 9,400 Depreciation and amortization..... (760) Cash and cash equivalents....... 14,500 Security deposits............... (4,500) Cumulative net income........... 3,906
(i) January 1993 Share Offering. On January 20, 1993, the Company received approximately $107,315 net proceeds from the public offering of 9,000,000 shares of the Company's stock. The proceeds were used, in part, to repay outstanding borrowings of $70,000 under the Company's term loans and $18,500 under the Company's revolving line of credit. On February 17, 1993, the Company received additional net proceeds of approximately $15,822 and issued 1,350,000 shares of the Company's stock in connection with the exercise of F-6 28 HEALTH AND REHABILITATION PROPERTIES TRUST NOTES TO UNAUDITED ADJUSTED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 1 -- BASES OF RECORDING THE ADJUSTMENTS -- (CONTINUED) the underwriters' over-allotment option. Adjustments to the unaudited adjusted financial statements in respect of these transactions are as follows: INCOME STATEMENT: Interest expense.................. $ (401)
(j) December 1993 Share Offering. During the last quarter of 1993, the Company raised approximately $121,655 net proceeds from the public offering of 9,000,000 Shares. The net proceeds were used to repay borrowings under the Company's repurchase facility and to fund the Community Care of America transaction. On January 19, 1994, the underwriters exercised their over-allotment option for 601,500 additional Shares, resulting in additional net proceeds to the Company of approximately $8,300. Adjustments to the unaudited adjusted financial statements in respect of these transactions are as follows: BALANCE SHEET: INCOME STATEMENT: Cash and cash equivalents....... $ 8,198 Interest income................... $ 519 Common Shares................... 6 Interest expense.................. (7,681) Additional paid-in capital...... 8,192
(k) Goldome Mortgage Portfolio. On November 19, 1993, the Company was selected as the winning bidder for a portfolio of performing mortgage loans originated by Goldome Credit Corporation. These loans have a combined principal balance of approximately $29,200, mature between 1994 and 1999, and are secured by mortgages on 18 nursing homes located in eight states. The Company's bid was for approximately $27,800. On December 10, 1993, the Company acquired for $26,600 mortgage loans with a combined principal balance of $27,900 secured by 17 nursing homes. In February 1994, the Company acquired the remaining mortgage loan. Also in February 1994 one loan with a balance of $2,275 at February 15, 1994 and December 31, 1993 was paid in full. Adjustments to the unaudited adjusted financial statements in respect of these transactions are as follows: BALANCE SHEET: INCOME STATEMENT: Real estate mortgages and notes, net.......................... $ (1,105) Interest income................... $ 2,866 Cash and cash equivalents....... 1,105 Interest expense.................. 1,746 Advisory fee...................... 128 Depreciation and amortization..... 44
F-7 29 HEALTH AND REHABILITATION PROPERTIES TRUST NOTES TO UNAUDITED ADJUSTED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 2 -- SUMMARY OF ADJUSTMENTS
ADJUSTMENT LETTER --------------------------------------------------------------------------------------------------------- (A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) TOTALS --------- -------- -------- -------- ---- ----- ------ -------- ----- ------- ------- -------- BALANCE SHEET: Land....... $ 32,500 $ (1,806) $ 30,694 Buildings and improve- ments... 276,250 (25,568) 250,682 Equipment... 16,250 (1,445) 14,805 Accumulated depreciation... (4,325) (4,325) Real estate mortgages and notes, net........... $(14,458) 9,400 $(1,105) (6,163) Cash and cash equi- valents...... (307,400) $101,541 $196,900 14,458 14,500 $ 8,198 1,105 29,302 Deferred interest and finance costs....... 3,100 3,100 Borrowings... 17,600 (73,000) 200,000 144,600 Security deposits..... (4,500) (4,500) Common shares of beneficial interest..... 127 6 133 Additional paid-in capital..... 174,414 8,192 182,606 Cumulative net income...... 3,906 3,906 INCOME STATEMENT: Rental income......$ 27,645 $313 $ 200 $3,814 $ (3,339) $ 28,633 Interest income...... $ 875 $ 1,795 (42) (137) 2,909 1,082 $ 519 $ 2,866 9,867 Interest expense..... 1,540 $ (3,468) 9,438 1,466 3,243 (270) $(401) (7,681) 1,746 5,613 Advisory fees........ 1,625 83 12 21 300 (97) 128 2,072 Depreciation and amortiza- tion......... 8,260 370 54 109 988 (760) 44 9,065
NOTE 3 -- OTHER INFORMATION FUNDS FROM OPERATIONS:
HISTORICAL DECEMBER 31, 1993 AS ADJUSTED ------------ ----------- Income before extraordinary item.................................... $37,738 $59,488 Depreciation and amortization....................................... 9,087 18,152 Other non-cash charges.............................................. 753 2,003 -------- ------- Funds from Operations............................................... $47,578 $79,643 ======== =======
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA):
HISTORICAL DECEMBER 31, 1993 AS ADJUSTED ------------ ----------- Income before extraordinary item.................................... $37,738 $59,488 Interest expense.................................................... 6,217 11,830 Depreciation and amortization....................................... 9,087 18,152 -------- ------- EBITDA $53,042 $89,470 ======== ======= Ratio of EBITDA to interest expense................................. 8.5x 7.6x
F-8 30 HEALTH AND REHABILITATION PROPERTIES TRUST NOTES TO UNAUDITED ADJUSTED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) NOTE 3 -- OTHER INFORMATION -- (CONTINUED) EARNINGS BEFORE FIXED CHARGES (EBIT):
HISTORICAL DECEMBER 31, 1993 AS ADJUSTED ------------ ----------- Income before extraordinary item.................................... $ 37,738 $59,488 Interest expense.................................................... 6,217 11,830 Amortization of deferred finance costs.............................. 312 682 -------- ------- EBIT $ 44,267 $72,000 ======== ======= Ratio of EBIT to fixed charges...................................... 6.8x 5.8x
F-9 31 PROSPECTUS $345,000,000 HEALTH AND REHABILITATION PROPERTIES TRUST DEBT SECURITIES, PREFERRED SHARES OF BENEFICIAL INTEREST, COMMON SHARES OF BENEFICIAL INTEREST AND COMMON SHARE WARRANTS ------------------------ Health and Rehabilitation Properties Trust (the "Company" or "HRP") may from time to time offer in one or more series (i) its unsecured debt securities (the "Debt Securities"), (ii) its preferred shares of beneficial interest, par value $.01 per share (the "Preferred Shares"), (iii) its common shares of beneficial interest, par value $.01 per share (the "Common Shares"), or (iv) warrants to purchase Common Shares (the "Common Share Warrants"), with an aggregate public offering price of up to $345,000,000 on terms to be determined at the time of offering. The Debt Securities, Preferred Shares, Common Shares and Common Share Warrants (collectively, the "Offered Securities") may be offered, separately or together, in separate series in amounts, at prices and on terms to be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). The specific terms of the Offered Securities in respect of which this Prospectus is being delivered will be set forth in the applicable Prospectus Supplement and will include, where applicable: (i) in the case of Debt Securities, the specific title, aggregate principal amount, currency, form (which may be registered or bearer, or certificated or global), authorized denominations, maturity, rate (or manner of calculation thereof) and time of payment of interest, terms for redemption at the option of the Company or repayment at the option of the Holder, terms for sinking fund payments, terms for conversion into Preferred Shares or Common Shares, terms for subordination to other indebtedness of the Company, and any initial public offering price; (ii) in the case of Preferred Shares, the specific title and stated value, any dividend, liquidation, redemption, conversion, voting and other rights, and any initial public offering price; (iii) in the case of Common Shares, any initial public offering price; and (iv) in the case of Common Share Warrants, the duration, offering price, exercise price and detachability. In addition, such specific terms may include limitations on direct or beneficial ownership and restrictions on transfer of the Offered Securities, in each case as may be appropriate to preserve the status of the Company as a real estate investment trust ("REIT") for federal income tax purposes. The applicable Prospectus Supplement will also contain information, where applicable, about certain United States federal income tax considerations relating to, and any listing on a securities exchange of, the Offered Securities covered by such Prospectus Supplement. The Offered Securities may be offered directly, through agents designated from time to time by the Company, or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of the Offered Securities, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in the applicable Prospectus Supplement. See "Plan of Distribution". No Offered Securities may be sold without delivery of the applicable Prospectus Supplement describing the method and terms of the offering of such series of Offered Securities. ------------------------ 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 COM- MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ------------------------ The date of this Prospectus is June 6, 1994. 32 AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") in Washington, D.C., a registration statement on Form S-3 (together with all exhibits, schedules and amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Offered Securities. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. Statements in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information concerning the Company and the Offered Securities, reference is made to the Registration Statement. Copies of the Registration Statement may be obtained from the Commission at its principal office in Washington, D.C. upon payment of the prescribed fee. 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 and other information with 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 can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office, Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, reports, proxy material and other information concerning the Company may be inspected at the offices of The New York Stock Exchange ("NYSE"), 20 Broad Street, New York, New York 10005. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which have been filed with the Commission pursuant to the Exchange Act, are hereby incorporated in this Prospectus and specifically made a part hereof by reference: (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, as amended; (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994; and (iii) the Company's Registration Statement on Form 8-A dated November 8, 1986, as amended by Form 8 dated July 30, 1991. The consolidated financial statements of Greenery Rehabilitation Group, Inc. ("Greenery"), Commission file number 1-10577, at and for the fiscal year ended September 30, 1993, are incorporated herein by reference from Greenery's Annual Report on Form 10-K for the fiscal year ended September 30, 1993; the consolidated financial statements of Horizon Healthcare Corporation ("Horizon"), Commission file number 1-9369, at and for the periods ended May 31, 1993 and February 28, 1994, are incorporated herein by reference from Horizon's Annual Report on Form 10-K/A -- Amendment No. 3 for the fiscal year ended May 31, 1993, dated October 5, 1993, and Quarterly Report on Form 10-Q for the nine months ended February 28, 1994; the consolidated financial statements of GranCare, Inc. ("GranCare"), Commission file number 1-19571, at and for the year ended December 31, 1993 and the quarter ended March 31, 1994 are incorporated herein by reference from GranCare's Annual Report on Form 10-K for the year ended December 31, 1993 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, respectively; and the consolidated financial statements of Marriott International, Inc. ("Marriott"), Commission file number 1-12188, at and for the fiscal year ended December 31, 1993 and the quarter ended March 25, 1994 are incorporated herein by reference from Marriott's Annual Report on Form 10-K for the year ended December 31, 1993 and its Quarterly Report on Form 10-Q for the quarter ended March 25, 1994, respectively. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Offered Securities shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the respective dates of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated herein by reference shall be deemed to be modified or superseded for purposes of this Prospectus to the extent 2 33 that a statement contained herein (or in the applicable Prospectus Supplement), or in any other subsequently filed document that also is or is deemed to be incorporated herein by reference, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any and all of the information that has been incorporated by reference in this Prospectus (excluding exhibits unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates). Requests for such copies should be made to the Company at its principal executive offices, 400 Centre Street, Newton, Massachusetts 02158, Attention: Investor Relations, telephone (617) 332-3990. THE COMPANY The Company is a real estate investment trust ("REIT") which invests primarily in retirement communities, assisted living centers, nursing homes and other long term care facilities. The Company recently agreed to acquire 14 retirement communities (the "Marriott Properties") leased to and operated by a subsidiary of Marriott International, Inc. (including its subsidiaries, "Marriott") for $320 million (the "Marriott Transaction"). The Marriott Properties will be acquired subject to the existing leases which are fully guaranteed by Marriott. The Marriott Properties contain a total of 3,952 residences or beds and are located in seven states. Upon completion of the Marriott Transaction: Marriott will be the Company's largest single tenant and will operate 38% of the Company's investment portfolio of properties; the Company will have gross real estate investments totalling $831 million, in 152 properties, located in 29 states and operated by 36 separate companies; approximately 70% of the Company's total investments will be in properties operated by seven NYSE listed companies; and 97% of the Company's investments will be in retirement communities, assisted living centers, nursing homes and other long term care facilities. USE OF PROCEEDS Unless otherwise described in the applicable Prospectus Supplement, the Company intends to use the net proceeds from the sale of the Offered Securities for general corporate purposes, which may include the acquisition of, or other investments in, retirement communities, assisted living centers, nursing homes, other long term care facilities or other healthcare or healthcare related properties, and the repayment of indebtedness outstanding at such time. If Offered Securities are sold prior to the closing of the Marriott Transaction, all or a portion of the net proceeds from the sale of Offered Securities will be used to fund the Marriott Transaction. If the Marriott Transaction is consummated prior to the sale of Offered Securities and the Company utilizes borrowings to fund the Marriott Transaction, all or a portion of the net proceeds from the sale of Offered Securities will be used to repay amounts outstanding under such borrowings, and/or to reduce amounts outstanding under the Company's credit facilities. In the event that the Marriott Transaction is not consummated by the Company, net proceeds from the sale of Offered Securities will be used to reduce amounts outstanding under the Company's revolving credit facility or for working capital or other general corporate purposes. Pending utilization as set forth above, the proceeds from the sale of the Offered Securities will be invested in short term investments, including repurchase agreements. Such investments may not be investment grade. DESCRIPTION OF DEBT SECURITIES The Debt Securities are to be issued under an Indenture, to be dated as of June 1, 1994, as amended or supplemented from time to time (the "Indenture"), between the Company and Shawmut Bank, N.A., as Trustee (the "Trustee"). The Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part and is available for inspection at the corporate trust office of the Trustee at One Federal Street, Boston, Massachusetts or as described above under "Available Information". The Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as amended (the "TIA"). The statements made 3 34 hereunder relating to the Indenture and the Debt Securities to be issued thereunder are summaries of certain provisions thereof and do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Indenture and such Debt Securities. All section references appearing herein are to sections of the Indenture, and capitalized terms used but not defined herein shall have the respective meanings set forth in the Indenture. GENERAL The Debt Securities will be direct, unsecured obligations of the Company. Except for any series of Debt Securities which is specifically subordinated to other indebtedness of the Company, the Debt Securities will rank equally with all other unsecured and unsubordinated indebtedness of the Company. The Indenture provides that the Debt Securities may be issued without limit as to aggregate principal amount, in one or more series, in each case as established from time to time in or pursuant to authority granted by a resolution of the Board of Trustees of the Company or as established in one or more indentures supplemental to the Indenture. All Debt Securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the Holders of the Debt Securities of such series, for issuances of additional Debt Securities of such series (Section 301). The Indenture provides that there may be more than one Trustee thereunder, each with respect to one or more series of Debt Securities. Any Trustee under the Indenture may resign or be removed with respect to one or more series of Debt Securities, and a successor Trustee may be appointed to act with respect to such series (Section 608). In the event that two or more persons are acting as Trustee with respect to different series of Debt Securities, each such Trustee shall be a trustee of a trust under the Indenture separate and apart from the trust administered by any other Trustee (Section 609), and, except as otherwise indicated herein, any action described herein to be taken by the Trustee may be taken by each such Trustee with respect to, and only with respect to, the one or more series of Debt Securities for which it is Trustee under the Indenture. Reference is made to the Prospectus Supplement relating to the series of Debt Securities being offered for the specific terms thereof, including: (1) the title of such Debt Securities; (2) the aggregate principal amount of such Debt Securities and any limit on such aggregate principal amount; (3) the percentage of the principal amount at which such Debt Securities will be issued and, if other than the principal amount thereof, the portion of the principal amount thereof payable upon declaration of acceleration of the maturity thereof, or (if applicable) the portion of the principal amount of such Debt Securities which is convertible into Common Shares or Preferred Shares, or the method by which any such portion shall be determined; (4) the date or dates, or the method for determining such date or dates, on which the principal of such Debt Securities will be payable; (5) the rate or rates (which may be fixed or variable), or the method by which such rate or rates shall be determined, at which such Debt Securities will bear interest, if any; (6) the date or dates, or the method for determining such date or dates, from which any such interest will accrue, the Interest Payment Dates on which any such interest will be payable, the Regular Record Dates for such Interest Payment Dates, or the method by which such Dates shall be determined, the Person to whom such interest shall be payable, and the basis upon which interest shall be calculated if other than that of a 360-day year of twelve 30-day months; (7) the place or places where the principal of (and premium, if any) and interest, if any, on such Debt Securities will be payable, such Debt Securities may be surrendered for conversion or registration of transfer or exchange and notices or demands to or upon the Company in respect of such Debt Securities and the Indenture may be served. 4 35 (8) the period or periods within which, or the date or dates on which, the price or prices at which and the terms and conditions upon which such Debt Securities may be redeemed, as a whole or in part, at the option of the Company, if the Company is to have such an option; (9) the obligation, if any, of the Company to redeem, repay or repurchase such Debt Securities pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof, and the period or periods within which or the date or dates on which, the price or prices at which and the terms and conditions upon which such Debt Securities will be redeemed, repaid or purchased, as a whole or in part, pursuant to such obligation; (10) if other than U.S. dollars, the currency or currencies in which such Debt Securities are denominated and/or payable, which may be a foreign currency or units of two or more foreign currencies or a composite currency or currencies, and the terms and conditions relating thereto; (11) whether the amount of payments of principal of (and premium, if any) or interest, if any, on such Debt Securities may be determined with reference to an index, formula or other method (which index, formula or method may, but need not be, based on a currency, currencies, currency unit or units or composite currency or currencies) and the manner in which such amounts shall be determined; (12) any additions to, modifications of or deletions from the terms of such Debt Securities with respect to the Events of Default or covenants set forth in the Indenture; (13) whether such Debt Securities will be issued in certificated or book-entry form; (14) whether such Debt Securities will be in registered or bearer form and, if in registered form, the denominations thereof if other than $1,000 and any integral multiple thereof and, if in bearer form, the denominations thereof and terms and conditions relating thereto; (15) the applicability, if any, of the defeasance and covenant defeasance provisions of Article XIV of the Indenture; (16) if such Debt Securities are to be issued upon the exercise of debt warrants, the time, manner and place for such Debt Securities to be authenticated and delivered; (17) the terms, if any, upon which such Debt Securities may be convertible into Common Shares or Preferred Shares of the Company and the terms and conditions upon which such conversion will be effected, including, without limitation, the initial conversion price or rate, the conversion period and, in connection with the preservation of the Company's status as a REIT, limitations on the ownership of the Common Shares or Preferred Shares into which such Debt Securities are convertible; (18) the terms and conditions, if any, upon which such Debt Securities may be subordinated to other indebtedness of the Company; (19) whether and under what circumstances the Company will pay Additional Amounts as contemplated in the Indenture on such Debt Securities in respect of any tax, assessment or governmental charge and, if so, whether the Company will have the option to redeem such Debt Securities in lieu of making such payment; and (20) any other terms of such Debt Securities not inconsistent with the provisions of the Indenture (Section 301). The Debt Securities may provide for less than the entire principal amount thereof to be payable upon declaration of acceleration of the maturity thereof ("Original Issue Discount Securities"). Special U.S. federal income tax, accounting and other considerations applicable to the Original Issue Discount Securities will be described in the applicable Prospectus Supplement. The Indenture does not contain any provisions that would limit the ability of the Company to incur indebtedness or that would afford Holders of Debt Securities protection in the event of a highly leveraged or 5 36 similar transaction involving the Company. However, restrictions on ownership and transfers of the Common Shares and Preferred Shares, designed to preserve its status as a REIT, may prevent or hinder a change of control. Reference is made to the applicable Prospectus Supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or covenants of the Company that are described below, including any addition of a covenant or other provision providing event risk or similar protection. DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER Unless otherwise described in the applicable Prospectus Supplement, the Debt Securities of any series will be issuable in denominations of $1,000 and integral multiples thereof (Section 302). Unless otherwise specified in the applicable Prospectus Supplement, the principal of (and premium, if any) and interest on any series of Debt Securities will be payable at the corporate trust office of the Trustee, initially located at One Federal Street, Boston, Massachusetts, provided that, at the option of the Company, payment of interest may be made by check mailed to the address of the Person entitled thereto as it appears in the Security Register or by wire transfer of funds to such Person at an account maintained within the United States (Sections 301, 305, 307 and 1002). Any interest not punctually paid or duly provided for on any Interest Payment Date with respect to a Debt Security ("Defaulted Interest") will forthwith cease to be payable to the Holder on the applicable Regular Record Date and may either be paid to the person in whose name such Debt Security is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to the Holder of such Debt Security not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner, all as more completely described in the Indenture (Sections 101 and 307). Subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series will be exchangeable for other Debt Securities of the same series and of a like aggregate principal amount and tenor of different authorized denominations upon surrender of such Debt Securities at the corporate trust office of the Trustee referred to above. In addition, subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series may be surrendered for conversion or registration of transfer thereof at the corporate trust office of the Trustee referred to above. Every Debt Security surrendered for conversion, registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer. No service charge will be made for any registration of transfer or exchange of any Debt Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith (Section 305). If the applicable Prospectus Supplement refers to any transfer agent (in addition to the Trustee) initially designated by the Company with respect to any series of Debt Securities, the Company may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts, except that the Company will be required to maintain a transfer agent in each Place of Payment for such series. The Company may at any time designate additional transfer agents with respect to any series of Debt Securities (Section 1002). Neither the Company nor the Trustee shall be required to (i) issue, register the transfer of or exchange Debt Securities of any series during a period beginning at the opening of business 15 days before any selection of Debt Securities of that series to be redeemed and ending at the close of business of the day of mailing of the relevant notice of redemption; (ii) register the transfer of or exchange any Debt Security, or portion thereof, called for redemption, except the unredeemed portion of any Debt Security being redeemed in part; or (iii) issue, register the transfer of or exchange any Debt Security which has been surrendered for repayment at the option of the Holder, except that portion, if any, of such Debt Security which is not to be so repaid (Section 305). 6 37 MERGER, CONSOLIDATION OR SALE The Company may consolidate with, or sell, lease or convey all or substantially all of its assets to, or merge with or into, any other trust or corporation, provided that (a) either the Company shall be the continuing entity, or the successor (if other than the Company) formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets shall expressly assume payment of the principal of (and premium, if any) and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions contained in the Indenture; (b) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any Subsidiary as a result thereof as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default under the Indenture, and no event which, after notice or the lapse of time, or both, would become such an Event of Default, shall have occurred and be continuing; and (c) an officer's certificate and legal opinion covering such conditions shall be delivered to the Trustee (Sections 801 and 803). CERTAIN COVENANTS Existence. Except as permitted under "Merger, Consolidation or Sale," the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (declaration and statutory) and franchises; provided, however, that the Company shall not be required to preserve any right or franchise if it determines that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the Holders of the Debt Securities (Section 1004). Provision of Financial Information. Whether or not the Company is subject to Section 13 or 15(d) of the Exchange Act, the Company will, to the extent permitted under the Exchange Act, file with the Commission the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Section 13 or 15(d) (the "Financial Statements") if the Company were so subject, such documents to be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required so to file such documents if the Company were so subject. The Company will also in any event (x) file with the Trustee copies of the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company were subject to such Sections and (y) if filing such documents by the Company with the Commission is not permitted under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective Holder (Section 1005). Other. Reference is made to the applicable Prospectus Supplement for information with respect to any additional covenants specific to a particular series of Debt Securities. EVENT OF DEFAULT, NOTICE AND WAIVER The Indenture provides that the following events are "Events of Default" with respect to any series of Debt Securities issued thereunder: (a) default for 30 days in the payment of any installment of interest on any Debt Security of such series; (b) default in the payment of the principal of (or premium, if any, on) any Debt Security of such series at its Maturity; (c) default in making any sinking fund payment as required for any Debt Security of such series; (d) default in the performance of any other covenant or warranty of the Company contained in the Indenture (other than a covenant or warranty, added to the Indenture solely for the benefit of a series of Debt Securities issued thereunder other than such series), continued for 60 days after written notice as provided in the Indenture; (e) default in the payment of an aggregate principal amount exceeding $10,000,000 of any evidence of indebtedness of the Company or any mortgage, indenture or other instrument under which such indebtedness is issued or by which such indebtedness is secured, such default having occurred after the expiration of any applicable grace period and having resulted in the acceleration of the maturity of such indebtedness, but only if such indebtedness is not discharged or such acceleration is not rescinded or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or court appointment of 7 38 a receiver, liquidator or trustee of the Company or any Significant Subsidiary or the property of either; (g) the acquisition by any Person (including any affiliates of such Person) of 20% or more of the Company's Common Shares, unless the Company's Board of Trustees shall have first approved of such acquisition; and (h) any other Event of Default provided with respect to a particular series of Debt Securities (Section 501). The term "Significant Subsidiary" means each significant subsidiary (as defined in Regulation S-X promulgated under the Securities Act) of the Company. If an Event of Default under the Indenture with respect to Debt Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of that series may declare the principal amount (or, if the Debt Securities of that series are Original Issue Discount Securities or Indexed Securities, such portion of the principal amount as may be specified in the terms thereof) of all of the Debt Securities of that series to be due and payable immediately by written notice thereof to the Company (and to the Trustee if given by the Holders). However, any time after such a declaration of acceleration with respect to Debt Securities of such series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) has been made, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the Holders of not less than a majority in principal amount of Outstanding Debt Securities of such series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) may rescind and annul such declaration and its consequences if (a) the Company shall have deposited with the Trustee all required payments of the principal of (and premium, if any) and interest on the Debt Securities of such series (or of all Debt Securities then outstanding under the Indenture, as the case may be), plus certain fees, expenses, disbursements and advances of the Trustee and (b) all Events of Default, other than the non-payment of accelerated principal (or specified portion thereof), with respect to Debt Securities of such series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) have been cured or waived as provided in the Indenture (Section 502). The Indenture also provides that the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) may waive any past default with respect to such series and its consequences, except a default (x) in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or (y) in respect of a covenant or provision contained in the Indenture that cannot be modified or amended without the consent of the Holder of each Outstanding Debt Security affected thereby (Section 513). The Trustee is required to give notice to the Holders of Debt Securities within 90 days of a default under the Indenture; provided, however, that the Trustee may withhold notice to the Holders of any series of Debt Securities of any default with respect to such series (except a default in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or in the payment of any sinking fund installment in respect of any Debt Security of such series) if the Responsible Officers of the Trustee consider such withholding to be in the interest of such Holders (Section 601). The Indenture provides that no Holders of Debt Securities of any series may institute any proceedings, judicial or otherwise, with respect to the Indenture or for any remedy thereunder, except in the case of failure of the Trustee, for 60 days, to act after it has received a written request to institute proceedings in respect of an Event of Default from the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series, as well as an offer of reasonable indemnity (Section 507). This provision will not prevent, however, any Holder of Debt Securities from instituting suit for the enforcement of payment of the principal of (and premium, if any) and interest on such Debt Securities at the respective due dates thereof (Section 508). Subject to provisions in the Indenture relating to its duties in case of default, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any Holders of any series of Debt Securities then Outstanding under the Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity (Section 602). The Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or of exercising any trust or power 8 39 conferred upon the Trustee. However, the Trustee may refuse to follow any direction which is in conflict with any law or the Indenture, which may involve the Trustee in personal liability or which may be unduly prejudicial to the Holders of Debt Securities of such series not joining therein (Section 512). Within 120 days after the close of each fiscal year, the Company must deliver to the Trustee a certificate, signed by one of several specified officers, stating whether or not such officer has knowledge of any default under the Indenture and, if so, specifying each such default and the nature and status thereof (Section 1006). MODIFICATION OF THE INDENTURE Modifications and amendments of the Indenture may be made only with the consent of the Holders of not less than a majority in principal amount of all Outstanding Debt Securities which are affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the Holder of each such Debt Security affected thereby, (a) change the Stated Maturity of the principal of, or any installment of interest (or premium, if any) on, any such Debt Security; (b) reduce the principal amount of, or the rate or amount of interest on, or any premium payable on redemption of, any such Debt Security, or reduce the amount of principal of an Original Issue Discount Security that would be due and payable upon declaration of acceleration of the maturity thereof or would be provable in bankruptcy, or adversely affect any right of repayment of the Holder of any such Debt Security; (c) change the Place of Payment, or the coin or currency, for payment of principal of, premium, if any, or interest on any such Debt Security; (d) impair the right to institute suit for the enforcement of any payment on or with respect to any such Debt Security; (e) reduce the above-stated percentage of Outstanding Debt Securities of any series necessary to modify or amend the Indenture, to waive compliance with certain provisions thereof or certain defaults and consequences thereunder or to reduce the quorum or voting requirements set forth in the Indenture; or (f) modify any of the foregoing provisions or any of the provisions relating to the waiver of certain past defaults or certain covenants, except to increase the required percentage to effect such action or to provide that certain other provisions may not be modified or waived without the consent of the Holder of such Debt Security (Section 902). The Holders of not less than a majority in principal amount of Outstanding Debt Securities have the right to waive compliance by the Company with certain covenants in the Indenture (Section 1008). Modifications and amendments of the Indenture may be made by the Company and the Trustee without the consent of any Holder of Debt Securities for any of the following purposes: (i) to evidence the succession of another Person to the Company as obligor under the Indenture; (ii) to add to the covenants of the Company for the benefit of the Holders of all or any series of Debt Securities or to surrender any right or power conferred upon the Company in the Indenture; (iii) to add Events of Default for the benefit of the Holders of all or any series of Debt Securities; (iv) to add or change any provisions of the Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt Securities in bearer form, or to permit or facilitate the issuance of Debt Securities in uncertified form, provided that such action shall not adversely affect the interests of the Holders of the Debt Securities of any series in any material respect; (v) to change or eliminate any provisions of the Indenture, provided that any such change or elimination shall become effective only when there are no Debt Securities Outstanding of any series created prior thereto which are entitled to the benefit of such provision; (vi) to secure the Debt Securities; (vii) to establish the form or terms of Debt Securities of any series, including the provision and procedures, if applicable, for the conversion of such Debt Securities into Common Shares or Preferred Shares; (viii) to provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trusts under the Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or inconsistency in the Indenture, provided that such action shall not adversely affect the interests of Holders of Debt Securities of any series in any material respect; or (x) to supplement any of the provisions of the Indenture to the extent necessary to permit or facilitate defeasance and discharge of any series of such Debt Securities, provided that such action shall not adversely affect the interests of the Holders of the Debt Securities of any series in any material respect (Section 901). The Indenture provides that in determining whether the Holders of the requisite principal amount of Outstanding Debt Securities of a series have given any request, demand, authorization, direction, notice, 9 40 consent or waiver thereunder or whether a quorum is present at a meeting of Holders of Debt Securities, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon declaration of acceleration of the maturity thereof, (ii) the principal amount of a Debt Security denominated in a Foreign Currency that shall be deemed outstanding shall be the U.S. dollar equivalent, determined on the issue date for such Debt Security, of the principal amount (or, in the case of an Original Issue Discount Security, the U.S. dollar equivalent on the issue date of such Debt Security of the amount determined as provided in (i) above), (iii) the principal amount of an Indexed Security that shall be deemed outstanding shall be the principal face amount of such Indexed Security at original issuance, unless otherwise provided with respect to such Indexed Security pursuant to Section 301 of the Indenture, and (iv) Debt Securities owned by the Company or any other obligor upon the Debt Securities or any Affiliate of the Company or of such other obligor shall be disregarded (Section 101). The Indenture contains provisions for convening meetings of the Holders of Debt Securities of a series (Section 1501). A meeting may be called at any time by the Trustee, and also, upon request, by the Company or the Holders of at least 25% in principal amount of the Outstanding Debt Securities of such series, in any such case upon notice given as provided in the Indenture (Section 1502). Except for any consent that must be given by the Holder of each Debt Security affected by certain modifications and amendments of the Indenture, any resolution presented at a meeting or adjourned meeting duly reconvened at which a quorum is present may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Debt Securities of that series; provided, however, that, except as referred to above, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Debt Securities of a series may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the Holders of such Debt Securities of that series. Any resolution passed or decision taken at any meeting of Holders of Debt Securities of any series duly held in accordance with the Indenture will be binding on all Holders of Debt Securities of that series. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be Persons holding or representing a majority in principal amount of the Outstanding Debt Securities of a series; provided, however, that if any action is to be taken at such meeting with respect to a consent or waiver which may be given by the Holders of not less than a specified percentage in principal amount of the Outstanding Debt Securities of a series, the Persons holding or representing such specified percentage in principal amount of the Outstanding Debt Securities of such series will constitute a quorum (Section 1504). Notwithstanding the foregoing provisions, if any action is to be taken at a meeting of Holders of Debt Securities of any series with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that the Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal amount of all Outstanding Debt Securities affected thereby, or of the Holders of such series and one or more additional series: (i) there shall be no minimum quorum requirement for such meeting and (ii) the principal amount of the Outstanding Debt Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under the Indenture (Section 1504). DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE The Company may discharge certain obligations to Holders of any series of Debt Securities that have not already been delivered to the Trustee for cancellation and that either have become due and payable or will become due and payable within one year (or scheduled for redemption within one year) by irrevocably depositing with the Trustee, in trust, funds in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable in an amount sufficient to pay the entire indebtedness on such Debt Securities in respect of principal (and premium, if any) and interest to the date of such deposit (if such Debt Securities have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be (Section 401). 10 41 The Indenture provides that, if the provisions of Article Fourteen are made applicable to the Debt Securities of or within any series pursuant to Section 301 of the Indenture, the Company may elect either (a) to defease and be discharged from any and all obligations with respect to such Debt Securities (except for the obligation to pay Additional Amounts, if any, upon the occurrence of certain events of tax, assessment or governmental charge with respect to payments on such Debt Securities and the obligations to register the transfer or exchange of such Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to maintain an office or agency in respect of such Debt Securities and to hold moneys for payment in trust) ("defeasance") (Section 1402) or (b) to be released from its obligations with respect to such Debt Securities under Sections 1004 and 1005, inclusive, of the Indenture (being the restrictions described under "Certain Covenants") or, if provided pursuant to Section 301 of the Indenture, its obligations with respect to any other covenant, and any omission to comply with such obligations shall not constitute a default or an Event of Default with respect to such Debt Securities ("covenant defeasance") (Section 1403), in either case upon the irrevocable deposit by the Company with the Trustee, in trust, of an amount, in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable at Stated Maturity, or Government Obligations (as defined below), or both, applicable to such Debt Securities which through the scheduled payment of principal and interest in accordance with their terms will provide money in an amount sufficient to pay the principal of (and premium, if any) and interest on such Debt Securities, and any mandatory sinking fund or analogous payments thereon, on the scheduled due dates therefor. Such a trust may only be established if, among other things, the Company has delivered to the Trustee an Opinion of Counsel (as specified in the Indenture) to the effect that the Holders of such Debt Securities will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred, and such Opinion of Counsel, in the case of defeasance, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable United States federal income tax law occurring after the date of the Indenture (Section 1404). "Government Obligations" means securities which are (i) direct obligations of the United States of America or the government which issued the Foreign Currency in which the Debt Securities of a particular series are payable, for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such government which issued the Foreign Currency in which the Debt Securities of such series are payable, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or such other government, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt (Section 101). Unless otherwise provided in the applicable Prospectus Supplement, if after the Company has deposited funds and/or Government Obligations to effect defeasance or covenant defeasance with respect to Debt Securities of any series, (a) the Holder of a Debt Security of such series is entitled to, and does, elect pursuant to Section 301 of the Indenture or the terms of such Debt Security to receive payment in a currency, currency unit or composite currency other than that in which such deposit has been made in respect of such Debt Security, or (b) a Conversion Event (as defined below) occurs in respect of the currency, currency unit or composite currency in which such deposit has been made, the indebtedness represented by such Debt Security shall be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal of (and premium, if any) and interest on such Debt Security as they become due out of the proceeds yielded by converting the amount so deposited in respect of such Debt Security into the currency, currency unit or 11 42 composite currency in which such Debt Security becomes payable as a result of such election or such cessation of usage based on the applicable market exchange rate (Section 1405). "Conversion Event" means the cessation of use of (i) a currency, currency unit or composite currency both by the government of the country which issued such currency and for the settlement of transactions by a central bank or other public institutions or within the international banking community, (ii) the ECU both within the European Monetary System and for the settlement of transactions by public institutions of or within the European Communities or (iii) any currency unit or composite currency other than the ECU for the purposes for which it was established. Unless otherwise provided in the applicable Prospectus Supplement, all payments of principal of (and premium, if any) and interest on any Debt Security that is payable in a Foreign Currency that cease to be used by its government of issuance shall be made in U.S. dollars (Section 101). In the event the Company effects covenant defeasance with respect to any Debt Securities and such Debt Securities are declared due and payable because of the occurrence of any Event of Default other than the Event of Default described in clause (d) under "Events of Default, Notice and Waiver" with respect to Sections 1004 and 1005, inclusive, of the Indenture (which Sections would no longer be applicable to such Debt Securities) or described in clause (h) under "Events of Default, Notice and Waiver" with respect to any other covenant as to which there has been covenant defeasance, the amount in such currency, currency unit or composite currency in which such Debt Securities are payable, and Government Obligations on deposit with the Trustee, will be sufficient to pay amounts due on such Debt Securities at the time of their Stated Maturity but may not be sufficient to pay amounts due on such Debt Securities at the time of the acceleration resulting from such Event of Default. However, the Company would remain liable to make payment of such amounts due at the time of acceleration. The applicable Prospectus Supplement may further describe the provisions, if any, permitting such defeasance or covenant defeasance, including any modifications to the provisions described above, with respect to the Debt Securities of or within a particular series. CONVERSION RIGHTS The terms and conditions, if any, upon which the Debt Securities are convertible into Common Shares or Preferred Shares will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include whether such Debt Securities are convertible into Common Shares or Preferred Shares, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the Holders or the Company, the events requiring an adjustment of the conversion price and provisions affecting conversion in the event of the redemption of such Debt Securities. SUBORDINATION The terms and conditions, if any, upon which the Debt Securities are subordinated to other indebtedness of the Company will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include a description of the indebtedness ranking senior to the Debt Securities, the restrictions on payments to the Holders of such Debt Securities while a default with respect to such senior indebtedness in continuing, the restrictions, if any, on payments to the Holders of such Debt Securities following an Event of Default, and provisions requiring Holders of such Debt Securities to remit certain payments to holders of senior indebtedness. GLOBAL SECURITIES The Debt Securities of a series may be issued in whole or in part in the form of one or more global securities (the "Global Securities") that will be deposited with, or on behalf of, a depositary (the "Depositary") identified in the applicable Prospectus Supplement relating to such series. Global Securities may be issued in either registered or bearer form and in either temporary or permanent form. The specific terms of the depositary arrangement with respect to a series of Debt Securities will be described in the applicable Prospectus Supplement relating to such series. 12 43 DESCRIPTION OF SHARES The following description of the Shares does not purport to be complete but contains a summary of certain portion of the Declaration of Trust (the "Declaration") and By-Laws of the Company. The Company is authorized to issue an aggregate of 150,000,000 shares ("Shares") in two classes: 100,000,000 Common Shares and 50,000,000 Preferred Shares, par value $.01 per share. All the shares presently outstanding are Common Shares. The Trustees are authorized to cause the issuance, without shareholder approval, of classes or series of Preferred Shares from time to time and to set (or change, if the class or series has previously been established) the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms and conditions of redemption of such Preferred Shares. Except as otherwise determined by the Trustees with respect to any class or series of Preferred Shares, all shares: (i) will participate equally in dividends payable to shareholders when, as and if declared by the Trustees and ratably in net assets available for distribution to shareholders on liquidation or dissolution; (ii) will have one vote per share on all matters submitted to a vote of the shareholders; (iii) will not have cumulative voting rights in the election of Trustees; (iv) will have no preference, conversion, exchange, sinking fund, redemption or preemptive rights; and (v) will be validly issued, fully paid and nonassessable by the Company upon issuance. DESCRIPTION OF PREFERRED SHARES The Company is authorized to issue 50,000,000 preferred shares of beneficial interest, par value $.01 per share. Under the Company's Declaration, the Board of Trustees may from time to time establish and issue one or more series of preferred shares of beneficial interest and fix the designations, powers, preferences and rights of the shares of such series and the qualifications, limitations or restrictions thereon, including, but not limited to, the fixing of the dividend rights, dividend rate or rates, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences. The following description of the preferred shares of beneficial interest sets forth certain general terms and provisions of the Preferred Shares to which any Prospectus Supplement may relate. The statements below describing the Preferred Shares are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Company's Declaration (including any applicable articles supplementary) and By-Laws. GENERAL Subject to limitations prescribed by Maryland law and the Declaration, the Board of Trustees is authorized to fix the number of shares constituting each series of preferred shares and the designations and powers, preferences and relative, participating, optional or other specific rights and qualifications, limitations or restrictions thereof, including such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by resolutions of the Board of Trustees. The Preferred Shares will, when issued, be fully paid and nonassessable and will have no preemptive rights. Reference is made to the Prospectus Supplement relating to the Preferred Shares offered thereby for specific terms, including: (1) the title of such Preferred Shares; (2) the number of shares of such Preferred Shares offered, the liquidation preference per share and the offering price of such Preferred Shares; 13 44 (3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof applicable to such Preferred Shares; (4) the date from which dividends on such Preferred Shares shall accumulate, if applicable; (5) the procedures, if any, for any auction and remarketing for such Preferred Shares; (6) the provision for a sinking fund, if any, for such Preferred Shares; (7) the provision for redemption, if applicable, of such Preferred Shares; (8) any listing of such Preferred Shares on any securities exchange; (9) the terms and conditions, if applicable, upon which such Preferred Shares will be convertible into Common Shares of the Company, including the conversion price (or manner of calculation thereof); (10) any other specific terms, preferences, rights, limitations or restrictions of such Preferred Shares; (11) a discussion of federal income tax considerations applicable to such Preferred Shares; (12) the relative ranking and preferences of such Preferred Shares as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; (13) any limitations on issuance of any series of preferred shares ranking senior to or on a parity with such series of Preferred Shares as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; and (14) 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. RANK Unless otherwise determined by the Board of Trustees of the Company and specified in the Prospectus Supplement, it is expected that the Preferred Shares will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, rank (i) senior to all Common Shares, and to all equity securities ranking junior to such Preferred Shares; (ii) on a parity with all equity securities issued by the Company the terms of which specifically provide that such equity securities rank on a parity with the Preferred Shares; and (iii) junior to all equity securities issued by the Company the terms of which specifically provide that such equity securities rank senior to the Preferred Shares. DIVIDENDS Holders of Preferred Shares of each series shall be entitled to receive, when, as and if declared by the Board of Trustees of the Company, out of assets of the Company legally available for payment, cash dividends at such rates and on such dates as will be set forth in the applicable Prospectus Supplement. Each such dividend shall be payable to holders of record as they appear on the stock transfer books of the Company on such record dates as shall be fixed by the Board of Trustees of the Company. Dividends on any series of the Preferred Shares may be cumulative or non-cumulative, as provided in the applicable Prospectus Supplement. Dividends, if cumulative, will be cumulative from and after the date set forth in the applicable Prospectus Supplement. If the Board of Trustees of the Company fails to declare a dividend payable on a dividend payment date on any series of the Preferred Shares for which dividends are noncumulative, then the holders of such series of the Preferred Shares will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and the Company will have no obligation to pay the dividend accrued for such period, whether or not dividends on such series are declared payable on any future dividend payment date. If Preferred Shares of any series are outstanding, no full dividends shall be declared or paid or set apart for payment on the preferred shares of the Company of any other series ranking, as to dividends, on a parity 14 45 with or junior to the Preferred Shares of such series for any period unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Shares of such series for all past dividend periods and the then current dividend period or (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends for the then current dividend period have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Shares of such series. When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Preferred Shares of any series and the shares of any other series of preferred shares ranking on a parity as to dividends with the Preferred Shares of such series, all dividends declared upon Preferred Shares of such series and any other series of preferred shares shall in all cases bear to each other the same ratio that accrued dividends per share on the Preferred Shares of such series (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such Preferred Shares do not have a cumulative dividend) and such other series of preferred shares bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on Preferred Shares of such series which may be in arrears. Except as provided in the immediately preceding paragraph, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on the Preferred Shares of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the repayment thereof set apart for payment for all past dividend periods and the then current dividend period and (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on the Preferred Shares of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, no dividends (other than in Common Shares or other capital stock ranking junior to the Preferred Shares of such series as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other distribution shall be declared or made upon the Common Shares or any other capital stock of the Company ranking junior to or on a parity with the Preferred Shares of such series as to dividends or upon liquidation, nor shall any Common Shares or any other capital stock of the Company ranking junior to or on a parity with the Preferred Shares of such series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for other capital stock of the Company ranking junior to the Preferred Shares of such series as to dividends and upon liquidation). Any dividend payment made on shares of a series of Preferred Shares shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of such series which remains payable. REDEMPTION If so provided in the applicable Prospectus Supplement, the Preferred Shares will be subject to mandatory redemption or redemption at the option of the Company, as a whole or in part, in each case upon the terms, at the times and at the redemption prices set forth in such Prospectus Supplement. The Prospectus Supplement relating to a series of Preferred Shares that is subject to mandatory redemption will specify the number of such Preferred Shares that shall be redeemed by the Company in each year commencing after a date to be specified, at a redemption price per share to be specified, together with an amount equal to all accrued and unpaid dividends thereon (which shall not, if such Preferred Shares does not have a cumulative dividend, include any accumulation in respect of unpaid dividends for prior dividend periods) to the date of redemption. The redemption price may be payable in cash or other property, as specified in the applicable Prospectus Supplement. If the redemption price for Preferred Shares of any series is payable only from the net proceeds of the issuance of capital stock of the Company, the terms of such Preferred Shares may provide that, if no such capital stock shall have been issued or to the extent the net proceeds from any issuance are insufficient to pay in full the aggregate redemption price then due, such Preferred Shares shall automatically and mandatorily be converted into shares of the applicable capital stock of the Company pursuant to conversion provisions specified in the applicable Prospectus Supplement. 15 46 Notwithstanding the foregoing, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on all shares of any series of Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period and (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on the Preferred Shares of any series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, no shares of any series of Preferred Shares shall be redeemed unless all outstanding Preferred Shares of such series are simultaneously redeemed; provided however, that the foregoing shall not prevent the purchase or acquisition of Preferred Shares of such series pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Preferred Shares of such series, and, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on all outstanding shares of any series of Preferred Shares have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period and (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on the Preferred Shares of any series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, the Company shall not purchase or otherwise acquire directly or indirectly any Preferred Shares of such series (except by conversion into or exchange for capital stock of the Company ranking, junior to the Preferred Shares of such series as to dividends and upon liquidation). If fewer than all of the outstanding Preferred Shares of any series are to be redeemed, the number of shares to be redeemed will be determined by the Company and such shares may be redeemed pro rata from the holders of record of such shares in proportion to the number of such shares held by such holders (with adjustments to avoid redemption of fractional shares) or by lot in manner determined by the Company. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of record of a Preferred Share of any series to be redeemed at the address shown on the stock transfer books of the Company. Each notice shall state: (i) the redemption date; (ii) the number of shares and series of the Preferred Shares to be redeemed; (iii) the redemption price; (iv) the place or places where certificates for such Preferred Shares are to be surrendered for payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vi) the date upon which the holder's conversion rights, if any, as to such shares shall terminate. If fewer than all the Preferred Shares of any series are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of Preferred Shares to be redeemed from each such holder. If notice of redemption of any Preferred Shares has been given and if the funds necessary for such redemption have been set aside by the Company in trust for the benefit of the holders of any of the Preferred Shares so called for redemption, then from and after the redemption date dividends will cease to accrue on such Preferred Shares, and all rights of the holders of such shares will terminate, except the right to receive the redemption price. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Common Shares or any other class or series of capital stock of the Company ranking junior to the Preferred Shares in the distribution of assets upon any liquidation, dissolution or winding up of the Company, the holders of each series of Preferred Shares shall be entitled to receive out of assets of the Company legally available for distribution to shareholders liquidating distributions in the amount of the liquidation preference per share (set forth in the applicable Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such Preferred Shares do not have a cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Preferred Shares will have no right or claim to any of the remaining assets of the Company. In the event that upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding Preferred Shares and the corresponding amounts payable on all shares of other 16 47 classes or series of capital stock of the Company ranking on a parity with the Preferred Shares in the distribution of assets, then the holders of the Preferred Shares and all other such classes or series of capital stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. If liquidating distributions shall have been made in full to all holders of Preferred Shares, the remaining assets of the Company shall be distributed among the holders of any other classes or series of capital stock ranking junior to the Preferred Shares upon liquidation, dissolution or winding up, according to their respective rights and preferences and in each case according to their respective number of shares. For such purposes, the consolidation or merger of the Company with or into any other trust or corporation, or the sale, lease or conveyance of all or substantially all of the property or business of the Company, shall not be deemed to constitute a liquidation, dissolution or winding up of the Company. VOTING RIGHTS Holders of the Preferred Shares will not have any voting rights, except as set forth below or as otherwise from time to time required by law or as indicated in the applicable Prospectus Supplement. Whenever dividends on any Preferred Shares shall be in arrears for six consecutive quarterly periods, the holders of such Preferred Shares (voting separately as a class with all other series of preferred shares upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional trustees of the Company at the next annual meeting of shareholders and at each subsequent meeting until (i) if such series of Preferred Shares has a cumulative dividend, all dividends accumulated on such Preferred Shares for the past dividend periods and the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment or (ii) if such series of Preferred Shares does not have a cumulative dividend, four consecutive quarterly dividends shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In such case, the entire Board of Trustees of the Company will be increased by two trustees. Unless provided otherwise for any series of Preferred Shares, so long as any Preferred Shares remain outstanding, the Company shall not, without the affirmative vote or consent of the holders of a majority of the shares of each series of Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of capital stock ranking prior to such series of Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, or reclassify any authorized capital stock of the Company into any such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the Company's Declaration of Trust or the certificate of designations for such series of Preferred Shares, whether by merger, consolidation or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of such series of Preferred Shares or the holders thereof; provided, however, that any increase in the number of the authorized preferred shares or the creation or issuance of any other series of preferred shares, or any increase in the amount of authorized shares of such series or any other series of Preferred Shares, in each case ranking on a parity with or junior to the Preferred Shares of such series with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. CONVERSION RIGHTS The terms and conditions, if any, upon which shares of any series of Preferred Shares are convertible into Common Shares will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will 17 48 include the number of Common Shares into which the Preferred Share is convertible, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the holders of the Preferred Shares or the Company, the events requiring an adjustment of the conversion price and provisions affecting conversion in the event of the redemption of such Preferred Shares. LIMITATION OF LIABILITY; SHAREHOLDER LIABILITY Maryland law permits a REIT to provide, and the Declaration provides, that no trustee, officer, shareholder, employee or agent of the Company shall be held to any personal liability, jointly or severally, for any obligation of or claim against the Company, and that, as far as practicable, each written agreement of the Company is to contain a provision to that effect. Despite these facts counsel has advised the Company that in some jurisdictions the possibility exists that shareholders of a non-corporate entity such as the Company may be held liable for acts or obligations of the Company. Counsel has advised the Company that the State of Texas may not give effect to the limitation of shareholder liability afforded by Maryland law, but that Texas law would likely recognize contractual limitations of liability such as those discussed above. The Company intends to conduct its business in a manner designed to minimize potential shareholder liability by, among other things, inserting appropriate provisions in written agreements of the Company; however, no assurance can be given that shareholders can avoid liability in all instances in all jurisdictions. The Declaration provides that, upon payment by a shareholder of any such liability, the shareholder will be entitled to indemnification by the Company. There can be no assurance that, at the time any such liability arises, there will be assets of the Company sufficient to satisfy the Company's indemnification obligation. The trustees intend to conduct the operations of the Company, with the advice of counsel, in such a way as to minimize or avoid, as far as practicable, the ultimate liability of the shareholders of the Company. The trustees do not intend to provide insurance covering such risks to the shareholders. REDEMPTION AND BUSINESS COMBINATIONS For the Company to qualify as a REIT under the Code, in any taxable year, not more than 50% in value of its outstanding Shares may be owned, directly or indirectly, by five or fewer individuals during the last six months of such year, and the Shares must be owned by 100 or more persons during at least 335 days of a taxable year or a proportionate part of a taxable year less than 12 months. In order to meet these and other requirements, the trustees have the power to redeem or prohibit the transfer of a sufficient number of Shares to maintain or bring the ownership of the Shares into conformity with such requirements. In connection with the foregoing, if the trustees shall, at any time and in good faith, be of the opinion that direct or indirect ownership of Shares representing more than 8.5% in value of the total Shares outstanding (the "Excess Shares") has or may become concentrated in the hands of one beneficial owner, other than "Excepted Persons" (as defined in the Declaration), the trustees shall have the power (i) to purchase from any shareholder of the Company such Excess Shares, and (ii) to refuse to transfer or issue Shares to any person whose acquisition of such Shares would, in the opinion of the trustees, result in the direct or indirect beneficial ownership by any person of Shares representing more than 8.5% in value of the outstanding Shares. Any transfer of Shares, options, or other securities convertible into Shares that would create a beneficial owner (other than any of the Excepted Persons) of Shares representing more than 8.5% in value of the total shares outstanding shall be deemed void ab initio and the intended transferee shall be deemed never to have had an interest therein. Further, the Declaration provides that transfers or purported acquisitions, directly, indirectly or by attribution, of Shares, or securities convertible into Shares, that could result in disqualification of the Company as a REIT are null and void and permits the trustees to repurchase Shares or other securities to the extent necessary to maintain the Company's status as a REIT. The purchase price for any Shares so purchased shall be determined by the price of the Shares on the principal exchange on which they are then traded, or, if no such price is available, then the purchase price shall be equal to the net asset value of such Shares as determined by the trustees in accordance with applicable law. From and after the date fixed for purchase by the trustees, and so long as payment of the purchase price for the Shares to be so redeemed shall have been made or duly provided for, the holder of any Excess Shares so called for purchase shall cease to be entitled to 18 49 distributions, voting rights and other benefits with respect to such Shares, except the right to payment of the purchase price for the Shares. The Declaration also requires that "Business Combinations" (as defined therein) between the Company and a beneficial holder of 10% or more of the outstanding Shares be approved by the affirmative vote of the holders of at least 75% of the Shares unless: (1) the Trustees by unanimous vote or written consent shall have expressly approved in advance the acquisition of the outstanding Shares that caused the Related Person (as defined in the Declaration) to become a Related Person or shall have approved the Business Combination prior to the Related Person involved in the Business Combination having become a Related Person; or (2) the Business Combination is solely between the Company and a 100% owned affiliate of the Company. As permitted by law, the Company has elected to be governed by such provisions rather than the provisions of Subtitle 6 of Title 3 of the Corporations and Associations Article of the Annotated Code of Maryland regarding business combinations. Under the Declaration the number of trustees may be fixed from time to time by two-thirds of the trustees or by amendment of the Declaration by the shareholders of the Company, with a minimum of three and a maximum of 12 trustees, a majority of whom must be Independent Trustees. The Declaration fixes the current number of trustees of the Company at five and divides the trustees into three groups. Trustees in each group are elected to three-year terms. As the trustees' terms expire, replacements are elected by a majority of the outstanding Shares. The classified nature of the trustees may make it more difficult for the shareholders to remove the management of the Company than if all trustees were elected on an annual basis. Vacancies may be filled by a majority of the remaining trustees, except that a vacancy among the Independent Trustees must be filled by a majority of the remaining Independent Trustees or by majority vote of the Company's shareholders. Any trustee may be removed for cause by all the remaining trustees, or with or without cause by vote of two-thirds of the Shares then outstanding and entitled to vote thereon. The provisions regarding business combinations and the classified nature of the trustees and certain other matters may not be repealed or amended without the affirmative vote of at least 75% of the shareholders of the Company, provided that the trustees, by two-thirds vote, may, without the approval or consent of the shareholders adopt any amendment that they in good faith determine to be necessary to permit the Company to qualify as a REIT under the Code. The foregoing provisions may have the effect of discouraging unilateral tender offers or other takeover proposals which certain shareholders might deem in their interests or pursuant to which they might receive a substantial premium for their Shares. The provisions could also have the effect of insulating current management against the possibility of removal and could, by possibly reducing temporary fluctuations in market price caused by accumulations of shares, deprive shareholders of opportunities to sell at a temporarily higher market price. However, the Trustees believe that inclusion of the business combination provisions in the Declaration may help assure fair treatment of shareholders and preserve the assets of the Company. CONTROL SHARE ACQUISITION Maryland law provides for a limitation of voting rights in a "control share acquisition". The Maryland statute defines a "control share acquisition" at the 20%, 33 1/3% and 50% acquisition levels, and requires a two-thirds vote (excluding shares owned by the acquiring person and certain members of management) to accord voting rights to shares acquired in a control share acquisition. The statute would require the target company to hold a special meeting at the request of an actual or proposed control share acquiror subject to compliance with certain conditions by such acquiror. In addition, unless the charter, declaration of trust or By-Laws provide otherwise, the statute gives the Company, within certain time limitations, various redemption rights if there is a shareholder vote on the issue and the grant of voting rights is not approved, or if an "acquiring person statement" is not delivered to the target company within 10 days following a control share acquisition. Moreover, unless the charter, declaration of trust or By-Laws provide otherwise, the statute provides that if, before a control share acquisition occurs, voting rights for "control shares" are approved at a shareholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, then all other shareholders may exercise appraisal rights. The statute does not apply to shares acquired in a merger, 19 50 consolidation or share exchange if the Company is a party to the transaction. An acquisition of shares may be exempted from the control share statute provided that a charter, declaration of trust or By-Law provision is adopted for such purpose prior to the control share acquisition. There are no such provisions in the Declaration or By-Laws of the Company. DESCRIPTION OF COMMON SHARE WARRANTS The Company may issue Common Share Warrants for the purchase of Common Shares. Common Share Warrants may be issued independently or together with any other Offered Securities offered by any Prospectus Supplement and may be attached to or separate from such Offered Securities. Each series of Common Share 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 Common Share Warrants of such series and will not assume any obligation or relationship of agency or trust for or with any holders or beneficial owners of Common Share Warrants. The following sets forth certain general terms and provisions of the Common Share Warrants offered hereby. Further terms of the Common Share Warrants and the applicable Warrant Agreement will be set forth in the applicable Prospectus Supplement. The applicable Prospectus Supplement will describe the terms of the Common Share Warrants in respect of which this Prospectus is being delivered, including, where applicable, the following: (1) the title of such Common Share Warrants; (2) the aggregate number of such Common Share Warrants; (3) the price or prices at which such Common Share Warrants will be issued; (4) the designation, number and terms of Common Shares purchasable upon exercise of such Common Share Warrants; (5) the designation and terms of the other Offered Securities with which such Common Share Warrants are issued and the number of such Common Share Warrants issued with each such Offered Security; (6) the date, if any, on and after which such Common Share Warrants and the related Common Shares will be separately transferable; (7) the price at which each Common Share purchasable upon exercise of such Common Share Warrants may be purchased; (8) the date on which the right to exercise such Common Share Warrants shall commence and the date on which such right shall expire; (9) the minimum or maximum amount of such Common Share 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 considerations; and (12) any other terms of such Common Share Warrants, including terms, procedures and limitations relating to the exchange and exercise of such Common Share Warrants. RATIOS OF EARNINGS TO FIXED CHARGES The Company's ratio of earnings to fixed charges for the years ended December 31, 1989, 1990, 1991, 1992 and 1993 and the quarter ended March 31, 1994 was 1.8x, 2.4x, 2.8x, 3.6x, 6.8x and 9.6x, respectively. To 20 51 date, the Company has not issued any preferred shares; therefore, the ratios of earnings to combined fixed charges and preferred share dividends are unchanged from the ratios presented in this section. For purposes of computing these ratios, earnings have been calculated by adding fixed charges (excluding capitalized interest) to income (loss) before income taxes and extraordinary items. Fixed charges consist of interest costs, whether expensed or capitalized, the interest component of rental expense, and amortization of debt discounts and issue costs, whether expensed or capitalized. PLAN OF DISTRIBUTION The Company may sell the Offered Securities to one or more underwriters for public offering and sale by them or may sell the Offered Securities to investors directly or through agents. Any such underwriter or agent involved in the offer and sale of the Offered Securities will be named in the applicable Prospectus Supplement. Underwriters may offer and sell the Offered Securities at a fixed price or prices, which may be changed, at prices related to the prevailing market prices at the time of sale or at negotiated prices. The Company also may offer and sell the Offered Securities in exchange for one or more of its then outstanding issues of debt or convertible debt securities. The Company also may, from time to time, authorize underwriters acting as the Company's agents to offer and sell the Offered Securities upon the terms and conditions as are set forth in the applicable Prospectus Supplement. In connection with the sale of Offered Securities, underwriters may be deemed to have received compensation from the Company in the form of underwriting discounts or commissions and may also receive commissions from purchasers of Offered Securities for whom they may act as agent. Underwriters may sell Offered Securities to or through dealers, and such dealers may receive compensation in the form of discounts, commissions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any underwriting compensation paid by the Company to underwriters or agents in connection with the offering of Offered Securities, and any discounts, concessions or commissions allowed by underwriters to participating dealers, are set forth in the applicable Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Offered 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 Offered Securities may be deemed to be underwriting discounts and commissions, under the Securities Act of 1933. Underwriters, dealers and agents may be entitled, under agreements entered into with the Company, to indemnification against and contribution toward certain civil liabilities, including liabilities under the Securities Act. If so indicated in the applicable Prospectus Supplement, the Company will authorize dealers acting as the Company's agents to solicit offers by certain institutions to purchase Offered Securities from the Company at the public offering price set forth in such Prospectus Supplement pursuant to Delayed Delivery Contracts ("Contracts") providing for payment and delivery on the date or dates stated in such Prospectus Supplement. Each Contract will be for an amount not less than, and the aggregate principal amount of Offered Securities sold pursuant to Contracts shall be not less than, and the aggregate principal amount of Offered Securities sold pursuant to Contracts shall not be less nor more than, the respective amounts stated 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 shall not be subject to any conditions except (i) the purchase by an institution of the Offered Securities covered by its Contracts shall not at the time of delivery be prohibited under the law of any jurisdiction in the United States to which such institution is subject, and (ii) if the Offered Securities are being sold to underwriters, the Company shall have sold to such underwriters the total principal amount of the Offered Securities less the principal amount thereof covered by Contracts. Certain of the underwriters and their affiliates may be customers of, engage in transactions with and perform services for the Company and its subsidiaries in the ordinary course of business. 21 52 LEGAL MATTERS Certain legal matters with respect to the Shares offered by the Company will be passed upon for the Company by Sullivan & Worcester, Boston, Massachusetts and for any underwriters, dealers or agents by counsel named in the applicable Prospectus Supplement. Sullivan & Worcester and such counsel will rely, as to all matters of Maryland law, upon the opinion of Piper & Marbury, Baltimore, Maryland. Barry M. Portnoy, a partner in the firm of Sullivan & Worcester, is a trustee of the Company, a director and 50% shareholder of each of HRPT Advisors, Inc., the Company's investment advisor (the "Advisor"), Connecticut Subacute Corporation ("CSC"), and Connecticut Subacute Corporation II ("CSCII") and a director of Horizon. Sullivan & Worcester represents the Advisor, CSC, CSCII and certain affiliates of each of the foregoing on various matters. CSC, CSCII and Horizon are tenants of the Company. EXPERTS The financial statements of the Company appearing in the Company's Annual Report (Form 10-K) for the year ended December 31, 1993; the consolidated financial statements of Greenery appearing in the Greenery Annual Report (Form 10-K) for the year ended September 30, 1993; and the consolidated financial statements of GranCare appearing in the GranCare Annual Report (Form 10-K) for the year ended December 31, 1993, have been audited by Ernst & Young, independent auditors, as set forth in their reports thereon included therein and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The audited consolidated financial statements and schedules of Horizon incorporated by reference in this Prospectus and elsewhere in the registration statement to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen & Co. and KPMG Peat Marwick, independent public accountants, and are included herein in reliance upon the authority of said firms as experts in giving said reports. The consolidated financial statements and schedules of Marriott incorporated by reference in this Prospectus and elsewhere in the registration statement have been audited by Arthur Andersen & Co., independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. Reference is made to said report, which includes an explanatory paragraph with respect to the change in the method of accounting for income taxes as discussed in "Income Taxes" in the notes to the consolidated financial statements. THE DECLARATION OF TRUST ESTABLISHING THE COMPANY, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND REHABILITATION PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. 22 53 ================================================================================ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON 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 SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY 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. ------------------------ TABLE OF CONTENTS PROSPECTUS SUPPLEMENT Summary.............................. S-3 Business............................. S-5 Use of Proceeds...................... S-9 Capitalization....................... S-10 Selected Financial Data.............. S-11 Ratio of EBITDA to Interest Expense............................ S-12 Management........................... S-13 Description of the Notes............. S-14 Underwriting......................... S-21 Legal Matters........................ S-21 Unaudited Adjusted Financial Statements......................... F-1 PROSPECTUS Available Information................ 2 Incorporation of Certain Documents by Reference.......................... 2 The Company.......................... 3 Use of Proceeds...................... 3 Description of Debt Securities....... 3 Description of Shares................ 13 Description of Preferred Shares...... 13 Description of Common Share Warrants........................... 20 Ratios of Earnings to Fixed Charges............................ 20 Plan of Distribution................. 21 Legal Matters........................ 22 Experts.............................. 22
================================================================================ ================================================================================ HEALTH AND REHABILITATION PROPERTIES TRUST $75,000,000 FLOATING RATE SENIOR NOTES, SERIES A, DUE 1999 $125,000,000 FLOATING RATE SENIOR NOTES, SERIES B, DUE 1999 ------------------------ PROSPECTUS SUPPLEMENT ------------------------ MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. PAINEWEBBER INCORPORATED JUNE 29, 1994 ================================================================================ 54 APPENDIX TO ELECTRONIC FORMAT DOCUMENT Page S-3: Pie Chart A pie chart depicting HRP Capitalization after the sale of Notes: debt $217,600 (26%) and equity $625,803 (74%). Page S-3: Pie Chart A pie chart depicting HRP Lessees and Mortgagors after the consummation of the Marriott transaction showing the Company's investments in Properties operated by Marriott International (38%); Other Public Companies (Horizon Healthcare, GranCare, Sun Healthcare, Integrated Health, Beverly Enterprises and Hillhaven) (31%); and 29 Private Companies (31%). Page S-5: Map A map of the United States with the states listed immediately below the map shaded to indicate the location of the HRP properties. Page S-6: Pie Charts [top of page] Two pie charts depicting the division of HRP's portfolio by type of property: Nursing homes, assisted living and retirement communities (97%) and two psychiatric hospitals (3%); and by type of investment: purchase and lease (81%) and mortgages (19%). Page S-6: Pie Charts [bottom of page] Two pie charts depicting the HRP Capital Structure before the sale of Notes: debt (4%) and equity (96%); after the sale of Notes and Completion of the Marriott Transaction: debt (26%) and equity (74%). Page S-12: Coverage Chart A bar graph depicting HRP's EBITDA to Interest Coverage: 1989 (2.3x); 1990 (3.0x); 1991 (3.5x); 1992 (4.8x); 1993 (8.5x); and as adjusted (7.6x). -----END PRIVACY-ENHANCED MESSAGE-----