Filed pursuant to Rule 424(b)(5)
PROSPECTUS SUPPLEMENT Registration Nos. 333-40055
(To Prospectus Dated June 10, 1998) and 333-40055-01
7,000,000 Depositary Shares
MEDITRUST CORPORATION
EACH REPRESENTING ONE-TENTH OF A SHARE OF
9% SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK
--------------
(Par Value $0.10 per Share of Preferred Stock)
(Liquidation Preference $25 per Depositary Share)
--------------
Each of the 7,000,000 Depositary Shares offered hereby (the "Depositary
Shares") represents a one-tenth interest in a share of 9% Series A Cumulative
Redeemable Preferred Stock, par value $0.10 per share (the "Series A Preferred
Stock"), of Meditrust Corporation (the "Corporation"), a self-administered real
estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as
amended, to be deposited with the Preferred Stock Depositary (as defined
herein), and entitles the holder to all proportionate rights and preferences of
the Series A Preferred Stock (including dividend, voting, redemption and
liquidation rights and preferences). The liquidation preference of each share of
Series A Preferred Stock is $250 (equivalent to $25 per Depositary Share). See
"Description of the Series A Preferred Stock and Depositary Shares."
Dividends on the Series A Preferred Stock are cumulative from the date of
original issuance and are payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year (or, if not a business day, on
the next succeeding business day), commencing September 30, 1998, at the rate
of 9% of the liquidation preference per annum (equivalent to an annual
rate of $2.25 per Depositary Share). See "Description of the Series A
Preferred Stock and Depositary Shares--Dividends."
The Series A Preferred Stock and the Depositary Shares representing such
Series A Preferred Stock are not redeemable prior to June 17, 2003. On and
after June 17, 2003, the Series A Preferred Stock may be redeemed for cash at
the option of the Corporation, in whole or from time to time in part, at a
redemption price of $250 per share (equivalent to $25 per Depositary Share),
plus accrued and unpaid dividends, if any, to the redemption date. The
redemption price (other than the portion consisting of accrued and unpaid
dividends) will be payable solely out of the sale proceeds of other capital
stock of the Corporation, which may include other series of the Corporation's
preferred stock, and from no other source. The Series A Preferred Stock has
no stated maturity and will not be subject to any sinking fund or mandatory
redemption and, except under the limited circumstances described below,
will not be convertible into any other securities of the Corporation.
See "Description of the Series A Preferred Stock and Depositary Shares
--Redemption." However, the Corporation will be entitled to purchase Series A
Preferred Stock and Depositary Shares from the holders thereof to preserve
its status as a REIT for Federal income tax purposes. In addition, certain
proposed amendments to the Corporation's certificate of incorporation, if
approved by its stockholders, would, among other things (i) provide for the
Series A Preferred Stock to be converted into Excess Stock (as defined
herein) if a holder acquired more than 9.25% of the outstanding shares of
Series A Preferred Stock and (ii) permit the Corporation to purchase such
Excess Stock. See "Restrictions on Ownership and Transfer."
--------------
Application has been made to list the Depositary Shares on the New York Stock
Exchange (the "NYSE"). If approval is obtained, trading of the Depositary
Shares on the NYSE is expected to commence within a 30-day period after
the initial delivery of the Depositary Shares. The Series A Preferred Stock
represented by the Depositary Shares will not be so listed, and the
Corporation does not expect that there will be any trading market for the
Series A Preferred Stock except as represented by the
Depositary Shares. See "Underwriters."
--------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS
FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE DEPOSITARY SHARES.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PRICE $25 PER DEPOSITARY SHARE
--------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Corporation(3)
---------------- ---------------- ---------------
<S> <C> <C> <C>
Per Depositary Share ......... $25.00 $.7875 $24.2125
Total(4) ..................... $175,000,000 $5,512,500 $169,487,500
</TABLE>
- ------------
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) The Corporation has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(3) Before deducting expenses payable by the Corporation estimated at $500,000.
(4) The Corporation has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
1,050,000 additional Depositary Shares at the price to public, less
underwriting discounts and commissions, for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total price to public, underwriting discounts and commissions and
proceeds to Corporation will be $201,250,000, $6,339,375 and $194,910,625,
respectively. See "Underwriters."
--------------
The Depositary Shares are offered by the Underwriters, subject to prior
sale, when, as and if accepted by the Underwriters and subject to approval of
certain legal matters by Brown & Wood LLP, counsel for the Underwriters. It is
expected that delivery of temporary Depositary Receipts (as defined herein)
evidencing the Depositary Shares will be made on or about June 17, 1998 at the
office of Morgan Stanley & Co. Incorporated, New York, New York, against payment
therefor in immediately available funds.
--------------
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
--------------
BT ALEX. BROWN DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
June 10, 1998
<PAGE>
No person is authorized in connection with the offering made hereby to give
any information or to make any representation other than those contained or
incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Corporation or by any Underwriter.
This Prospectus Supplement and the accompanying Prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, any security other than the
securities offered hereby, nor do they constitute an offer to sell, or a
solicitation of an offer to buy, any of the securities offered hereby to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus Supplement
or the accompanying Prospectus nor any offer or sale made hereunder or
thereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Corporation since the date hereof.
Unless otherwise expressly stated or the context otherwise requires, all of
the information set forth in this Prospectus Supplement assumes that the
over-allotment option granted to the Underwriters is not exercised.
----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Meditrust Companies ................................................... S-3
Certain Recent Developments ............................................... S-5
Properties ................................................................ S-7
Use of Proceeds ........................................................... S-8
Capitalization ............................................................ S-8
Selected Historical Financial Data ........................................ S-10
Selected Pro Forma Financial Data ......................................... S-14
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... S-16
Description of the Series A Preferred Stock and Depositary Shares ......... S-23
Restrictions on Ownership and Transfer .................................... S-28
Certain Federal Income Tax Considerations ................................. S-32
Underwriters .............................................................. S-34
Legal Matters ............................................................. S-35
Forward-Looking Statements ................................................ S-36
Unaudited Pro Forma Financial Statements .................................. F-1
</TABLE>
Prospectus
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Available Information ..................................................... 2
Incorporation of Certain Documents By Reference ........................... 3
Risk Factors .............................................................. 4
The Meditrust Companies ................................................... 19
Ratios of Earnings to Fixed Charges and to Combined Fixed Charges
and Preferred Stock Dividends ........................................... 21
Use of Proceeds ........................................................... 21
Description of Capital Stock .............................................. 22
Description of Paired Common Stock ........................................ 27
Description of Preferred Stock ............................................ 27
Description of Depositary Shares .......................................... 34
Description of Series Common Stock ........................................ 39
Description of Debt Securities ............................................ 41
Description of Securities Warrants ........................................ 45
Federal Income Tax Considerations ......................................... 48
Plan of Distribution ...................................................... 58
Legal Matters ............................................................. 59
Interests of Named Experts and Counsel .................................... 59
Experts ................................................................... 59
</TABLE>
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEPOSITARY SHARES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE, DEPOSITARY SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
S-2
<PAGE>
THE MEDITRUST COMPANIES
Unless otherwise expressly stated or the context otherwise requires (i)
references to the "Corporation" mean Meditrust Corporation, a Delaware
corporation, and its consolidated subsidiaries and its predecessor, Meditrust, a
Massachusetts business trust, and its consolidated subsidiaries (Meditrust is
sometimes referred to herein as the "Corporation's Predecessor"), (ii)
references to the "Operating Company" mean Meditrust Operating Company, a
Delaware corporation, and its consolidated subsidiaries, and (iii) references to
the "Companies" or "The Meditrust Companies" mean the Corporation and the
Operating Company.
The Corporation
The Corporation is a self-administered real estate investment trust (a
"REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), which
has historically invested primarily in health care related real property in
locations throughout the United States. The Corporation also invests in other
entities outside of the United States which make similar health care related
real property investments. As a result of recent acquisitions, the Corporation
also owns golf courses and golf related properties. In addition, the Corporation
owns an approximately 400 acre parcel of land in Arcadia, California on which
Santa Anita Park, a thoroughbred horse racing facility (the "Race Track"), is
located, a 50% interest in the operations of the Santa Anita Fashion Park Mall,
a 1.1 million square foot regional shopping mall, and Santa Anita Medical Plaza,
a six story, 85,000 square foot medical office building, and certain land under
development and held for development. Additionally, the Corporation owns a
24-acre undeveloped land parcel in Southern California.
As described below under "Certain Recent Developments," the Companies have
entered into an agreement to acquire La Quinta Inns, Inc. ("La Quinta"), a
fully-integrated lodging company, and on May 29, 1998 acquired Cobblestone
Holdings, Inc. ("Cobblestone"), a privately-held company which owned and
operated golf courses in the United States. As a result of the Cobblestone
acquisition, the Corporation has made a significant investment in golf courses.
If the La Quinta acquisition is consummated, the Corporation will have made a
significant investment in hotels and related lodging facilities. See "Certain
Recent Developments" and "Unaudited Pro Forma Financial Statements."
The Corporation's total gross investments were $3,167,723,000 at March 31,
1998. As of March 31, 1998, the Corporation had investments in 466 health care
related facilities, consisting of 216 long-term care facilities, 26
rehabilitation hospitals, 186 retirement and assisted living facilities, six
psychiatric, alcohol and substance abuse facilities, 31 medical office
buildings, one acute care hospital campus and, as described above, also owned
the Race Track, five golf courses, a 50% interest in a fashion mall, and land
under development and land held for development. As of March 31, 1998, the
properties were located in 40 different states and the health care related
properties were operated by 37 health care companies. Of the 37 different
operators, as of March 31, 1998, 14 were publicly-traded companies (i.e., Sun
Healthcare Group, Inc., Emeritus Corporation, Tenet Healthcare, Harborside
Healthcare Corporation, ARV Assisted Living, Columbia/HCA Healthcare
Corporation, Integrated Health Services, Inc., Alternative Living Services,
Inc., HealthSouth Rehabilitation Corporation, Assisted Living Concepts, Inc.,
Mariner Health Group, Inc., Karrington HealthCare, Inc., Genesis Healthcare
Ventures, Inc. and Youth Services International, Inc.). At March 31, 1998,
long-term care facilities constituted approximately 46% of the Corporation's
total real estate investments.
Historically, the Corporation's investments have typically taken the form
of permanent mortgage loans, sale/ leaseback transactions and development
projects. Generally, the Corporation has entered into development projects
where, upon completion of the facility, the Corporation's development funding is
to be replaced by either a permanent mortgage loan or a sale/leaseback
transaction with the Corporation. As of March 31, 1998 permanent mortgage loans
constituted 35%, sale/leaseback transactions constituted 51%, development
financing constituted 7%, and medical office buildings owned and managed by the
Corporation constituted 7% of the Corporation's portfolio as measured by gross
real estate investments.
The Corporation was organized to qualify, and intends to continue to
operate, as a REIT in accordance with Federal tax laws and regulations. So long
as the Corporation so complies, with limited exceptions, the Corporation will
not be taxed under Federal income tax laws on that portion of its taxable income
that it distributes to its shareholders. See "Risk Factors--Tax Risks Related to
Real Estate Investment Trusts" and "Federal Income Tax Considerations" in the
accompanying Prospectus and "Certain Federal Income Tax Considerations" herein.
S-3
<PAGE>
The Operating Company
The Operating Company is engaged in thoroughbred horse racing and, as a
result of the recent Cobblestone acquisition, the operation of golf course
properties. The thoroughbred horse racing operation is conducted by Los Angeles
Turf Club, Incorporated ("LATC") (a wholly-owned subsidiary of The Santa Anita
Companies, Inc., itself a wholly-owned subsidiary of the Operating Company),
which leases the Race Track from the Corporation. The Operating Company believes
that the Race Track is one of the premier thoroughbred horse racing venues in
North America. The Operating Company has conducted a winter live thoroughbred
horse racing meet at the Race Track each year since 1934 (except for three years
during World War II). In addition, the Race Track has been the site of a fall
meet conducted by Oak Tree Racing Association, which has subleased the Race
Track from LATC since 1969. The Race Track was the location of the 1986 and 1993
Breeders' Cup Championships. As a result of the recent acquisitions, including
the Cobblestone acquisition, the Operating Company manages, through
subsidiaries, golf courses and golf related facilities in Arizona, California,
Florida, Georgia, Texas and Virginia.
Santa Anita Mergers
On November 5, 1997, the Corporation's Predecessor merged with Santa Anita
Realty Enterprises, Inc. ("Realty"), with Realty as the surviving corporation,
whereupon Realty changed its name to Meditrust Corporation. At the same time,
Meditrust Acquisition Company ("MAC"), a Massachusetts business trust and newly
formed subsidiary of the Corporation's Predecessor, merged with Santa Anita
Operating Company ("SAOC"), with SAOC as the surviving corporation, whereupon
SAOC changed its name to Meditrust Operating Company. The mergers (the "Santa
Anita Mergers") were accounted for as reverse acquisitions whereby the
Corporation's Predecessor and MAC were treated as the acquirors for accounting
purposes. Accordingly, unless otherwise expressly stated or the context
otherwise requires, the historical financial information with respect to the
Corporation, the Operating Company and the Companies included in this Prospectus
Supplement, the accompanying Prospectus and the documents incorporated or deemed
to be incorporated by reference therein as of any dates and for any periods
prior to November 5, 1997 is that of the Corporation's Predecessor and MAC and
not of Realty or SAOC.
Series A Preferred Stock Constitutes an Equity Interest Only in the Corporation
As described in the accompanying Prospectus, the Corporation is a "paired
share" real estate investment trust because the shares of its common stock (the
"REIT Common Stock") may be issued and transferred only together with an equal
number of shares of common stock of the Operating Company (the "Operating Common
Stock" and, together with the REIT Common Stock, the "Paired Common Stock" or
the "Shares"). The Shares trade as a single unit on the NYSE. See "Description
of Capital Stock--The Pairing" in the accompanying Prospectus.
The Series A Preferred Stock is being issued exclusively by the Corporation
and will constitute an equity interest only in the Corporation. The Series A
Preferred Stock will not constitute an equity interest in, and will not
otherwise be an obligation of, the Operating Company. The Series A Preferred
Stock and the Depositary Shares will not be paired with any capital stock of the
Operating Company.
In that regard, this Prospectus Supplement, the accompanying Prospectus and
the documents incorporated or deemed to be incorporated by reference therein
include historical and pro forma financial statements and other information
concerning the Corporation as well as the combined Companies and the Operating
Company. Although the Corporation believes that prospective investors should
carefully evaluate all such information in making their investment decision,
prospective investors are reminded that the Operating Company will have no
obligation whatsoever with respect to the Series A Preferred Stock or the
Depositary Shares offered hereby.
S-4
<PAGE>
CERTAIN RECENT DEVELOPMENTS
On January 3, 1998, the Companies entered into a merger agreement with La
Quinta pursuant to which La Quinta will merge with and into the Corporation with
the Corporation being the surviving corporation (the "La Quinta Merger"). If the
La Quinta Merger is consummated, holders of La Quinta common stock will receive
in exchange therefor cash and newly-issued shares of Paired Common Stock of the
Companies with an aggregate value of approximately $1.65 billion, subject to
certain adjustments. In addition, the Corporation will assume or retire
approximately $961 million of La Quinta's existing indebtedness. La Quinta is a
fully- integrated lodging company that focuses on the ownership, operation and
development of its two hotel products: (i) La Quinta Inns, a chain positioned in
the mid-price segment without food and beverage facilities, and (ii) La Quinta
Inn & Suites, a new concept positioned at the upper end of the mid-price segment
without food and beverage facilities. As of April 22, 1998, La Quinta owned and
operated 274 hotels with a total of over 35,000 rooms. The La Quinta Merger is
expected to close in the second quarter of 1998 and is subject to various
conditions including approval of the La Quinta Merger by two-thirds of the
outstanding shares of La Quinta common stock, by a majority of the outstanding
shares of the Corporation and by a majority of the outstanding shares of the
Operating Company. Only shareholders of record on April 22, 1998 will be
entitled to vote in respect of the La Quinta Merger and, accordingly, holders of
the Depositary Shares offered hereby will not be entitled to vote in respect
thereof.
On May 29, 1998, the Companies completed the acquisition of Cobblestone,
parent of Cobblestone Golf Group, Inc., in which Cobblestone merged with and
into the Corporation with the Corporation as the surviving corporation (the
"Cobblestone Merger"). As a result of the Cobblestone Merger, holders of all of
the issued and outstanding preferred and common stock of Cobblestone received in
exchange therefor approximately 8,177,300 newly-issued shares of Paired Common
Stock of the Companies with an aggregate market value of approximately $230
million. In addition, under the terms of the Cobblestone merger agreement,
approximately $169 million of Cobblestone debt and associated costs were paid
off in cash by the Corporation at the time of the Cobblestone Merger with the
proceeds from borrowings under the Corporation's credit facilities. Cobblestone
was previously a privately-held company which owned and operated golf courses in
the United States. As a result of the Cobblestone Merger, the Corporation
succeeded to Cobblestone's portfolio of 27 facilities with 31 golf courses in
Arizona, California, Florida, Georgia, Texas and Virginia. The portfolio
includes ten private country clubs, eight semi-private clubs and nine daily fee
courses.
Although the Corporation believes that the La Quinta Merger will be
consummated as planned, the La Quinta Merger is subject to various conditions
and contingencies, and there can be no assurance that the terms of such merger
will not be changed or that such merger will be consummated by the currently
anticipated date or at all. In addition, prospective investors should carefully
review the information under "Risk Factors" in the accompanying Prospectus for a
description of certain risks relating to both the proposed La Quinta Merger and
the assets and businesses acquired in the Cobblestone Merger. In that regard,
the Corporation will require additional financing in order to fund the cash
payable in connection with the La Quinta Merger (including an anticipated cash
dividend which the Corporation will be required to distribute in connection
therewith) and to assume or retire indebtedness in connection with the La Quinta
Merger. The Corporation is currently evaluating a number of possible sources of
funding for the foregoing purposes.
On March 6, 1998, the Corporation entered into an agreement to acquire five
golf courses located in Texas from the IRI Golf Group ("IRI"), a privately held
owner and manager of golf facilities, for $41 million in cash. The Corporation
completed the acquisition of three of the courses on the same date, and the
acquisitions of the other two courses closed shortly thereafter. The Corporation
also acquired an 18-hole golf course facility in Virginia on May 4, 1998 for a
purchase price of $8.65 million in cash, a golf course in Georgia on May 19,
1998 for a purchase price of $13.3 million in cash and has agreed to purchase a
total of eleven additional golf courses located in Florida, North Carolina, New
Jersey and Texas from several different sellers for an aggregate of
approximately $117 million in cash. There can be no assurance that these pending
acquisitions will be completed. The golf courses currently owned by the
Corporation are being managed by subsidiaries of the Operating Company.
On February 26, 1998, the Companies entered into two transactions with
Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill
Lynch & Co., Inc. ("MLI"). Pursuant to the terms of a stock purchase agreement,
MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock
from each of the Companies at a purchase price of $32.625 per share. The Series
A Non-Voting Convertible Common Stock is non-voting paired Series Common Stock
(as defined in the accompanying Prospectus) that will convert to shares of
S-5
<PAGE>
Paired Common Stock on the earlier of (a) the business day following the date on
which the stockholders of the Companies have approved the La Quinta Merger or
(b) the date of any termination of the La Quinta merger agreement. Net proceeds
from this private placement of securities were approximately $272,000,000 and
were used by the Companies to repay existing indebtedness. In addition, pursuant
to the terms of the stock purchase agreement, MLI is prohibited from disposing
of these shares during the period in which the Meeting Day Price (as defined
under "Unaudited Pro Forma Financial Statements") is determined. In connection
with the issuance of the Series A Non-Voting Convertible Common Stock, the
Companies entered into a Purchase Price Adjustment Mechanism Agreement, dated as
of February 26, 1998, with MLI (the "Price Adjustment Agreement"), pursuant to
which the parties agreed to adjust the purchase price of the 8,500,000 paired
shares of Series A Non-Voting Convertible Common Stock on or prior to February
26, 1999 by the difference between (i) the market price for the Shares at the
time of the settlement and (ii) a reference price (the "Reference Price") based
on the closing price for the Shares on February 25, 1998 plus a forward
accretion, minus an adjustment to reflect distributions on the Shares during the
transaction period (such difference, the "Price Difference"). If the Price
Difference is positive, MLI is obligated to deliver Shares or cash to the
Companies equal in value to the aggregate Price Difference. If the Price
Difference is negative, the Companies are obligated to deliver additional Shares
equal in value to the aggregate Price Difference to MLI. In the event that the
market price for the Shares at the time of settlement is lower than the
Reference Price, the Companies will have to deliver additional Shares to MLI,
which would have dilutive effects on the capital stock of the Companies.
Additionally, under certain adverse market conditions, MLI has the right to
accelerate the settlement of all or a portion of the obligation under the Price
Adjustment Agreement. Such early settlement may force the Companies to issue
Shares at a depressed price, which may heighten the dilutive effects on the
capital stock of the Companies.
In connection with its annual meeting of shareholders to be held on June
18, 1998, the Corporation is soliciting the vote of its shareholders to approve
certain amendments to its certificate of incorporation which, if approved, would
add certain additional, more stringent, restrictions on the ownership and
transfer of the Corporation's capital stock (including the Series A Preferred
Stock) which are intended to preserve the Corporation's status as a REIT for
federal income tax purposes. Only shareholders of the Corporation of record on
April 22, 1998 will be entitled to vote in respect of such proposed amendments
and, accordingly, holders of the Depositary Shares offered hereby will not be
entitled to vote in respect of such proposed amendments. See "Restrictions on
Ownership and Transfer."
On June 9, 1998, the Corporation obtained signed commitments from a bank
group to provide a $2.25 billion credit facility. If this new credit facility is
entered into, it will replace the Corporation's current $365 million credit
facilities. The commitments of the bank group are subject to certain conditions.
For certain other recent developments, see "The Meditrust Companies--Recent
Developments" in the accompanying Prospectus.
S-6
<PAGE>
PROPERTIES
The following chart sets forth certain information regarding the
Corporation's properties on a state-by-state basis as of March 31, 1998:
<TABLE>
<CAPTION>
Number of Investments(1)
State Properties (in thousands) % of Total
- ----------------------------- ------------ ------------------- -----------
<S> <C> <C> <C>
Alabama ..................... 1 $ 7,759 .24%
Arizona ..................... 12 143,826 4.54%
Arkansas .................... 7 37,594 1.19%
California .................. 24 386,187 12.19%
Colorado .................... 17 87,761 2.77%
Connecticut ................. 17 122,529 3.87%
Delaware .................... 1 3,928 .12%
Florida ..................... 65 468,679 14.80%
Georgia ..................... 1 2,489 .08%
Idaho ....................... 7 47,491 1.50%
Indiana ..................... 17 84,273 2.66%
Kansas ...................... 10 37,660 1.19%
Kentucky .................... 2 25,054 .79%
Louisiana ................... 3 30,670 .97%
Maryland .................... 1 18,188 .57%
Massachusetts ............... 40 368,526 11.63%
Michigan .................... 13 64,684 2.04%
Minnesota ................... 6 7,211 .23%
Missouri .................... 19 83,685 2.64%
Mississippi ................. 1 6,520 .21%
Nebraska .................... 3 12,609 .40%
New Hampshire ............... 7 46,598 1.47%
New Jersey .................. 10 141,093 4.45%
New Mexico .................. 1 10,967 .35%
Nevada ...................... 4 31,877 1.01%
New York .................... 9 93,104 2.94%
North Carolina .............. 8 38,205 1.21%
Ohio ........................ 22 91,332 2.88%
Oklahoma .................... 3 3,335 .11%
Oregon ...................... 1 3,050 .10%
Pennsylvania ................ 19 70,371 2.22%
Rhode Island ................ 2 15,015 .47%
South Carolina .............. 4 24,597 .78%
Tennessee ................... 12 78,623 2.48%
Texas ....................... 49 262,052 8.27%
Utah ........................ 4 24,721 .78%
Washington .................. 16 87,626 2.77%
West Virginia ............... 8 30,349 .96%
Wisconsin ................... 25 49,300 1.56%
Wyoming ..................... 3 18,185 .56%
--- ---------- -----
Total Portfolio ......... 474 $3,167,723(2) 100%
=== ========== =====
</TABLE>
- ------------
(1) Historically, the Corporation's investments have taken the form of
permanent mortgage loans, sale/lease back transactions and development
projects. Data in this column represents, for operating facilities, the
purchase price of properties owned by the Corporation or the mortgage
amount in the case of mortgage loans made by the Corporation and, for
facilities under construction, the estimated construction loan amount. In
the case where mortgage debt encumbers multiple properties, allocation of
such mortgage investment to each property is based on third party
appraisals of such properties.
(2) Includes $1,252,674,000 of mortgage loans.
S-7
<PAGE>
USE OF PROCEEDS
The net proceeds to the Corporation from the sale of the Depositary Shares
offered hereby are estimated to be approximately $169 million (approximately
$194.4 million if the Underwriters' over-allotment is exercised in full). The
Corporation will use the net proceeds of this offering to repay debt outstanding
under its Revolving Loan Agreements (as defined in the accompanying Prospectus)
with Fleet National Bank, as agent, and certain other financial institutions,
and with Via Banque, which Agreements currently provide for interest at the
prime rate or LIBOR plus 0.875% on all outstanding balances. Both of the
Revolving Loan Agreements terminate in September 1999. The proceeds of such
indebtedness were used for real estate investments in health care and golf
course properties, including the acquisition of Cobblestone. See
"Capitalization." Amounts repaid under the Revolving Loan Agreements with the
net proceeds of the offering made hereby may, subject to the terms and
conditions of the Revolving Loan Agreements, be reborrowed from time to time.
CAPITALIZATION
The following table sets forth (i) the historical capitalization for the
Corporation and its consolidated subsidiaries as of March 31, 1998, (ii) the pro
forma capitalization of the Corporation and its consolidated subsidiaries as of
such date after giving pro forma effect to the proposed La Quinta Merger and
Cobblestone Merger as if such transactions had been consummated as of March 31,
1998, and (iii) on such pro forma basis and as further adjusted to give effect
to the offering made hereby and the application of the estimated net proceeds
therefrom as described above under "Use of Proceeds." The following table should
be read in conjunction with, and is qualified in its entirety by reference to,
the information set forth herein under "Unaudited Pro Forma Financial
Statements" and the historical financial statements and notes thereto of the
Corporation, The Meditrust Companies, the Operating Company, La Quinta and
Cobblestone and the other historical and pro forma financial data included in
this Prospectus Supplement, the accompanying Prospectus and the documents
incorporated or deemed to be incorporated by reference therein. In particular,
the following pro forma information is subject to a number of estimates,
assumptions and other uncertainties and does not purport to be indicative of the
actual capitalization that would have occurred had the transactions and events
reflected therein in fact occurred on the dates specified or to be indicative of
the Corporation's capitalization as of any future date. In that regard, the
number of Shares issuable in the La Quinta Merger will depend upon the Meeting
Date Price (as defined below under "Unaudited Pro Forma Financial Statements")
of the Shares and the following pro forma financial information assumes a
Meeting Date Price of $30.40 per Share. The actual Meeting Date Price, as
announced by the Corporation on June 9, 1998, is $28.75625 per Share. Under the
terms of the La Quinta merger agreement this decline from the assumed Meeting
Date Price of $30.40 per Share will not result in a change in the number of
Shares assumed to be issued in the La Quinta Merger. In addition, the following
pro forma financial information has been prepared on the basis of certain
assumptions regarding the amount of costs and the interest rate on borrowings to
be incurred by the Corporation, and the amount of the earnings and profits
distribution (as discussed below under "Unaudited Pro Forma Financial
Statements") to be made by the Corporation, in connection with the La Quinta
Merger, and the Corporation expects that the amount of the actual earnings and
profits distribution made, and the actual costs and interest rate incurred, by
the Corporation will differ from those assumed for purposes of such pro forma
financial information. In that regard, the Corporation is currently seeking to
enter into replacement credit facilities in order to increase the aggregate
amount of borrowings available under its credit facilities from $365 million to
approximately $2.25 billion (see "Recent Developments"), and expects that, if
these replacement credit facilities are entered into, the actual interest rate
on borrowings thereunder will be higher than the per annum interest rate
reflected in such pro forma financial information. Furthermore, pursuant to the
terms of the La Quinta merger agreement, shareholders of La Quinta may elect to
receive cash instead of a portion of the Shares which they otherwise would
receive in the merger, subject to certain limitations on the amount of cash
distributed, and the following pro forma financial information assumes that the
La Quinta shareholders will elect to receive the maximum amount of this cash
distribution. Accordingly, if the following pro forma financial information were
prepared on the basis of the amount of the actual earnings and profits and other
cash distributions made, and the actual costs and interest rate on borrowings
incurred, in connection with the La Quinta Merger, such pro forma financial
information would differ, perhaps substantially, from that set forth below. In
addition, the following pro forma financial information reflects certain
assumptions made by the Companies regarding the Cobblestone Merger at the time
the pro forma condensed financial statements included herein were prepared,
which assumptions differ to a limited extent from the actual terms upon which
the Cobblestone Merger was completed. Prospective investors should carefully
review the information set forth herein under "Selected Pro Forma Financial
Data" and "Unaudited Pro Forma Financial Statements" for a discussion of certain
assumptions and other information affecting the following pro forma financial
information.
S-8
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1998
------------------------------------------
Corporation
Corporation Corporation Pro Forma
Historical Pro Forma As Adjusted
------------- ------------- --------------
(in thousands of dollars)
<S> <C> <C> <C>
Indebtedness (1):
Bank notes payable, net (2) ........................................... $ 49,643 $1,952,309 $1,783,322
Notes payable, net .................................................... 900,946 900,946 900,946
6.875% convertible debentures, net (3) ................................ 42,988 42,988 42,988
9.000% convertible debentures, net (4) ................................ 3,526 3,526 3,526
7.500% convertible debentures, net (5) ................................ 89,031 89,031 89,031
8.540% convertible notes, net (6) ..................................... 42,356 42,356 42,356
8.560% convertible notes, net (7) ..................................... 50,406 50,406 50,406
Bonds and mortgages payable, net ...................................... 64,013 155,910 155,910
---------- ---------- ----------
Total indebtedness .................................................. $1,242,909 $3,237,472 $3,068,485
---------- ---------- ----------
Shareholders' equity:
Preferred stock of the Corporation, $.10 par value; 6,000,000
shares authorized; no shares issued or outstanding at March 31,
1998 or pro forma; 700,000 shares issued and outstanding pro
forma as adjusted ................................................... -- -- 70
Series common stock of the Corporation, $.10 par value;
30,000,000 shares authorized; 8,500,000 shares of Series A
Non-Voting Convertible Common Stock issued and outstanding
at March 31, 1998, pro forma and pro forma as adjusted .............. 850 850 850
Common stock of the Corporation, $.10 par value; 270,000,000 shares
authorized; 89,726,000 shares issued and outstanding at March 31,
1998; 140,951,000 shares issued and outstanding pro forma and
pro forma as adjusted (8)(9) ........................................ 8,973 14,096 14,096
Additional paid-in capital (10) ....................................... 2,265,513 3,833,011 4,001,928
Note receivable - Meditrust Operating Company ......................... (13,128) (13,128) (13,128)
Distributions in excess of net income (11) ............................ (194,216) (344,216) (344,216)
---------- ---------- ----------
Total capitalization .............................................. $3,310,901 $6,728,085 $6,728,085
========== ========== ==========
</TABLE>
- ------------
(1) All indebtedness is shown net of underwriting fees and other costs of
issuance.
(2) As of May 29, 1998, the Corporation had outstanding bank borrowings in the
aggregate principal amount of $300 million. See "Use of Proceeds."
(3) Due November 1, 1998; $30.896 per share of Paired Common Stock conversion
price.
(4) Due January 1, 2002; $22.47 per share of Paired Common Stock conversion
price.
(5) Due March 1, 2001; $30.11 per share of Paired Common Stock conversion
price.
(6) Due July 1, 2000; $27.15 per share of Paired Common Stock conversion
price.
(7) Due July 1, 2002; $27.15 per share of Paired Common Stock conversion
price.
(8) Assuming 100% conversion of the Corporation's convertible debt outstanding
at March 31, 1998, there would have been 97,716,000 shares of REIT Common
Stock issued and outstanding at March 31, 1998, 148,941,000 shares of REIT
Common Stock pro forma and 148,941,000 shares of REIT Common Stock pro
forma as adjusted.
(9) Does not include 3,508,855 shares of REIT Common
Stock authorized for issuance pursuant to options, as of March 31, 1998.
(10) Assumes the value of the shares of Paired Common Stock to be issued in the
La Quinta Merger and issued in the Cobblestone Merger is allocated 98% to
the Corporation and 2% to the Operating Company.
(11) Assumes that the estimated earnings and profits distribution of $150
million to be paid in connection with the La Quinta Merger will be paid by
the Corporation. See "Unaudited Pro Forma Financial Statements."
S-9
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables present (i) selected historical consolidated financial
data for the Corporation as of and for the five years ended December 31, 1997
and as of and for the three month periods ended March 31, 1998 and 1997, and
(ii) selected historical combined consolidated financial data for The Meditrust
Companies as of and for the year ended December 31, 1997 and as of and for the
three month period ended March 31, 1998. Data as of and for each of the five
years in the period ended December 31, 1997 (in the case of the Corporation) and
as of and for the year ended December 31, 1997 (in the case of The Meditrust
Companies) have been derived from audited financial statements of the
Corporation and The Meditrust Companies, respectively. Data as of and for the
three months ended March 31, 1998 (and, in the case of the Corporation, March
31, 1997) have been derived from unaudited financial statements of the
Corporation and The Meditrust Companies, which, in the opinion of management,
include all necessary adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information. Data as of
and for the three months ended March 31, 1998 do not purport to be indicative of
results of operations for the full fiscal year. The following financial data is
qualified by reference to, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Unaudited Pro Forma Financial Statements" included herein and the historical
and pro forma financial statements (together with related notes) and financial
data of The Meditrust Companies, the Corporation and the Operating Company
included and incorporated by reference in the accompanying Prospectus.
As described under "The Meditrust Companies--Santa Anita Mergers," The
Meditrust Companies commenced operations in the form of a paired share REIT on
November 5, 1997, the date of the Santa Anita Mergers. Accordingly, no separate
selected financial data of The Meditrust Companies is presented as of or for
the four years ended December 31, 1996 or the three months ended March 31, 1997
because that financial data is identical to that of the Corporation.
THE CORPORATION
<TABLE>
<CAPTION>
At and For the
Three Months
Ended March 31,
---------------------- At and For the Year Ended December 31,
(unaudited) --------------------------------------------------
1998(1) 1997(1) 1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
----------- ---------- -------- ---------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue .................................... $115,441 $ 67,965 $289,923 $254,024 $209,369 $172,993 $150,375
Expenses:
Interest .................................. 25,417 18,115 87,412 64,216 64,163 67,479 62,193
Depreciation and amortization ............. 11,833 6,476 29,168 23,207 18,176 17,171 16,277
General and administrative ................ 3,794 2,321 10,111 8,625 7,058 7,883 8,269
Other ..................................... 22,695 -- 220 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total expenses ............................. 63,739 26,912 126,911 96,048 89,397 92,533 86,739
-------- -------- -------- -------- -------- -------- --------
Net income before extraordinary item ....... 51,702 41,053 163,012 157,976 119,972 80,460 63,636
Loss on prepayment of debt ................. -- -- -- -- 33,454 -- --
-------- -------- -------- -------- -------- -------- --------
Net income ................................. $ 51,702 $ 41,053 $163,012 $157,976 $ 86,518 $ 80,460 $ 63,636
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA (2):
Basic earnings per share
Net income before extraordinary items ...... $ 0.56 $ 0.56 $ 2.14 $ 2.21 $ 2.10 $ 1.90 $ 1.69
Loss on prepayment of debt ................. -- -- -- -- (0.59) -- --
-------- -------- -------- -------- -------- -------- --------
Basic earnings per share ................... $ 0.56 $ 0.56 $ 2.14 $ 2.21 $ 1.51 $ 1.90 $ 1.69
======== ======== ======== ======== ======== ======== ========
Diluted earnings per share
Net income before extraordinary items ...... $ 0.55 $ 0.55 $ 2.12 $ 2.20 $ 2.09 $ 1.89 $ 1.68
Loss on prepayment of debt ................. -- -- -- -- (0.58) -- --
-------- -------- -------- -------- -------- -------- --------
Diluted earnings per share ................. $ 0.55 $ 0.55 $ 2.12 $ 2.20 $ 1.51 $ 1.89 $ 1.68
======== ======== ======== ======== ======== ======== ========
Distributions paid per share ............... $ 0.606 $ 0.59 $ 2.38 $ 2.31 $ 2.25 $ 2.18 $ 2.11
Book value per share ....................... $ 21.05 $ 22.54 $ 20.04 $ 22.57 $ 20.75 $ 19.44 $ 17.84
Basic weighted average shares outstanding .. 92,734 73,828 76,274 71,445 57,151 42,433 37,622
Diluted weighted average shares outstanding 93,213 74,094 77,007 71,751 57,423 42,564 37,840
CASH FLOW DATA:
Cash provided by operating activities ...... $ 59,530 $ 31,956 $185,195 $188,551 $149,997 $100,819 $ 79,291
Cash used in investing activities .......... $100,452 $113,172 $580,560 $437,150 $310,135 $284,996 $208,649
Cash provided by financing activities ...... $ 80,240 $ 44,156 $376,698 $247,077 $164,449 $207,808 $120,806
</TABLE>
S-10
<PAGE>
<TABLE>
<CAPTION>
At and For the
Three Months Ended
March 31,
------------------------- At and For the Three Months Ended December 31,
(unaudited) ------------------------------------------------------------
1998(1) 1997(1) 1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
------------- ----------- ----------- ------------ ----------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments, net .... $3,022,605 $2,293,086 $2,935,772 $2,188,078 $1,777,798 $1,484,229 $1,214,308
Total assets .................... $3,379,016 $2,386,371 $3,259,536 $2,316,875 $1,891,852 $1,595,130 $1,310,401
Indebtedness, net ............... $1,242,909 $ 942,649 $1,377,438 $ 858,760 $ 762,291 $ 765,752 $ 658,245
Total liabilities ............... $1,311,024 $ 999,961 $1,467,296 $ 931,934 $ 830,097 $ 824,983 $ 724,606
Total shareholders' equity ...... $2,067,992 $1,386,410 $1,792,240 $1,384,941 $1,061,755 $ 770,147 $ 585,795
</TABLE>
- ------------
(1) The historical financial data contained herein includes the historical
results of operations of the Corporation's Predecessor for the four years
ended December 31, 1996 and for the period from January 1, 1997 through
November 5, 1997 and of the Corporation after November 5, 1997 through
December 31, 1997 and for the three months ended March 31, 1998, as well
as historical balance sheet data of the Corporation's Predecessor as of
December 31, 1993, 1994, 1995 and 1996 and as of March 31, 1997 and of the
Corporation as of December 31, 1997 and March 31, 1998.
(2) The 8,500,000 shares of Series A Non-Voting Convertible Common Stock of the
Corporation issued February 26, 1998 are included in calculating the per
share data as well as the basic and diluted weighted average shares
outstanding as of and for the three months ended March 31, 1998, because
such shares of Series A Non-Voting Convertible Common Stock are
convertible into shares of Paired Common Stock. See "Certain Recent
Developments."
S-11
<PAGE>
THE MEDITRUST COMPANIES
<TABLE>
<CAPTION>
At and for the
Three Months At and for
Ended March 31, the Year Ended
1998 (1) December 31,
(unaudited) 1997 (1)
----------------- ---------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenue ............................................. $ 145,196 $ 294,355
Expenses:
Interest ........................................... 25,453 87,428
Horse racing operations ............................ 28,196 4,263
Depreciation and amortization ...................... 12,847 29,474
General and administrative ......................... 4,384 10,558
Other .............................................. 22,695 220
---------- ----------
Total expenses ...................................... 93,575 131,943
---------- ----------
Net income before extraordinary item ................ 51,621 162,412
---------- ----------
Net income .......................................... $ 51,621 $ 162,412
========== ==========
PER SHARE DATA (2):
Basic earnings per share
Net income before extraordinary items ............... $ 0.56 $ 2.14
---------- ----------
Basic earnings per share ............................ $ 0.56 $ 2.14
========== ==========
Diluted earnings per share
Net income before extraordinary items ............... $ 0.56 $ 2.12
---------- ----------
Diluted earnings per share .......................... $ 0.56 $ 2.12
========== ==========
Distributions paid per share ........................ $ 0.606 $ 2.38
Book value per share ................................ $ 21.74 $ 20.72
Basic weighted average shares outstanding ........... 91,428 76,070
Diluted weighted average shares outstanding ......... 91,907 76,524
OTHER AND CASH FLOW DATA:
Funds from operations (3) ........................... $ 59,085 $ 191,511
Cash provided by operating activities ............... $ 64,885 $ 184,412
Cash used in investing activities ................... $ 100,452 $ 571,325
Cash provided by financing activities ............... $ 82,361 $ 387,919
BALANCE SHEET DATA:
Real estate investments, net ....................... $3,022,605 $2,935,772
Total assets ....................................... $3,459,704 $3,323,891
Indebtedness, net .................................. $1,242,909 $1,377,438
Total liabilities .................................. $1,352,991 $1,498,152
Total shareholders' equity ......................... $2,106,713 $1,825,739
</TABLE>
- ------------
(1) The historical financial data contained herein includes the historical
results of operations of the Corporation's Predecessor from January 1,
1997 through November 5, 1997 and of The Meditrust Companies after
November 5, 1997 through December 31, 1997, as well as the historical
balance sheet data of The Meditrust Companies as of December 31, 1997.
Historical financial data as of and for the three months ended March 31,
1998 reflects the unaudited historical results of operations and balance
sheet data of The Meditrust Companies.
(2) The 8,500,000 shares of Series A Non-Voting Convertible Common Stock of each
of the Companies issued February 26, 1998 are included in calculating the
per share data as well as the basic and diluted weighted average shares
outstanding as of and for the three months ended March 31, 1998, because
such shares of Series A Non-Voting Convertible Common Stock are convertible
into shares of Paired Common Stock. See "Certain Recent Developments."
(3) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from Operations as net income (loss) (computed in
accordance with Generally Accepted Accounting Principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. The
Corporation believes that Funds
S-12
<PAGE>
from Operations is helpful to investors as a measure of the performance of a
REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an
indication of the ability of the Corporation and The Meditrust Companies to
incur and service debt, to make capital expenditures and to fund other cash
needs. The Corporation computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than the Corporation. Funds from Operations is
unaudited and does not represent cash generated by operating activities
determined in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of financial performance or to cash flow from operating
activities (determined in accordance with GAAP) as a measure of liquidity,
nor is it indicative of funds available to fund cash needs, including cash
distributions.
S-13
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The following tables set forth (i) selected unaudited condensed pro forma
financial information for The Meditrust Companies and the Corporation for the
year ended December 31, 1997 and the three months ended March 31, 1998 and (ii)
selected unaudited condensed pro forma financial information for The Meditrust
Companies as of March 31, 1998. The following condensed pro forma statements of
operations, basic and diluted earnings per share and other data assumes that the
La Quinta Merger and the Cobblestone Merger were consummated, and that the sale
by each of the Corporation and the Operating Company of 8.5 million shares of
its respective Series A Non-Voting Convertible Common Stock as described under
"Certain Recent Developments" was consummated, as of January 1, 1997. The
following condensed pro forma balance sheet data assumes that the La Quinta
Merger and the Cobblestone Merger were consummated on March 31, 1998. The
following selected condensed pro forma financial information is derived from the
historical financial statements of The Meditrust Companies, the Corporation, the
Operating Company, La Quinta and Cobblestone, all of which are incorporated by
reference in the accompanying Prospectus.
The following condensed pro forma financial information is based upon a
number of assumptions and estimates, is subject to a number of uncertainties and
does not purport to be indicative of the actual financial position or results of
operations that would have occurred had the above transactions in fact been
consummated on the dates indicated, nor does such pro forma financial data
purport to be indicative of the results of operations or financial condition for
any future periods. In particular, the number of Shares issuable in the La
Quinta Merger will depend upon the Meeting Date Price of the Shares and the
following pro forma financial information assumes a Meeting Date Price of $30.40
per Share. The actual Meeting Date Price, as announced by the Corporation on
June 9, 1998, is $28.75625 per Share. Under the terms of the La Quinta merger
agreement this decline from the assumed Meeting Date Price of $30.40 per Share
will not result in a change in the number of Shares assumed to be issued in the
La Quinta Merger. In addition, the following pro forma financial information has
been prepared on the basis of certain assumptions regarding the amount of costs
and the interest rate on borrowings to be incurred by the Corporation, and the
amount of the earnings and profits distribution (as discussed below under
"Unaudited Pro Forma Financial Statements") to be made by the Corporation, in
connection with the La Quinta Merger, and the Corporation expects that the
amount of the actual earnings and profits distribution made, and the actual
costs and interest rate incurred, by the Corporation will differ from those
assumed for purposes of such pro forma financial information. In that regard,
the Corporation is currently seeking to enter into replacement credit facilities
in order to increase the aggregate amount of borrowings available under its
credit facilities from $365 million to approximately $2.25 billion (see "Recent
Developments"), and expects that, if these replacement credit facilities are
entered into, the actual interest rate on borrowings thereunder will be higher
than the per annum interest rate reflected in such pro forma financial
information. Furthermore, pursuant to the terms of the La Quinta merger
agreement, shareholders of La Quinta may elect to receive cash instead of a
portion of the Shares which they otherwise would receive in the merger, subject
to certain limitations on the amount of cash distributed, and the following pro
forma financial information assumes that the La Quinta shareholders will elect
to receive the maximum amount of this cash distribution. Accordingly, if the
following pro forma financial information were prepared on the basis of the
amount of the actual earnings and profits and other cash distributions made, and
the actual costs and interest rate on borrowings incurred, in connection with
the La Quinta Merger, such pro forma financial information would differ, perhaps
substantially, from that set forth below. Moreover, the La Quinta Merger may not
be accretive, on a per Share basis, as had been previously disclosed. In
addition, the following pro forma financial information reflects certain
assumptions made by the Companies regarding the Cobblestone Merger at the time
the pro forma condensed financial statements included herein were prepared,
which assumptions differ to a limited extent from the actual terms upon which
the Cobblestone Merger was completed. Accordingly, prospective investors should
carefully review the information set forth herein under "Unaudited Pro Forma
Financial Statements" for a discussion of certain assumptions and other
information affecting the following pro forma financial data. The following pro
forma financial data should be read in conjunction with, and is qualified in its
entirety by reference to, the information under "Unaudited Pro Forma Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this Prospectus Supplement and the historical
financial statements and notes thereto of The Meditrust Companies, the
Corporation, the Operating Company, La Quinta and Cobblestone and the other
historical and pro forma financial data included and incorporated or deemed to
be incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus.
S-14
<PAGE>
<TABLE>
<CAPTION>
The Meditrust Companies The Corporation
---------------------------------------- ---------------------------------------
For the For the For the For the
Year Ended Three Months Ended Year Ended Three Months Ended
December 31, 1997 March 31, 1998 December 31, 1997 March 31, 1998
------------------- -------------------- ------------------- -------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue .............................. $ 871,683 $ 299,519 $537,475 $181,925
Total expenses ............................. 702,624 250,573 372,260 129,870
--------- --------- -------- --------
Net income ................................. $ 169,059 $ 48,946 $165,215 $ 52,055
========= ========= ======== ========
Per Share Data (1):
Basic earnings per share ................... $ 1.24 $ 0.33 $ 1.21 $ 0.35
Diluted earnings per share ................. $ 1.24 $ 0.33 $ 1.21 $ 0.35
Basic weighted average shares outstanding .. 135,795 148,320 135,999 149,626
Diluted weighted average shares outstanding 136,249 148,799 136,732 150,105
OTHER DATA:
Funds from operations (2) .................. $ 331,395 $ 91,870 (3) (3)
Ratio of earnings to fixed charges (4) ..... 1.75x 1.72x 1.74x 1.77x
</TABLE>
<TABLE>
<CAPTION>
The Meditrust Companies
------------------------
March 31, 1998
------------------------
(in thousands)
<S> <C>
BALANCE SHEET DATA:
Real estate investments, net ............................................................. $5,893,053
Total assets ............................................................................. $7,049,292
Total indebtedness, net .................................................................. $3,237,472
Total liabilities ........................................................................ $3,489,499
Total shareholders' equity ............................................................... $3,559,793
Total shares outstanding ................................................................. 148,146
</TABLE>
(1) The 8,500,000 shares of Series A Non-Voting Convertible Common Stock of each
of the Companies issued February 26, 1998 are included in and fully weighted
for purposes of calculating the per share data as well as the basic and
diluted weighted average shares outstanding for all periods presented,
because such shares of Series A Non-Voting Convertible Common Stock are
convertible into shares of Paired Common Stock. See "Certain Recent
Developments."
(2) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Corporation believes that Funds from Operations is
helpful to investors as a measure of the performance of a REIT because,
along with cash flow from operating activities, financing activities and
investing activities, it provides investors with an indication of the
ability of the Corporation and The Meditrust Companies to incur and service
debt, to make capital expenditures and to fund other cash needs. The
Corporation computes Funds from Operations in accordance with standards
established by NAREIT which may not be comparable to Funds from Operations
reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than the Corporation. Funds from Operations is unaudited and
does not represent cash generated by operating activities determined in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of financial
performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of liquidity, nor is it indicative of
funds available to fund cash needs, including cash distributions.
(3) Because The Meditrust Companies are a paired share REIT, funds from
operations are presented for The Meditrust Companies on a combined basis
only; accordingly, no separate pro forma funds from operations are presented
for the Corporation.
(4) See "Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and
Preferred Stock Dividends" in the accompanying Prospectus for a description
of how the ratios of earnings to fixed charges are calculated.
S-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed below may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although the Corporation believes the statements are based on reasonable
assumptions, the Corporation can give no assurance that its expectations will be
attained. Actual results and timing of certain events could differ materially
from those projected in or contemplated by the forward-looking statements due to
a number of factors, including, without limitation, general economic and real
estate conditions, the availability of equity and debt financing for
acquisitions and renovations, interest rates, competition for hotel and golf
services in a given market, the enactment of legislation impacting the
Companies' status as a paired share REIT or the Corporation's status as a REIT,
and the risks described under "Risk Factors" in the accompanying Prospectus and
in the documents incorporated or deemed to be incorporated by reference in the
accompanying Prospectus.
The basis of presentation includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the combined Companies and
separately for the Corporation. Management believes that the combined
presentation is most beneficial to the reader. However it should be noted that
combined results of operations for the three months ended March 31, 1997 are
principally related to the activity of the Corporation. Prospective investors
should refer to The Meditrust Companies' Annual Report on Form 10-K for the year
ended December 31, 1997, as amended, and Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 for a discussion of the Operating Company's
financial condition and results of operations. In that regard, the Series A
Preferred Stock represented by the Depositary Shares offered hereby is being
issued exclusively by the Corporation and will constitute an equity interest
only in the Corporation, and the Series A Preferred Stock will not constitute an
equity interest in, and will not otherwise be an obligation of, the Operating
Company.
On November 5, 1997, the Corporation's Predecessor merged with Realty, with
Realty as the surviving corporation, and MAC merged with SAOC, with SAOC as the
surviving corporation. Upon completion of the Santa Anita Mergers, Realty
changed its corporate name to Meditrust Corporation and SAOC changed its
corporate name to Meditrust Operating Company. The Santa Anita Mergers were
accounted for as reverse acquisitions whereby the Corporation's Predecessor and
MAC were treated as the acquirors for accounting purposes. Accordingly, the
historical financial information set forth below as of dates and for periods
prior to November 5, 1997 is that of the Corporation's Predecessor and its
consolidated subsidiaries and not of Realty or SAOC. For the three month period
ended March 31, 1997, all share and per share amounts have been retroactively
adjusted to reflect the exchange of shares of beneficial interest in the
Corporation's Predecessor and MAC for shares of Paired Common Stock.
As discussed above under "Certain Recent Developments," the Cobblestone
Merger was recently consummated and the Corporation expects that the La Quinta
Merger will close in the second quarter of 1998. If the La Quinta Merger is
consummated, it will result in a substantial increase in the size of The
Meditrust Companies and, considered together with the Cobblestone Merger, a
substantial change in their operations. As a result, the financial condition and
results of operations of The Meditrust Companies and the Corporation as of dates
and for periods subsequent to the Cobblestone Merger and, if consummated, the La
Quinta Merger will differ from their historical financial condition and results
of operations as reflected in this Prospectus Supplement, the accompanying
Prospectus and the documents incorporated or deemed to be incorporated by
reference therein.
As also discussed above under "Certain Recent Developments," each of the
Companies issued 8.5 million shares of its Series A Non-Voting Convertible
Common Stock on February 26, 1998, which shares have been included for purposes
of calculating the per share data set forth below for the three months ended
March 31, 1998. Accordingly, any references to net income per share for the
three months ended March 31, 1998 and any references of like import include such
Series A Non-Voting Convertible Common Stock.
The Meditrust Companies--Combined Results of Operations
Three months ended March 31, 1998 vs. three months ended March 31, 1997
Revenue for the three months ended March 31, 1998 was $145,196,000 compared
to $67,965,000 for the three months ended March 31, 1997, an increase of
$77,231,000. Revenue growth was primarily attributable to the addition of horse
racing revenue of $36,511,000, increased rental income of $11,704,000 and
increased interest income of $3,016,000. Horse racing revenue during the three
month period ended March 31, 1998 was seasonally high as the track was open with
live racing for the entire period. The rental and interest income increases
resulted from additional real
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estate investments made over the twelve months ended March 31, 1998 net of
mortgage prepayments. Other income for the three months ended March 31, 1998
included a nonrecurring $26,000,000 prepayment and make-whole gain as a result
of approximately $120,000,000 in mortgage investments that were repaid prior to
their maturity.
For the three months ended March 31, 1998, total expenses increased by
$66,663,000. A significant portion of the expense growth was attributed to the
addition, through the Santa Anita Mergers, of horse racing operations which
included costs of $28,196,000. Horse racing operating costs incurred during the
three month period ended March 31, 1998 were seasonally high as the track was
open with live racing for the entire period. Interest expense increased by
$7,338,000 due to increases in debt outstanding resulting from additional real
estate investments made over the twelve months ended March 31, 1998.
Depreciation and amortization increased by $6,371,000 as a result of increased
real estate investments, associated debt issuance costs and amortization of
goodwill as a result of the Santa Anita Mergers. General and administrative
expenses increased by $2,063,000, principally due to a higher level of operating
costs associated with portfolio growth and as a result of the Santa Anita
Mergers. Rental property operating expenses were incurred during the three
months ended March 31, 1998 of which $1,265,000 related to management of medical
office buildings, a significant portion of which were for owned properties.
During the three months ended March 31, 1998, the Companies pursued a
strategy of diversifying into new business lines including hospitality and golf.
See "Certain Recent Developments". Consistent with this strategy, the
Corporation commenced a reevaluation of its existing health care real estate
portfolio and other assets.
As a result of continued deteriorating performance at two psychiatric
facilities owned by the Corporation and the corresponding impact on the
Corporation's resources, management of the Corporation has committed to a plan
to sell these facilities as soon as practicable. Accordingly, the Corporation
has recorded a provision of $10.5 million to adjust the carrying value of these
facilities and related working capital receivables to estimated fair value less
estimated costs to sell as of March 31, 1998. As part of the continuing
evaluation of its existing health care real estate portfolio, the Corporation
has also provided for the establishment of a $3 million valuation reserve as of
March 31, 1998.
The Corporation holds other assets and receivables that are unrelated to
its historical primary business of health care financing. Management of the
Corporation has determined that further collection efforts for these assets is
currently an inefficient use of its resources and therefore has recorded a
provision of approximately $5.1 million to reduce the carrying value of these
assets to net realizable value as of March 31, 1998.
Additionally, the Corporation has recorded approximately $3 million of
non-recurring costs related to the evaluation of certain acquisition targets
which it was no longer pursuing at March 31, 1998.
Net income for the three months ended March 31, 1998 was $51,621,000
compared to $41,053,000 for the three months ended March 31, 1997, an increase
of $10,568,000 or 26%. Net income per Share was unchanged at $0.56 for the three
months ended March 31, 1998 and 1997. The per Share amount remained unchanged
primarily due to dilution caused by the issuance of additional Shares related to
the Santa Anita Mergers. Per Share amounts for 1997 have been restated to
reflect the exchange of the Corporation's Predecessor's shares of beneficial
interest for Shares of the Companies pursuant to the Santa Anita Mergers. In
connection with the Santa Anita Mergers, 24,822,000 additional Shares are now
outstanding.
Year ended December 31, 1997 vs. year ended December 31, 1996
Revenues for the year ended December 31, 1997 were $294,355,000 compared to
$254,024,000 for the year ended December 31, 1996, an increase of $40,331,000 or
16%. Revenue growth was primarily attributed to increased rental income of
$28,749,000 and increased interest income of $6,287,000. These increases
resulted from additional real estate investments made over the twelve months
ended December 31, 1997. The remaining increase in revenue of approximately
$5,295,000 was primarily from horse racing operations following the Santa Anita
Mergers on November 5, 1997. Revenue from horse racing was generated primarily
during December 26 through December 31, 1997, which was the beginning of the
live racing season.
For the year ended December 31, 1997, total expenses increased by
$35,895,000. Interest expense increased by $23,212,000 due to increases in debt
outstanding resulting from additional real estate investments made over the
twelve months ended December 31, 1997. This increase was partially offset by
lower interest rates compared to 1996. Depreciation and amortization increased
by $5,474,000, as a result of increased real estate investments and associated
debt issuance costs. Amortization of goodwill increased $793,000 as a result of
amortization of the excess of the purchase price over fair value of the assets
acquired in the Santa Anita Mergers. Horse race operating
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costs of $4,263,000 were incurred during the period following the Santa Anita
Mergers and included substantial repair and maintenance costs incurred to
prepare and upgrade the track for the live racing season. General and
administrative and other expenses increased by $2,153,000, principally due to a
higher level of operating costs associated with portfolio growth and as a result
of the Santa Anita Mergers.
Net income for the year ended December 31, 1997 was $162,412,000 compared
to $157,976,000 for the year ended December 31, 1996, an increase of $4,436,000
or 3%. Net income per Share decreased to $2.14 for the year ended December 31,
1997 compared to $2.21 for the year ended December 31, 1996, a decrease of $.07
or 3%. The per Share decrease was primarily due to dilution caused by the Santa
Anita Mergers. Per Share amounts have been restated to reflect the exchange of
shares of beneficial interest in the Corporation's Predecessor for Shares of the
Companies pursuant to the Santa Anita Mergers.
Year ended December 31, 1996 vs. year ended December 31, 1995
Revenues for the year ended December 31, 1996 were $254,024,000 compared to
$209,369,000 for the year ended December 31, 1995, an increase of $44,655,000 or
21%. Revenue growth was attributed to increased rental income of $23,503,000 and
increased interest income of $21,152,000. These increases were principally the
result of additional real estate investments made during 1996. There were no
revenues or expenses associated with the Operating Company in 1996 or 1995.
For the year ended December 31, 1996, total expenses increased by
$6,651,000. Interest expense increased by $53,000 due to increases in debt
outstanding resulting from additional real estate investments. This increase was
partially offset by an equity offering in February, 1996, and lower interest
rates on the notes outstanding during 1996 compared to those outstanding during
1995. Depreciation and amortization increased by $5,031,000, as a result of
increased real estate investments. General and administrative expenses increased
by $1,567,000, principally due to a higher level of operating costs associated
with portfolio growth and the issuance of shares of beneficial interest in the
Corporation's Predecessor for executive compensation, a non-cash expense.
The Meditrust Companies--Combined Liquidity and Capital Resources
As of March 31, 1998, the Companies' gross real estate investments totaled
approximately $3,167,723,000, consisting of 216 long-term care facilities, 186
retirement and assisted living facilities, 31 medical office buildings, 26
rehabilitation hospitals, six alcohol, psychiatric and substance abuse treatment
facilities, five golf courses, one acute care hospital campus, one racetrack, a
50% interest in a fashion mall and land held for development. As of March 31,
1998, the Companies' outstanding commitments for additional financing totaled
approximately $219,281,000 for the completion of 36 assisted living facilities,
eight long-term care facilities and five medical office buildings currently
under construction and additions to existing facilities in the portfolio.
The Companies provide funding for their investments through a combination
of long-term and short-term financing including both debt and equity. The
Companies obtain long-term financing through the issuance of securities
including Shares, long-term unsecured notes and convertible debentures and
through the assumption of mortgage notes. The Companies obtain short-term
financing through the use of bank lines of credit which are replaced with
long-term financing as appropriate. From time to time, the Companies may utilize
interest rate caps or swaps to attempt to hedge interest rate volatility. It is
the Companies' objective to match mortgage and lease terms with the terms of
their borrowings. The Companies attempt to maintain an appropriate spread
between their borrowing costs and the rate of return on their investments. When
development loans convert to sale/leaseback transactions or permanent mortgage
loans, the base rent or interest rate, as appropriate, is fixed at the time of
such conversion. There is, however, no assurance that the Companies will
satisfactorily achieve, if at all, the objectives set forth in this paragraph.
On August 7, 1997, the Corporation completed the sale of $160,000,000 of 7%
notes due August 15, 2007. The Corporation also completed the sale of
$100,000,000 in notes due August 15, 2002 bearing interest at LIBOR plus .45%
(6.14% on November 15, 1997); such interest is subject to reset quarterly during
the first year of the loan. Subsequent to the first year of the loan, the
character and duration of the interest rate will be determined periodically by
the Corporation and the underwriter. The Corporation also completed the sale of
$150,000,000 of 7.114% notes due August 15, 2011. The notes were sold to a trust
from which exercisable put option securities due August 15, 2004, each
representing a fractional undivided beneficial interest in the trust, were
issued. The trust has entered a call option pursuant to which the callholder has
the right to purchase the notes from the trust on
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August 15, 2004 at par value. The trust also has a put option which it is
required to exercise if the callholder does not exercise the call option,
pursuant to which the Corporation must repurchase the notes at par value on
August 15, 2004. A portion of the net proceeds from the sale of the notes
described above was used to repay the outstanding balance on the unsecured
revolving line of credit and other unsecured short-term borrowings.
On October 3, 1997, the Corporation's Predecessor paid a dividend to
shareholders of record on that date of one share of beneficial interest of its
wholly-owned subsidiary Meditrust Acquisition Company ("MAC"), a Massachusetts
business trust, for each outstanding share of beneficial interest in the
Corporation's Predecessor. MAC was organized to accomplish the Santa Anita
Mergers and had conducted no business other than in connection with the Santa
Anita Mergers prior to November 5, 1997.
On November 5, 1997, the Santa Anita Mergers were consummated. Shareholders
of the Corporation's Predecessor received 1.2016 Shares for each outstanding
share of beneficial interest in the Corporation's Predecessor they owned in a
tax-free exchange of shares. As a result of the Santa Anita Mergers,
approximately 12,366,000 Shares were issued to former Realty and SAOC
shareholders.
On December 19, 1997, the Corporation invested an additional $13,473,000 in
Nursing Home Properties Plc ("NHP Plc") raising its total equity investment to
$26,982,000, at cost. The investment consists of 14,285,000 shares of common
stock, and represents a 19.99% interest; however, the Corporation does not have
the right to vote more than 9.99% of the shares of NHP Plc. NHP Plc is a
property investment group that specializes in the financing, through sale and
leaseback transactions, of nursing homes located in the United Kingdom.
On January 3, 1998, the Companies signed a definitive merger agreement with
La Quinta providing for, among other transactions, the merger of La Quinta with
and into the Corporation. The transaction is expected to close in the second
quarter of 1998. See "Certain Recent Developments" and "Unaudited Pro Forma
Financial Statements."
On January 9, 1998, the Board of Directors of the Corporation declared a
distribution of $.60625 per Share which was paid on February 13, 1998, to
shareholders of record on January 30, 1998.
On February 26, 1998, the Companies entered into two transactions with
Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill
Lynch & Co., Inc. ("MLI"). Pursuant to the terms of a stock purchase agreement,
MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock
from each of the Companies at a purchase price of $32.625 per share. The Series
A Non-Voting Convertible Common Stock is non-voting paired Series Common Stock
that will convert to Shares on the earlier of (a) the business day following the
date on which the stockholders of the Companies have approved the La Quinta
Merger or (b) the date of any termination of the La Quinta merger agreement. Net
proceeds from this private placement of securities of approximately $272,000,000
were used by the Companies to repay existing indebtedness. Separately, the
Companies and MLI entered into a purchase price adjustment agreement under which
the Companies will, within one year from the date of MLI's purchase, adjust the
original $32.625 purchase price per share based on the market price of the
Shares at the time of the adjustment, by receiving Shares from MLI or by issuing
additional Shares to MLI.
The Series A Non-Voting Convertible Common Stock will receive the same
dividend as the Shares; however, the guaranteed minimum return is LIBOR plus 75
basis points. Any difference between LIBOR plus 75 basis points and the dividend
payments received by the holders of the Series A Non-Voting Convertible Common
Stock will be included in an adjustment amount under a purchase price adjustment
agreement. The Companies expect the annual dividend to exceed the LIBOR plus 75
basis points.
The foregoing transactions with MLI have been accounted for as an equity
transaction with the shares treated as outstanding from their date of issuance
for both basic and diluted earnings per Share purposes. The accounting treatment
for this transaction is expected to be reviewed by the Emerging Issues Task
Force ("EITF"). The Securities and Exchange Commission has concluded that until
the EITF has an opportunity to perform a full review of this transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment used by the Companies.
As of May 11, 1998, the Corporation had unsecured revolving lines of credit
expiring September 23, 1999 in the aggregate amount of $365,000,000 bearing
interest at the lender's prime rate (8.5%) or LIBOR plus .875% (6.5% at May 11,
1998). A total of $311,000,000 was available from all credit facilities at May
11, 1998. In addition, the Companies have filed a shelf registration statement
with the Securities and Exchange Commission under which the Companies may issue
$2,000,000,000 of securities including Shares, preferred stock, debt, Series
Common Stock, convertible debt and
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warrants to purchase Shares, preferred stock, debt, Series Common Stock and
convertible debt. The offering made hereby is being made pursuant to such shelf
registration statement.
The Companies had shareholders' equity of $2,106,713,000 and debt
constituted 37% of the Companies' total capitalization as of March 31, 1998.
On May 29, 1998, the Companies completed the acquisition of Cobblestone in
which the Companies acquired all of the outstanding preferred and common shares
of Cobblestone for Shares valued at approximately $241 million. In addition, the
Companies paid off in cash approximately $170 million of Cobblestone debt and
associated costs with borrowings under credit facilities.
The Companies believe that, subject to the discussion under "Recent
Developments" above, their various sources of capital available over the next
twelve months are adequate to finance their operations as well as pending
acquisitions, mortgage financings and future dividends. Over the next twelve
months, as the Companies identify appropriate investment opportunities, the
Companies may seek to raise additional capital through the sale of securities
including Shares, Series Common Stock or preferred stock, the use of a forward
equity transaction, the issuance of additional long-term debt or through a
securitization transaction.
The Corporation--Results of Operations
Three months ended March 31, 1998 vs. three months ended March 31, 1997
Revenue for the three months ended March 31, 1998 was $115,441,000 compared
to $67,965,000 for the three months ended March 31, 1997, an increase of
$47,476,000. Revenue growth was primarily attributable to increased rental
income of $18,144,000 and increased interest income of $3,332,000. The rental
and interest income increases resulted from additional real estate investments
made over the twelve months ended March 31, 1998 net of mortgage prepayments and
include rent of $6,781,000 collected from the Operating Company related to horse
racing. Other income for the three months ended March 31, 1998 included a
nonrecurring $26,000,000 prepayment and make-whole gain as a result of
approximately $120,000,000 in mortgage investments that were repaid.
For the three months ended March 31, 1998, total expenses increased by
$36,827,000. Interest expense increased by $7,302,000 due to increases in debt
outstanding resulting from additional real estate investments made over the
twelve months ended March 31, 1998. Depreciation and amortization increased by
$5,357,000, as a result of increased real estate investments, associated debt
issuance costs and amortization of goodwill as a result of the Santa Anita
Mergers. General and administrative expenses increased by $1,473,000,
principally due to a higher level of operating costs associated with portfolio
growth and as a result of the Santa Anita Mergers. Rental property operating
expenses of $1,265,000 incurred during the three months ended March 31, 1998
were related to management of medical office buildings, a significant portion of
which were for properties owned by the Corporation.
Net income for the three months ended March 31, 1998 was $51,702,000
compared to $41,053,000 for the three months ended March 31, 1997, an increase
of $10,649,000 or 26%. Net income per share was unchanged at $0.56 for the three
months ended March 31, 1998 and 1997. The per share amount remained unchanged
primarily due to dilution caused by the issuance of additional Shares related to
the Santa Anita Mergers. Per share amounts for 1997 have been restated to
reflect the exchange of shares of beneficial interest in the Corporation's
Predecessor for Shares of the Companies pursuant to the Santa Anita Mergers.
See "--The Meditrust Companies--Combined Results of Operations--Three
months ended March 31, 1998 vs. three months ended March 31, 1997" for
information regarding matters relating to the Corporation's reevaluation of its
existing health care real estate portfolio and other assets, including a $10.5
million provision recorded in connection with the proposed disposition of two
psychiatric facilities, a $3 million valuation reserve relating to its health
care real estate portfolio and a $5.1 million provision relating to certain
other assets, as well as $3 million of non-recurring costs relating to the
evaluation of certain acquisition targets which the Corporation is no longer
pursuing.
Year ended December 31, 1997 vs. year ended December 31, 1996
Revenues for the year ended December 31, 1997 were $289,923,000 compared to
$254,024,000 for the year ended December 31, 1996, an increase of $35,899,000 or
14%. Revenue growth was primarily attributed to increased rental income of
$28,749,000 and increased interest income of $6,217,000. These increases
resulted from
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additional real estate investments made over the twelve months ended December
31, 1997. The remaining increase in revenue of approximately $933,000 was
primarily from rent and interest collected from horse racing operations
following the Santa Anita Mergers on November 5, 1997.
For the year ended December 31, 1997, total expenses increased by
$30,863,000. Interest expense increased by $23,196,000 due to increases in debt
outstanding resulting from additional real estate investments made over the
twelve months ended December 31, 1997. This increase was partially offset by
generally lower interest rates compared to 1996. Depreciation and amortization
increased by $5,303,000, as a result of increased real estate investments and
associated debt issuance costs. Amortization of goodwill increased $658,000 as a
result of amortization of the excess of the purchase price over the fair value
of the assets acquired in the Santa Anita Mergers. General and administrative
and other expenses increased by $1,706,000, principally due to a higher level of
administrative costs associated with portfolio growth and as a result of the
Santa Anita Mergers.
Net income for the year ended December 31, 1997 was $163,012,000 compared
to $157,976,000 for the year ended December 31, 1996, an increase of $5,036,000
or 3%. Net income per common share decreased to $2.14 for the year ended
December 31, 1997 compared to $2.21 for the year ended December 31, 1996, a
decrease of $.07 or 3%. The per common share decrease was primarily due to
dilution caused by the Santa Anita Mergers. Per common share amounts have been
restated to reflect the exchange of shares of beneficial interest in the
Corporation's Predecessor for Shares pursuant to the Santa Anita Mergers.
Year ended December 31, 1996 vs. year ended December 31, 1995
Revenues for the year ended December 31, 1996 were $254,024,000 compared to
$209,369,000 for the year ended December 31, 1995, an increase of $44,655,000 or
21%. Revenue growth was attributed to increased rental income of $23,503,000 and
increased interest income of $21,152,000. These increases were principally the
result of additional real estate investments made during 1996.
For the year ended December 31, 1996, total expenses increased by
$6,651,000. Interest expense increased by $53,000 due to increases in debt
outstanding resulting from additional real estate investments. This increase was
partially offset by an equity offering in February 1996, and lower interest
rates on the notes outstanding during 1996 compared to those outstanding during
1995. Depreciation and amortization increased by $5,031,000, as a result of
increased real estate investments. General and administrative expenses increased
by $1,567,000, principally due to a higher level of operating costs associated
with portfolio growth and the issuance of shares of beneficial interest in the
Corporation's Predecessor for executive compensation, a non-cash expense.
The Corporation--Liquidity and Capital Resources
As of March 31, 1998, the Corporation's gross real estate investments
totaled approximately $3,167,723,000, consisting of 216 long-term care
facilities, 186 retirement and assisted living facilities, 31 medical office
buildings, 26 rehabilitation hospitals, six alcohol, psychiatric and substance
abuse treatment facilities, one acute care hospital campus, five golf courses,
one racetrack, a 50% interest in a fashion mall and land held for development.
As of March 31, 1998, the Corporation's outstanding commitments for additional
financing totaled approximately $219,281,000 for the completion of 36 assisted
living facilities, eight long-term care facilities and five medical office
buildings currently under construction and additions to existing facilities in
the portfolio.
The Corporation provides funding for investments through a combination of
long-term and short-term financing including both debt and equity. The
Corporation obtains long-term financing through the issuance of equity
securities, long-term unsecured notes, convertible debentures and the assumption
of mortgage notes. The Corporation obtains short-term financing through the use
of bank lines of credit which are replaced with long-term financing as
appropriate. From time to time, the Corporation may utilize interest rate caps
or swaps to attempt to hedge interest rate volatility. It is the objective of
the Corporation to match mortgage and lease terms with the terms of its
borrowings. The Corporation attempts to maintain an appropriate spread between
borrowing costs and the rate of return on its investments. When development
loans convert to sale/leaseback transactions or permanent mortgage loans, the
base rent or interest rate, as appropriate, is fixed at the time of such
conversion. There is, however, no assurance that the Corporation will
satisfactorily achieve, if at all, the objectives set forth in this paragraph.
On January 9, 1998, the Board of Directors of the Corporation declared a
distribution of $.60625 per Share which was paid on February 13, 1998, to
shareholders of record on January 30, 1998.
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The Corporation had shareholders' equity of $2,067,992 and debt constituted
38% of its total capitalization as of March 31, 1998.
The Corporation believes, subject to the discussion under "Recent
Developments" above, that various sources of capital available over the next
twelve months are adequate to finance its operations as well as pending
acquisitions, mortgage financings and dividends. Over the next twelve months, as
the Corporation identifies appropriate investment opportunities, the Corporation
may need to raise additional capital through the sale of securities including
Shares, Series Common Stock or preferred stock, the use of a forward equity
transaction, the issuance of additional long-term debt or through a
securitization transaction.
See "--The Meditrust Companies--Combined Liquidity and Capital Resources"
for information regarding the issuance by the Corporation of certain debt
securities, the distribution of shares of beneficial interest in MAC by the
Corporation's Predecessor as a dividend to its shareholders, the issuance of
Shares in the Santa Anita Mergers, an investment made by the Corporation in NHP
Plc, matters relating to the La Quinta Merger and the Cobblestone Merger, the
declaration of a dividend on the Shares, the issuance of Series A Non-Voting
Convertible Common Stock, the Corporation's unsecured revolving lines of credit
as of May 11, 1998 and a shelf registration statement filed by the Companies
with the Securities and Exchange Commission.
Newly Issued Accounting Standards
Financial Accounting Standards Board Statement No. 131 ("FAS 131"),
"Disclosure about Segments of an Enterprise and Related Information," is
effective for financial statements issued for periods beginning after December
15, 1997. FAS 131 requires disclosures about segments of an enterprise and
related information regarding the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates. Due to the Companies' plans for acquisitions of companies in a variety
of business segments, the Companies are in the process of evaluating the effect
of the implementation of FAS 131.
During the three months ended March 31, 1998, the Companies adopted
Emerging Issues Task Force No. 97-11 (EITF 97-11): Accounting for Internal Costs
Relating to Real Estate Property Acquisitions. The adoption of EITF 97-11 did
not and is not expected to have a material adverse impact on the Companies'
financial position or results of operations.
Year 2000
The Companies are assessing the potential impact on information systems as
a result of reaching the year 2000. Presently, the Corporation believes its
current systems are year 2000 compliant and would not expect any costs
associated to be material to the Companies' financial position or results of
operations. The Operating Company is in the process of determining what, if any,
cost would be incurred to remedy existing information systems. Additionally, the
Companies will assess the costs, if any, required to remedy business operations
of acquired companies in the future.
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DESCRIPTION OF THE SERIES A PREFERRED STOCK AND DEPOSITARY SHARES
This description of certain terms of the Series A Preferred Stock and
Depositary Shares offered hereby, the Depositary Receipts (as defined below) and
the Deposit Agreement (as defined below) supplements, and to the extent
inconsistent therewith replaces, the description of certain general terms and
provisions of the Corporation's preferred stock, par value $0.10 per share (the
"REIT Preferred Stock"), Depositary Shares, Depositary Receipts and the Deposit
Agreement set forth in the accompanying Prospectus. As used under this caption
"Description of the Series A Preferred Stock and Depositary Shares;" all
references to the "Corporation" mean Meditrust Corporation excluding, unless
otherwise expressly stated or the context otherwise requires, its subsidiaries.
The following summary of certain terms of the Series A Preferred Stock, the
Depositary Shares, the Depositary Receipts and Deposit Agreement does not
purport to be complete and is subject to and qualified in its entirety by
reference to all of the provisions of the Certificate of Incorporation of the
Corporation, as amended and restated (the "REIT Charter"), the by-laws of the
Corporation, the form of certificate of designation ("Certificate of
Designation") relating to the Series A Preferred Stock, the form of Deposit
Agreement and the form of Depositary Receipt, all of which have been or will be
filed as exhibits to or incorporated by reference in the Registration Statement
(as defined in the accompanying Prospectus), and copies of which may be obtained
as described under "Available Information" in the accompanying Prospectus.
The Series A Preferred Stock is being issued exclusively by the Corporation
and will constitute an equity interest only in the Corporation. The Series A
Preferred Stock will not constitute an equity interest in, and will not
otherwise be an obligation of, the Operating Company. The Series A Preferred
Stock and the Depositary Shares will not be paired with any capital stock or
depositary shares of the Operating Company.
Prospective investors should carefully review the information set forth
below under "Restrictions on Ownership and Transfer" for important information
concerning certain proposed amendments to the REIT Charter which, if adopted,
would be applicable to the Series A Preferred Stock and the Depositary Shares.
General
The REIT Charter authorizes the Corporation to issue up to 306,000,000
shares of its capital stock, consisting of (i) 270,000,000 shares of common
stock, par value $0.10 per share, of the Corporation (the "REIT Common Stock"),
(ii) 6,000,000 shares of preferred stock, par value $0.10 per share, of the
Corporation (the "REIT Preferred Stock"), in one or more series and (iii)
30,000,000 shares of series common stock, par value $0.10 per share, of the
Corporation in one or more series (the "REIT Series Common Stock"). In addition,
as described below under "Restrictions on Ownership and Transfer," the
Corporation is soliciting the vote of its shareholders to, among other things,
approve an amendment to the REIT Charter authorizing the issuance of up to
25,000,000 shares of Excess Stock (as defined below). The REIT Charter grants
the Corporation's Board of Directors the power, without further shareholder
authorization, to authorize from time to time the issuance of REIT Preferred
Stock and REIT Series Common Stock in one or more series and to determine the
number of shares, dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
redemption price or prices, and liquidation preference, if any, of any such
series and the designation thereof. As of the date of this Prospectus
Supplement, no shares of REIT Preferred Stock or REIT Series Common Stock were
outstanding other than 8,500,000 shares of the Corporation's Series A Non-Voting
Convertible Common Stock (the "REIT Series A Common Stock"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Meditrust Companies--Combined Liquidity and Capital Resources" and "Certain
Recent Developments" herein and "Description of Series Common Stock--Series A
Non-Voting Convertible Common Stock" in the accompanying Prospectus. In
addition, the Corporation has authorized the issuance of 200,000 shares of its
Junior Participating Preferred Stock (the "REIT Junior Preferred Stock") in
connection with its shareholder rights plan (see "Description of Capital
Stock--Rights Agreement" in the accompanying Prospectus); no shares of REIT
Junior Preferred Stock are outstanding as of the date of this Prospectus
Supplement. See "Description of Capital Stock," "Description of Paired Common
Stock," "Description of Preferred Stock" and "Description of Series Common
Stock" in the accompanying Prospectus.
The Corporation has authorized the issuance of a series of Preferred Stock,
consisting of 700,000 shares (plus up to an additional 105,000 shares issuable
upon exercise of the Underwriters' over-allotment option), designated as the 9%
Series A Cumulative Redeemable Preferred Stock. The Series A Preferred Stock
will be represented by a total of 7,000,000 Depositary Shares (plus up to an
additional 1,050,000 Depositary Shares issuable upon exercise
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of the Underwriters' over-allotment option), each of which will represent a
one-tenth interest in a share of Series A Preferred Stock. The shares of Series
A Preferred Stock will be deposited with State Street Bank and Trust Company, as
depositary (the "Preferred Stock Depositary") under a Deposit Agreement (the
"Deposit Agreement") among the Corporation, the Preferred Stock Depositary and
the holders from time to time of depositary receipts (the "Depositary Receipts")
issued by the Preferred Stock Depositary thereunder. The Depositary Receipts
will evidence the Depositary Shares. Subject to the terms of the Deposit
Agreement and except as otherwise described under "Restrictions on Ownership and
Transfer," each holder of a Depositary Receipt evidencing a Depositary Share
will be entitled to all the rights and preferences of a one-tenth fractional
interest in a share of Series A Preferred Stock (including dividend, voting,
redemption and liquidation rights and preferences). See "Description of
Depositary Shares" in the accompanying Prospectus.
Application has been made to list the Depositary Shares on the NYSE. The
Series A Preferred Stock will not be so listed, and the Corporation does not
expect that there will be any trading market for the Series A Preferred Stock
except as represented by the Depositary Shares. See "Underwriters."
The Series A Preferred Stock does not contain any provisions affording
holders of the Series A Preferred Stock or Depositary Shares protection in the
event of a highly leveraged or other transaction that might adversely affect
holders of the Series A Preferred Stock or Depositary Shares.
The transfer agent, registrar and paying agent for the Series A Preferred
Stock will be State Street Bank and Trust Company, acting through its servicing
agent, Boston EquiServe. The Certificate of Designation will provide that the
Corporation will at all times maintain an office or agency in the Borough of
Manhattan, The City of New York, where Depositary Receipts and shares of Series
A Preferred Stock may be surrendered for payment (including upon redemption, if
any), registration of transfer or exchange.
The Depositary Receipts will initially be issued in the form of temporary
Depositary Receipts. Holders of temporary Depositary Receipts will be entitled
to exchange them for definitive Depositary Receipts as soon as such definitive
Depositary Receipts are available (which the Corporation anticipates will be
within 150 days after the original issuance of the Depositary Receipts).
Ranking
The Series A Preferred Stock will rank, with respect to the payment of
dividends and the distribution of assets upon liquidation, dissolution or
winding up of the Corporation (i) senior to the REIT Common Stock and senior to
all other capital stock of the Corporation other than capital stock referred to
in clauses (ii) and (iii) of this sentence; (ii) on a parity with all capital
stock of the Corporation the terms of which specifically provide that such
capital stock ranks on a parity with the Series A Preferred Stock with respect
to the payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Corporation; and (iii) junior to all capital
stock of the Corporation the terms of which specifically provide that such
capital stock ranks senior to the Series A Preferred Stock with respect to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Corporation. In that regard, the Board of
Directors of the Corporation may from time to time, without shareholder
approval, authorize the issuance of one or more series of REIT Preferred Stock
or REIT Series Common Stock ranking on a parity with the Series A Preferred
Stock. See "--General" above and "Description of Preferred Stock--Voting Rights"
in the accompanying Prospectus. In addition, with the affirmative vote or
consent of the holders of at least two-thirds of the shares of Series A
Preferred Stock outstanding at the time as described in the accompanying
Prospectus under "Description of Preferred Stock--Voting Rights," the
Corporation may issue capital stock which ranks senior to the Series A Preferred
Stock as to the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up of the Corporation, and the rights of
holders of Series A Preferred Stock to receive dividends and amounts due upon
liquidation, dissolution or winding up of the Corporation shall be subject to
the preferential rights of any such senior capital stock; however, no such
senior capital stock is currently outstanding.
Dividends
Subject to the preferential rights of holders of any other capital stock of
the Corporation ranking prior to the Series A Preferred Stock as to dividends,
holders of the Series A Preferred Stock shall be entitled to receive, when, as
and if declared by the Board of Directors of the Corporation, out of funds of
the Corporation legally available for the payment of dividends, cumulative cash
dividends at the rate of 9% of the $250 per share liquidation preference per
annum (equivalent to an annual rate of $2.25 per Depositary Share). Dividends
shall accrue and be cumulative from the Original
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Issue Date (which will be defined in the Certificate of Designation as the first
date on which any shares of Series A Preferred Stock are originally issued) and
shall be payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each a "Dividend Payment Date") or, if such day is not
a Business Day (as defined in the Certificate of Designation), the next
succeeding Business Day. The first dividend, which will be payable on September
30, 1998 (or, if such day is not a Business Day, on the next succeeding Business
Day), will be for more than a full quarter. Dividends payable on the Series A
Preferred Stock, including dividends payable for partial dividend periods, will
be computed on the basis of a 360-day year consisting of twelve 30-day months.
Dividends will be payable to holders of record as they appear in the stock
transfer books of the Corporation at the close of business on the applicable
record date, which shall be the 15th day of the calendar month in which the
applicable Dividend Payment Date falls or such other date designated by the
Board of Directors of the Corporation that is not more than 30 nor less than ten
days prior to such Dividend Payment Date (each, a "Dividend Record Date").
If any Dividend Payment Date or redemption date for the Series A Preferred
Stock falls on a day which is not a Business Day, the payment which would
otherwise be due on such Dividend Payment Date or redemption date, as the case
may be, may be made on the next succeeding Business Day with the same force and
effect as if made on such Dividend Payment Date or redemption date, as the case
may be, and no interest or additional dividends or other sum shall accrue on the
amount so payable for the period from and after such Dividend Payment Date or
redemption date, as the case may be, to such next succeeding Business Day. Under
those circumstances, distributions on the Depositary Shares will also be
postponed to such next succeeding Business Day.
The Corporation is a party to certain instruments and agreements which
could restrict or prevent the payment of dividends on the Series A Preferred
Stock. See "Risk Factors--Risks Related to Restrictions on Dividends and
Distributions; Risks Relating to Restrictive Debt Covenants and Compliance with
Debt Instruments" and "Description of Preferred Stock--Dividend and Redemption
Restrictions" in the accompanying Prospectus. In that regard, no dividends on
any shares of Series A Preferred Stock shall be declared by the Board of
Directors of the Corporation or paid or set apart for payment by the Corporation
at such time as any agreement of the Corporation, including any agreement
relating to its indebtedness, prohibits such declaration, payment or setting
apart for payment or provides that such declaration, payment or setting apart
for payment would constitute a breach thereof or a default thereunder, or if
such declaration, payment or setting apart for payment shall be restricted or
prohibited by applicable law.
Notwithstanding the foregoing, dividends on the Series A Preferred Stock
will accrue regardless of whether or not the Corporation has earnings,
regardless of whether or not there are funds legally available for the payment
of such dividends, and regardless of whether or not such dividends are declared.
No interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on the Series A Preferred Stock that may be in
arrears, and holders of the Series A Preferred Stock will not be entitled to any
dividends, whether payable in cash, securities or other property, in excess of
the full cumulative dividends described above. Any dividend payment made on
shares of the Series A Preferred Stock shall first be credited against the
earliest accrued but unpaid dividend due with respect to such shares.
If for any taxable year the Corporation elects to designate as "capital
gain dividends" (as defined in Section 857 of the Code) any portion (the
"Capital Gains Amount") of the dividends (within the meaning of the Code) paid
or made available for the year to holders of all classes and series of the
Corporation's capital stock (the "Total Dividends"), then the portion of the
Capital Gains Amount that shall be allocable to the holders of Series A
Preferred Stock shall be an amount equal to the total Capital Gains Amount
multiplied by a fraction the numerator of which is the total dividends (within
the meaning of the Code) paid or made available to the holders of Series A
Preferred Stock for that year and the denominator of which is the Total
Dividends for that year. See "Certain Federal Income Tax Considerations" below
and "Federal Income Tax Considerations" in the accompanying Prospectus.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution, or winding up
of the Corporation, then, before any distribution or payment shall be made to
the holders of any REIT Common Stock or any other class or series of capital
stock of the Corporation ranking junior to the Series A Preferred Stock with
respect to the distribution of assets upon liquidation, dissolution or winding
up of the Corporation, but subject to the preferential rights of the holders of
any capital stock of the Corporation ranking prior to the Series A Preferred
Stock with respect to such distribution of assets, the holders of shares of
Series A Preferred Stock are entitled to be paid out of the assets of the
Corporation legally available for distribution to its stockholders liquidating
distributions in cash or property
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at its fair market value as determined by the Corporation's Board of Directors
in the amount of a liquidation preference of $250 per share (equivalent to $25
per Depositary Share), plus an amount equal to all accrued and unpaid dividends
to the date of payment. After payment of the full amount of the liquidating
distributions (including accrued and unpaid dividends) to which they are
entitled, the holders of Series A Preferred Stock will have no right or claim to
any of the remaining assets of the Corporation. For further information
regarding matters affecting the holders of Series A Preferred Stock upon the
liquidation, dissolution or winding up of the Corporation, see "Description of
Preferred Stock--Liquidation Preference" in the accompanying Prospectus.
Redemption
The Series A Preferred Stock is not redeemable prior to June 17, 2003.
However, the Corporation will be entitled, pursuant to certain provisions in its
by-laws, to call for purchase and purchase from the holders thereof shares of
Series A Preferred Stock and Depositary Shares in order to preserve the
Corporation's status as a REIT for federal income tax purposes. Likewise, in
connection with its annual meeting of shareholders to be held on June 18, 1998,
the Corporation is soliciting the vote of its shareholders to approve certain
amendments to the REIT Charter which, if approved, would provide for the
conversion of Series A Preferred Stock into Excess Stock in order to preserve
the Corporation's status as a REIT for federal income tax purposes and the
purchase by the Corporation or a third party of such Excess Stock. See
"Restrictions on Ownership and Transfer" below.
On and after June 17, 2003, the Corporation may, at its option upon not
less than 30 nor more than 60 days' prior written notice to the holders of the
Series A Preferred Stock, redeem the Series A Preferred Stock, in whole or from
time to time in part, for a cash redemption price equal to $250 per share
(equivalent to $25 per Depositary Share) plus (except as provided below) accrued
and unpaid dividends to the date fixed for redemption. Upon the redemption of
any Series A Preferred Stock by the Corporation, the Preferred Stock Depositary
is required to redeem, as of the same redemption date, the number of Depositary
Shares representing the shares of Series A Preferred Stock so redeemed upon not
less than 30 nor more than 60 days' prior written notice to the holders of the
Depositary Receipts evidencing such Depositary Shares, provided that the
Corporation has paid in full to the Preferred Stock Depositary the redemption
price of the Series A Preferred Stock to be redeemed plus accrued and unpaid
dividends thereon, if any. The redemption price of the Series A Preferred Stock
(other than the portion thereof consisting of accrued and unpaid dividends)
shall be payable solely out of the sale proceeds of other capital stock of the
Corporation and not from any other source. For purposes of the preceding
sentence, the term "capital stock" means any equity securities (including REIT
Common Stock, REIT Series Common Stock and REIT Preferred Stock), shares,
interests, participations or other ownership interests (however designated),
depositary shares representing interests in any of the foregoing, and any rights
(other than debt securities convertible into or exchangeable for equity
securities) or options to purchase any of the foregoing. Holders of Depositary
Receipts evidencing Depositary Shares to be redeemed shall surrender such
Depositary Receipts at the place or one of the places, as the case may be,
designated in the notice of redemption and, upon such surrender, shall be
entitled, in proportion to their respective fractional interests in the shares
of Series A Preferred Stock being redeemed, to the redemption price and any
accrued and unpaid dividends payable upon such redemption. If fewer than all the
outstanding Depositary Shares are to be redeemed, the Depositary Shares to be
redeemed will be selected pro rata (as nearly as may be practicable without
creating fractional Depositary Shares) or by lot or by any other equitable
method determined by the Corporation that will not give the Corporation the
right to purchase Depositary Shares, Depositary Receipts or shares of Series A
Preferred Stock represented by Depositary Shares pursuant to the provisions of
its by-laws allowing the purchase of its capital stock to preserve the status of
the Corporation as a REIT for federal income tax purposes and, if the proposed
amendments to the REIT Charter described below are adopted, that will not result
in the conversion of Series A Preferred Stock into Excess Stock. See
"Restrictions on Ownership and Transfer" below. If the Depositary Shares
evidenced by a Depositary Receipt are to be redeemed in part only, one or more
new Depositary Receipts will be issued for the Depositary Shares not so
redeemed. See "Description of Preferred Stock --Redemption" and "Description of
Depositary Shares--Redemption of Depositary Shares" in the accompanying
Prospectus.
If notice of redemption has been given and if funds necessary for such
redemption have been set aside by the Corporation in trust for the benefit of
the holders of the shares of Series A Preferred Stock called for redemption,
then from and after the date fixed for redemption dividends will cease to accrue
on the shares of Series A Preferred Stock so called for redemption, such shares
of Series A Preferred Stock and the Depositary Shares representing such shares
of Series A Preferred Stock will no longer be deemed outstanding, and all rights
of the holders of such shares of Series A Preferred Stock and of the Depositary
Receipts evidencing such Depositary Shares will terminate, except the right to
receive the redemption price together with, if applicable, accrued and unpaid
dividends thereon.
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Notice of redemption will be given by publication in a newspaper of general
circulation in The City of New York, such publication to be made at least once a
week for two successive weeks commencing not less than 30 nor more than 60 days
prior to the redemption date. A similar notice furnished by the Corporation will
be mailed by the Preferred Stock Depositary, postage prepaid, not less than 30
nor more than 60 days prior to the redemption date, addressed to the holders of
record of the Depositary Receipts evidencing the Depositary Shares to be
redeemed at their respective addresses as they appear on the records of the
Preferred Stock Depositary. No failure to mail or defect in such mailed notice
shall affect the validity of the proceedings for the redemption of any shares of
Series A Preferred Stock or Depositary Shares except as to the holder to whom
notice was defective or not given. Each notice shall state: (i) the redemption
date; (ii) the redemption price; (iii) the number of shares of Series A
Preferred Stock and the number of Depositary Shares to be redeemed; (iv) the
place or places (which shall include the Borough of Manhattan, The City of New
York) where the Depositary Receipts evidencing the Depositary Shares are to be
surrendered for payment of the redemption price; and (v) that dividends on the
shares of the Series A Preferred Stock represented by the Depositary Shares to
be redeemed will cease to accrue on such redemption date. If fewer than all of
the Depositary Shares evidenced by the Depositary Receipts held by any holder
are to be redeemed, the notice mailed to such holder shall also specify the
number of Depositary Shares to be redeemed from such holder.
The holders of record of Depositary Receipts at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to the Series A Preferred Stock represented by the Depositary Shares
evidenced by such Depositary Receipts on the corresponding Dividend Payment Date
notwithstanding the redemption of such Depositary Shares or the shares of Series
A Preferred Stock represented by such Depositary Shares after such Dividend
Record Date and on or prior to the corresponding Dividend Payment Date or the
Corporation's default in the payment of the dividend due on such Dividend
Payment Date, in which case the redemption price for such Depositary Shares and
the shares (including fractional shares) of Series A Preferred Stock represented
thereby will not include such dividend (which shall instead be paid on the
applicable Dividend Payment Date to the holders of record on such Dividend
Record Date as aforesaid). Except as provided above, the Corporation will make
no payment or allowance for unpaid dividends, regardless of whether or not in
arrears, on shares of Series A Preferred Stock or Depositary Shares called for
redemption.
The Series A Preferred Stock has no stated maturity and is not subject to
any sinking fund or mandatory redemption. However, see "Restrictions on
Ownership and Transfer" below.
Voting Rights
Holders of the Series A Preferred Stock will not have any voting rights,
except as described in the accompanying Prospectus under "Description of
Preferred Stock--Voting Rights." In that regard, holders of the Series A
Preferred Stock will be entitled, on the terms and subject to the conditions
described in the accompanying Prospectus, to vote for the election of two
additional directors of the Corporation whenever dividends on the Series A
Preferred Stock shall be in arrears for six or more quarterly periods (whether
or not consecutive). See "Description of Preferred Stock--Voting Rights" in the
accompanying Prospectus.
In any matter in which the Series A Preferred Stock is entitled to vote,
including any action by written consent, each share of Series A Preferred Stock
shall be entitled to ten votes, each of which ten votes may be directed
separately by the holder thereof (or by any proxy or proxies of such holder).
With respect to each share of Series A Preferred Stock, the holder thereof may
designate up to ten proxies, with each such proxy having the right to vote a
whole number of votes (totalling ten votes per share of Series A Preferred
Stock). As a result, each Depositary Share will be entitled to one vote.
For further information regarding the voting rights of the holders of the
Series A Preferred Stock and related Depositary Shares, see "Description of
Preferred Stock--Voting Rights" and "Description of Depositary Shares --Voting
of the Preferred Stock" in the accompanying Prospectus.
Conversion
The Series A Preferred Stock will not be exchangeable for or convertible
into any other property or securities of the Corporation, except as described in
the next paragraph.
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Proposed Amendments to REIT Charter
In connection with its annual meeting of stockholders to be held on June
18, 1998, the Corporation is soliciting the approval of its shareholders to
certain amendments to the REIT Charter which, if approved, would, among other
things, provide for the conversion of Series A Preferred Stock into Excess Stock
in order to preserve the Corporation's status as a REIT for federal income tax
purposes and impose certain additional, more stringent, limitations on the
ownership and transfer of Series A Preferred Stock and the Depositary Shares.
See "Restrictions on Ownership and Transfer." If these amendments to the REIT
Charter are approved, and, thereafter, any Series A Preferred Stock is converted
into Excess Stock, then, among other things, investors will not be entitled to
receive dividends on or vote Depositary Shares representing Excess Stock issued
upon conversion of Series A Preferred Stock and, in the event of a liquidation
or winding up of the Corporation, the distributions, if any, payable per share
of Excess Stock may be less than the distributions, if any, payable per share of
Series A Preferred Stock. In addition, the Corporation or, under certain
circumstances, a third party will have the right to purchase shares of Excess
Stock at prices specified in the REIT Charter.
Registrar and Transfer Agent
The Registrar and Transfer Agent for the Series A Preferred Stock and the
Depositary Shares is State Street Bank and Trust Company, acting through its
servicing agent, Boston EquiServe.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Corporation to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), it must meet certain requirements concerning the
ownership of its outstanding shares of capital stock. Among other things, not
more than 50% in value of the Corporation's outstanding shares of capital stock
may be owned, directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) and 100 or more persons must
beneficially own the capital stock of the Corporation. In addition, in order to
qualify as a REIT, at least 75% of the Corporation's gross income for each year
must consist of rents from real property and income from certain other real
property investments. The rents received by the Corporation from the Operating
Company will not qualify as rents from real property if the Corporation owns,
actually or constructively, 10% or more of the outstanding capital stock of the
Operating Company, the result of which would be the loss of REIT status for the
Corporation. See "Federal Income Tax Considerations--REIT Qualification of the
Corporation" in the accompanying Prospectus.
The Corporation's by-laws contain provisions and restrictions intended to
preserve the status of the Corporation as a REIT for federal income tax
purposes, including provisions permitting the Corporation to call for purchase,
and to purchase, its capital stock from shareholders or to refuse to transfer
its capital stock. As described below, the Series A Preferred Stock will be
subject to all such provisions and restrictions and, pursuant to the terms of
the Deposit Agreement, the Depositary Receipts and Depositary Shares will also
be subject to all such provisions and restrictions as if the owners of
Depositary Receipts and Depositary Shares owned the underlying Series A
Preferred Stock directly. See "Description of Capital Stock--Ownership
Limitations and Restrictions on Transfers," "Description of Preferred
Stock--Restrictions on Ownership and Transfer" and "Description of Depositary
Shares--Restrictions on Ownership and Transfer" in the accompanying Prospectus.
In addition, the Corporation is soliciting the vote of its shareholders to
approve certain amendments to the REIT Charter which, if approved by its
shareholders, would add certain additional, and more stringent, restrictions on
the ownership and transfer of the Corporation's capital stock, including the
Series A Preferred Stock. In order for these proposed amendments to operate as
described below, the Corporation must be authorized to issued a new class of its
capital stock to be known as "Excess Stock", and the Corporation is therefore
also soliciting the vote of its shareholders to approve an amendment to the REIT
Charter authorizing the issuance of up to 25 million shares of Excess Stock. The
Operating Company is soliciting the vote of its shareholders to approve
substantially similar amendments to its certificate of incorporation, as amended
and restated.
The foregoing amendments to the REIT Charter require the affirmative vote
of at least a majority of the outstanding shares of REIT Common Stock, and such
shareholder vote will take place at the Corporation's annual meeting to be held
on June 18, 1998. Only shareholders of the Corporation of record on April 22,
1998 will be entitled to vote in respect of such proposed amendments at the
annual meeting. Accordingly, holders of the Depositary Shares offered hereby and
the shares of Series A Preferred Stock represented by such Depositary Shares
will not be entitled to vote in respect of such proposed amendments. However,
the Certificate of Designation relating to the Series A Preferred Stock will
provide
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that, if the foregoing amendments to the REIT Charter are approved by the
Corporation's shareholders, then such amendments shall also apply with respect
to the Series A Preferred Stock represented by the Depositary Shares offered
hereby. In addition, the Deposit Agreement will contain provisions to the effect
that, among other things, the Depositary Receipts issued thereunder and the
related Depositary Shares will be subject to the provisions in these proposed
amendments to the REIT Charter if approved by the Corporation's shareholders.
The proposed amendments to the REIT Charter will (i) add a new Article
Thirteenth ("Article Thirteenth") which will contain the restrictions on
ownership and transfer described below and (ii) amend certain other provisions
of the REIT Charter in order to authorize the issuance of 25 million shares of
Excess Stock. The proposed form of Article Thirteenth is attached as Annex E to
The Meditrust Companies' joint proxy statement/prospectus dated May 18, 1998
(the "Joint Proxy Statement"). Prospective investors should carefully review the
provisions of Annex E (copies of which may be obtained as described in the
accompanying Prospectus under "Available Information"). The following summary of
certain provisions of Article Thirteenth does not purport to be complete and is
subject to, and qualified in its entirety by reference to, such Annex E. In
addition, capitalized terms used below and not defined in this Prospectus
Supplement have the respective meanings assigned to them in such Annex E.
Proposed Article Thirteenth of the REIT Charter will provide, in substance,
as follows: no person or entity (other than a Look-Through Entity) may
Beneficially Own or Constructively Own in excess of 9.25%, and no Look- Through
Entity may Beneficially Own or Constructively Own in excess of 9.8%, of the
outstanding shares of any class or series of Equity Stock (which is defined to
include both common stock and preferred stock) of the Corporation (the
"Ownership Limitation"), unless the Ownership Limitation is waived by the Board
of Directors of the Corporation in accordance with Article Thirteenth. As a
series of Equity Stock, the shares of Series A Preferred Stock will be subject
to the Ownership Limitation and, as a result, no person or entity may
Beneficially Own or Constructively Own more than 9.25% or, in the case of a
Look-Through Entity, more than 9.8% of the outstanding shares of Series A
Preferred Stock or Depositary Shares. In addition, any transfer of Equity Stock
of the Corporation that would (i) violate the Ownership Limitation, or (ii)
result in the Corporation being "closely held" within the meaning of Section
856(h) of the Code, or (iii) cause the Corporation to Constructively Own 10% or
more of the ownership interests in a tenant of the real property of the
Corporation or any of its direct or indirect subsidiaries, within the meaning of
Section 856(d)(2)(B) of the Code, or (iv) result in the shares of capital stock
of the Corporation being beneficially owned (within the meaning of Section
856(a)(5) of the Code) by fewer than 100 persons, will be void ab initio and the
intended transferee will acquire no right or interest in such shares of Equity
Stock. The limitations described in clauses (ii), (iii) and (iv) of the
preceding sentence are hereinafter called the "Other Limitations."
The Ownership Limitation and the Other Limitations can be violated as a
result of either a transfer of Equity Stock or a Non-Transfer Event (defined, in
general, as any event, other than a purported transfer, which would violate the
Ownership Limitation or Other Limitations). If there is a purported transfer of
Equity Stock or a Non-Transfer Event that would result in a violation of the
Ownership Limitation or the Other Limitations, then, unless such violation is
waived by the Board of Directors of the Corporation in accordance with Article
Thirteenth, (i) the purported transferee shall be deemed to be a Prohibited
Owner (defined, in general, as any person or entity which is prevented from
becoming the record owner of Equity Stock by the provisions of Article
Thirteenth described in this paragraph) and shall acquire no right or interest
(or, in the case of a Non-Transfer Event, the person or entity holding record
title to the relevant Equity Securities shall cease to own any right or
interest) in such number of shares of such Equity Stock the ownership of which
would violate the Ownership Limitation or the Other Limitations, (ii) such
number of shares of such Equity Stock in excess of the Ownership Limitation or
which results in the violation of the Other Limitations shall be automatically
converted into an equal number of shares of Excess Stock and transferred to a
trust (the "Trust") created and administered for the exclusive benefit of a
beneficiary (the "Beneficiary") named by the Corporation, and (iii) the
Prohibited Owner shall submit such number of shares of Equity Stock to the
Corporation for registration in the name of the trustee (the "Trustee") of the
Trust. Such conversion into Excess Stock and transfer to a Trust shall be
effective as of the close of trading on the Trading Day prior to the date of the
transfer or Non-Transfer Event, as the case may be. The shares of Excess Stock
held by the Trust shall remain outstanding shares of capital stock of the
Corporation, and shall be held by the Trustee for the exclusive benefit of the
Beneficiary.
Each share of Excess Stock shall be entitled to the same dividends and
distributions as the shares of the class or series of Equity Stock from which
such Excess Stock was converted. However, the Trustee shall be entitled to
receive all such dividends and distributions and shall hold them in trust for
the benefit of the Beneficiary, and the
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Prohibited Owner shall not be entitled to any such dividends and distributions
and shall, in addition, be required to repay to the Trust the amount of any
dividends or distributions received by the Prohibited Owner that are
attributable to any shares of Equity Stock that have been converted into Excess
Stock if the record date for such dividend or distribution was on or after the
date such shares were converted into Excess Stock. In the event of any voluntary
or involuntary liquidation, winding up or distribution of assets of the
Corporation, each holder of Excess Stock shall be entitled to receive, ratably
with each other holder of shares of Equity Stock of the same class or series
from which it was converted, that portion of the assets of the Corporation that
is available for distribution to the holders of such class or series of Equity
Stock. The Trust will distribute to the Prohibited Owner the amounts received
upon such liquidation, winding up or distribution; provided, however, that the
Prohibited Owner shall not be entitled to receive amounts in excess of the price
per share such Prohibited Owner paid for such shares of Equity Stock in the
transfer which resulted in the conversion of such shares into Excess Stock or,
in the case of a Non-Transfer Event or transfer in which the Prohibited Owner
did not give value (such as a gift or devise) and which Non-Transfer Event or
transfer, as the case may be, resulted in the conversion of the shares into
Excess Stock, the price per share equal to the Market Price on the date of such
Non-Transfer Event or transfer, and any remaining amount shall be distributed to
the Beneficiary. As a result, the amount received by a Prohibited Owner per
share of Excess Stock upon any such liquidation, winding up or distribution of
assets may be greater or less than the amount it would have received had it
disposed of a share of the corresponding Equity Stock.
The Trustee, as record holder of the Excess Stock, shall be entitled to
vote all shares of Excess Stock. Each share of Excess Stock shall entitle the
Trustee, as record holder thereof, to the same number of votes that the Trustee
would have had if such share of Excess Stock were a share of the corresponding
class or series of Equity Stock. The holders of shares of Excess Stock converted
from the same class or series of Equity Stock shall vote together with the
holders of such Equity Stock as a single class. Any vote taken by a Prohibited
Owner prior to the discovery by the Corporation that such Prohibited Owner's
shares of Equity Stock had been converted into shares of Excess Stock shall be
rescinded and shall be void ab initio as to such Excess Stock.
Shares of Excess Stock will be deemed to have been offered for sale to the
Corporation or its designee at a price per share equal to the lesser of (i) the
price per share in the transaction that created such shares of Excess Stock (or,
in the case of a devise, gift or Non-Transfer Event, the Market Price at the
time of such devise, gift or Non-Transfer Event) and (ii) the Market Price on
the date the Corporation or its designee accepts such offer. The Corporation
shall have the right to accept such offer for a period of 90 days following the
later of (a) the date of the Non-Transfer Event or purported transfer resulting
in such Excess Stock and (b) the date on which the Corporation determines in
good faith that a transfer or Non-Transfer Event resulting in shares of Excess
Stock previously has occurred.
If the Corporation fails to exercise its option to purchase the Excess
Stock as described in the immediately preceding paragraph, the Trustee shall as
soon as practicable designate one or more persons or entities as Permitted
Transferees, provided that the Permitted Transferees so designated purchase for
"valuable consideration" (whether in a public or private sale) the shares of
Excess Stock in question. Upon transfer of shares of Excess Stock by the Trustee
to a Permitted Transferee, such shares of Excess Stock shall be automatically
converted into an equal number of shares of Equity Stock of the same class and
series from which such Excess Stock was converted.
In the event the Corporation accepts the offer to purchase shares of Excess
Stock or such Excess Stock is transferred to a Permitted Transferee as
aforesaid, the Prohibited Owner of such Excess Stock shall be entitled to
receive from the Trustee, following the sale or other disposition of such shares
of Excess Stock, the lesser of (i)(a) in the case of a purported transfer in
which the Prohibited Owner gave value for shares of Equity Stock and which
transfer resulted in the conversion of such shares into shares of Excess Stock,
the price per share, if any, such Prohibited Owner paid for the shares of Equity
Stock and (b) in the case of a Non-Transfer Event or transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or transfer, as
the case may be, resulted in the conversion of such shares into shares of Excess
Stock, the price per share equal to the Market Price on the date of such
Non-Transfer Event or transfer and (ii) the price per share received by the
Trustee from the sale or other disposition of such Excess Stock to the
Corporation or a Permitted Transferee, and any excess amounts received by the
Trustee shall be distributed to the Beneficiary. As a result, any amounts
received by a Prohibited Owner in respect of Excess Stock as aforesaid may be
more or less than the amounts such Prohibited Owner would have received had it
disposed of the Equity Stock which was converted into such Excess Stock.
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<PAGE>
Every Beneficial Owner and Constructive Owner of more than 5% (or such
lower percentages as required pursuant to regulations under the Code) of the
outstanding shares of any class or series of Equity Stock of the Corporation
shall, within 30 days after January 1 of each year, provide the Corporation with
a written statement or affidavit stating the name and address of such owner, the
number of shares of Equity Stock Beneficially Owned or Constructively Owned, and
a description of how such shares are held. In addition, each person or entity
who is a Beneficial Owner or Constructive Owner of shares of Equity Stock and
each person or entity (including the stockholder of record) who is holding
shares of Equity Stock for a Beneficial Owner or Constructive Owner shall
provide to the Corporation a written statement or affidavit containing such
information as the Corporation may request to determine the Corporation's status
as a REIT and to ensure compliance with the Ownership Limitations.
The foregoing restrictions on ownership and transfer pursuant to Article
Thirteenth shall apply until the Board of Directors of the Corporation
determines that it is no longer in the best interests of the Corporation to
attempt to qualify, or to continue to qualify, as a REIT. In addition, the Board
of Directors of the Corporation, upon receipt of a ruling from the Internal
Revenue Service or an opinion of counsel and subject to certain further terms
and conditions, may exempt a person or entity from the Ownership Limitation.
Each certificate evidencing shares of Series A Preferred Stock, as well as the
Depositary Receipts evidencing the Depositary Shares offered hereby, shall bear
a legend reflecting the foregoing restrictions on transfer imposed by the
by-laws and the REIT Charter.
The Deposit Agreement will contain provisions to the effect that, among
other things, the Depositary Receipts issued thereunder and the related
Depositary Shares will be subject to the provisions in the Corporation's by-laws
referred to above (which provisions are described in the accompanying Prospectus
under "Description of Capital Stock--Ownership Limitations and Restrictions on
Transfer") and, if approved by the Corporation's shareholders, the provisions
set forth in proposed Article Thirteenth of the REIT Charter described above,
and (i) for purposes of applying those provisions, each holder of any Depositary
Receipts will be deemed to be the owner of the number of shares (including
fractional shares) of Series A Preferred Stock represented by the Depositary
Shares evidenced by such Depositary Receipts and (ii) except as otherwise
expressly stated in the Deposit Agreement, such provisions of the Corporation's
by-laws and, if approved by the Corporation's stockholders, such provisions of
Article Thirteenth of the REIT Charter shall apply to such holder and such
Depositary Receipts and Depositary Shares as if (A) such holder owned the shares
(including fractional shares) of Series A Preferred Stock represented by such
Depositary Shares directly, (B) such Depositary Receipts evidenced such shares
(including fractional shares) of Series A Preferred Stock and (C) each such
Depositary Share was a fractional share of Series A Preferred Stock, mutatis
mutandis. Accordingly, the Corporation will be entitled, among other things, to
purchase, and to refuse to transfer, Depositary Shares evidenced by Depositary
Receipts on the same terms and conditions as are applicable to the Series A
Preferred Stock pursuant to the Corporation's by-laws and, if approved by the
Corporation's shareholders, Article Thirteenth. In addition, if such amendments
to the REIT Charter are approved by the Corporation's shareholders, the
Depositary Shares will be subject to the Ownership Limitation and the Other
Limitations and the Deposit Agreement provides that, if any shares of Series A
Preferred Stock are converted into Excess Stock, the Depositary Shares which
previously represented such shares of Series A Preferred Stock shall be deemed
to represent such shares of Excess Stock and the Prohibited Owner shall submit
Depositary Receipts evidencing such Depositary Shares to the Corporation for
registration in the name of the applicable Trustee. In the event that the
Corporation purchases any Depositary Shares pursuant to such provisions of its
by-laws, the purchase price per Depositary Share shall be equal to one-tenth of
the purchase price payable under the Corporation's by-laws for one share of
Series A Preferred Stock. In addition, if the foregoing amendments to the REIT
Charter are approved by the Corporation's shareholders and, thereafter, any
shares of deposited Series A Preferred Stock are converted into Excess Stock,
the Deposit Agreement provides that, if any Prohibited Owner shall be entitled
to receive any monies from the Trustee following the sale or disposition of such
Excess Stock or upon any voluntary or involuntary liquidation, winding up or
distribution of assets of the Corporation, or if any dividend or other
distribution of monies, securities or other property shall be paid or made upon
such Excess Stock, then, unless Article Thirteenth provides that such monies,
securities or other property shall be paid or made to the applicable Trustee or
Beneficiary, the amount of such monies, securities or other property payable or
distributable, as the case may be, in respect of each Depositary Share
representing such Excess Stock shall be equal to one-tenth of the amount payable
in respect of a share of such Excess Stock.
In addition, the Deposit Agreement will provide that, if Excess Stock is
issued upon conversion of deposited Series A Preferred Stock, then (i) the
Depositary Shares representing Excess Stock shall not represent a fractional
interest in or be entitled to share in or receive any monies, securities or
other property payable, distributable or
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offered in respect of the deposited Series A Preferred Stock and (ii) the
Depositary Shares representing deposited Series A Preferred Stock shall not
represent a fractional interest in or be entitled to share in or receive any
monies, securities or other properties payable, distributable or offered in
respect of such Excess Stock. As a result, because dividends payable on Excess
Stock will be paid to the Trustee for the benefit of the Beneficiary, no
dividends will be paid to investors in respect of Depositary Shares representing
Excess Stock, nor will the Depositary Shares representing Excess Stock be
entitled to receive any portion of the dividends or other distributions payable
on the Series A Preferred Stock. Likewise, in the event of any liquidation or
winding up of the Corporation, the distributions, if any, payable per share of
Excess Stock may be less than the distributions, if any, payable per share of
Series A Preferred Stock.
As used in the proposed amendments to the REIT Charter described above, the
following terms have the meanings set forth below:
"Beneficial Ownership" shall mean, with respect to any person or entity,
ownership of shares of Equity Stock equal to the sum of (i) the shares of Equity
Stock directly or indirectly owned by such person or entity, (ii) the number of
shares of Equity Stock treated as owned directly or indirectly by such person or
entity through the application of the constructive ownership rules of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code, and (iii) the
number of shares of Equity Stock which such person or entity is deemed to
beneficially own pursuant to Rule 13d-3 under the Securities Exchange Act of
1934; provided, however, that, for the purposes of calculating the foregoing, no
share shall be counted more than once. The terms "Beneficial Owner,"
"Beneficially Owns" and "Beneficially Owned" shall have correlative meanings.
"Constructive Ownership" shall mean ownership of shares of Equity Stock by
a person or entity who is or would be treated as a direct or indirect owner of
such shares of Equity Stock through the application of Section 318 of the Code,
as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
"Look-Through Entity" shall mean a person or entity that is either (i) a
trust described in Section 401(a) of the Code and exempt from tax under Section
501(a) of the Code as modified by Section 856(h)(3) of the Code or (ii)
registered under the Investment Company Act of 1940.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax considerations
pertaining to the acquisition, ownership and disposition of the Depositary
Shares. This discussion is general in nature and not exhaustive of all possible
tax considerations, nor does the discussion address any state, local or foreign
tax considerations. The discussion is based on current law and does not purport
to deal with all aspects of federal income taxation that may be relevant to a
prospective holder of Depositary Shares in light of its particular circumstance
or to certain types of shareholders (including insurance companies, financial
institutions, broker-dealers, tax exempt investors, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws. The Corporation has not
requested and will not request a ruling from the Internal Revenue Service (the
"IRS") with respect to any of the federal income tax issues discussed below.
This Prospectus Supplement does not address the taxation of the Corporation
or the impact on the Corporation of its election to be taxed as a REIT. Such
matters are addressed in the accompanying Prospectus under the caption "Federal
Income Tax Considerations--REIT Qualification of the Corporation."
For a discussion of certain additional Federal income tax considerations
associated with an investment in the Depositary Shares, see "Federal Income Tax
Considerations" in the accompanying Prospectus.
Prospective investors should consult, and must depend on, their own tax
advisors regarding the federal, state, local, foreign and other tax consequences
of holding and disposing of the Depositary Shares.
Taxation of Holders of Depositary Shares
Dividends and Other Distributions; Backup Withholding. For a discussion of
the taxation of the Corporation, the treatment of dividends and other
distributions with respect to shares of the Corporation, and the backup
withholding rules, see the captions "Federal Income Tax Considerations--REIT
Qualification of the Corporation" and "--Federal Income Taxation of Paired
Capital Stock" in the accompanying Prospectus. In determining the extent
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to which a distribution with respect to the Depositary Shares constitutes a
dividend for tax purposes, the earnings and profits of the Corporation will be
allocated, on a pro rata basis, first to distributions with respect to the
Series A Preferred Stock and then to the REIT Common Stock and, if outstanding,
the REIT Series Common Stock. In the event that the Corporation designates any
portion of a dividend as a "capital gain dividend," taxable as a 20 percent gain
distribution, 28 percent gain distribution or a Section 1250 gain distribution
taxed at a 25 percent rate (each a "specific capital gain dividend"), a holder's
proportionate share of such specific capital gain dividend would be an amount
which bears the same ratio to the total amount of dividends paid to such holder
for the year as the aggregate amount designated as a specific capital gain
dividend bears to the aggregate amount of all dividends paid on all classes and
series of capital stock of the Corporation for the year.
Sale or Exchange of Depositary Shares. Upon the sale or exchange of
Depositary Shares to a party other than the Corporation, a holder of the
Depositary Shares will realize a capital gain or loss measured by the difference
between the amount realized on the sale or other disposition and the holder's
adjusted tax basis in the Depositary Shares (provided the Depositary Shares are
held as a capital asset). See "Federal Income Tax Considerations-- Federal
Income Taxation of Paired Capital Stock--Taxation of Stockholders on the
Disposition of Paired Capital Stock" in the accompanying Prospectus.
Redemption of Depositary Shares. The treatment accorded to any redemption
by the Corporation (as distinguished from a sale, exchange or other disposition)
of the Depositary Shares can only be determined on the basis of particular facts
as to each holder at the time of redemption. In general, a holder of the
Depositary Shares will recognize capital gain measured by the excess of the
amount received by the holder of the Depositary Shares upon the redemption over
such holder's adjusted tax basis in the Depositary Shares (provided the
Depositary Shares are held as a capital asset) if such redemption (i) results in
a "complete termination" of the holder's interest in all classes of stock of the
Corporation under Section 302(b)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"), or (ii) is "not essentially equivalent to a dividend" with
respect to the holder of the Depositary Shares under Section 302(b)(1) of the
Code. In applying these tests, there must be taken into account not only any
Depositary Shares owned by the holder of the Depositary Shares, but also such
holder's ownership of REIT Common Stock, REIT Series Common Stock, or other
series of REIT Preferred Stock and any other options (including stock purchase
rights) to acquire any of the foregoing. The holder of the Depositary Shares
also must take into account any such securities (including options) which are
considered to be owned by such holder by reason of the constructive ownership
rules set forth in Sections 318 and 302(c) of the Code.
If a particular holder of the Depositary Shares owns (actually or
constructively) no REIT Common Stock or an insubstantial percentage of the
outstanding REIT Common Stock, based upon current law, it is probable that the
redemption of the Depositary Shares from such a holder would be considered "not
essentially equivalent to a dividend." However, whether a distribution is "not
essentially equivalent to a dividend" depends on all of the facts and
circumstances, and a holder of the Depositary Shares intending to rely on any of
these tests at the time of redemption should consult its own tax advisor to
determine their application to its particular situation.
If the redemption does not meet any of the tests under Section 302(b) of
the Code, then the redemption proceeds received from the Depositary Shares will
be treated as a distribution on the Depositary Shares as described under
"Federal Income Tax Considerations--Federal Income Taxation of Paired Capital
Stock--Taxation of Taxable U.S. Stockholders" in the accompanying Prospectus. If
the redemption is taxed as a dividend, the adjusted tax basis of a holder of
Depositary Shares in the Depositary Shares will be transferred to any other
shares held by such holder. If the holder of the Depositary Shares owns no other
shares in the Corporation, under certain circumstances, such basis may be
transferred to a related person, or it may be lost entirely.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named below, for whom Morgan Stanley & Co. Incorporated, PaineWebber
Incorporated, Prudential Securities Incorporated, Smith Barney Inc., BT Alex.
Brown Incorporated and Donaldson, Lufkin & Jenrette Securities Corporation are
acting as representatives (the "Representatives"), have severally agreed to
purchase, and the Corporation has agreed to sell to them, severally, the
respective numbers of Depositary Shares set forth opposite the names of such
Underwriters below:
<TABLE>
<CAPTION>
Number of
Name Depositary Shares
---- -----------------
<S> <C>
Morgan Stanley & Co. Incorporated ...................... 1,253,000
PaineWebber Incorporated ............................... 1,253,000
Prudential Securities Incorporated ..................... 1,253,000
Smith Barney Inc. ...................................... 1,253,000
BT Alex. Brown Incorporated ............................ 416,500
Donaldson, Lufkin & Jenrette Securities Corporation .... 416,500
CIBC Oppenheimer Corp. ................................. 70,000
EVEREN Securities, Inc. ................................ 70,000
Raymond James & Associates, Inc. ....................... 70,000
Tucker Anthony Incorporated ............................ 70,000
Advest, Inc. ........................................... 35,000
Cowen & Company ........................................ 35,000
Craige Incorporated .................................... 35,000
Crowell, Weedon & Co. .................................. 35,000
Dain Rauscher Incorporated ............................. 35,000
Davenport & Company LLC ................................ 35,000
Fahnestock & Co. Inc. .................................. 35,000
Fidelity Capital Markets - a division of
National Financial Services Corporation ............... 35,000
First Albany Corporation ............................... 35,000
Gibraltar Securities Co. ............................... 35,000
Interstate/Johnson Lane Corporation .................... 35,000
Janney Montgomery Scott Inc. ........................... 35,000
J.C. Bradford & Co. .................................... 35,000
J.J.B. Hilliard, W.L. Lyons, Inc. ...................... 35,000
Legg Mason Wood Walker, Incorporated ................... 35,000
McDonald & Company Securities, Inc. .................... 35,000
McGinn, Smith & Co., Inc. .............................. 35,000
Morgan Keegan & Company, Inc. .......................... 35,000
The Ohio Company ....................................... 35,000
Piper Jaffray Inc. ..................................... 35,000
The Robinson-Humphrey Company, LLC ..................... 35,000
Roney & Co., L.L.C. .................................... 35,000
Scott & Stringfellow, Inc. ............................. 35,000
Stifel, Nicolaus & Company, Incorporated ............... 35,000
Sutro & Stringfellow, Inc. ............................. 35,000
---------
Total .............................................. 7,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Depositary Shares offered
hereby are subject to the approval of certain legal matters by their counsel and
to certain other conditions. The Underwriters are committed to take and pay for
all of the Depositary Shares offered hereby if any are taken.
The Underwriters initially propose to offer part of the Depositary Shares
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement and part to certain dealers at a price that
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represents a concession not in excess of $.50 per Depositary Share below the
public offering price. Any Underwriter may allow, and such dealers may reallow,
a concession not in excess of $.40 per Depositary Share to other Underwriters or
to certain other dealers. After the initial offering of the Depositary Shares,
the offering price and other selling terms may from time to time be varied by
the Representatives.
The Corporation has granted to the Underwriters an option, exercisable for
30 days from the date of this Prospectus Supplement, to purchase up to an
aggregate of 1,050,000 additional Depositary Shares at the public offering price
set forth on the cover page hereof, less underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the Depositary
Shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional Depositary Shares as the number set forth
next to such Underwriter's name in the preceding table bears to the total number
of Depositary Shares set forth next to the names of all Underwriters in the
preceding table.
The Corporation and the several Underwriters have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act of 1933.
The Corporation has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 30 days after the date of this Prospectus Supplement
(a) offer, issue, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of, directly or
indirectly, any shares of Series A Preferred Stock, any shares of any other
class or series of capital stock of the Corporation which is substantially
similar to the Series A Preferred Stock or any depositary shares or depositary
receipts representing or evidencing any of the foregoing (other than the
Depositary Shares to be sold to the Underwriters and the shares of Series A
Preferred Stock represented by such Depositary Shares) or (b) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of any shares of Series A Preferred
Stock, any shares of any other class or series of capital stock of the
Corporation which is substantially similar to the Series A Preferred Stock or
any depositary shares or depositary receipts representing or evidencing any of
the foregoing, whether any such transaction described in clause (a) or (b) of
this sentence is to be settled by delivery of Series A Preferred Stock, other
securities, in cash or otherwise.
The Corporation will apply to list the Depositary Shares on the NYSE.
Trading of the Depositary Shares on the NYSE is expected to commence within the
30-day period after initial delivery of the Depositary Shares. The Underwriters
have advised the Corporation that they intend to make a market in the Depositary
Shares prior to the commencement of trading on the NYSE. The Underwriters will
have no obligation to make a market in the Depositary Shares, however, and may
cease market-making activities, if commenced, at any time.
In order to facilitate the offering of the Depositary Shares, the
Underwriters may engage in transactions that stabilize, maintain, or otherwise
affect the price of the Depositary Shares. Specifically, the Underwriters may
over- allot in connection with the offering, creating a short position in the
Depositary Shares for their own account. In addition, to cover over-allotments
or to stabilize the price of the Depositary Shares, the Underwriters may bid
for, and purchase, the Depositary Shares in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an Underwriter
or a dealer for distributing the Depositary Shares in the offering, if the
syndicate repurchases previously distributed Depositary Shares in transactions
to cover syndicate short positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
Depositary Shares above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
LEGAL MATTERS
Certain legal matters will be passed upon for the Corporation by Nutter,
McClennen & Fish, LLP, Boston, Massachusetts. Brown & Wood LLP, San Francisco,
California will act as counsel for the Underwriters.
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FORWARD-LOOKING STATEMENTS
Any statements in this Prospectus Supplement, in the accompanying
Prospectus and in the documents that are incorporated or deemed to be
incorporated by reference in the accompanying Prospectus that are not strictly
historical are forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Any such
forward-looking statements contained or incorporated by reference herein, in the
accompanying Prospectus or in the documents incorporated or deemed to be
incorporated by reference therein should not be relied upon as predictions of
future events. Prospective investors are cautioned that, while forward-looking
statements reflect the Corporation's good faith belief, they are not guarantees
of future performance and they involve known and unknown risks and
uncertainties and there can be no assurance that the events, results or
conditions reflected in such forward-looking statements will occur. Actual
results may differ materially from those in the forward-looking statements as a
result of various factors. The information contained or incorporated by
reference in this Prospectus Supplement, the accompanying Prospectus and the
documents incorporated or deemed to be incorporated by reference, including,
without limitation, the information set forth under "Risk Factors" in the
accompanying Prospectus and under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Prospectus Supplement,
identifies important factors that could cause such differences. See "Risk
Factors--Cautionary Statements Concerning Forward-Looking Statements" in the
accompanying Prospectus.
S-36
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On January 3, 1998, The Meditrust Companies entered into a merger
agreement with La Quinta pursuant to which La Quinta will merge with and into
the Corporation with the Corporation being the surviving corporation. As a
result of the La Quinta Merger, the Corporation will acquire all of the assets
and liabilities of La Quinta and will assume or retire La Quinta's existing
indebtedness.
Pursuant to the terms of the La Quinta merger agreement, shareholders of
La Quinta may receive a combination of Shares and the earnings and profits
distribution referred to below, or they may elect to receive cash, subject to
the amount of aggregate cash payable to La Quinta shareholders being limited to
approximately $521 million (representing approximately 24% to 28% of the total
merger consideration depending on the Meeting Date Price described below). The
stock consideration will be payable in Shares under an exchange ratio
determined based on the average closing price of the Shares for 20 randomly
determined trading days in a 30 trading day period ending the eighth day prior
to La Quinta's shareholder meeting called to consider the La Quinta Merger (the
"Meeting Date Price"). As discussed below, the following unaudited pro forma
financial statements assume a Meeting Date Price of $30.40 per share. The
actual Meeting Date Price, as announced by the Corporation on June 9, 1998, is
$28.75625 per Share. Under the terms of the La Quinta merger agreement this
decline from the assumed Meeting Date Price of $30.40 per Share will not result
in a change in the number of Shares assumed to be issued in the La Quinta
Merger. In addition, although La Quinta had the right, subject to certain
exceptions, to terminate the merger agreement as a result of the foregoing
decline in the Meeting Date Price, the board of directors of La Quinta has
elected to proceed with the merger.
Pursuant to the La Quinta merger agreement, if the La Quinta Merger is
consummated the La Quinta shareholders will receive 0.7602 Shares in exchange
for each share of La Quinta common stock, reduced by the amount to be received
in the earnings and profits distribution per La Quinta share (resulting in
total consideration of $23.11 per share of La Quinta common stock, based upon
an assumed Meeting Date Price of $30.40 per Share, including the earnings and
profits distribution). La Quinta shareholders receiving stock consideration
will also receive the earnings and profits distribution so long as they hold
the Shares on the applicable record date. The earnings and profits distribution
is expected to be declared immediately prior to the La Quinta Merger, payable
to all shareholders of record of The Meditrust Companies on a date to be
determined by the Corporation between the fifteenth and the forty-fifth day
following the La Quinta Merger and payable within fifteen days of such record
date.
The La Quinta Merger is subject to various conditions including, without
limitation, approval of the La Quinta Merger by two-thirds of the outstanding
shares of La Quinta common stock and by a majority of the outstanding shares of
each of The Meditrust Companies.
To maintain its qualification as a REIT in the event the La Quinta Merger
is consummated, the Corporation will be required to distribute any current and
accumulated earnings and profits inherited from La Quinta in the merger (as
determined for federal income tax purposes). Accordingly, following the La
Quinta Merger, the Corporation intends to make a distribution of earnings and
profits in the amount determined by the Corporation to be necessary for federal
income tax purposes. For purposes of the following pro forma financial
statements, the amount of such earnings and profits distribution is assumed to
be $150 million. See "Risk Factors--Tax Risks Related to Real Estate Investment
Trusts--Requirement to Distribute Accumulated Earnings and Profits" in the
accompanying Prospectus.
In addition, on January 11, 1998 The Meditrust Companies and Cobblestone
entered into a merger agreement pursuant to which Cobblestone merged with and
into the Corporation on May 29, 1998. Cobblestone was a privately held company
which had a portfolio of 27 golf facilities with 31 golf courses.
Under the terms of the Cobblestone merger agreement The Meditrust
Companies were entitled to acquire all of the outstanding common stock of
Cobblestone for Shares and all of the outstanding preferred stock of
Cobblestone for either Shares or, at The Meditrust Companies' option, cash,
with an aggregate value of approximately $241 million. The following pro forma
condensed financial statements were prepared on the assumption that 7,928,000
Shares would be issued in the Cobblestone Merger, based on an assumed market
price per Share of $30.40, and that approximately $169 million of Cobblestone
debt and associated costs would be refinanced or assumed as a condition of the
closing. However, due to a decline in the market price of the Shares,
approximately 8,177,300 Shares with an aggregate market value of approximately
$230 million were issued in the Cobblestone Merger and the $169 million of
Cobblestone debt and associated costs referred to above were paid off by the
Corporation in cash at the closing of the Cobblestone Merger
F-1
<PAGE>
with borrowings under credit facilities. Accordingly, if the following pro
forma condensed financial statements had been prepared on the basis of the
actual number of Shares issued and the other terms upon which the Cobblestone
Merger was actually consummated, such pro forma condensed financial statements
would differ to a limited extent from the pro forma condensed financial
statements set forth below.
The following pro forma condensed financial statements (the "Pro Forma
Financial Satements") have been adjusted for the purchase method of accounting
whereby the hotels, golf courses and related improvements and other assets and
liabilities owned by La Quinta and Cobblestone are adjusted to estimated fair
market value. The fair market value of the assets and liabilities of La Quinta
and Cobblestone have been determined based upon preliminary estimates and are
subject to change as additional information is obtained. Management does not
anticipate that the preliminary allocation of purchase costs based upon the
estimated fair market value of the assets and liabilities of La Quinta and
Cobblestone will materially change; however, the allocation of purchase costs
is subject to final determination based upon estimates and other evaluations of
fair market value as of the close of the transactions. Therefore, the
allocations reflected in the following unaudited Pro Forma Financial Statements
may differ from the amounts ultimately determined.
The following Pro Forma Financial Statements also give effect to the
February 26, 1998 issuance by each of the Corporation and the Operating Company
of 8.5 million shares of its respective Series A Non-Voting Convertible Common
Stock as described under "Certain Recent Developments" at a purchase price of
$32.625 per share.
The following unaudited Pro Forma Condensed Statements of Operations
assume the Mergers had been consummated on terms set forth in the respective
merger agreements as of January 1, 1997, and that the issuance by each of the
Corporation and the Operating Company of the aforesaid 8.5 million shares of
its Series A Non-Voting Convertible Common Stock had occurred as of January 1,
1997. In addition, the unaudited Pro Forma Condensed Combined Balance Sheet
assumes the Mergers had occurred on March 31, 1998.
Separate Pro Forma Condensed Consolidated Statements of Operations for the
year ended December 31, 1997 and the three months ended March 31, 1998 are
presented for both the Corporation and the Operating Company. In addition, Pro
Forma Condensed Combined Statements of Operations for the year ended December
31, 1997 and the three months ended March 31, 1998, and a Pro Forma Condensed
Combined Balance Sheet as of March 31, 1998, are presented to show the impact
of the Mergers on The Meditrust Companies taken as a whole.
The following Pro Forma Financial Statements are based upon, and should be
read in conjunction with, the combined or consolidated, as the case may be,
financial statements of The Meditrust Companies, the Corporation, the Operating
Company, La Quinta and Cobblestone which are incorporated by reference in the
accompanying Prospectus. In that regard, the following Pro Forma Condensed
Statements of Operations for the year ended December 31, 1997 are based upon
the historical financial statements of The Meditrust Companies, the
Corporation, the Operating Company and La Quinta for the year ended December
31, 1997 and the historical financial statements of Cobblestone for the year
ended September 30, 1997 and the following Pro Forma Condensed Statements of
Operations for the three months ended March 31, 1998 are based upon the
historical unaudited financial statements of The Meditrust Companies, the
Corporation, the Operating Company, La Quinta and Cobblestone for the three
months ended March 31, 1998. In management's opinion, all material adjustments
necessary to reflect the effects of the Mergers have been made.
The Pro Forma Financial Statements set forth below are based upon a number
of assumptions and estimates, are subject to a number of uncertainties, and do
not purport to be indicative of the actual financial position or results of
operations that would have occurred had the Mergers and the issuance by each of
The Meditrust Companies of its Series A Non-Voting Convertible Common Stock in
fact occurred on the dates indicated, nor do they purport to be indicative of
the results of operations or financial condition that may occur in the future.
In particular, the number of Shares issuable in the La Quinta Merger will
depend upon the Meeting Date Price of the Shares and the following Pro Forma
Financial Statements assume a Meeting Date Price of $30.40 per Share. The
actual Meeting Date Price, as announced by the Corporation on June 9, 1998, is
$28.75625 per Share. Under the terms of the La Quinta merger agreement this
decline from the assumed Meeting Date Price of $30.40 per Share will not result
in a change in the number of Shares assumed to be issued in the La Quinta
Merger. In addition, the Pro Forma Financial Statements have been prepared on
the basis of certain assumptions regarding the amount of costs and the interest
rate on borrowings to be incurred by the Corporation, and the amount of the
earnings and profits distribution to be made by the Corporation, in connection
with the La Quinta Merger, and the Corporation expects that the amount of the
actual earnings and profits distribution made, and the actual costs and
interest rate incurred, by the Corporation will differ from those assumed
F-2
<PAGE>
for purposes of the Pro Forma Financial Statements. In that regard, the
Corporation is currently seeking to enter into replacement credit facilities in
order to increase the aggregate amount of borrowings available under its credit
facilities from $365 million to approximately $2.25 billion (see "Recent
Developments"), and expects that, if these replacement credit facilities are
entered into, the actual interest rate on borrowings thereunder will be higher
than the per annum interest rate reflected in such pro forma financial
information. Furthermore, pursuant to the terms of the La Quinta merger
agreement, shareholders of La Quinta may elect to receive cash instead of a
portion of the Shares which they otherwise would receive in the merger, subject
to certain limitations on the amount of cash distributed, and the following pro
forma financial information assumes that the La Quinta shareholders will elect
to receive the maximum amount of this cash distribution. Accordingly, if the
following Pro Forma Financial Statements were prepared on the basis of the
amount of the actual earnings and profits and other cash distributions made,
and the actual costs and interest rate on borrowings incurred, in connection
with the La Quinta Merger, such Pro Forma Financial Statements would differ,
perhaps substantially, from those set forth below. Moreover, the La Quinta
Merger may not be accretive, on a per Share basis, as previously disclosed. In
addition, as discussed above, the following Pro Forma Financial Statements
reflect assumptions regarding the Cobblestone Merger which differ to a limited
extent from the actual terms upon which the Cobblestone Merger was consummated.
F-3
<PAGE>
THE MEDITRUST COMPANIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
The Meditrust
Companies La Quinta Cobblestone
(Historical) (A) (Historical) (B) (Historical) (C)
------------------ ------------------ ------------------
<S> <C> <C> <C>
(In thousands)
ASSETS
Real estate investments .................. $3,022,605 $1,523,581 $ 176,830
Cash and cash equivalents ................ 90,526 1,453 400
Trade, notes and other receivables ....... 41,662 18,612 9,714
Deferred charges, prepaid expenses,
inventory and other assets .............. 111,655 28,502 11,053
Deferred income taxes .................... -- 8,325 --
Intangible assets ........................ -- -- 3,489
Goodwill ................................. 193,256 -- --
---------- ---------- ---------
Total assets ........................... $3,459,704 $1,580,473 $ 201,486
========== ========== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Debt ..................................... $1,242,909 $ 960,932 $ 154,631
Accounts payable, accrued expenses
and other liabilities ................... 109,581 125,973 12,989
Deferred income taxes .................... 501 39,291 4,184
Minority interest ........................ -- 2,646 337
---------- ---------- ---------
Total liabilities ...................... 1,352,991 1,128,842 172,141
---------- ---------- ---------
Redeemable preferred stock ............... -- -- 42,241
Shareholders' equity:
Series A Non-Voting Convertible
Common Stock ............................ 1,700 -- --
Common stock ............................. 17,684 8,509 17
Additional paid-in-capital ............... 2,282,226 250,496 5,389
Unearned officers' compensation .......... -- (948) --
Retained earnings (loss) ................. -- 288,607 (18,302)
Distributions in excess of net income..... (194,897) -- --
Treasury stock, at cost .................. -- (95,033) --
---------- ---------- ---------
Total shareholders' equity ............. 2,106,713 451,631 (12,896)
---------- ---------- ---------
Total liabilities and shareholders'
equity ................................ $3,459,704 $1,580,473 $ 201,486
========== ========== =========
<CAPTION>
La Quinta Cobblestone Total
Pro Forma Pro Forma Pro Forma Total
Adjustments (D) Adjustments (AA) Adjustments Pro Forma
------------------- ------------------- -------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
ASSETS
Real estate investments .................. $1,083,673 (E) $ 86,364 (BB) $1,170,037 $5,893,053
Cash and cash equivalents ................ -- -- -- 92,379
Trade, notes and other receivables ....... 42,000 (F) -- 42,000 111,988
Deferred charges, prepaid expenses,
inventory and other assets .............. (5,862)(G) -- (5,862) 145,348
Deferred income taxes .................... (8,325)(H) -- (8,325) --
Intangible assets ........................ 112,543 (I) 7,511 (CC) 120,054 123,543
Goodwill ................................. 331,129 (J) 158,596 (DD) 489,725 682,981
---------- -------- ---------- ----------
Total assets ........................... $1,555,158 $252,471 $1,807,629 $7,049,292
========== ======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt ..................................... $ 834,000 (K) $ 45,000 (EE) $ 879,000 $3,237,472
Accounts payable, accrued expenses
and other liabilities ................... -- -- -- 248,543
Deferred income taxes .................... (39,291)(H) (4,184)(FF) (43,475) 501
Minority interest ........................ -- -- -- 2,983
---------- -------- ---------- ----------
Total liabilities ...................... 794,709 40,816 835,525 3,489,499
---------- -------- ---------- ----------
Redeemable preferred stock ............... -- (42,241)(GG) (42,241) --
Shareholders' equity:
Series A Non-Voting Convertible
Common Stock ............................ -- -- 1,700
Common stock ............................. 150 (L) 1,569 (HH) 1,719 27,929
Additional paid-in-capital ............... 1,102,925 (M) 234,025 (II) 1,336,950 3,875,061
Unearned officers' compensation .......... 948 (N) -- 948 --
Retained earnings (loss) ................. (288,607)(O) 18,302 (JJ) (270,305) --
Distributions in excess of net income..... (150,000)(P) -- (150,000) (344,897)
Treasury stock, at cost .................. 95,033 (N) -- 95,033 --
---------- -------- ---------- ----------
Total shareholders' equity ............. 760,449 253,896 1,014,345 3,559,793
---------- -------- ---------- ----------
Total liabilities and shareholders'
equity ................................ $1,555,158 $252,471 $1,807,629 $7,049,292
========== ======== ========== ==========
</TABLE>
See accompanying notes to the unaudited pro forma
condensed combined balance sheet.
F-4
<PAGE>
The Meditrust Companies
Notes to Pro Forma Condensed Combined Balance Sheet as of March 31, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
(A) Represents the historical combined balance sheet of the Corporation and the
Operating Company as of March 31, 1998.
(B) Represents the historical balance sheet of La Quinta as of March 31, 1998.
(C) Represents the historical balance sheet of Cobblestone as of March 31,
1998.
Adjustments for the La Quinta Transaction:
(D) Represents adjustments to record the merger between the Corporation and La
Quinta. The La Quinta Merger will be accounted for using the purchase method of
accounting, based upon the estimated purchase price of $3,007,012 assuming a
Meeting Date Price of $30.40 per Share, as follows:
<TABLE>
<S> <C>
Issuance of 43,297 Shares of The Meditrust Companies, and
cash of $475,384 in exchange for 77,223 shares of
La Quinta common stock (see Note M) ............................. $1,837,464
Assumption of mortgage debt and other liabilities ................ 960,932
Merger costs (see calculation below) ............................. 208,616
----------
$3,007,012
==========
</TABLE>
The following is a calculation of the estimated fees and other expenses related
to the La Quinta Merger:
<TABLE>
<S> <C>
Buyout of options and restricted stock (8,339 common stock options
and 25 shares of restricted stock) ..................................... $132,000
Employment and non-compete agreements ................................... 12,000
Severance agreements .................................................... 7,000
Adjustment of pension plan liability to fair value ...................... 5,000
Estimated call premium for retirement of $120,000 La Quinta
9.25% Senior Subordinated Notes, plus interest on defeasance of debt ... 10,000
Estimated loan costs in connection with increasing the availability
under The Meditrust Companies' revolving credit facility ............... 5,000
Advisory fees ........................................................... 28,616
Legal and accounting fees ............................................... 5,000
Other, including printing and filing costs .............................. 4,000
--------
$208,616
========
</TABLE>
(E) Represents adjustments for the purchase method of accounting whereby the
investment in La Quinta hotel properties is adjusted to its estimated fair
market value, as follows:
<TABLE>
<S> <C>
Purchase price (see Note D) ........................................... $3,007,012
Less: pre-merger historical basis of La Quinta real estate ............ 1,523,581
Allocation of pro forma basis of La Quinta net assets acquired
as follows:
Intangible assets ..................................................... 112,543
Goodwill .............................................................. 331,129
Other assets .......................................................... 84,705
Other liabilities ..................................................... (128,619)
----------
Subtotal ............................................................. 1,923,339
----------
Step-up to record fair value of La Quinta's real estate investments ... $1,083,673
==========
</TABLE>
(F) Represents adjustment for the purchase method of accounting to record a
receivable associated with the tax benefit provided from the realization of a
preacquisition net operating loss carry back resulting from the buyout of La
Quinta stock options and restricted stock.
F-5
<PAGE>
The Meditrust Companies
Notes to Pro Forma Condensed Combined Balance Sheet as of March 31, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
(G) Represents adjustments for the purchase method of accounting to write off
deferred costs of $10,862 and record $5,000 of deferred loan costs expected to
be incurred in connection with increasing the availability under The Meditrust
Companies' revolving credit facility.
(H) Represents adjustments for the purchase method of accounting to write off
the deferred tax assets and liabilities of La Quinta.
(I) Represents adjustments for the purchase method of accounting whereby the
tradename, assembled work force and customer reservation system of La Quinta
are adjusted to their estimated fair market values.
(J) Represents purchase consideration in excess of the fair market value of the
net assets of La Quinta.
(K) Represents additional borrowings assumed to be incurred in connection with
the La Quinta Merger as follows:
<TABLE>
<S> <C>
Cash consideration for La Quinta shares .................................. $475,384
Assumed current and accumulated earnings and profits distribution ........ 150,000
Merger costs (see calculation above in Note D) ........................... 208,616
--------
Total additional borrowings .............................................. $834,000
========
</TABLE>
(L) Represents adjustments to record the exchange of La Quinta common stock for
Shares of The Meditrust Companies. Pursuant to the La Quinta merger agreement,
La Quinta shareholders may elect to receive either (i) $26.00 cash per share of
La Quinta common stock; or (ii) Shares, for which the Exchange Ratio, as
defined in the La Quinta merger agreement, is based upon the Meeting Date Price
of a Share of The Meditrust Companies. For purposes of these statements, the
Meeting Date Price is assumed to be $30.40 and the earnings and profits
distribution is assumed to be $150,000. At March 31, 1998, there were 77,223
shares of La Quinta common stock outstanding. Assuming approximately 18,284
outstanding shares of La Quinta are exchanged for cash, the remaining 58,939
shares will be exchanged for 43,297 Shares of The Meditrust Companies. The
change in common stock is summarized as follows:
<TABLE>
<S> <C>
Shares issued in connection with the La Quinta Merger ......... 43,297
Par value of each Share ....................................... $ 0.20
--------
Increase in common stock ...................................... 8,659
Less: La Quinta historical common stock ....................... (8,509)
--------
Adjustment to common stock .................................... $ 150
========
</TABLE>
(M) Represents adjustments to eliminate La Quinta's historical additional
paid-in-capital and record equity based upon the number of Shares issued in
connection with the La Quinta Merger as follows:
<TABLE>
<S> <C>
Consideration for La Quinta outstanding shares (58,939 shares
of La Quinta common stock for $23.11 per share in Shares and
earnings and profits distribution; 18,284 shares for $26.00
cash per share) ................................................. $1,837,464
Less: 18,284 shares of La Quinta common stock to be exchanged
for cash ........................................................ (475,384)
----------
Remaining consideration .......................................... 1,362,080
Book value of La Quinta's additional paid-in-capital ............. (250,496)
Increase in common stock ......................................... (8,659)
----------
Adjustment to additional paid-in-capital ......................... $1,102,925
==========
</TABLE>
(N) Represents adjustments to eliminate unearned officers compensation and
treasury stock of La Quinta of $948 and $95,033, respectively.
(O) Represents adjustment to eliminate La Quinta's historical retained earnings
of $288,607.
F-6
<PAGE>
The Meditrust Companies
Notes to Pro Forma Condensed Combined Balance Sheet as of March 31, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
(P) Represents adjustment to record the distribution of current and accumulated
earnings and profits, which is assumed to be $150,000, to the shareholders of
The Meditrust Companies after consummation of the La Quinta Merger. The
estimated earnings and profits distribution has been presented as if the
transaction had been consummated based on the terms and assumptions set forth
in the La Quinta merger agreement.
Adjustments for the Cobblestone Transaction
(AA) Represents adjustments to record the merger between the Corporation and
Cobblestone. The merger will be accounted for using the purchase method of
accounting, based upon the estimated purchase price of $440,631, assuming an
exchange price of $30.40 per Share of The Meditrust Companies, as follows:
<TABLE>
<S> <C>
Issuance of 7,928 Shares of The Meditrust Companies in
exchange for 5,220 redeemable preferred shares of Cobblestone
at $8.25 per share and 1,722 common shares of Cobblestone
at $114.94 per share .............................................. $241,000
Assumption of mortgage debt and other liabilities .................. 154,631
Merger costs (see calculation below) ............................... 45,000
--------
$440,631
========
</TABLE>
The following is a calculation of the estimated fees and other expenses related
to the Cobblestone Merger:
<TABLE>
<S> <C>
Buyout of stock options (113 options at an average strike
price of $15.80) ................................................. $13,000
Estimated cash required for tender premium to retire
outstanding Cobblestone debt ..................................... 15,000
Employment and severance costs .................................... 3,000
Advisory fees ..................................................... 10,000
Legal and accounting fees ......................................... 3,000
Other, including printing and filing costs ........................ 1,000
-------
$45,000
=======
</TABLE>
(BB) Represents adjustments for the purchase method of accounting whereby the
investment in Cobblestone golf properties is adjusted to its estimated fair
market value, as follows:
<TABLE>
<S> <C>
Purchase price of Cobblestone (see Note AA) ....................... $440,631
Less: pre-merger basis of Cobblestone real estate investments ..... 176,830
</TABLE>
Allocation of pro forma basis of Cobblestone to net assets acquired, as
follows:
<TABLE>
<S> <C>
Intangible assets ................................................ 11,000
Goodwill ......................................................... 158,596
Other assets ..................................................... 21,167
Other liabilities ................................................ (13,326)
-------
Subtotal ........................................................ 354,267
-------
Step-up to record fair value of Cobblestone's real
estate investments .............................................. $ 86,364
========
</TABLE>
(CC) Represents adjustments for the purchase method of accounting to write off
certain intangible assets of Cobblestone of $3,489 and record the tradename,
assembled work force and other intangible assets of $11,000 acquired in the
Cobblestone Merger at their estimated fair market values.
(DD) Represents purchase consideration in excess of the fair market value of
the net assets of Cobblestone.
(EE) Represents additional borrowings assumed to be incurred in connection with
the Cobblestone Merger as follows:
<TABLE>
<S> <C>
Merger costs -- (see calculation above) .......................... $45,000
=======
</TABLE>
F-7
<PAGE>
The Meditrust Companies
Notes to Pro Forma Condensed Combined Balance Sheet as of March 31, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
(FF) Represents adjustment for the purchase method of accounting to write off
the deferred tax liability of Cobblestone.
(GG) Represents the exchange of 5,220 shares of redeemable preferred stock of
Cobblestone with a historical value of $42,241 for 1,390 Shares of The
Meditrust Companies based on a redemption price of $8.25 per redeemable
preferred share and an assumed exchange price of $30.40 per Share of The
Meditrust Companies.
(HH) Represents adjustments to record the exchange of redeemable preferred
stock and common stock of Cobblestone for Shares. Pursuant to the Cobblestone
merger agreement, each share of outstanding Cobblestone common stock will be
converted into the right to receive Shares based on the Exchange Ratio, as
defined in the Cobblestone merger agreement, and each share of outstanding
Cobblestone redeemable preferred stock will be converted into $8.25 per share
payable in cash or Shares. At the balance sheet date, The Meditrust Companies
will exchange 7,928 Shares for 5,220 and 1,722 shares of redeemable preferred
stock and common stock of Cobblestone, respectively, based upon an assumed
exchange price of $30.40.
The increase in common stock is summarized as follows:
<TABLE>
<S> <C>
Shares issued in connection with the Cobblestone Merger ......... 7,928
Par value of each Share ......................................... $ 0.20
-------
Increase in common stock ........................................ 1,586
Less: Cobblestone's historical common stock ..................... (17)
-------
Adjustment to common stock ...................................... 1,569
=======
</TABLE>
(II) Represents adjustments to eliminate Cobblestone's historical additional
paid-in capital and record equity based upon the number of Shares issued in the
Cobblestone Merger as follows:
<TABLE>
<S> <C>
Purchase consideration for outstanding shares of Cobblestone
redeemable preferred stock and common stock (5,220
redeemable preferred shares at $8.25 per share and
1,722 common shares at $114.94 per share) ...................... $241,000
Book value of Cobblestone's additional paid-in-capital .......... (5,389)
Increase in common stock ........................................ (1,586)
--------
Adjustment to additional paid-in-capital ........................ $234,025
========
</TABLE>
(JJ) Represents the adjustment to eliminate Cobblestone's historical retained
loss of $18,302.
F-8
<PAGE>
THE MEDITRUST COMPANIES
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
The
Operating Meditrust
The Corporation Company Eliminating Companies
Pro Forma (A) Pro Forma (B) Entries Pro Forma
----------------- --------------- ----------------- ------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Rental ....................................... $137,868 $ -- $ -- $137,868
Rent from Operating Company .................. 248,292 -- (248,292)(C) --
Interest ..................................... 151,315 -- (193)(D) 151,122
Horse racing revenue ......................... -- 5,228 -- 5,228
Hotel revenue ................................ -- 494,494 -- 494,494
Restaurant rent, food & beverage revenue ..... -- 21,158 -- 21,158
Golf club revenue ............................ -- 58,333 -- 58,333
Other ........................................ -- 3,480 -- 3,480
-------- -------- --------- --------
Total revenue ............................... 537,475 582,693 (248,485) 871,683
Expenses:
Interest expense ............................. 190,920 209 (193)(D) 190,936
Amortization of goodwill...................... 26,700 135 -- 26,835
Depreciation, amortization & asset
retirements ................................ 144,309 6,438 -- 150,747
General and administrative ................... 10,111 22,905 -- 33,016
Rental expense due to the Corporation ........ -- 248,292 (248,292)(C) --
Horse racing operations ...................... -- 4,263 -- 4,263
Hotel and restaurant operations .............. -- 244,501 -- 244,501
Golf club operations ......................... -- 57,984 -- 57,984
Property operations .......................... 220 -- -- 220
Net gain on property transactions ............ -- (8,808) -- (8,808)
Partners' equity in earnings ................. -- 860 -- 860
-------- -------- --------- --------
Total expenses .............................. 372,260 576,779 (248,485) 700,554
-------- -------- --------- --------
Income before income taxes .................... 165,215 5,914 -- 171,129
Income tax provision .......................... -- 2,070 -- 2,070
-------- -------- --------- --------
Net income .................................... 165,215 3,844 -- 169,059
-------- -------- --------- --------
Basic earnings per share ...................... $ 1.21 $ 0.03 $ 1.24
Basic weighted average shares outstanding ..... 135,999(E) 135,795(E) 135,795
Diluted earnings per share .................... $ 1.21 $ 0.03 $ 1.24
Diluted weighted average shares outstanding ... 136,732(E) 136,249(E) 136,249
</TABLE>
See accompanying notes to the unaudited pro forma
condensed combined statement of operations.
F-9
<PAGE>
The Meditrust Companies
Notes to Pro Forma Condensed Combined Statement of Operations
for the Year Ended December 31, 1997
(In Thousands, Except Per Share Amounts)
(Unaudited)
(A) Represents the pro forma results of operations of the Corporation for the
year ended December 31, 1997 as adjusted for the Mergers.
(B) Represents the pro forma results of operations of the Operating Company for
the year ended December 31, 1997 as adjusted for the Mergers.
(C) Represents the elimination of rental income and expense related to the race
track, hotels and golf course properties leased by the Operating Company from
the Corporation.
(D) Represents the elimination of interest income and expense related to the
operating note between the Corporation and the Operating Company.
(E) Basic and diluted weighted average shares include 8,500 shares of Series A
Non-Voting Convertible Common Stock issued in a forward equity transaction on
February 27, 1998. See "Certain Recent Developments."
The Series A Non-Voting Convertible Common Stock will receive the same dividend
as the Shares; however, the guaranteed minimum return is Libor plus 75 basis
points. Any difference between Libor plus 75 basis points and the dividend
payments received by the holders of the Series A Non-Voting Convertible Common
Stock will be included in an adjustment amount under a purchase price
adjustment agreement. The Companies expect the annual dividend to exceed the
Libor plus 75 basis points.
This forward equity transaction has been accounted for as an equity transaction
with the shares treated as outstanding from their date of issuance for both
basic and diluted earnings per share purposes. The accounting treatment for
this transaction is expected to be reviewed by the Emerging Issues Task Force
("EITF"). The Securities and Exchange Commission has concluded that until the
EITF has an opportunity to perform a full review of this transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in the Pro
Forma Condensed Combined Statement of Operations.
F-10
<PAGE>
THE MEDITRUST COMPANIES
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
The
Operating Meditrust
The Corporation Company Eliminating Companies
Pro Forma (A) Pro Forma (B) Entries Pro Forma
----------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Rental ....................................... $ 43,656 $ -- $ -- $ 43,656
Rent from Operating Company .................. 73,265 -- (73,265)(C) --
Interest ..................................... 39,004 -- (290)(D) 38,714
Horse racing revenue ......................... -- 36,511 -- 36,511
Hotel revenue ................................ -- 131,297 -- 131,297
Restaurant rent, food & beverage revenue ..... -- 5,279 -- 5,279
Golf club revenue ............................ -- 17,019 -- 17,019
Other ........................................ 26,000 1,043 -- 27,043
-------- -------- -------- --------
Total revenue ............................... 181,925 191,149 (73,555) 299,519
Expenses:
Interest expense ............................. 56,088 528 (290)(D) 56,326
Amortization of goodwill...................... 7,496 201 -- 7,697
Depreciation, amortization & asset
retirements ................................ 39,797 4,088 -- 43,885
General and administrative ................... 3,794 7,248 -- 11,042
Rental expense due to the Corporation ........ -- 73,265 (73,265)(C) --
Horse racing operations ...................... -- 28,196 -- 28,196
Hotel and restaurant operations .............. -- 65,959 -- 65,959
Golf club operations ......................... -- 14,569 -- 14,569
Property operations .......................... 1,265 -- -- 1,265
Other ........................................ 21,430 -- -- 21,430
Partners' equity in earnings ................. -- 204 -- 204
-------- -------- -------- --------
Total expenses .............................. 129,870 194,258 (73,555) 250,573
-------- -------- -------- --------
Income before income taxes .................... 52,055 (3,109) -- 48,946
Income tax provision .......................... -- -- -- --
-------- -------- -------- --------
Net income .................................... 52,055 (3,109) -- 48,946
-------- -------- -------- --------
Basic earnings per share ...................... $ 0.35 $ (0.02) $ 0.33
Basic weighted average shares outstanding ..... 149,626(E) 148,320(E) 148,320
Diluted earnings per share .................... $ 0.35 $ (0.02) $ 0.33
Diluted weighted average shares outstanding ... 150,105(E) 148,799(E) 148,799
</TABLE>
See accompanying notes to the unaudited pro forma
condensed combined statement of operations.
F-11
<PAGE>
The Meditrust Companies
Notes to Pro Forma Condensed Combined Statement of Operations
for the Three Months Ended March 31, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
(A) Represents the pro forma results of operations of the Corporation for the
three months ended March 31, 1998 as adjusted for the Mergers.
(B) Represents the pro forma results of operations of the Operating Company for
the three months ended March 31, 1998 as adjusted for the Mergers.
(C) Represents the elimination of rental income and expense related to the race
track, hotels and golf course properties leased by the Operating Company from
the Corporation.
(D) Represents the elimination of interest income and expense related to the
operating note between the Corporation and the Operating Company.
(E) Basic and diluted weighted average shares include 8,500 shares of Series A
Non-Voting Convertible Common Stock issued in a forward equity transaction on
February 27, 1998. See "Certain Recent Developments."
The Series A Non-Voting Convertible Common Stock will receive the same dividend
as the Shares; however, the guaranteed minimum return is Libor plus 75 basis
points. Any difference between Libor plus 75 basis points and the dividend
payments received by the holders of the Series A Non-Voting Convertible Common
Stock will be included in an adjustment amount under a purchase price
adjustment agreement. The Companies expect the annual dividend to exceed the
Libor plus 75 basis points.
This forward equity transaction has been accounted for as an equity transaction
with the shares treated as outstanding from their date of issuance for both
basic and diluted earnings per share purposes. The accounting treatment for
this transaction is expected to be reviewed by the Emerging Issues Task Force
("EITF"). The Securities and Exchange Commission has concluded that until the
EITF has an opportunity to perform a full review of this transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in the Pro
Forma Condensed Combined Statement of Operations.
F-12
<PAGE>
MEDITRUST CORPORATION
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
La Quinta Cobblestone Other
The Corporation Merger Merger Pro Forma The Corporation
Historical (A) Adjustments (B) Adjustments (C) Adjustments Pro Forma
----------------- ---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Rental ............................ $ 137,868 $ -- $ -- $ -- $137,868
Rent from Operating Company ....... 740 234,753(D) 12,799 (D) -- 248,292
Interest .......................... 151,315 -- -- -- 151,315
--------- --------- -------- -------- --------
Total revenue .................... 289,923 234,753 12,799 -- 537,475
Expenses:
Interest expense .................. 87,412 110,408(E) 13,500 (F) (20,400)(I) 190,920
Amortization of goodwill........... 2,214 16,556(G) 7,930 (G) -- 26,700
Depreciation and amortization ..... 26,954 107,383(H) 9,972 (H) -- 144,309
General and administrative ........ 10,111 -- -- -- 10,111
Property operations ............... 220 -- -- -- 220
--------- --------- -------- -------- --------
Total expenses ................... 126,911 234,347 31,402 (20,400) 372,260
--------- --------- -------- -------- --------
Net income ......................... 163,012 406 (18,603) 20,400 165,215
========= ========= ======== ======== ========
Basic earnings per share ........... $ 2.14 $ 1.21
Basic weighted average shares
outstanding ..................... 76,274 135,999(J)
Diluted earnings per share ......... $ 2.12 $ 1.21
Diluted weighted average shares
outstanding ....................... 77,007 136,732(J)
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated statement of operations.
F-13
<PAGE>
Meditrust Corporation
Notes to Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1997
(In Thousands, Except Per Share Amounts)
(Unaudited)
(A) Represents the historical statement of operations of the Corporation for
the year ended December 31, 1997.
(B) Represents adjustments to the Corporation's results of operations assuming
the La Quinta Merger had occurred as of January 1, 1997.
(C) Represents adjustments to the Corporation's results of operations assuming
the Cobblestone Merger had occurred as of January 1, 1997.
(D) Represents the pro forma lease revenue from Operating Company to the
Corporation for the use of assets that the Corporation will have ownership of
subsequent to the Mergers. The respective lease revenue is calculated on a
triple net basis based upon the historical revenue and expenses of the assets
for the period presented.
(E) Represents adjustments to historical interest expense of the Corporation
based on the La Quinta Merger as follows:
<TABLE>
<S> <C>
Reclassification of historical interest expense from
Operating Company ................................................... $ 49,186
Adjustment to reflect the net increase in interest expense as
a result of additional borrowings of $834,000 at an assumed rate
of 7.5% partially offset by the effect of refinancing the
existing La Quinta $120,000 9.25% Senior Subordinated Notes
from an effective rate of 9.58% to 7.5% ............................. 60,222
Amortization of additional deferred loan costs ........................ 1,000
--------
Adjustment to interest expense ........................................ $110,408
========
</TABLE>
(F) Represents adjustments to historical interest expense of the Corporation
based on the Cobblestone Merger as follows:
<TABLE>
<S> <C>
Reclassification of historical interest expense from
Operating Company .................................................. $ 15,273
Adjustment to reflect the net decrease in interest expense
as a result of additional borrowings of $45,000 and refinancing
the existing debt at 7.5% .......................................... (1,773)
--------
Adjustment to interest expense ...................................... $ 13,500
========
</TABLE>
(G) Represents adjustments to reflect amortization of goodwill of $16,556 and
$7,930 pertaining to the Mergers with La Quinta and Cobblestone, respectively.
Goodwill represents purchase consideration in excess of the fair market value
of the net assets of La Quinta and Cobblestone. Amortization of goodwill is
computed using the straight line method over a 20 year estimated useful life.
(H) Represents adjustment to increase depreciation of real estate and
personalty and amortization of intangible assets acquired. Depreciation is
computed using the straight line method and is based upon the estimated useful
lives of 30 years for buildings and improvements, 20 years for land
improvements and 5 to 7 years for personal property. Amortization of the
tradename asset is computed using the straight line method over a 20 year
estimated life. Intangible assets for the assembled work force and customer
reservation system are amortized on a straight line basis over a 3 year
estimated life. These estimates are based upon management's knowledge of the
properties and the hotel and golf course industries in general.
(I) Represents adjustments to interest expense based upon the reduction in
additional borrowings assumed to be incurred in connection with the Mergers,
effected through the receipt of approximately $272,000 on February 27, 1998
from the issuance of 8,500 shares of Series A Non-Voting Convertible Common
Stock in a forward equity transaction, which is assumed to have occurred as of
January 1, 1997 for pro forma purposes.
Interest expense on additional borrowings under The Meditrust Companies'
revolving credit facility assumes an average interest rate of 7.5%. An increase
of 25 basis points in the interest rate on this variable rate debt would
increase pro forma interest expense by $2,217, decrease pro forma net income to
$162,998 and decrease pro forma basic earnings per share by $0.02 based upon
135,999 basic weighted average common shares outstanding. An increase of 50
basis points in the
F-14
<PAGE>
interest rate on this variable rate debt would increase pro forma interest
expense by $4,395, decrease pro forma net income to $160,820 and decrease pro
forma basic earnings per share by $0.03 based upon 135,999 basic weighted
average common shares outstanding. An increase of 75 basis points in the
interest rate on this variable rate debt would increase pro forma interest
expense by $6,593, decrease pro forma net income to $158,622 and decrease pro
forma basic earnings per share by $0.05 based upon 135,999 basic weighted
average common shares outstanding.
(J) Basic and diluted weighted average shares include 8,500 shares of Series A
Non-Voting Convertible Common Stock issued in a forward equity transaction on
February 27, 1998. See "Certain Recent Developments."
The Series A Non-Voting Convertible Common Stock will receive the same dividend
as the Shares; however, the guaranteed minimum return is Libor plus 75 basis
points. Any difference between Libor plus 75 basis points and the dividend
payments received by the holders of the Series A Non-Voting Convertible Common
Stock will be included in an adjustment amount under a purchase price
adjustment agreement. The Companies expect the annual dividend to exceed the
Libor plus 75 basis points.
This forward equity transaction has been accounted for as an equity transaction
with the shares treated as outstanding from their date of issuance for both
basic and diluted earnings per share purposes. The accounting treatment for
this transaction is expected to be reviewed by the Emerging Issues Task Force
("EITF"). The Securities and Exchange Commission has concluded that until the
EITF has an opportunity to perform a full review of this transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in the Pro
Forma Condensed Consolidated Statement of Operations.
F-15
<PAGE>
MEDITRUST CORPORATION
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
La Quinta Cobblestone Other
The Corporation Merger Merger Pro Forma The Corporation
Historical (A) Adjustments (B) Adjustments (C) Adjustments Pro Forma
----------------- ---------------- ----------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Rental ............................ $ 43,656 $ -- $ -- $ -- $ 43,656
Rent from Operating Company ....... 6,781 60,554(D) 5,930 (D) -- 73,265
Interest .......................... 39,004 -- -- -- 39,004
Other ............................. 26,000 -- -- -- 26,000
-------- ------- ------- ------- --------
Total revenue .................... 115,441 60,554 5,930 -- 181,925
Expenses:
Interest expense .................. 25,417 29,369(E) 4,702 (F) (3,400)(I) 56,088
Amortization of goodwill........... 1,375 4,139(G) 1,982 (G) -- 7,496
Depreciation and amortization ..... 10,458 26,846(H) 2,493 (H) -- 39,797
General and administrative ........ 3,794 -- -- -- 3,794
Property operations ............... 1,265 -- -- -- 1,265
Other ............................. 21,430 -- -- -- 21,430
-------- ------- ------- ------- --------
Total expenses ................... 63,739 60,354 9,177 (3,400) 129,870
-------- ------- ------- ------- --------
Net income ......................... 51,702 200 (3,247) $ 3,400 52,055
======== ======= ======= ======= ========
Basic earnings per share ........... $ 0.56 $ 0.35
Basic weighted average shares
outstanding ..................... 92,734 149,626(J)
Diluted earnings per share ......... $ 0.55 $ 0.35
Diluted weighted average shares
outstanding ....................... 93,213 150,105(J)
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated statement of operations.
F-16
<PAGE>
Meditrust Corporation
Notes to Pro Forma Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
(A) Represents the historical statement of operations of the Corporation for
the three months ended March 31, 1998.
(B) Represents adjustments to the Corporation's results of operations assuming
the La Quinta Merger had occurred as of January 1, 1997.
(C) Represents adjustments to the Corporation's results of operations assuming
the Cobblestone Merger had occurred as of January 1, 1997.
(D) Represents the pro forma lease revenue from Operating Company to the
Corporation for the use of assets that the Corporation will have ownership of
subsequent to the Mergers. The respective lease revenue is calculated on a
triple net basis based upon the historical revenue and expenses of the assets
for the period presented.
(E) Represents adjustments to historical interest expense of the Corporation
based on the La Quinta Merger as follows:
<TABLE>
<S> <C>
Reclassification of historical interest expense from
Operating Company ................................................ $14,063
Adjustment to reflect the increase in interest expense
as a result of additional borrowings of $834,000 at an
assumed rate of 7.5% partially offset by the effect of
refinancing the existing La Quinta $120,000 9.25% Senior
Subordinated Notes from an effective rate of 9.58% to 7.5% ....... 15,056
Amortization of additional deferred loan costs ..................... 250
-------
Adjustment to interest expense ..................................... $29,369
=======
</TABLE>
(F) Represents adjustments to historical interest expense of the Corporation
based on the Cobblestone Merger as follows:
<TABLE>
<S> <C>
Reclassification of historical interest expense from
Operating Company .............................................. $5,145
Adjustment to reflect the net decrease in interest
expense as a result of additional borrowings of $45,000 and
refinancing the existing debt at 7.5% .......................... (443)
------
Adjustment to interest expense ................................... $4,702
======
</TABLE>
(G) Represents adjustments to reflect amortization of goodwill of $4,139 and
$1,982 pertaining to the Mergers with La Quinta and Cobblestone, respectively.
Goodwill represents purchase consideration in excess of the fair market value
of the net assets of La Quinta and Cobblestone. Amortization of goodwill is
computed using the straight line method over a 20 year estimated useful life.
(H) Represents adjustment to increase depreciation of real estate and
personalty and amortization of intangible assets acquired. Depreciation is
computed using the straight line method and is based upon the estimated useful
lives of 30 years for buildings and improvements, 20 years for land
improvements and 5 to 7 years for personal property. Amortization of the
tradename asset is computed using the straight line method over a 20 year
estimated life. Intangible assets for the assembled work force and customer
reservation system are amortized on a straight line basis over a 3 year
estimated life. These estimates are based upon management's knowledge of the
properties and the hotel and golf course industries in general.
(I) Represents adjustments to interest expense based upon the reduction in
additional borrowings assumed to be incurred in connection with the Mergers,
effected through the receipt of approximately $272,000 on February 27, 1998,
from the issuance of 8,500 shares of Series A Non-Voting Convertible Common
Stock in a forward equity transaction, which is assumed to have occurred as of
January 1, 1997 for pro forma purposes.
Interest expense on additional borrowings under The Meditrust Companies'
revolving credit facility assumes an average interest rate of 7.5%. An increase
of 25 basis points in the interest rate on this variable rate debt would
increase pro forma interest expense by $554, decrease pro forma net income to
$51,501 and decrease pro forma basic earnings per share by $0.00 based upon
149,626 basic weighted average common shares outstanding. An increase of 50
basis points in the interest rate on this variable rate debt would increase pro
forma interest expense by $1,099, decrease pro forma net income to $50,956
F-17
<PAGE>
and decrease pro forma basic earnings per share by $0.01 based upon 149,626
basic weighted average common shares outstanding. An increase of 75 basis
points in the interest rate on this variable rate debt would increase pro forma
interest expense by $1,648, decrease pro forma net income to $50,407 and
decrease pro forma basic earnings per share by $0.01 based upon 149,626 basic
weighted average common shares outstanding.
(J) Basic and diluted weighted average shares include 8,500 shares of Series A
Non-Voting Convertible Common Stock issued in a forward equity transaction on
February 27, 1998. See "Certain Recent Developments."
The Series A Non-Voting Convertible Common Stock will receive the same dividend
as the Shares; however, the guaranteed minimum return is Libor plus 75 basis
points. Any difference between Libor plus 75 basis points and the dividend
payments received by the holders of the Series A Non-Voting Convertible Common
Stock will be included in an adjustment amount under a purchase price
adjustment agreement. The Companies expect the annual dividend to exceed the
Libor plus 75 basis points.
This forward equity transaction has been accounted for as an equity transaction
with the shares treated as outstanding from their date of issuance for both
basic and diluted earnings per share purposes. The accounting treatment for
this transaction is expected to be reviewed by the Emerging Issues Task Force
("EITF"). The Securities and Exchange Commission has concluded that until the
EITF has an opportunity to perform a full review of this transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in the Pro
Forma Condensed Consolidated Statement of Operations.
F-18
<PAGE>
MEDITRUST OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Operating
Company La Quinta Cobblestone
(Historical)(A) (Historical)(B) (Historical)(C)
----------------- ----------------- -----------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Horse racing revenue ...................... $ 5,228 $ -- $ --
Hotel revenue ............................. -- 494,494 --
Restaurant rent, food & beverage
revenue .................................. -- 8,075 13,083
Golf club revenue ......................... -- -- 65,515
Other ..................................... 137 -- 3,343
------- -------- --------
Total revenue ............................ 5,365 502,569 81,941
Expenses:
Interest expense .......................... 209 49,186 15,273
Amortization of goodwill .................. 135 -- --
Depreciation, amortization & asset
retirements .............................. 171 60,817 8,909
General and administrative ................ 447 18,524 4,030
Rent expense due to the
Corporation .............................. 740 -- --
Horse racing operations ................... 4,263 -- --
Hotel operations .......................... -- 244,501 --
Golf club operations ...................... -- -- 58,786
Net gain on property transactions ......... -- (8,808) --
Partners' equity in earnings .............. -- 860 --
------- -------- --------
Total expenses ........................... 5,965 365,080 86,998
------- -------- --------
(Loss) income before income taxes .......... (600) 137,489 (5,057)
Income tax provision ....................... -- 50,185 49
------- -------- --------
Net (loss) income .......................... $ (600) $ 87,304 $ (5,106)
======= ======== ========
Basic earnings per share ................... $ (0.01)
Basic weighted average shares
outstanding ............................... 82,490
Diluted earnings per share ................. $ (0.01)
Diluted weighted average shares
outstanding ............................... 83,223
<CAPTION>
La Quinta Cobblestone Total Operating
Pro Forma Pro Forma Pro Forma Company
Adjustments(D) Adjustments(E) Adjustments Pro Forma
------------------ ------------------ ------------- ----------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Horse racing revenue ...................... $ -- $ -- $ -- $ 5,228
Hotel revenue ............................. -- -- -- 494,494
Restaurant rent, food & beverage
revenue .................................. -- -- -- 21,158
Golf club revenue ......................... -- (7,182)(F) (7,182) 58,333
Other ..................................... -- -- -- 3,480
--------- -------- --------- --------
Total revenue ............................ -- (7,182) (7,182) 582,693
Expenses:
Interest expense .......................... (49,186)(G) (15,273)(G) (64,459) 209
Amortization of goodwill .................. -- -- -- 135
Depreciation, amortization & asset
retirements .............................. (58,592)(G) (4,867)(G) (63,459) 6,438
General and administrative ................ -- (96)(J) (96) 22,905
Rent expense due to the
Corporation .............................. 234,753 (H) 12,799 (H) 247,552 248,292
Horse racing operations ................... -- -- -- 4,263
Hotel operations .......................... -- -- -- 244,501
Golf club operations ...................... -- (802)(F) (802) 57,984
Net gain on property transactions ......... -- -- -- (8,808)
Partners' equity in earnings .............. -- -- -- 860
--------- -------- --------- --------
Total expenses ........................... 126,975 (8,239) 118,736 576,779
--------- -------- --------- --------
(Loss) income before income taxes .......... (126,975) 1,057 (125,918) 5,914
Income tax provision ....................... (48,164)(I) -- (48,164) 2,070
--------- -------- --------- --------
Net (loss) income .......................... $ (78,811) $ 1,057 $ (77,754) $ 3,844
========= ======== ========= ========
Basic earnings per share ................... $ 0.03
Basic weighted average shares
outstanding ............................... 135,795(K)
Diluted earnings per share ................. $ 0.03
Diluted weighted average shares
outstanding ............................... 136,249(K)
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated statement of operations.
F-19
<PAGE>
Meditrust Operating Company
Notes to Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1997
(In Thousands, Except Per Share Amounts)
(Unaudited)
(A) Represents the historical statement of operations of the Operating Company
for the period ended December 31, 1997.
(B) Represents the historical statement of operations of La Quinta for the year
ended December 31, 1997.
(C) Represents the historical statement of operations of Cobblestone for the
year ended September 30, 1997.
(D) Represents adjustments to the Operating Company's results of operations
assuming the La Quinta Merger had occurred as of January 1, 1997.
(E) Represents adjustments to the Operating Company's results of operations
assuming the Cobblestone Merger had occurred as of January 1, 1997.
(F) Represents the adjustment to defer all initiation fee revenue from the sale
of club memberships along with the direct incremental costs of selling the
memberships, and to amortize deferred revenue over the expected term of
memberships and supported by a course by course analysis of member attrition.
The incremental direct costs incurred with the selling of memberships will be
deferred and capitalized in a manner similar to deferred loan costs in
accordance with SFAS No. 91.
(G) Represents the adjustment to reclassify interest, depreciation and
amortization expenses related to the ownership of real estate assets from
Operating Company to the Corporation.
(H) Represents the pro forma lease expense of the Operating Company for the use
of assets that the Corporation will have ownership of subsequent to the
Mergers. The lease expense is calculated on a triple net basis based upon the
historical revenue and expenses of the assets for the periods presented.
(I) Represents the adjustment to La Quinta's and Cobblestone's income tax
provisions necessitated by the impact to taxable income from the effects of the
Mergers.
(J) Represents the adjustment to eliminate semi-annual investment banking and
service fees to an affiliate of the majority shareholder of Cobblestone.
(K) Basic and diluted weighted average shares include 8,500 shares of Series A
Non-Voting Convertible Common Stock issued in a forward equity transaction on
February 27, 1998. See "Certain Recent Developments."
The Series A Non-Voting Convertible Common Stock will receive the same dividend
as the Shares; however, the guaranteed minimum return is Libor plus 75 basis
points. Any difference between Libor plus 75 basis points and the dividend
payments received by the holders of the Series A Non-Voting Convertible Common
Stock will be included in an adjustment amount under a purchase price
adjustment agreement. The Companies expect the annual dividend to exceed Libor
plus 75 basis points.
This forward equity transaction has been accounted for as an equity transaction
with the shares treated as outstanding from their date of issuance for both
basic and diluted earnings per share purposes. The accounting treatment for
this transaction is expected to be reviewed by the Emerging Issues Task Force
("EITF"). The Securities and Exchange Commission has concluded that until the
EITF has an opportunity to perform a full review of this transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in the Pro
Forma Condensed Combined Statement of Operations.
F-20
<PAGE>
MEDITRUST OPERATING COMPANY
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Operating
Company La Quinta Cobblestone
(Historical)(A) (Historical)(B) (Historical)(C)
----------------- ----------------- -----------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Horse racing revenue ..................... $36,511 $ -- $ --
Hotel revenue ............................ -- 131,297 --
Restaurant rent, food & beverage
revenue ................................. -- 2,029 3,250
Golf club revenue ........................ 341 -- 17,701
Other .................................... 176 -- 867
------- -------- --------
Total revenue ........................... 37,028 133,326 21,818
Expenses:
Interest expense ......................... 528 14,063 5,145
Amortization of goodwill ................. 201 -- --
Depreciation, amortization & asset
retirements ............................. 813 16,823 2,706
General and administrative ............... 590 5,577 1,081
Rent expense due to the
Corporation ............................. 6,781 -- --
Horse racing operations .................. 28,196 -- --
Hotel operations ......................... -- 65,959 --
Golf club operations ..................... -- -- 14,686
Partners' equity in earnings ............. -- 204 --
------- -------- --------
Total expenses .......................... 37,109 102,626 23,618
------- -------- --------
(Loss) income before income taxes ......... (81) 30,700 (1,800)
Income tax provision ...................... -- 11,205 --
------- -------- --------
Net (loss) income ......................... $ (81) $ 19,495 $ (1,800)
======= ======== ========
Basic earnings per share .................. $ (0.00)
Basic weighted average shares
outstanding .............................. 91,428
Diluted earnings per share ................ $ (0.00)
Diluted weighted average shares
outstanding .............................. 91,907
<CAPTION>
La Quinta Cobblestone Total Operating
Pro Forma Pro Forma Pro Forma Company
Adjustments(D) Adjustments(E) Adjustments Pro Forma
------------------ ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Horse racing revenue ..................... $ -- $ -- $ -- $ 36,511
Hotel revenue ............................ -- -- -- 131,297
Restaurant rent, food & beverage
revenue ................................. -- -- -- 5,279
Golf club revenue ........................ -- (1,023)(F) (1,023) 17,019
Other .................................... -- -- -- 1,043
-------- ------- --------- ---------
Total revenue ........................... -- (1,023) (1,023) 191,149
Expenses:
Interest expense ......................... (14,063)(G) (5,145)(G) (19,208) 528
Amortization of goodwill ................. -- -- -- 201
Depreciation, amortization & asset
retirements ............................. (13,548)(G) (2,706)(G) (16,254) 4,088
General and administrative ............... -- -- -- 7,248
Rent expense due to the
Corporation ............................. 60,554 (H) 5,930 (H) 66,484 73,265
Horse racing operations .................. -- -- -- 28,196
Hotel operations ......................... -- -- -- 65,959
Golf club operations ..................... -- (117)(F) (117) 14,569
Partners' equity in earnings ............. -- -- -- 204
-------- ------- --------- ---------
Total expenses .......................... 32,943 (2,038) 30,905 194,258
-------- ------- --------- ---------
(Loss) income before income taxes ......... (32,943) 1,015 (31,928) (3,109)
Income tax provision ...................... (11,205)(I) -- (11,205) --
-------- ------- --------- ---------
Net (loss) income ......................... $(21,738) $ 1,015 $ (20,723) $ (3,109)
======== ======= ========= =========
Basic earnings per share .................. $ (0.02)
Basic weighted average shares
outstanding .............................. 148,320 (J)
Diluted earnings per share ................ $ (0.02)
Diluted weighted average shares
outstanding .............................. 148,799 (J)
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated statement of operations.
F-21
<PAGE>
Meditrust Operating Company
Notes to Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 1998
(In Thousands, Except Per Share Amounts)
(Unaudited)
(A) Represents the historical statement of operations of the Operating Company
for the three months ended March 31, 1998.
(B) Represents the historical statement of operations of La Quinta for the
three months ended March 31, 1998.
(C) Represents the historical statement of operations of Cobblestone for the
three months ended March 31, 1998.
(D) Represents adjustments to the Operating Company's results of operations
assuming the La Quinta Merger had occurred as of January 1, 1997.
(E) Represents adjustments to the Operating Company's results of operations
assuming the Cobblestone Merger had occurred as of January 1, 1997.
(F) Represents the adjustment to defer all initiation fee revenue from the sale
of club memberships along with the direct incremental costs of selling the
memberships, and to amortize deferred revenue over the expected term of
memberships and supported by a course by course analysis of member attrition.
The incremental direct costs incurred with the selling of memberships will be
deferred and capitalized in a manner similar to deferred loan costs in
accordance with SFAS No. 91.
(G) Represents the adjustment to reclassify interest, depreciation and
amortization expenses related to the ownership of real estate assets from
Operating Company to the Corporation.
(H) Represents the pro forma lease expense of the Operating Company for the use
of assets that the Corporation will have ownership of subsequent to the
Mergers. The lease expense is calculated on a triple net basis based upon the
historical revenue and expenses of the assets for the periods presented.
(I) Represents the adjustment to La Quinta's income tax provision necessitated
by the impact to taxable income from the effects of the Mergers.
(J) Basic and diluted weighted average shares include 8,500 shares of Series A
Non-Voting Convertible Common Stock issued in a forward equity transaction on
February 27, 1998. See "Certain Recent Developments."
The Series A Non-Voting Convertible Common Stock will receive the same dividend
as the Shares; however, the guaranteed minimum return is Libor plus 75 basis
points. Any difference between Libor plus 75 basis points and the dividend
payments received by holders of the Series A Non-Voting Convertible Common
Stock will be included in an adjustment amount under a purchase price
adjustment agreement. The Companies expect the annual dividend to exceed the
Libor plus 75 basis points.
This forward equity transaction has been accounted for as an equity transaction
with the shares treated as outstanding from their date of issuance for both
basic and diluted earnings per share purposes. The accounting treatment for
this transaction is expected to be reviewed by the Emerging Issues Task Force
("EITF"). The Securities and Exchange Commission has concluded that until the
EITF has an opportunity to perform a full review of this transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in the Pro
Forma Condensed Combined Statement of Operations.
F-22
<PAGE>
PROSPECTUS
Common Stock, Preferred Stock, Depositary Shares,
Series Common Stock, Debt Securities and/or Securities Warrants
--------------
The Meditrust Companies are comprised of two companies, Meditrust
Corporation (the "REIT" or the "Corporation") and Meditrust Operating Company
(the "Operating Company"), each incorporated under the laws of Delaware
(collectively, the "Companies" and, individually, a "Company"). The REIT is a
real estate investment trust under the Internal Revenue Code of 1986, as
amended. The shares of common stock of the Companies, comprised of common stock
of the REIT ("REIT Common Stock") and common stock of the Operating Company
("Operating Common Stock" and, together with the REIT Common Stock, the "Common
Stock"), are paired and traded as units consisting of one share of each Company,
and are herein sometimes referred to as "Paired Common Stock." Shares of
preferred stock of the Companies, comprised of preferred stock of the REIT
("REIT Preferred Stock") and preferred stock of the Operating Company
("Operating Preferred Stock" and, together with the REIT Preferred Stock, the
"Preferred Stock"), may or may not be paired, but if paired will trade as units
consisting of one share of each Company. Shares of REIT Preferred Stock may or
may not be represented by depositary shares ("REIT Depositary Shares") and
shares of Operating Preferred Stock may or may not be represented by depositary
shares ("Operating Depositary Shares" and, together with the REIT Depositary
Shares, the "Depositary Shares"), and REIT Depositary Shares and Operating
Depositary Shares may or may not be paired, but if paired will trade as units
consisting of one Depositary Share of each Company. Shares of series common
stock, comprised of series common stock of the REIT ("REIT Series Common Stock")
and series common stock of the Operating Company ("Operating Series Common
Stock" and, together with the REIT Series Common Stock, the "Series Common
Stock"), may or may not be paired, but if paired will trade as units consisting
of one share of each Company. The Companies may offer, from time to time, shares
of Paired Common Stock, shares of Preferred Stock (which may or may not be
paired) in one or more series, Depositary Shares (which may or may not be
paired) representing fractional interests in shares of Preferred Stock (which
may or may not be paired), shares of Series Common Stock (which may or may not
be paired) in one or more series, debt securities ("Debt Securities") which will
not be paired in one or more series, warrants to purchase shares of Paired
Common Stock (the "Share Warrants") and warrants to purchase Debt Securities
(the "Debt Securities Warrants" and, together with the Share Warrants, the
"Securities Warrants"). The Common Stock, Preferred Stock, Depositary Shares,
Series Common Stock, Debt Securities and Securities Warrants are collectively
referred to herein as the "Securities." The Securities will have an aggregate
offering price of up to $2,000,000,000 and will be offered in amounts, at prices
and on terms to be determined at the time of offering.
Each of the Companies may offer its Securities separately from the other
Company, or the Companies may offer their respective Securities together. When
issued, the particular Securities (or, in the case of Depositary Shares, the
Preferred Stock represented by such Depositary Shares) will be an equity
interest in, or an obligation of, as the case may be, only the respective
issuing Company, and will not represent an equity interest in or an obligation
of the other Company, even though the Securities of one Company may be paired
with Securities of the other Company.
In the case of shares of Paired Common Stock ("Shares"), the specific
number of Shares and public offering price per Share will be set forth in an
accompanying supplement to this Prospectus (a "Prospectus Supplement"). In the
case of Preferred Stock, the public offering price, dividend rights, dividend
rates, any conversion rights, any voting rights, any rights and terms of
redemption (including any sinking fund provisions), liquidation preferences and
any other specific terms of any series and the designation thereof will be set
forth in an accompanying Prospectus Supplement. In the case of Depositary
Shares, the public offering price and the fraction of a share of Preferred Stock
represented by such Depositary Share will be set forth in an accompanying
Prospectus Supplement. In the case of Series Common Stock, the public offering
price, dividend rights, dividend rates, any conversion rights, any voting
rights, any rights and terms of redemption (including any sinking fund
provisions), any liquidation preferences and any other specific terms of any
series and the designation thereof will be set forth in an accompanying
Prospectus Supplement. In the case of Debt Securities, the specific title, the
aggregate principal amount, the public offering price, the maturity, the rate
and time of payment of any interest, any redemption or sinking fund provisions,
any conversion provisions, any provisions for the subordination of such Debt
Securities to other indebtedness, and any other specific terms, of such Debt
Securities will be set forth in an accompanying Prospectus Supplement. In the
case of Securities Warrants, the duration, public offering price, exercise price
and detachability, if applicable, will be set forth in an accompanying
Prospectus Supplement. The Prospectus Supplement will also disclose whether the
Securities will be listed on a national securities exchange.
The Securities may be sold: (i) directly by the Companies; (ii) through
underwriting syndicates represented by one or more managing underwriters, or by
one or more underwriters without a syndicate; and (iii) through agents
designated from time to time. The names of any underwriters or agents of the
Companies involved in the sale of the Securities in respect of which this
Prospectus is being delivered and any applicable commissions or discounts will
be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." The net proceeds to the Companies from such sale also will be set
forth in the Prospectus Supplement.
The Shares are traded on the New York Stock Exchange (the "NYSE") under the
symbol "MT". On June 9, 1998, the last reported sale price of the shares on the
NYSE composite tape was $26.9375.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
--------------
The date of this Prospectus is June 10, 1998.
<PAGE>
AVAILABLE INFORMATION
The Companies are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission" or "SEC"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024 of the
offices of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained from the principal offices of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed
rates. The Companies file information electronically with the Commission, and
the Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants (including the Companies)
that file electronically with the Commission. The address of the Commission's
Web site is (http://www.sec.gov). Reports, proxy materials and other information
concerning the Companies can also be inspected at the offices of the New York
Stock Exchange, 20 Broad Street, Room 1102, New York, New York 10005.
The Companies have filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act").
This Prospectus and any accompanying Prospectus Supplement do not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement, copies of
which may be obtained upon payment of a fee prescribed by the Commission, or may
be examined free of charge at the principal office of the Commission in
Washington, D.C.
Statements made in this Prospectus and any accompanying Prospectus
Supplement as to the contents of any contract or other document referred to are
not necessarily complete, and 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.
------------
Certain persons, including any underwriters, participating in the offering
made by any Prospectus Supplement may engage in transactions that stabilize,
maintain or otherwise affect the price of the Securities. Such transactions may
include stabilizing, the purchase of Securities to cover syndicate short
positions and the imposition of penalty bids. For a description of these
activities, see the applicable Prospectus Supplement.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated herein by reference:
The REIT and the Operating Company
1. Annual Report on Form 10-K, as amended by Annual Report on Form 10-K/A,
each for the fiscal year ended December 31, 1997;
2. Joint Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
3. Joint Current Report on Form 8-K, event date January 3, 1998;
4. Joint Current Report on Form 8-K, event date January 3, 1998, as amended
by the Joint Current Report on Form 8-K/A filed May 21, 1998;
5. Joint Current Report on Form 8-K, event date January 4, 1998;
6. Joint Current Report on Form 8-K, event date January 11, 1998;
7. Joint Current Report on Form 8-K, event date January 11, 1998;
8. Joint Current Report on Form 8-K, event date February 24, 1998;
9. Joint Current Report on Form 8-K, event date February 26, 1998, as
amended by the Joint Current Report on Form 8-K/A filed April 29, 1998;
10. Joint Current Report on Form 8-K, event date March 16, 1998;
11. Joint Current Report on Form 8-K, event date March 31, 1998;
12. Joint Current Report on Form 8-K, event date May 13, 1998;
13. Joint Current Report on Form 8-K, event date May 20, 1998; and
14. Joint Current Report on Form 8-K, event date May 29, 1998.
All other documents filed by the Companies with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Securities offered
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the date of filing such documents. Any statement
contained herein, in any Prospectus Supplement or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, in a Prospectus Supplement or in a subsequently filed document
which also is or is deemed to be incorporated by reference herein, as the case
may be, 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 Companies 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 or all documents incorporated by reference into this Prospectus other
than exhibits to such documents which are not specifically incorporated by
reference in such documents. Requests for such copies should be directed, with
respect to the REIT, to Michael S. Benjamin, Esq., Senior Vice President,
Secretary and General Counsel, Meditrust Corporation, 197 First Avenue, Suite
300, Needham Heights, Massachusetts 02194, telephone (781) 433-6000; and with
respect to the Operating Company, to Michael J. Bohnen, Secretary, Meditrust
Operating Company, 197 First Avenue, Suite 100, Needham Heights, Massachusetts
02194, telephone (781) 453-8062.
------------
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized. Neither this Prospectus nor any
Prospectus Supplement constitutes an offer to sell or the solicitation of an
offer to buy any securities other than the securities described in this
Prospectus or an offer to sell or the solicitation of an offer to buy such
securities in any jurisdiction where or to any person to whom it is unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus or
any Prospectus Supplement nor any sale made hereunder or thereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Companies since the date hereof or thereof or that the
information contained or incorporated by reference herein or therein is correct
as of any time subsequent to its date.
3
<PAGE>
RISK FACTORS
In addition to the other information contained or incorporated by
reference in this Prospectus, prospective investors should carefully consider
the following risk factors.
Tax Risks Related to Real Estate Investment Trusts
Dependence on Qualification as a REIT; General. The Corporation operates
and will operate in the future so as to qualify as a real estate investment
trust (a "REIT") for federal income tax purposes. However, there is no
assurance that the Corporation has satisfied the requirements for REIT
qualification in the past or will qualify as a REIT in the future.
Qualification as a REIT involves the application of highly technical and
complex provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), for which there are only limited judicial or administrative
interpretations. The complexity of these provisions is greater in the case of a
paired share REIT such as the Corporation. Qualification as a REIT also
involves the determination of various factual matters and circumstances not
entirely within the Corporation's control. In addition, the Corporation's
ability to qualify as a REIT is dependent upon its continued exemption from the
anti-pairing rules of Section 269B(a)(3) of the Code, which would ordinarily
prevent the Corporation from qualifying as a REIT. The "grandfathering" rules
governing Section 269B generally provide, however, that Section 269B(a)(3) does
not apply to a paired share REIT if the REIT and its paired operating company
were paired on June 30, 1983. On June 30, 1983, the Corporation (which was then
known as Santa Anita Realty Enterprises, Inc. ("Realty")) was paired with the
Operating Company (which was then known as Santa Anita Operating Company
("SAOC," and together with Realty, "Santa Anita")). There are, however, no
judicial or administrative authorities interpreting this "grandfathering" rule.
Moreover, if for any reason the Corporation failed to qualify as a REIT in
1983, the benefit of the "grandfathering" rule would not be available to the
Corporation, in which case the Corporation would not qualify as a REIT for any
taxable year from and after 1983. Failure of the Corporation to qualify as a
REIT would have a material adverse effect on the Companies and their ability to
make distributions to their shareholders and to pay amounts due on their
indebtedness. See "Federal Income Considerations--REIT Qualification of the
Corporation."
Legislation, as well as regulations, administrative interpretations or
court decisions, also could change the tax law with respect to the
Corporation's qualification as a REIT and the federal income tax consequence of
such qualification. See "--Pending Legislation May Curb Use of Paired Share
Structure" below. The adoption of any such legislation, regulations or
administrative interpretations or court decisions could have a material adverse
effect on the Companies and their ability to make distributions to shareholders
and to pay amounts due on their indebtedness and could prevent the Companies
from growing as originally intended at the time of the Santa Anita Mergers (as
defined below).
On November 5, 1997, Meditrust, a Massachusetts business trust and the
predecessor to the Corporation (hereinafter called the "Corporation's
Predecessor"), merged (the "Realty Merger") with Realty, with Realty as the
surviving corporation, whereupon Realty changed its name to Meditrust
Corporation. At the same time, Meditrust Acquisition Company ("MAC"), a newly
organized Massachusetts business trust and subsidiary of the Corporation's
Predecessor, merged (the "SAOC Merger" and, together with the Realty Merger,
the "Santa Anita Mergers") with SAOC, with SAOC as the surviving corporation,
whereupon SAOC changed its name to Meditrust Operating Company. Qualification
of the Corporation as a REIT in the future also generally depends on the REIT
qualification of the Corporation for prior periods and the REIT qualification
of the Corporation's Predecessor for periods prior to November 5, 1997.
Accordingly, failure of the Corporation's Predecessor to qualify as a REIT for
periods prior to November 5, 1997 could have a material adverse effect on the
Companies and their ability to make distributions to shareholders and pay
amounts due on their indebtedness. See "Federal Income Tax Considerations--REIT
Qualification of the Corporation."
Nutter, McClennen & Fish LLP, special tax counsel to the Corporation, has
rendered an opinion (the "REIT Opinion") that (i) the Corporation's Predecessor
was organized and operated in conformity with the requirements for
qualification and taxation as a REIT under the Code since its taxable year
ended December 31, 1989 through its final taxable year, and (ii) the
Corporation has been organized and operated in conformity with the requirements
for qualification as a REIT under the Code since its taxable year ended
December 31, 1992 through its taxable year ended December 31, 1997 and the
Corporation's form of organization and proposed method of operation will enable
it to continue to meet the requirements for qualification and taxation as a
REIT under the Code. Counsel is unable, however, to render an opinion regarding
the Corporation's qualification as a REIT in its taxable years ended December
31, 1989, 1990 and 1991 because it did not conduct the due diligence necessary
to render an opinion for such years. If it is subsequently determined that the
Corporation did not qualify as a REIT in those years, the
4
<PAGE>
Corporation potentially could incur corporate tax with respect to a year that
is still open to adjustment by the Internal Revenue Service. However, the
Corporation believes that any such tax would not be material to its
shareholders, although there can be no assurance in this regard. See "Federal
Income Tax Considerations--REIT Qualification of the Corporation."
The REIT Opinion is based upon factual representations from the
Corporation regarding the Corporation's Predecessor and the Corporation's
compliance with requirements for REIT qualification, and is not binding on the
Internal Revenue Service. In addition, as described under "The Meditrust
Companies--Recent Developments," the Corporation has entered into a merger
agreement to acquire La Quinta (as defined below) and, on May 29, 1998,
acquired Cobblestone (as defined below) and, in rendering the REIT Opinion,
Nutter, McClennen & Fish, LLP relied upon representations of the Corporation
that it will distribute, with respect to the taxable year in which each merger
closes, all earnings and profits (if any) inherited from Cobblestone and La
Quinta. If the Internal Revenue Service were to determine that La Quinta's
actual earnings and profits (if any) for federal income tax purposes exceeded
the amount distributed, or that Cobblestone in fact had current or accumulated
earnings and profits for federal income tax purposes, the Corporation would be
disqualified as a REIT. Moreover, the Corporation's qualification and taxation
as a REIT following the Cobblestone and La Quinta mergers will depend on the
Corporation's continuing ability to meet, through actual operating results, the
income and asset requirements, distribution levels, diversity of stock
ownership and other requirements for qualification as a REIT under the Code;
and counsel has not reviewed and will not review the Corporation's compliance
with these tests on a continuing basis. See "--Requirement to Distribute
Accumulated Earnings and Profits" and "Federal Income Tax Considerations--REIT
Qualification of the Corporation--General" below.
If the Corporation were to fail to qualify as a REIT, it would be subject
to federal income tax (including any applicable alternative minimum tax) on its
taxable income at corporate rates. In addition, unless entitled to relief under
certain statutory provisions and subject to the discussion above regarding the
impact if the Corporation failed to qualify as a REIT in 1983, the Corporation
also would be disqualified from re-electing REIT status for the four taxable
years following the year during which qualification is lost. Failure to qualify
as a REIT would result in additional tax liability to the Corporation for the
year or years involved. In addition, the Corporation would no longer be
required by the Code to make distributions to its shareholders. To the extent
that distributions to shareholders had been made in anticipation of the
Corporation's qualifying as a REIT, the Corporation might be required to borrow
funds or to liquidate certain of its investments to pay the applicable tax. See
"Federal Income Tax Considerations--REIT Qualification of the Corporation."
The failure to qualify as a REIT would also constitute a default under
certain debt obligations of the Corporation, which would generally allow the
holders thereof to demand the immediate repayment of such indebtedness, which
could have a material adverse effect on the Companies and their ability to make
distributions to shareholders and to pay amounts due on their indebtedness.
Pending Legislation May Curb Use of Paired Share Structure. On February 2,
1998, the Department of Treasury released an explanation of the revenue
proposals included in the Clinton Administration's fiscal 1999 budget (the
"Administration Tax Proposals"). The Administration Tax Proposals, among other
things, include a freeze on the grandfathered status of paired share REITs such
as the Companies. Under these proposals, the Corporation and Operating Company
would be treated as one entity with respect to properties acquired on or after
the date of the first Congressional committee action with respect to such
proposals and with respect to activities or services relating to such
properties that are undertaken or performed by one of the paired entities on or
after such date. The Administration Tax Proposals would prevent the Companies
from using their paired share structure to operate properties acquired on or
after the date of such first Congressional committee action. The Administration
Tax Proposals also would prohibit REITs from holding stock of a corporation
possessing more than 10% (and less than 100%) of the vote or value of all
classes of stock of the corporation. These proposals would be effective with
respect to stock acquired on or after the date of the first Congressional
committee action with respect to the proposals; provided that the proposals
would apply to stock acquired before such effective date if, on or after such
date, the subsidiary corporation engaged in a new trade or business or acquired
substantial new assets.
On March 26, 1998, Representative William Archer, Chairman of the House
Ways and Means Committee, and Senator William V. Roth, Jr., Chairman of the
Senate Finance Committee, introduced similar legislation to limit this
"grandfathering" rule applicable to paired share REITS (the "Tax Proposals").
Under the Tax Proposals, the anti-pairing rules provided in the Code would
apply to real property interests acquired after March 26, 1998 by the
Companies, or a subsidiary or partnership in which a ten percent or greater
interest is owned by the Companies
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(collectively, the "REIT Group"), unless (1) the real property interests are
acquired pursuant to a written agreement which was binding on March 26, 1998
and at all times thereafter or (2) the acquisition of such real property
interests was described in a public announcement or in a filing with the SEC on
or before March 26, 1998. On May 7, 1998, the Senate unanimously passed The
Internal Revenue Service Restructuring and Reform Bill of 1998 (the "Bill"),
which contains the Tax Proposals described above. Moreover, the Bill provides
that any property acquired after March 26, 1998 by a company that is acquired
by a paired share REIT, other than property acquired pursuant to a written
agreement that was binding on March 26, 1998, would be subject to the
anti-pairing rules.
Under the Tax Proposals and the Bill as currently proposed, the properties
to be acquired through the proposed merger of the Corporation with La Quinta
Inns, Inc. ("La Quinta") and acquired through the May 29, 1998 merger of the
Corporation and Cobblestone Holdings, Inc. ("Cobblestone") (see "The Meditrust
Companies--Recent Developments") would not be subject to these anti-pairing
rules. However, any property acquired by the Companies, La Quinta or
Cobblestone after March 26, 1998, other than property acquired pursuant to a
written agreement that was binding on March 26, 1998, would be subject to the
anti-pairing rules. Moreover, there can be no assurance that the Tax Proposals
or the Bill will be adopted in their current forms, with a consequence that the
properties to be acquired from La Quinta and acquired from Cobblestone or other
properties of the Companies could become subject to the anti-pairing rules of
the Code in the future. In addition, the Tax Proposals and the Bill also
provide that a property held by the Companies that is not subject to the
anti-pairing rules would become subject to such rules in the event of either
(1) an improvement placed in service after December 31, 1999 that changes the
use of the property and the cost of which is greater than 200 percent of (A)
the undepreciated cost of the property (prior to the improvement) or (B) in the
case of property acquired where there is a substituted basis (e.g., the
properties to be acquired from La Quinta and acquired from Cobblestone), the
fair market value of the property on the date it was acquired by the Companies;
or (2) an addition or improvement that expands beyond the boundaries of the
land included in such property. There is an exception for improvements placed
in service before January 1, 2004 pursuant to a binding contract in effect on
December 31, 1999 and at all times thereafter. This proposed restriction on
property improvements would apply to the properties to be acquired from La
Quinta and acquired from Cobblestone, as well as all other properties owned by
the Companies, and would limit the ability of the Companies to improve or
change the use of those properties after December 31, 1999.
If adopted in their present form, the restrictions on the activities of a
grandfathered REIT provided in the Administration Tax Proposals, the Tax
Proposals and the Bill may in the future make it impractical or undesirable for
the Companies to continue to maintain their paired share structure.
Restructuring the operations of the Corporation and the Operating Company to
comply with the rules contemplated by the Administration Tax Proposals, the Tax
Proposals or the Bill could cause the Companies to incur substantial tax
liabilities, to recognize an impairment loss on their goodwill assets, or
otherwise materially adversely affect the Companies and their ability to make
distributions to shareholders and to pay amounts due on their indebtedness.
In addition, a significant component of the Companies' strategy is to grow
through acquisitions. The Companies believe that the current tax treatment of
their paired share structure may provide them with certain advantages in making
acquisitions, and the Tax Proposals and the Bill could therefore make it more
difficult to make acquisitions in the future.
Adverse Effects of REIT Minimum Distribution Requirements. In order to
qualify as a REIT the Corporation is generally required each year to distribute
to its shareholders at least 95% of its taxable income (excluding any net
capital gain). In addition, if the Corporation were to dispose of assets
acquired in certain acquisitions during the ten-year period following the
acquisition, the Corporation would be required to distribute at least 95% of
the amount of any "built-in gain" attributable to such assets that the
Corporation recognizes in the disposition, less the amount of any tax paid with
respect to such recognized built-in gain. See "Federal Income Tax
Considerations--REIT Qualification of the Corporation--Built-In Gain Tax." The
Corporation generally is subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of
its undistributed income from prior years.
The Corporation intends to make distributions to its shareholders to
comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. Differences in timing between the recognition of taxable income and
the receipt of cash available for distribution and the seasonality of the
businesses it owns or may acquire could require the
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Corporation to borrow funds on a short-term basis to meet the 95% distribution
requirement and to avoid the nondeductible excise tax.
Distributions to shareholders by the Companies are determined by their
respective Boards of Directors and depend on a number of factors, including,
the amount of cash available for distribution, financial condition, results of
operations, any decision by either Board of Directors to reinvest funds rather
than to distribute such funds, capital expenditures, the annual distribution
requirements under the REIT provisions of the Code (in the case of the
Corporation) and such other factors as either Board of Directors deems
relevant. For federal income tax purposes, distributions paid to shareholders
may consist of ordinary income, capital gains (in the case of the Corporation),
return of capital, or a combination thereof. The Companies will provide
shareholders with annual statements as to the taxability of distributions.
Requirement to Distribute Accumulated Earnings and Profits. To maintain
its qualification as a REIT in the event its merger with La Quinta is
consummated, the Corporation will be required to distribute any current and
accumulated earnings and profits inherited from La Quinta in the merger (as
determined for federal income tax purposes). Following the merger, the
Corporation intends to make a distribution of earnings and profits in the
amount determined by the Corporation to be necessary for federal income tax
purposes.
It is a condition to the obligation of the Companies to consummate the
proposed merger with La Quinta that, at the closing date of the proposed
merger, La Quinta and the Corporation shall have obtained a report prepared by
KPMG Peat Marwick LLP ("KPMG") of any accumulated and current earnings and
profits of La Quinta (as determined for federal income tax purposes) as of the
most recent date through which earnings and profits are ascertainable, as well
as a reasonable estimate of any earnings and profits from such most recent date
through the closing date of the merger, and Coopers & Lybrand L.L.P. shall have
reviewed and approved in the exercise of its reasonable judgment the report and
workpapers of KPMG. La Quinta has provided a report of the earnings and profits
calculation through December 31, 1996 from KPMG.
As a condition to the obligation of the Companies to consummate the merger
with Cobblestone, Cobblestone obtained a report of the independent accountants
of Cobblestone to the effect that Cobblestone had no current or accumulated
earnings and profits (as determined for federal income tax purposes) as of
September 30, 1997, and a certification from Cobblestone's Chief Financial
Officer to the effect that, as of the closing date of the merger, Cobblestone
had no such current or accumulated earnings and profits.
If the Internal Revenue Service ("IRS") were to determine that La Quinta's
actual current or accumulated earnings and profits exceeded the amount
distributed or deemed distributed by the Corporation following the proposed
merger (due to miscalculation, insufficient funds or any other reason), or that
Cobblestone in fact had current or accumulated earnings and profits, the
Corporation would be disqualified as a REIT. Certain technical provisions of
the Taxpayer Relief Act of 1997 facilitate the distribution of inherited
earnings and profits, but do not change the basic requirement that inherited
earnings and profits must be distributed.
Risks Associated with Rapid Growth of the Companies; Execution of Growth
Strategy
The Companies currently are experiencing a period of rapid growth through
acquisitions. The Companies have recently consummated the Santa Anita Mergers
and the Cobblestone merger, recently acquired (the "IRI Acquisition") five golf
courses (the "IRI Golf Courses") from IRI Golf Group ("IRI"), and two
additional golf courses and have agreed to acquire a total of 11 additional
golf courses, and have recently entered into a merger agreement with La Quinta.
See "The Meditrust Companies--Recent Developments." Failure to efficiently
manage acquired assets, or the failure of the Companies to successfully
integrate Santa Anita's, La Quinta's, IRI's, or Cobblestone's operations with
existing operations and the operations of other acquired businesses, could have
a material adverse effect on the Companies and their ability to make
distributions to shareholders and to pay amounts due on their indebtedness. The
success of any completed acquisition will depend in large measure on the
Companies' ability to integrate the acquired properties within the Companies'
existing portfolio, to integrate the accounting systems, management information
systems, personnel and other operations acquired with those of the Companies,
and to improve the operating results of the acquired properties and businesses.
The process of integrating acquired properties, operations and personnel and in
particular, geographically diverse properties and properties which, like the
Santa Anita, La Quinta, IRI and Cobblestone properties, are outside of the
Companies' traditional expertise
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in health care related properties, with the Companies' existing properties may
involve unforeseen difficulties and may require a disproportionate amount of
the Companies' financial and other resources, including management time, which
could adversely impact the Companies.
As noted above, there can be no assurance that proposed or pending
acquisitions will be consummated or that acquired properties or businesses will
perform in accordance with expectations. In that regard, see "--Cautionary
Statements Concerning Forward-Looking Statements" below. In addition, the
proposed La Quinta acquisition will be, and the Cobblestone acquisition was,
financed to a significant extent through the issuance of Shares, and the
Companies may finance acquisitions by, among other things, issuing debt and
equity securities, including Shares. The issuance of Shares to finance
acquisitions could have a dilutive effect on funds from operations per Share.
Accordingly, there can be no assurance that acquisitions, including the
Cobblestone acquisition and the proposed La Quinta acquisition, will not be
dilutive to funds from operations per Share or other operating results, that
acquired businesses (including La Quinta and Cobblestone) will be able to
maintain or improve historical results of operations or contribute to future
growth, or the effect of the Cobblestone acquisition or, if consummated, the La
Quinta acquisition on the Companies.
The Companies' growth strategy depends, in large part, on their ability to
identify, finance, acquire and successfully operate additional real estate
interests. No assurance can be given that the Companies will find suitable
acquisitions, that the Companies will be able to consummate or obtain financing
for these acquisitions in a timely manner or at all, that potential
acquisitions will not be acquired by the Companies' competitors or that
acquired properties will perform in accordance with expectations. In that
regard, enactment of the Tax Proposals could make it more difficult for the
Companies to consummate acquisitions in the future. See "--Tax Risks Related to
Real Estate Investment Trusts" above.
Consummation of the acquisition of La Quinta is subject to various
conditions, including approval of the shareholders of La Quinta and the
Companies. The Companies may also be required to obtain additional financing in
connection with such merger, which is not, however, a condition to such merger.
See "--Financing Risks Relating to Proposed La Quinta Acquisition" below.
Moreover, La Quinta and the Companies were named in two substantially similar
lawsuits filed after the announcement of the planned merger with La Quinta. See
"The Meditrust Companies--Recent Developments." These lawsuits (which have been
consolidated) seek compensatory and injunctive relief on the alleged grounds
that the La Quinta directors violated their fiduciary duty, duty of care and
duty of loyalty to La Quinta shareholders by entering into the merger agreement
with the Corporation without having first invited other bidders. Although the
Companies believe the claims are entirely without merit, there can be no
assurance that the plaintiffs in these actions will not be successful or that
these actions will not have an adverse effect on the Companies. Among other
things, if the plaintiffs were to prevail in these actions, they might obtain
injunctive or other relief blocking the proposed merger or requiring other
action that could adversely affect the consummation of the proposed merger, as
well as monetary damages against La Quinta and the Companies. La Quinta and the
Companies have entered into an agreement in principle with the plaintiffs to
settle these lawsuits. The terms of the settlement would permit the La Quinta
merger to proceed substantially as planned; however, there can be no assurance
that the proposed settlement will be successfully completed. As a result of the
foregoing, and other factors, there can be no assurance that the acquisition of
La Quinta will be consummated on its current terms or at all.
The Companies Are Heavily Dependent on Health Care Related Properties and Will
Need to Rely on New Members of Management as They Diversify Their Operations
As of May 22, 1998, approximately 93% of the Companies' real property
portfolio was comprised of health care related real property. Recently, through
acquisitions that are either pending, such as La Quinta, or have been
consummated, such as Cobblestone and the IRI Golf Courses, the Companies have
begun to diversify their operations as well as their real property portfolio.
The Companies are currently in the business of operating a race track acquired
in November 1997 in the Santa Anita Merger, the Corporation purchased the IRI
Golf Courses in February 1998, further expanded their golf businesses through
the acquisition of Cobblestone on May 29, 1998 and, if the La Quinta merger is
consummated, the Companies will enter the hotel business. To the extent that
the Companies are successful in diversifying into new areas through
acquisitions, it is likely that the Companies will rely heavily upon the
expertise of the existing management of the acquired businesses or will need to
hire outside management to operate these diversified
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operations. No assurance can be given that the Companies will be able to hire
or retain experienced management to operate the businesses they acquire or
propose to acquire, which could have a material adverse effect on the Companies
and their ability to make distributions to shareholders and to pay amounts due
on their indebtedness.
Health Care Industry Risks
Operating Risks. One of the Corporation's primary businesses is that of
buying, selling, financing and leasing health care related properties. The
risks of this business include, among other things: competition for tenants;
competition from other health care financing providers, a number of which may
have greater marketing, financial and other resources and experience than the
Corporation; changes in government regulation of health care; changes in the
availability and cost of insurance coverage; increases in operating costs due
to inflation and other factors; changes in interest rates; the availability of
financing; and adverse effects of general and local economic conditions.
Concentration of Credit Risks. As of December 31, 1997, long-term care
facilities comprised 51% of the Corporation's real estate investments and the
Corporation's investments in facilities of its three largest health care
operators totaled approximately 39% of the Corporation's total real estate
investments. Such a concentration in specific types of facilities, as well as
in these operators, could have a material adverse effect on the Companies.
Government Regulation May Increase. The health care industry is subject to
changing political, economic, regulatory and demographic influences that may
affect the operations of health care facilities and providers. During the past
several years, the health care industry has been subject to an increase in
government regulation of, among other things, reimbursement rates and certain
capital expenditures. Some elected officials have announced that they intend to
examine certain aspects of the United States health care system including
proposals which may further increase governmental involvement in health care.
For example, the President and Congress have in the past, and may in the
future, propose health care reforms which could impose additional regulations
on the Corporation and its operators (including the Operating Company) or limit
the amounts that operators may charge for services. The Corporation and the
operators of its health care facilities are and will continue to be subject to
varying degrees of regulation and licensing by health or social service
agencies and other regulatory authorities in the various states and localities
in which they operate or in which they will operate.
Reliance on Third-Party Payors; Availability of Reimbursement. The cost of
many of the services offered by the current operators of the Corporation's
health care facilities are reimbursed or paid for by third-party payors such as
Medicare and Medicaid programs for elderly, low income and disabled patients
and state Medicaid programs for managed care organizations. No assurance can be
given that third-party reimbursement for the Corporation's operators will
continue to be available or when reimbursement will be offered or that
reimbursement rates will not be reduced. The increase in the number of
providers contracting to provide per person fixed cost health care to a patient
population has increased pressure on third party payors to lower costs.
The foregoing factors could adversely affect the ability of the operators
of the Corporation's health care facilities to generate revenues and make
payments to the Corporation. This, in turn, could materially adversely affect
the Companies and their ability to make distributions to shareholders and to
pay amounts due on their indebtedness.
Lodging Industry Risks
In the event the proposed merger with La Quinta is consummated, the
Companies will have made a significant investment in hotels and related lodging
facilities. If the La Quinta merger occurs, La Quinta will be operated as a
business unit of the Operating Company and its real estate assets will be owned
by the Corporation.
Competition. The results of operations of La Quinta hotels are subject to
general economic conditions, competition, the desirability of particular
locations, the relationship between supply of and demand for hotel rooms and
other factors. La Quinta hotels generally operate in markets that contain
numerous competitors, including wide range of lodging facilities offering
full-service, limited-service and all-suite lodging options to the public. The
continued success of La Quinta's hotels will be dependent, in large part, upon
their ability to compete in such areas as reasonableness of room rates, quality
of accommodations, name recognition, service level and convenience of
locations. Additionally, an increasing supply of hotel rooms in La Quinta's
market segment and recent consolidations in the lodging industry generally
resulting in the creation of several large, multi-branded hotel chains with
diversified operations may adversely impact La Quinta's financial condition,
results of operations and business. No assurance can be given that demographic,
geographic or other changes in markets will not adversely affect the
convenience or desirability of the locations of La Quinta's hotels.
Furthermore, no assurance can be given that,
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in the markets in which La Quinta's hotels operate, competing hotels will not
provide greater competition for guests than currently exists, and that new
hotels will not enter such markets.
Geographic Concentration. La Quinta's hotels are concentrated in the
western and southern regions of the United States. As a result, La Quinta is
sensitive to economic and competitive conditions in those regions.
Extensive Employment and Other Governmental Regulations. The hotel
business is subject to extensive federal, state and local regulatory
requirements, including building and zoning requirements, all of which can
prevent, delay, make uneconomical or significantly increase the cost of
developing additional lodging facilities. In addition, La Quinta's hotels and
the Operating Company are subject to laws governing their relationship with
employees, including minimum wage requirements, overtime, working conditions,
work permit requirements and discrimination claims. If the merger with La
Quinta is consummated, an increase in the minimum wage rate, employee benefit
costs or other costs associated with employees could adversely affect the
Companies.
Fluctuations in Operating Results. The lodging industry may be adversely
affected by, among other things, changes in economic conditions, changes in
local market conditions, oversupply of hotel space, a reduction in demand for
hotel space in specific areas, changes in travel patterns, weather conditions,
changes in governmental regulations that influence or determine wages, prices
or construction costs, changes in interest rates, the availability of financing
for operating or capital needs, and changes in real estate tax rates and other
operating expenses. Room supply and demand historically have been sensitive to
shifts in gross domestic product growth, which has resulted in cyclical changes
in average daily room and occupancy rates. Due in part to the strong
correlation between the lodging industry's performance and economic conditions,
the lodging industry is subject to cyclical changes in revenues. In that
regard, there can be no assurance that the recent strength in the lodging
industry generally, or in the segment of the industry in which La Quinta
operates, will not decline in the future. Furthermore, the lodging industry is
seasonal in nature, with revenues typically higher in summer periods than in
winter periods.
Expansion Strategy May Not Be Successfully Continued. If the La Quinta
merger is consummated, the Corporation intends to continue La Quinta's strategy
of growth through both the construction of new lodging facilities and the
opportunistic acquisition of existing lodging facilities. No assurance can be
given that the Corporation will find suitable sites for construction or
suitable properties for acquisition or that these sites and properties will not
be acquired by competitors. The Corporation will incur certain costs in
connection with the construction and acquisition of new properties and may be
required to provide significant capital expenditures for conversions and
upgrades when acquiring a property operating as other than a La Quinta[RegTM]
brand property. No assurance can be given that any of the properties the
Corporation may construct or acquire will be profitable following such
construction or acquisition. The construction or acquisition of a property that
is not profitable, or the acquisition or construction of a property that
results in significant unanticipated conversion costs, or substantial
construction cost overruns, could materially adversely affect the Companies and
their ability to make distributions to shareholders and to pay amounts due on
their indebtedness. The Corporation may in the future require additional
financing in order to continue to make acquisitions and to fund construction
costs of hotel properties. No assurance can be given that such additional
financing will be available to the Corporation on acceptable terms or at all.
Construction. If the La Quinta merger is consummated and the Corporation
continues La Quinta's strategy of growing through new construction, the
Corporation may from time to time experience shortages of materials or
qualified tradespeople or volatile increases in the cost of certain
construction materials or labor, resulting in longer than normal construction
and remodeling periods, loss of revenue and increased costs. The Corporation
will rely heavily on local contractors, who may be inadequately capitalized or
understaffed. The inability or failure of one or more local contractors to
perform may result in construction or remodeling delays, increased cost and
loss of revenue.
The foregoing factors could adversely affect La Quinta's operations which,
in turn, could materially adversely affect the Companies and their ability to
make distributions to shareholders and to pay amounts due on their
indebtedness.
Golf Course Industry Risks
As a result of the acquisition of Cobblestone, IRI, a golf course in
Virginia and a golf course in Georgia, the Companies have made a significant
investment in golf courses and related facilities. In addition, the Corporation
has agreed to purchase a total of eleven additional golf courses for an
aggregate amount of approximately $117 million in cash.
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Real Estate Investment Considerations. Investments in golf courses and
related properties are subject to risks typically associated with investments
in real estate. Revenue from golf courses may be affected by many factors,
including changes in government regulations, general or local economic
conditions, the available local supply of golf courses, a decrease in the
number of people playing golf or adverse weather conditions. One factor
specifically affecting real estate investments in golf facilities is the
availability of water. A severe water shortage could adversely affect the
revenue received from these investments.
Geographic Concentration. The golf courses which the Companies acquired in
the Cobblestone merger are generally located in sun-belt states. Nine golf
facilities are located in Texas, eight in California, four in Arizona, three in
Florida, two in Georgia and one in Virginia. The five golf courses acquired
from IRI are all located in Texas. The Companies also recently acquired a golf
course in Virginia and a golf course in Georgia and have agreed to acquire from
several different sellers a total of eleven additional golf courses which are
located in Florida, New Jersey, North Carolina and Texas. The geographic
proximity of many of these golf courses may mean that adverse economic and/or
weather conditions in the same geographic area could adversely affect the
operating results of a large portion of the Companies' golf course facilities.
Competition. The Corporation intends to continue to acquire golf courses.
The Companies will compete with several national and regional golf course
companies for the purchase, lease and management of golf courses. No assurance
can be given that suitable golf course acquisition opportunities will be
available or that, because of competition from other purchasers or other
reasons, the Corporation will be able to consummate acquisitions on
satisfactory terms or at all or to obtain necessary acquisition financing. In
addition, the acquisition of golf courses may become more expensive in the
future if demand for properties increases.
Cobblestone competes for the purchase, lease and management of golf
courses with several national and regional golf course companies. Several of
Cobblestone's national competitors have larger staffs and more golf courses
currently owned, leased or under management than does Cobblestone. In addition,
several of Cobblestone's national competitors and certain of its smaller,
regional competitors have significantly greater capital resources than does
Cobblestone.
Golf courses are also subject to competition for players and members from
other golf courses located in the same geographic areas. The number and quality
of golf courses in a particular area could have a material adverse effect on
the revenue of a golf course. The availability of sufficient acreage often
limits the number of competing courses, particularly in metropolitan areas.
However, the parts of Arizona and Texas in which many of Cobblestone's existing
properties, and all of the IRI Golf Courses, are clustered have significant
open land available, and there has been continued construction of both public
and private golf facilities in those areas. In addition, revenue will be
affected by a number of factors including, the demand for golf and the
availability of other forms of recreation.
Consumer Spending and Trends. The amount spent by consumers on
discretionary items, such as those currently offered by, and those expected to
be offered by, Cobblestone and IRI, has historically been dependent upon levels
of discretionary income which may be adversely affected by general economic
conditions. A decrease in the number of golfers and in consumer spending on
golf and golf associated activities could have a material adverse effect on the
Companies' golf course division's financial condition and results of operations
of the Companies' golf course business.
The foregoing factors could adversely affect the operations of Cobblestone
and the IRI Golf Courses which, in turn, could materially adversely affect the
Companies and their ability to make distributions to shareholders and to pay
amounts due on their indebtedness.
Horse Racing Industry Risks
Regulation of Gaming Operations. The Operating Company's pari-mutuel
wagering operations at Santa Anita Park (the "Race Track"), conducted by Los
Angeles Turf Club, Incorporated ("LATC"), a subsidiary of The Santa Anita
Companies, Inc. (itself a subsidiary of the Operating Company), depend upon the
continued governmental acceptance of such operations as forms of legalized
gaming. As a form of gaming, pari-mutuel wagering is subject to extensive
licensing and regulatory control by the California Horse Racing Board (the
"CHRB"). The CHRB has broad powers with respect to the licensing of gaming
operations. It may revoke, suspend, condition or limit the gaming operations of
the Operating Company. Any such change in regulations may have a material
adverse effect on the Companies.
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Dependence on Relationship with Owners and Trainers Associations. LATC's
horse racing operations require it to maintain good working relationships with
the Thoroughbred Owners of California, or the "Owners Association", and the
California Horsemen's Benevolent and Protective Association, or the "Trainers
Association." If LATC cannot maintain working relationships with the Owners
Association or the Trainers Association or finds itself unable to attract a
sufficient number of horses to its live horse race meets, such events could
have a material adverse effect on the Companies.
Competition. Thoroughbred horse racing, and gaming generally, are
competitive industries. The Operating Company competes in its markets with
other horse racing facilities, off-track betting, state-run lotteries and
Native American reservation gaming. Many of these competitors have resources
that exceed those of the Companies. The Operating Company also competes locally
with other sporting and entertainment businesses. Approval of legislation
legalizing casinos and other forms of gaming or expansion of gaming at Native
American reservations could increase competition for the Operating Company. The
Operating Company also may face increasing competition from businesses
accepting wagers by telephone and via the Internet.
Declines in On-Track Attendance and Wagering Revenue. The Companies
believe that many horse racing tracks across the nation, including the Race
Track, are experiencing declines in on-track attendance. In addition, the
Operating Company has experienced declining revenues from wagering in recent
years. It cannot be assured that the Operating Company will not experience
further declines in on-track attendance and wagering revenues, which could have
a material adverse effect on the Companies. In that regard, the amount of
rental revenues received by the Corporation from its lease of the Race Track to
LATC is wholly dependent upon the level of racing activities and wagering.
Seasonality. The Operating Company has historically conducted a live
thoroughbred horse racing meet at the Race Track each winter and has sublet the
Race Track each fall for a live thoroughbred racing meet conducted by Oak Tree
Racing Association. The winter and fall meets generate a substantial amount of
the Operating Company's horse racing revenue each year. As a result, the
Operating Company's horse racing activities are subject to significant seasonal
variations in revenue and net income or loss.
Real Estate Investment Risks
General Risks. The Corporation's investments (including those of
Cobblestone and, assuming consummation of the merger, La Quinta) will be
subject to the risks inherent in owning real estate. The underlying value of
the Corporation's real estate investments and the Companies' results of
operations and ability to make distributions to their shareholders and pay
amounts due on their indebtedness will depend on the ability of the lessees,
the operators and the Operating Company to operate the Corporation's properties
in a manner sufficient to maintain or increase revenues and to generate
sufficient revenues in excess of operating expenses to make rent payments under
their leases or loan payments in respect of their loans from the Corporation.
Results of operations of the Corporation's properties may also be
adversely affected by, among other things:
[bullet] changes in national economic conditions, changes in local market
conditions due to changes in general or local economic conditions
and neighborhood characteristics;
[bullet] changes in interest rates and in the availability, cost and terms of
financing;
[bullet] the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory
requirements;
[bullet] the ongoing need for capital improvements, particularly in older
structures;
[bullet] changes in real estate tax rates and assessments and other operating
expenses;
[bullet] adverse changes in governmental rules and fiscal policies;
[bullet] adverse changes in zoning and other land use laws; and
[bullet] civil unrest, earthquakes and other natural disasters (which may
result in uninsured losses) and other factors which are beyond its
control.
Value and Illiquidity of Real Estate. Real estate investments are
relatively illiquid. The Corporation's ability to vary its portfolio in
response to changes in economic and other conditions will therefore be limited.
If the Corporation wants to sell an investment, no assurance can be given that
the Corporation will be able to dispose
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of it in the time period it desires or that the sales prices of any investment
will recoup or exceed the amount of the Corporation's investment.
Increases in Property Taxes Could Affect Ability to Make Expected
Shareholder Distributions. The Corporation's health care facilities and real
estate investments, La Quinta's and Cobblestone's properties and the
Corporation's racing facilities are all subject to real property taxes. The
real property taxes on properties in which the Corporation invests may increase
or decrease as property tax rates change and as the value of the properties are
assessed or reassessed by taxing authorities. In addition, as a result of
acquisitions, certain of the Corporation's properties may be subject to
reappraisal or reassessment. Increases in property taxes resulting from such
reappraisals or reassessments may have an adverse effect on the Companies and
their ability to make distributions to shareholders and to pay amounts due on
their indebtedness.
Environmental Matters. The obligation to pay for the cost of complying
with existing environmental laws, ordinances and regulations, as well as the
cost of complying with future legislation, may affect the operating costs of
the Corporation and the Operating Company. Under various federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on or under the property.
Environmental laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances and whether or not such substances originated from the property. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the Corporation's
ability to borrow by using such real property as collateral.
Persons who arrange for the transportation, disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of hazardous or toxic substances at the disposal or treatment
facility, whether or not such facility is or ever was owned or operated by such
person. Certain environmental laws and common law principles could be used to
impose liability for releases of hazardous materials, including asbestos-
containing materials or "ACMs", into the environment. In addition, third
parties may seek recovery from owners or operators of real properties for
personal injury associated with exposure to released ACMs or other hazardous
materials. Environmental laws may also impose restrictions on the use or
transfer of property, and these restrictions may require expenditures. In
connection with the ownership and operation of any of the Corporation's
properties, the Corporation, the Operating Company and the other lessees or
operators of these properties may be liable for any such costs. The cost of
defending against claims of liability or remediating contaminated property and
the cost of complying with environmental laws could materially adversely affect
the Companies and their ability to make distributions to shareholders and to
pay amounts due on their indebtedness.
Compliance with the ADA May Affect Expected Distributions to the
Companies' Shareholders. Under the Americans with Disabilities Act of 1990 (the
"ADA"), all public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. A determination
that the Corporation or the Operating Company is not in compliance with the ADA
could result in the imposition of fines and/or an award of damages to private
litigants. If the Corporation or the Operating Company were required to make
modifications to comply with the ADA, there could be a material adverse effect
on the Companies and their ability to make distributions to shareholders and to
pay amounts due on their indebtedness.
Uninsured and Underinsured Losses. Each of the Corporation's leases and
mortgage loans typically specifies that comprehensive insurance is to be
maintained on each of the applicable properties, including liability, fire and
extended coverage. Leases and loan documents for new investments (including
those leased to the Operating Company) typically contain similar provisions.
However, there are certain types of losses, generally of a catastrophic nature,
such as earthquakes and floods, that may be uninsurable or not economically
insurable. The Corporation will use its discretion in determining amounts,
coverage limits and deductibility provisions of insurance, with a view to
maintaining appropriate insurance coverage on the investments of the
Corporation and the Operating Company at a reasonable cost and on suitable
terms. This may result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the lost investment and also may result in
certain losses being totally uninsured. Inflation, changes in building codes,
zoning or other land use ordinances, environmental considerations, lender
imposed restrictions and other factors also might make it infeasible to use
insurance proceeds to replace the property after such property has been damaged
or destroyed. Under such circumstances, the insurance proceeds, if any,
received by the Corporation or the Operating Company might not be adequate to
restore its economic position with respect to such property.
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Real Estate Financing Risks
Financing and Maturities. The Corporation is subject to the normal risks
associated with debt and preferred stock financing, including the risk that the
Corporation's cash flow will be insufficient to meet required payments of
principal and interest and dividends, the risk that indebtedness on its
properties, or unsecured indebtedness, will not be able to be renewed, repaid
or refinanced when due or that the terms of any renewal or refinancing will not
be as favorable as the terms of such indebtedness. If the Corporation were
unable to refinance the indebtedness on acceptable terms, or at all, the
Corporation might be forced to dispose of one or more of its properties on
disadvantageous terms, which might result in losses to the Corporation, which
losses could have a material adverse effect on the Corporation and its ability
to make distributions to shareholders and to pay amounts due on its
indebtedness. Furthermore, if a property is mortgaged to secure payment of
indebtedness and the Corporation is unable to meet mortgage payments, the
mortgagee could foreclose upon the property, appoint a receiver and receive an
assignment of rents and leases or pursue other remedies, all with a consequent
loss of revenues and asset value to the Corporation. Foreclosures could also
create taxable income without accompanying cash proceeds, thereby hindering the
Corporation's ability to meet the REIT distribution requirements of the Code.
Risk of Rising Interest Rates. The Corporation has incurred and expects in
the future to incur indebtedness which bears interest at variable rates.
Accordingly, increases in interest rates would increase the Corporation's
interest costs (to the extent that the related indebtedness was not protected
by interest rate protection arrangements), which could have a material adverse
effect on the Corporation and its ability to make distributions to shareholders
and to pay amounts due on its indebtedness or cause the Corporation to be in
default under certain debt instruments (including its Debt Securities). In
addition, an increase in market interest rates may lead holders of the Shares
to demand a higher yield on their Shares from distributions by the Companies,
which could adversely affect the market price for the Shares and could also
adversely affect the market price of any Preferred Stock issued by either of
the Companies.
Additional Debt. The Corporation currently funds acquisition opportunities
partially through borrowings (including its lines of credit). The
organizational documents of the Corporation do not contain any limitation on
the amount of indebtedness that the Corporation may incur. Accordingly, the
Corporation could become more highly leveraged, resulting in an increase in
debt service, which could have a material adverse effect on the Corporation and
its ability to make distributions to shareholders and to pay amounts due on its
indebtedness and in an increased risk of default on its obligations.
Employment and Other Governmental Regulation
The health care, golf, hotel, race track and related businesses of the
Companies are subject to varying degrees to extensive federal, state and local
regulatory requirements, including building and zoning requirements, all of
which can prevent, delay, make uneconomical or significantly increase the cost
of developing and maintaining existing and additional facilities or properties
in the health care, golf, hotel, race track and related businesses. In
addition, La Quinta, Cobblestone and the Companies are subject to laws
governing their relationship with employees, including minimum wage
requirements, overtime, working conditions, work permit requirements and
discrimination claims. An increase in the minimum wage rate, employee benefit
costs or other costs associated with employees, could adversely affect the
Companies and their ability to make distributions to shareholders and to pay
amounts due on their indebtedness.
ERISA Plans May Be Affected by Certain Ownership of REIT Securities
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and section 4975 of the Code prohibit certain transactions that involve (i)
certain pension, profit-sharing, employee benefit, or retirement plans or
individual retirement accounts (each, a "Plan") and (ii) the assets of a Plan,
on the one hand, and a "party in interest" or "disqualified person" with
respect to such Plan, on the other hand. A "party in interest" or
"disqualified person" with respect to a Plan will be subject to (x) an initial
15% excise tax on the amount involved in any prohibited transaction involving
the assets of the Plan and (y) an excise tax equal to 100% of the amount
involved if any prohibited transaction is not corrected. Consequently, the
fiduciary of a Plan contemplating an investment in Securities offered by any
Prospectus Supplement should consider whether the Companies, any other person
associated with the issuance of the Securities offered by any Prospectus
Supplement, or any affiliate of the foregoing is or might become a "party in
interest"
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or "disqualified person" with respect to the Plan. In such a case, the
acquisition or holding of Securities offered by any Prospectus Supplement by or
on behalf of the Plan could be considered to give rise to a prohibited
transaction under ERISA and the Code.
Regulations of the Department of Labor that define "plan assets" provide
that in some situations, when a Plan acquires an equity interest in an entity,
the Plan's assets include both the equity interest and an undivided interest in
each of the underlying assets of the entity, unless one or more exceptions
specified in the plan asset regulations are satisfied. In such a case, certain
transactions that the Companies might enter into in the ordinary course of
their business and operations might constitute "prohibited transactions" under
ERISA and the Code.
Substantial Leverage Risks
The Corporation has substantial leverage. In that regard, on June 9, 1998
the Corporation obtained signed commitments, which are subject to certain
conditions, from a bank group to provide a $2.25 billion credit facility. If
this new credit facility is entered into, it will replace the Corporation's
current $365 million credit facilities. In addition, the Companies are
exploring various alternative means to finance the cash which will be payable
in connection with the proposed La Quinta merger, which may include additional
borrowings. The degree of leverage of the Corporation could have important
consequences to investors, including the following: (i) the Corporation's
ability to obtain additional financing may be impaired, both currently and in
the future; (ii) a substantial portion of the Corporation's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Corporation for other
purposes; (iii) as described below, certain of the Corporation's borrowings are
and will continue to be at variable rates of interest, which will expose the
Corporation to the risk of increased interest rates; (iv) the Corporation may
be substantially more leveraged than certain of its competitors, which may
place the Corporation at a competitive disadvantage; and (v) the Corporation's
substantial degree of leverage may limit its flexibility to adjust to changing
market conditions, reduce its ability to withstand competitive pressures and
make it more vulnerable to a downturn in general economic conditions or its
business.
If the mergers with La Quinta and Cobblestone had been consummated on
March 31, 1998, the Companies would have had, as of March 31, 1998,
approximately $3.24 billion of pro forma combined total indebtedness as
compared to combined total indebtedness of the Companies, without giving effect
to the La Quinta and Cobblestone acquisitions, of approximately $1.24 billion
at that date. Consequently, the indebtedness which was incurred in connection
with the Cobblestone acquisition and which is expected will be incurred in
connection with the La Quinta merger, the Corporation's anticipated
distribution of inherited earnings and profits if the La Quinta merger is
consummated (see "--Tax Risks Related to Real Estate Investment
Trusts--Requirement to Distribute Accumulated Earnings and Profits"), and the
issuance of additional debt securities will result in increased interest
expense under the Companies' credit facilities. In addition, because the
Companies' credit facilities currently bear interest at variable rates based,
in part, on the Corporation's long-term indebtedness credit ratings, any
increases in market interest rates or decrease in the Corporation's credit
ratings will also result in increased borrowing costs for the Companies, which
may adversely affect the Companies and their ability to make distributions to
shareholders and to pay amounts due on their indebtedness.
The foregoing risks associated with the debt obligations of the Companies
may adversely affect the market price of Securities offered by any Prospectus
Supplement and may inhibit the ability of the Companies to raise capital in
both the public and private markets.
Risks Related to Restrictions on Dividends and Distributions; Risks Relating to
Restrictive Debt Covenants and Compliance with Debt Instruments
The Companies and their subsidiaries are or in the future may become
parties to agreements and debt instruments which restrict or prevent the
payment of dividends on, or the purchase or redemption of, their Paired Common
Stock, Preferred Stock or Series Common Stock, including indirect restrictions
(through, for example, covenants requiring the maintenance of specified levels
of net worth) and direct restrictions. In particular, the Corporation is
currently a party to revolving loan agreements (the "Revolving Loan
Agreements") which permit borrowings in an aggregate amount of up to $365
million with Fleet National Bank, as agent for certain other financial
institutions, and with Via Banque. However, the Corporation has received
commitments, which are subject to certain conditions, from a bank group to
provide replacement credit facilities in order to increase the aggregate amount
of borrowings available under its credit facilities to approximately $2.25
billion. The Revolving Loan Agreements provide that the Corporation shall not
declare
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or pay any dividends (other than a dividend payable in capital stock of the
Companies) on any of its capital stock if such action would constitute an event
of default or an event which, with the giving of notice or lapse of time or
both, would constitute an event of default under the Revolving Loan Agreements
or any other material agreement to which the Corporation is a party. Events of
default under the Revolving Loan Agreements include, among other things,
failure by the Corporation to comply with certain financial covenants relating
to cash flow coverage, combined tangible net worth, and a ratio of total
liabilities to combined financial net worth. Other events of default under the
Revolving Loan Agreements include failure to pay principal, interest, fees or
reimbursements under letters of credit when due, certain events of bankruptcy
or insolvency or creditor actions with respect to the Corporation and its
subsidiaries, breach of any of the representations, warranties or covenants
under the Revolving Loan Agreements, certain monetary defaults under other debt
instrument of the Corporation, failure to pay all amounts due under the
Revolving Loan Agreements upon the sale or permanent disposition of an operator
of the Corporation's properties who operates more than a specified percentage
of the Corporation's properties, or the occurrence of events of default under
any of the other documents relating to the Revolving Loan Agreements. Likewise,
the Corporation has previously issued debt securities under several indentures
(each, an "Existing Indenture"). As of March 31, 1998, approximately $1.1
billion of borrowings were outstanding under the Existing Indentures. Each
Existing Indenture provides that the Corporation may not pay dividends on any
of its capital stock (other than dividends payable in capital stock) if at the
time of such action an event of default under such Existing Indenture has
occurred and is continuing or would exist immediately after giving effect to
such action. Events of default under the Existing Indenture include a failure
by the Corporation, after the expiration of any applicable grace period, to pay
principal or interest when due, failure by the Corporation after expiration of
a grace period to comply with any agreements in the Existing Indentures, events
of default under any other debt instruments of the Corporation or its
subsidiaries if any such event of default results from either the failure to
pay such other indebtedness when due or acceleration of such other
indebtedness, and the commencement of voluntary or involuntary bankruptcy or
similar proceedings with respect to the Corporation. As a result of the
foregoing, in the event of a deterioration in the financial condition or
results of operations of the Corporation or the Operating Company, the terms of
the Revolving Loan Agreements, the Existing Indentures or other instruments or
agreements to which the Companies or their subsidiaries are or may in the
future become parties could limit or prohibit the payment of dividends on
shares of Paired Common Stock, Preferred Stock or Series Common Stock offered
by any Prospectus Supplement. Any such limitation or prohibition could have a
material adverse effect on the market price of such Paired Common Stock,
Preferred Stock, or Series Common Stock. Any failure of the Corporation to pay
dividends as required by the Code, whether as a result of restrictive covenants
in its debt instruments or otherwise, would result in the loss of its status as
a real estate investment trust under the Code, which would have a material
adverse effect on the Companies and their ability to make distributions to
shareholders and to pay amounts due on their indebtedness.
Debt instruments (including the Revolving Loan Agreements and the Existing
Indentures) to which the Corporation is currently a party and to which the
Corporation and/or the Operating Company may in the future become parties
contain and may contain a number of significant covenants that, among other
things, will restrict in varying degrees the applicable Company from disposing
of assets, incurring additional indebtedness, repaying other indebtedness,
paying dividends, creating liens on assets, entering into leases, making
investments, loans or advances, making acquisitions, engaging in mergers or
consolidations, engaging in certain transactions with affiliates and otherwise
restrict certain other corporate activities.
A Company's ability to remain in compliance with certain such covenants
will depend upon, among other things, its results of operations and may be
affected by events beyond its control, including economic, financial and
industry conditions. Accordingly, there can be no assurance that the Companies
will remain in compliance with such agreements and covenants. In the event of a
default under such instruments or agreements relating to any indebtedness of
the applicable Company, the holders of such indebtedness generally will be able
to declare all such indebtedness, together with accrued interest thereon, to be
due and payable immediately and, in the case of collateralized indebtedness, to
proceed against their collateral. In addition, default under one debt
instrument could in turn permit lenders under other debt instruments to declare
borrowings outstanding thereunder to be due and payable pursuant to
cross-default clauses. Accordingly, the occurrence of a default under any debt
instrument could have a material adverse effect on the Companies.
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Financing Risks Relating to Proposed La Quinta Acquisition
Although the La Quinta merger will be financed to a significant extent
through the issuance of Shares, the Companies are exploring various alternative
means to most effectively finance the cash that will be payable in connection
with the La Quinta merger, including costs associated with the earnings and
profits distribution (see "--Tax Risks Related to Real Estate Investment
Trusts" above), the cash consideration to be paid in the La Quinta merger
pursuant to cash elections by La Quinta shareholders and the other costs
associated with the proposed merger, such as the refinancing and assumption of
certain La Quinta debt. This financing may consist of, among other things,
public or private offerings of equity or debt securities, borrowings under the
Revolving Loan Agreements, or a combination thereof. No assurance can be given,
however, that the Companies will successfully obtain the financing necessary to
consummate the merger, or if obtained, that such financing will be on terms and
conditions favorable to the Companies. The Companies' obligations under the La
Quinta merger agreement are not conditioned on the obtaining of financing.
Possible Effects of Failure to Consummate the La Quinta Acquisition
It cannot be assured that the merger with La Quinta will be completed. The
Companies have incurred substantial expenses in connection with the proposed
acquisition of La Quinta. The Companies may also be responsible for sizable
termination fees, under certain circumstances, if the La Quinta acquisition
does not occur. The La Quinta merger agreement provides that a termination fee
of $75 million may be payable by La Quinta or the Corporation, as the case may
be, in the event the merger agreement is terminated for certain reasons or
certain other events occur under the merger agreement.
Restrictions on Transfer of Capital Stock; Repurchase of Capital Stock
In order to qualify as a REIT under the Code, the Corporation's capital
stock must be held by 100 or more shareholders and more than 50% of its capital
stock may not be held by five or fewer individuals. The Companies' respective
by-laws contain provisions intended to preserve the status of the Corporation
as a REIT for federal income tax purposes. Among other things, the by-laws of
each Company provide that, if its Board of Directors shall at any time be of
the opinion that direct or indirect ownership of shares of its capital stock
has or may become concentrated to an extent that would cause the Corporation to
fail to qualify or to be disqualified as a REIT under the Code, or to an extent
that would cause any rent to be paid to the Corporation to fail to qualify or
to be disqualified as rent from real property for purposes of the Code, the
Board of Directors of such Company may call for the purchase from any
shareholder of such Company such number of shares sufficient, in the opinion of
the Board of Directors, to maintain or bring the direct or indirect ownership
of shares of stock of such Company into conformity with the requirements of the
Code. The purchase price for the shares called for purchase shall be equal to
the fair market value of such shares as reflected in the closing price for such
shares on the principal stock exchange on which such shares are listed or, if
such shares are not listed, then the last bid quotation for shares of such
stock as of the close of business on the date fixed by the Board of Directors
for such purchase or, if no quotation for the shares is available, as
determined in good faith by the Board of Directors. From and after the date
fixed for purchase by the Board of Directors as aforesaid, the holders of any
shares so called for purchase shall cease to be entitled to dividends, voting
rights and other benefits with respect to such shares, excepting only the right
to payment of the purchase price fixed as aforesaid. Such purchase price may be
paid in cash or, at the option of the Board of Directors, in the form
subordinated indebtedness equal to the purchase price of the shares (less
amounts paid in cash, if any), which subordinated indebtedness shall have such
other terms as may be determined by the Board of Directors. In addition, the
by-laws of each Company provide that such Company may refuse to transfer shares
of stock to any person whose acquisition of such shares would, in the opinion
of its Board of Directors, result in the Corporation being unable to conform to
the requirements of the Code referred to above. The by-laws also provide that
any transfer of shares that would prevent the Corporation from continuing to be
qualified as a REIT under the Code shall be void and the intended transferee of
such shares shall be deemed never to have had an interest therein. If the
foregoing provision is determined to be invalid, the by-laws also provide that
the transferee of such shares shall be deemed to have acted as agent on behalf
of the Corporation or the Operating Company, as applicable, in acquiring such
shares and to hold such shares on behalf of the Corporation or the Operating
Company, as applicable. See "Federal Income Tax Considerations."
In addition, each of the Companies is soliciting the vote of its
shareholders to approve certain amendments to its Charter (as hereinafter
defined) which, if approved, would add certain additional, and more stringent,
restrictions on the ownership and transfer of such Company's capital stock.
Such proposed amendments would,
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among other things, add a new Article Thirteenth to the Charter of each
Company. See "Description Of Capital Stock--Ownership Limitations and
Restrictions on Transfers."
Year 2000 Issues
The Companies have begun the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue affects computer systems that have programs that may not
properly recognize the year 2000. This could result in system failures or
miscalculations. The Companies are currently addressing their internal year
2000 issues, with modifications to existing programs and conversions to new
programs. The Companies are also communicating with financial institutions,
software vendors and others with which they conduct business to help them
identify and resolve the year 2000 issue. The total cost of converting all
internal systems has not been completely quantified, but it is not expected to
be a material cost. However, no estimates can be made as to the potential
adverse impact that may result from the financial institutions, software
vendors and others with which the Companies conduct business. Costs related to
the year 2000 issue are being expensed as incurred.
Cautionary Statements Concerning Forward-Looking Statements
Any statements included or incorporated by reference in this Prospectus or
any Prospectus Supplement, including statements in the documents that are
incorporated by reference as set forth on page 2 under "Available Information,"
that are not strictly historical are forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Any such forward-looking statements contained or
incorporated by reference herein or in the accompanying Prospectus Supplement
should not be relied upon as predictions of future events. Certain such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "pro forma," "estimates" or "anticipates"
or the negative thereof or other variations thereof or comparable terminology,
or by discussions of strategy, plans, intentions or anticipated or projected
events, results or conditions. Such forward-looking statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise
and they may be incapable of being realized. Such forward-looking statements
include statements with respect to (i) the declaration or payment of
distributions by the Companies, (ii) the ownership, management and operation of
hotels, golf courses, health care related facilities, race tracks and other
properties, including the integration of the acquisitions effected or proposed
by the Companies, (iii) potential acquisitions or dispositions of properties,
assets or other public or private companies by the Companies, including the
acquisition of La Quinta, (iv) the policies of the Companies or Cobblestone and
(if the merger with La Quinta is consummated) La Quinta regarding investments,
acquisitions, dispositions, financings, conflicts of interest and other
matters, (v) the qualification of the Corporation and the Corporation's
Predecessor as a REIT under the Code and the "grandfathering" rules under
Section 269B of the Code, (vi) the health care, real estate, golf and lodging
industries and real estate markets in general, (vii) the availability of debt
and equity financing, (viii) interest rates, (ix) general economic conditions,
(x) supply and customer demand, (xi) trends affecting the Companies',
Cobblestone's and, if the merger is consummated, La Quinta's financial
condition or results of operations, (xii) the effect of acquisitions (including
the Cobblestone acquisition and, if consummated, the proposed La Quinta
acquisition) on results of operations (including funds from operations,
margins, and cash flow, financial condition (including market capitalization)
and financial flexibility, (xiii) the anticipated performance of the Companies
and of acquired properties and businesses, including, without limitation,
statements regarding anticipated revenues, cash flows, funds from operations,
EBITDA, operating or profit margins and sensitivity to economic downturns or
anticipated growth or improvements in any of the foregoing, (xiv) conditions or
prospects in the lodging and other industries, including anticipated growth or
profitability, and the sensitivity of certain segments of those industries to
economic downturns, (xv) the ability of the Companies and of acquired
properties and businesses to grow (including La Quinta's ability to renovate
hotels and open new hotels as planned), and (xvi) the Corporation's funds from
operations payout ratio after giving effect to anticipated acquisitions.
Shareholders are cautioned that, while forward-looking statements reflect the
respective Companies' good faith beliefs, they are not guarantees of future
performance and they involve known and unknown risks and uncertainties and
there can be no assurance that the events, results or conditions reflected in
such forward-looking statements will occur. Actual results may differ
materially from those in the forward-looking statements as a result of various
factors. The information contained or incorporated by reference in this
Prospectus or any Prospectus Supplement hereto, including, without limitation,
the information set forth in "Risk Factors," identifies important factors that
could cause such differences. The Companies undertake no obligations to
publicly release the results of any revisions to these forward-looking
statements that may reflect any future events or circumstances.
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THE MEDITRUST COMPANIES
The REIT
The REIT is a self-administered real estate investment trust under the
Internal Revenue Code of 1986, as amended (the "Code"), which has historically
invested primarily in health care related real property in locations throughout
the United States. The REIT also invests in other entities outside of the
United States which make similar health care related real property investments.
As a result of recent acquisitions, the REIT also owns golf courses and golf
related properties. The REIT invests in high quality facilities that are
managed by experienced operators and achieves diversity in its property
portfolio by sector of the health care industry, geographic location, operator
and form of investment. The REIT's investments have historically taken the form
of permanent mortgage loans, sale/leaseback transactions and development
projects.
The REIT was organized to qualify, and intends to continue to operate, as
a real estate investment trust in accordance with federal tax laws and
regulations. So long as the REIT so complies, with limited exceptions, the REIT
will not be taxed under Federal income tax laws on that portion of its taxable
income that it distributes to its shareholders. See "Federal Income Tax
Considerations".
The REIT's principal executive offices are located at 197 First Avenue,
Suite 300, Needham Heights, Massachusetts 02194, and its telephone number is
(781) 433-6000.
The Operating Company
The Operating Company is engaged in thoroughbred horse racing and, as a
result of the recent Cobblestone acquisition, the operation of golf course
properties. The thoroughbred horse racing operation is conducted by Los Angeles
Turf Club, Incorporated ("LATC") (a wholly-owned subsidiary of The Santa Anita
Companies, Inc., itself a wholly-owned subsidiary of the Operating Company),
which leases from the REIT an approximately 400 acre parcel of land in Arcadia,
California on which Santa Anita Park, a thoroughbred horse racing facility (the
"Race Track"), is located. The Operating Company believes that the Race Track
is one of the premier thoroughbred horse racing venues in North America. The
Operating Company has conducted a winter live thoroughbred horse racing meet at
the Race Track each year since 1934 (except for three years during World War
II). In addition, the Race Track has been the site of a fall meet conducted by
Oak Tree Racing Association, which has leased the Race Track from LATC since
1969. The Race Track was the location of the 1986 and 1993 Breeders' Cup
Championships. As a result of the Cobblestone acquisition on May 29, 1998, the
Operating Company manages, through subsidiaries, golf courses and related golf
facilities in Arizona, California, Florida, Georgia, Texas and Virginia.
As described below, shares of Operating Common Stock are paired and trade
together with shares of REIT Common Stock as a single unit on the NYSE. The
Operating Company's principal executive offices are located at 197 First
Avenue, Suite 100, Needham Heights, Massachusetts 02194, and its telephone
number is (781) 453-8062.
Santa Anita Mergers
On November 5, 1997, the Corporation's Predecessor completed its merger
with Realty, with Realty as the surviving corporation, whereupon Realty changed
its name to Meditrust Corporation. At the same time, MAC, a Massachusetts
business trust and newly formed subsidiary of the Corporation's Predecessor,
completed its merger with SAOC, with SAOC as the surviving corporation,
whereuopn SAOC changed its name to Meditrust Operating Company. The mergers
were accounted for as reverse acquisitions whereby the Corporation's
Predecessor and MAC were treated as the acquirors for accounting purposes.
Accordingly, unless otherwise expressly stated or the context otherwise
requires, the historical financial information with respect to the Companies
included in this Prospectus, the documents incorporated or deemed to be
incorporated by reference herein and any accompanying Prospectus Supplement as
of any dates and for any periods prior to November 5, 1997 is that of the
Corporation's Predecessor and MAC and not of Realty or SAOC.
Recent Developments
On January 3, 1998, the Companies entered into a merger agreement with La
Quinta Inns, Inc. ("La Quinta") pursuant to which La Quinta will merge with and
into the REIT with the REIT being the surviving corporation (the "La Quinta
Merger"). If the La Quinta Merger is consummated, holders of La Quinta common
stock will receive in exchange therefor cash and newly-issued shares of Paired
Common Stock of the Companies with an aggregate value of approximately $1.65
billion, subject to certain adjustments. In addition, the REIT will assume or
retire
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approximately $961 million of La Quinta's existing indebtedness. La Quinta is a
fully-integrated lodging company that focuses on the ownership, operation and
development of its two hotel products: (i) La Quinta Inns, a chain positioned
in the mid-price segment without food and beverage facilities, and (ii) La
Quinta Inn & Suites, a new concept positioned at the upper end of the mid-price
segment without food and beverage facilities. The La Quinta Merger is expected
to close in the second quarter of 1998 and is subject to various conditions
including approval of the La Quinta Merger by two-thirds of the outstanding
shares of La Quinta and a majority of the outstanding shares of the REIT and by
a majority of the outstanding shares of the Operating Company.
On January 8, 1998 the Companies received notice that they were named as
defendants in a class action entitled Lynn Robbins v. William J. Razzouk, et
al., Civil Action No. 98CI-00192 filed January 7, 1998 in the District Court of
Bexar County, Texas and on January 20,1998 the Companies received notice that
they were named as defendants in a class action entitled, Adele Brody v.
William J. Razzouk, et al., Civil Action No. 98CI-00456 filed January 12, 1998
in the District Court of Bexar County, Texas. The complaints, which have been
consolidated into one action, (i) allege, in part, that La Quinta and its
directors violated their fiduciary duty, duty of care and duty loyalty to La
Quinta shareholders by entering into a merger agreement with the Companies
without having first invited other bidders, and that the Companies aided and
abetted La Quinta and its directors in the alleged breaches, and (ii) seek both
injunctive relief enjoining the merger with La Quinta and compensatory damages.
The defendants and counsel for the class plaintiffs have negotiated and entered
into an agreement in principle to settle the action, dated on or about May 8,
1998 (the "Memorandum of Understanding"). The Memorandum of Understanding sets
forth the principal bases for the settlement which include the issuance of a
series of press releases prior to the meetings of the shareholders of the
Companies and La Quinta to consider the La Quinta merger agreement and the
inclusion of a section describing the forward equity transaction with Merrill
Lynch International (as described below) in the joint proxy
statement/prospectus prepared for the Companies' and La Quinta's shareholder
meetings. The proposed settlement will be contingent upon execution of an
appropriate and satisfactory stipulation of settlement and related documents,
and Final Court Approval of the settlement (as defined in the Memorandum of
Understanding) by the Texas court. La Quinta has agreed to pay counsel for the
class plaintiffs attorney's fees in an amount not to exceed $700,000 in the
event such settlement is consummated.
On January 11, 1998, the Companies entered into a merger agreement with
Cobblestone Holdings, Inc. ("Cobblestone"), parent of Cobblestone Golf Group,
Inc. On May 29, 1998, Cobblestone merged with and into the REIT with the REIT
being the surviving corporation (the "Cobblestone Merger"). In connection with
the Cobblestone Merger, holders of all of the outstanding preferred and common
stock of Cobblestone received in exchange therefor approximately 8,177,300
newly-issued shares of Paired Common Stock of the Companies with an aggregate
market value of approximately $230,000,000. In addition, under the terms of the
Cobblestone merger agreement, approximately $169,000,000 of Cobblestone debt
and associated costs were paid off in cash by the Corporation with the proceeds
of borrowings under its credit facilities. Cobblestone was a privately-held
company which owned and operated golf courses in the United States.
On February 26, 1998, the Companies entered into two transactions with
Merrill Lynch International, a UK- based broker/dealer subsidiary of Merrill
Lynch & Co., Inc. ("MLI"). Pursuant to the terms of a stock purchase agreement,
MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock
from each of the Companies at a purchase price of $32.625 per share. The Series
A Non-Voting Convertible Common Stock is non-voting paired Series Common Stock
that will convert to Shares on the earlier of (a) the business day following
the date on which the stockholders of the Companies have approved the La Quinta
merger or (b) the date of any termination of the La Quinta merger agreement.
Net proceeds from this private placement of securities of approximately
$272,000,000 were used by the Companies to repay existing indebtedness. In
addition, pursuant to the terms of the stock purchase agreement, MLI is
prohibited from disposing of these shares during the period in which the
Meeting Day Price (as defined in the La Quinta merger agreement) is determined.
Separately, the Companies and MLI entered into a purchase price adjustment
agreement under which the Companies will, within one year from the date of
MLI's purchase, adjust the original $32.625 purchase price per share based on
the market price of the Shares at the time of the adjustment, by receiving
Shares from MLI or by issuing additional Shares to MLI.
On March 6, 1998, the REIT entered into an agreement to acquire five golf
courses located in Texas from the IRI Golf Group ("IRI"), a privately held
owner and manager of golf facilities, for $41 million in cash. The REIT
completed the acquisition of three of the courses on the same date, and the
acquisitions of the other two courses closed shortly thereafter. The
Corporation also acquired an 18-hole golf course facility in Virginia on May 4,
1998, for $8.65 million
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in cash, a golf course in Georgia on May 19, 1998 for purchase price of $13.3
million in cash, and has agreed to purchase a total of eleven additional golf
courses from several different sellers for an aggregate of $117 million in
cash. There can be no assurance that these pending acquisitions will be
completed.
RATIOS OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The ratios of earnings to fixed charges and the ratios of earnings to
combined fixed charges and preferred stock dividends (i) for the Companies on a
combined basis, (ii) for the REIT on a consolidated basis and (iii) for the
Operating Company on a consolidated basis for each of the periods indicated are
as follows:
The Companies
<TABLE>
<CAPTION>
Year Ended December 31, Three Months
--------------------------------------------------------- Ended
1993 1994 1995 1996 1997 March 31, 1998
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges ............. 2.02 2.19 2.35 3.27 2.71 2.84
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends ......... 2.02 2.19 2.35 3.27 2.71 2.84
</TABLE>
The REIT
<TABLE>
<CAPTION>
Year Ended December 31, Three Months
--------------------------------------------------------- Ended
1993 1994 1995 1996 1997 March 31, 1998
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges ............. 2.02 2.19 2.35 3.27 2.72 2.85
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends ......... 2.02 2.19 2.35 3.27 2.72 2.85
</TABLE>
The Operating Company
<TABLE>
<CAPTION>
Year Ended December 31, Thee Months
----------------------------------------------------------- Ended
1993 1994 1995 1996 1997 March 31, 1998
------ ------ ------ ------ --- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges ............. -- -- -- -- --(A) .85
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends ......... -- -- -- -- --(A) .85
</TABLE>
- ----------------
(A) Earnings were inadequate to cover fixed charges. The amount of the
deficiency was $391,000.
For periods prior to November 5, 1997, the ratios set forth above reflect
historical financial information for the Corporation's Predecessor and MAC. See
"The Meditrust Companies--Santa Anita Mergers." MAC was organized in 1997. In
addition, the ratios of earnings to fixed charges and earnings to combined
fixed charges and preferred stock dividends are identical for the periods
indicated because neither the Corporation's Predecessor, MAC or the Companies
had any preferred stock outstanding.
The ratio of earnings to fixed charges is computed as income from operations
before extraordinary items plus fixed charges (excluding capitalized interest)
divided by fixed charges. Fixed charges consist of interest costs, including
amortization and debt discount and deferred financing fees, whether capitalized
or expensed, plus the interest component of rental expense. The Companies did
not pay or accrue any preferred stock dividends during the periods presented
above and, accordingly, the ratios of earnings to fixed charges are identical
to the ratios of earnings to combined fixed charges and preferred stock
dividends.
USE OF PROCEEDS
Unless otherwise specified in the Prospectus Supplement which accompanies
this Prospectus, the net proceeds from the sale of the Securities offered
thereby will be used for general corporate purposes of the issuing Company,
which may include the repayment of indebtedness, the acquisition, development
and improvement of properties, to provide all or a portion of the financing for
acquisitions, and to refinance indebtedness incurred in connection with
acquisitions.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Certificate of Incorporation of the REIT, as amended and restated (the
"REIT Charter"), authorizes the REIT to issue up to 306,000,000 shares of
capital stock, consisting of (i) 270,000,000 shares of REIT Common Stock, (ii)
6,000,000 shares of REIT Preferred Stock and (iii) 30,000,000 shares of REIT
Series Common Stock (collectively, the "REIT Capital Stock" or "Corporation
Capital Stock"). The REIT Charter grants the REIT Board of Directors the power,
without further shareholder authorization, to authorize from time to time the
issuance of REIT Preferred Stock and REIT Series Common Stock in one or more
series, and to determine the number of shares, dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and liquidation
preferences, if any, of any such series and the designation thereof. As of
March 30, 1998, except for the authorized but unissued Junior Participating
Preferred Stock (see "--Rights Agreement" below), and the outstanding Series A
Non-Voting Convertible Common Stock ("REIT Series A Stock") (see "Description
of Series Common Stock--Series A Non-Voting Convertible Common Stock" below),
no shares of REIT Preferred Stock or REIT Series Common Stock were outstanding.
REIT Preferred Stock and REIT Series Common Stock may be subject to the Pairing
Agreement described below.
The Certificate of Incorporation of the Operating Company, as amended and
restated (the "Operating Company Charter" and, together with the REIT Charter,
the "Charters") authorizes the Operating Company to issue up to 306,000,000
shares of capital stock, consisting of (i) 270,000,000 shares of Operating
Common Stock, (ii) 6,000,000 shares of Operating Preferred Stock and (iii)
30,000,000 shares of Operating Series Common Stock (collectively, the
"Operating Capital Stock", and, together with the REIT Capital Stock or
Corporation Capital Stock, the "Capital Stock"). The Operating Company Charter
grants the Operating Company Board of Directors the power, without further
shareholder authorization, to authorize from time to time the issuance of
Operating Preferred Stock and Operating Series Common Stock in one or more
series, and to determine the number of shares, dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and liquidation
preferences, if any, of any such series and the designation thereof. As of
March 30, 1998, except for the authorized but unissued Junior Participating
Preferred Stock (see "--Rights Agreement" below), and the outstanding Series A
Non-Voting Convertible Common Stock ("Operating Series A Stock" and, together
with the REIT Series A Stock, the "Series A Stock") (see "Description of Series
Common Stock--Series A Non-Voting Convertible Common Stock" below), no shares
of Operating Preferred Stock or Operating Series Common Stock were outstanding.
Operating Preferred Stock and Operating Series Common Stock may be subject to
the Pairing Agreement described below.
The summary in this Prospectus of certain provisions of the REIT Charter,
the REIT Capital Stock, the Operating Company Charter, the Operating Capital
Stock, the by-laws of the REIT, the by-laws of the Operating Company, the
Pairing Agreement, the Rights Agreement, the Rights, the Junior Preferred Stock
and the Series A Stock (as such terms are herein defined) do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the terms of such instruments and agreements, copies of which have been filed
or incorporated by reference as exhibits to the Registration Statement.
The Pairing
Pursuant to a pairing agreement by and between the REIT and the Operating
Company, dated as of December 20, 1979, as amended (the "Pairing Agreement"),
(i) the shares of REIT Common Stock and shares of Operating Common Stock are
transferable and tradeable only in combination as units, each unit consisting
of one share of REIT Common Stock and one share of Operating Common Stock.
These restrictions on the transfer of shares of REIT Common Stock and Operating
Common Stock are also imposed by the Companies' respective by-laws. The pairing
is evidenced by "back-to-back" stock certificates; that is, certificates
evidencing shares of Operating Common Stock are printed on the reverse side of
certificates evidencing shares of REIT Common Stock. The certificates bear a
legend referring to the restrictions on transfer imposed by the Companies'
by-laws. To permit proper allocation of the consideration received in
connection with the sale of Paired Common Stock, the Pairing Agreement provides
that the REIT and the Operating Company shall, as decided from time to time but
not less than once a year, jointly make arrangements to determine the relative
value of the stock of each Company. Shares of the Preferred Stock and/or Series
Common Stock which are convertible into shares of REIT Common Stock or
Operating Common Stock are also subject to the Pairing Agreement.
Ownership Limitations and Restrictions on Transfers
Under the Code, the REIT may not own, directly or indirectly, after
application of the attribution rules of the Code, 10% or more of the
outstanding shares of Operating Capital Stock, if the REIT is to qualify as a
REIT. Moreover, under
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<PAGE>
the Code the REIT Capital Stock must be held by 100 or more shareholders and
more than 50% of the REIT Capital Stock may not be held by five or fewer
individuals. The Companies' respective by-laws provide that if the Board of
Directors shall at any time and in good faith be of the opinion that direct or
indirect ownership of shares of capital stock of such Company has or may become
concentrated to an extent which would cause the REIT to fail to qualify or be
disqualified as a REIT under the Code, or to an extent which would cause any
rent to be paid to the REIT to fail to qualify or to be disqualified as rent
from real property for purposes of the Code, the Board of Directors of such
Company may call for the purchase from any shareholder of such Company such
number of shares sufficient, in the opinion of the Board of Directors, to
maintain or bring the direct or indirect ownership of shares of stock of such
Company into conformity with the requirements of the Code. The purchase price
for the shares called for purchase shall be equal to the fair market value of
such shares as reflected in the closing price for such shares on the principal
stock exchange on which such shares are listed or, if such shares are not
listed, then the last bid quotation for shares of such stock as of the close of
business on the date fixed by the Board of Directors for such purchase or, if
no quotation for the shares is available, as determined in good faith by the
Board of Directors. From and after the date fixed for purchase by the Board of
Directors as aforesaid, the holders of any shares so called for purchase shall
cease to be entitled to dividends, voting rights and other benefits with
respect to such shares, excepting only the right to payment of the purchase
price fixed as aforesaid. Such purchase price may be paid in cash or, at the
option of the Board of Directors, in the form of subordinated indebtedness. In
addition, the by-laws of each Company provide that such Company may refuse to
transfer shares of stock to any person whose acquisition of such shares would,
in the opinion of its Board of Directors, result in the Corporation being
unable to conform to the requirements of the Code referred to above. The
by-laws also provide that any transfer of shares that would prevent the
Corporation from continuing to be qualified as a REIT under the Code shall be
void and the intended transferee of such shares shall be deemed never to have
had an interest therein. If the foregoing provision is determined to be
invalid, the by-laws also provide that the transferee of such shares shall be
deemed to have acted as agent on behalf of the REIT or the Operating Company,
as applicable, in acquiring such shares and to hold such shares on behalf of
the REIT or the Operating Company, as applicable. See "Federal Income Tax
Considerations."
In addition, each of the Companies is soliciting the vote of its
shareholders to approve certain amendments (the "Amendments") to its Charter
which, if approved, would add certain additional, and more stringent,
restrictions on the ownership and transfer of such Company's capital stock.
Such proposed amendments would, among other things, add a new Article
Thirteenth ("Article Thirteenth") to the Charter of each Company and amend
certain other provisions of each Charter in order to authorize the issuance of
25,000,000 shares of a new class of capital stock of each Company to be known
as Excess Stock ("Excess Stock"), and would also provide for the conversion of
shares of capital stock of each Issuing Company into shares of its Excess Stock
under circumstances intended to preserve the status of the Corporation as a
real estate investment trust for federal income tax purposes. The Prospectus
Supplement relating to any offering of Common Stock, Preferred Stock,
Depositary Shares, Series Common Stock or Share Warrants will, if relevant,
further describe the provisions of proposed Article Thirteenth.
Rights Agreement
The REIT has distributed to each holder of REIT Common Stock, and has
authorized, with respect to each additional share of REIT Common Stock that
shall become outstanding between the date of such distribution and the earliest
of the Distribution Date, the Expiration Date (as such terms are hereinafter
defined) or the date, if any, on which Rights (as hereinafter defined) may be
redeemed, the distribution of one right (a "Right") for each share of REIT
Common Stock. Each Right entitles the registered holder to purchase from the
REIT, initially, one one-hundredth of a share of Junior Participating Preferred
Stock ("REIT Junior Preferred Stock") at a price of $100 (the "Purchase
Price"), subject to adjustment. The terms of the Rights are set forth in a
Rights Agreement among the REIT, the Operating Company and Boston EquiServe, as
Rights Agent, dated as of June 15, 1989 (the "Rights Agreement").
REIT Junior Preferred Stock purchasable upon exercise of the Rights will
be entitled to dividends of 100 times the dividends per share declared on REIT
Common Stock and, in the event of liquidation, will be entitled to a minimum
preferential liquidating distribution of $100 per share and an aggregate
liquidating distribution per share of 100 times the distribution made with
respect to each share of REIT Common Stock. Each share of REIT Junior Preferred
Stock is entitled to 100 votes on all matters submitted to a vote of
shareholders. REIT Junior Preferred Stock will vote together with REIT Common
Stock and, in the event of any merger, consolidation or other transaction in
which REIT Common Stock is exchanged, each share of REIT Junior Preferred Stock
will be entitled to receive 100 times the amount received per share of REIT
Common Stock.
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<PAGE>
Because of the voting, dividend and liquidation rights of the REIT Junior
Preferred Stock, the value when issued of the one one-hundredth interest in a
share of REIT Junior Preferred Stock purchasable upon exercise of each Right
should approximate the value of one share of REIT Common Stock.
Until the earlier to occur of (i) 10 business days following a public
announcement that an Acquiring Person (as defined) has acquired beneficial
ownership of 10% or more of the REIT's general voting power other than pursuant
to a Qualified Offer (as defined below), the date of such public announcement
being called the "Stock Acquisition Date," or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors) following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 10% or more of the REIT's general voting
power (the date of the earliest to occur of the foregoing being called the
"Distribution Date"), the Rights will be evidenced by the certificates
representing REIT Common Stock and will be transferred with and only with REIT
Common Stock. The surrender for transfer of any certificate for REIT Common
Stock will also constitute the transfer of the Rights associated with the REIT
Common Stock represented by such certificate. As soon as practicable, following
the Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of REIT Common Stock as of
the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on August 31, 1999 (the "Expiration Date"), unless the Expiration
Date is extended or unless the Rights are earlier redeemed or exchanged by the
REIT, as described below.
The Purchase Price payable, the number of shares or other securities or
property issuable upon exercise of the Rights, and the number of outstanding
Rights, are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, REIT Common Stock or REIT Junior Preferred Stock, (ii)
upon the grant to holders of REIT Common Stock or REIT Junior Preferred Stock
of certain rights or warrants to subscribe for REIT Common Stock or REIT Junior
Preferred Stock at a price, or securities convertible into REIT Common Stock or
REIT Junior Preferred Stock with a conversion price, less than the then current
per share market price, or (iii) upon the distribution to holders of REIT
Common Stock or REIT Junior Preferred Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in REIT Common Stock) or of subscription
rights or warrants (other than those referred to above).
A "Qualified Offer" is a tender offer or exchange offer for all
outstanding REIT Common Stock which is determined by a majority of the
independent directors to be adequate and otherwise in the best interests of the
REIT and its shareholders.
If any person becomes an Acquiring Person other than by a purchase
pursuant to a Qualified Offer, each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will not be entitled to the
benefit of an Exercise Adjustment (as defined below)), will thereafter have the
right to receive upon exercise that number of shares of REIT Common Stock or
REIT Common Stock equivalents having a market value of two times the exercise
price of the Right (an "Exercise Adjustment"). Such an Exercise Adjustment will
also be made in the event that (i) an Acquiring Person merges with or otherwise
consolidates or combines with the REIT in a transaction in which the REIT is
the surviving corporation, (ii) an Acquiring Person engages in one or more
self-dealing transactions specified in the Rights Agreement, or (iii) during
such time as there is an Acquiring Person, an event specified in the Rights
Agreement occurs which results in the Acquiring Person's ownership interest in
the REIT being increased by more than 1%.
In the event that, at any time after an Acquiring Person has become such,
the REIT is acquired in a merger or other business combination transaction
(other than a merger which follows a Qualified Offer at the same or a higher
price) or 50% or more of its consolidated assets or earning power are sold,
each holder of a Right (other than an Acquiring Person) will thereafter have
the right to receive, upon the exercise thereof at the then current exercise
price of the Right, that number of shares of common stock of the acquiring
company which at the time of such transaction will have a market value of two
times the exercise price of the Right.
At any time after an Acquiring Person has become such, the Board of
Directors of the REIT may exchange the Rights (other than Rights owned by such
person or group), in whole or in part, at an exchange ratio of one share of
REIT Common Stock per Right (subject to adjustment).
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With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares will be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of REIT Common
Stock or REIT Junior Preferred Stock, as the case may be, on the last trading
day prior to the date of exercise.
Up to and including the tenth business day after a Stock Acquisition Date,
the REIT Board of Directors may redeem the Rights in whole, but not in part, at
a price of $.001 per Right (the "Rights Redemption Price"). The redemption of
the Rights may be made effective at such time on such conditions as the Board
of Directors in its sole discretion may establish. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Rights
Redemption Price.
The terms of the Rights may be amended by the REIT Board of Directors
without the consent of the holders of the Rights at any time prior to the
Distribution Date. Thereafter the Rights may be amended to make changes which
do not adversely affect the interests of the holders of the Rights, or which
shorten or lengthen time periods, subject to certain limitations set forth in
the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a REIT shareholder, including, without limitation, the right to vote
or to receive dividends.
The Operating Company has authorized the issuance of a series of Junior
Participating Preferred Stock ("Operating Junior Preferred Stock" and, together
with the REIT Junior Preferred Stock, the "Junior Preferred Stock") with terms
substantially similar to the REIT Junior Preferred Stock. The Rights Agreement
provides that, during such time as the Pairing Agreement shall remain in
effect, the Operating Company will issue, on a share for share basis, Operating
Common Stock or Operating Junior Preferred Stock, as the case may be, to each
person receiving REIT Common Stock or REIT Junior Preferred Stock,
respectively, upon exercise of or in exchange for one or more Rights.
The terms of the Rights Agreement and the Junior Preferred Stock could
make it more difficult for a third party to gain control of the Companies, and
could have the effect of delaying or preventing a merger, tender offer or other
attempt to take over the Companies.
Certain Anti-Takeover Provisions
Under the Delaware General Corporation Law (the "DGCL"), transactions such
as mergers, consolidations, sales of substantially all of the assets or
dissolution of a corporation generally must be approved by the holders of at
least a majority of all outstanding shares entitled to vote, unless the
certificate of incorporation requires approval by a greater number of shares.
However, the ability of the Companies to merge with or be acquired by
another corporation is limited by the DGCL. Under the DGCL, with certain
exceptions, a publicly-held corporation may not engage, in a "business
combination" with an "interested stockholder" for a period of three years
following the time of the transaction in which the person became an interested
stockholder unless (i) prior to such date either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder is approved by the board of directors of the corporation, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85 percent of
the voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (A) persons who are both directors and
officers and (B) certain employee stock plans, or (iii) on or after such date
the business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66-2/3 percent of the outstanding voting stock
which is not owned by the interested stockholder. A "business combination"
includes certain mergers, consolidations, asset sales, transfers and
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is, in general, a person who, together with affiliates
and associates, owns (or within three years, did own) 15 percent or more of the
corporation's voting stock. The DGCL permits the corporation, by vote of the
holders of at least a majority of the shares entitled to vote, to adopt an
amendment to its certificate of incorporation or by-laws expressly electing not
to be governed by the provision restricting business combinations with
interested shareholders. Neither the REIT nor the Operating Company has adopted
such an amendment.
Both the REIT Charter and the Operating Company Charter restrict certain
"business combinations" (as defined therein) with interested shareholders (the
"Business Combination Provisions"). An interested shareholder for the
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purposes of the Business Combination Provisions includes any person or entity
who is, together with its affiliates and associates, the beneficial owner of
more than 10% of the voting stock of the applicable Company. The Business
Combination Provisions provide that business combinations with interested
shareholders of a Company may not be consummated without:
(a) the affirmative vote of the holders of at least 80% of the combined
voting power of all issued and outstanding shares entitled to vote in the
election of directors of such Company ("Voting Stock");
(b) if less than 90% of the combined voting power of the Voting Stock approve
the business combination, the affirmative vote of at least a majority of
the combined voting power of Voting Stock held by persons who are not
interested shareholders.
The Business Combination Provisions do not apply to business combinations
approved by a majority of the directors unaffiliated with the interested
shareholder and elected prior to such an interested shareholder becoming an
interested shareholder or if certain price and procedural requirements are met.
A "business combination" includes:
(a) a merger or consolidation with an interested shareholder;
(b) the sale or disposition of assets to an interested shareholder having an
aggregate fair market value of $5,000,000 or more;
(c) the issuance of securities to an interested shareholder having a fair
market value of $5,000,000 or more;
(d) the adoption of a plan of liquidation or dissolution proposed by or on
behalf of an interested shareholder; and
(e) any merger, consolidation, reclassification or recapitalization which
increases the proportionate shareholdings of an interested shareholder.
The higher percentage of shareholder approval required for a business
combination with interested shareholders, together with the provisions of the
DGCL described above and the Rights Agreement, could make it more difficult for
a third party to gain control of the Companies, and could have the effect of
delaying or preventing a merger, tender offer or other attempt to take over the
Companies.
Certain provisions of the DCGL, the REIT Charter and by-laws and the
Operating Company Charter and by-laws could have a potential for similar
anti-takeover effects. Those provisions include the following:
[bullet] the REIT Charter and the Operating Company Chart and the by-laws of
each of the Companies provide for a classified board of directors,
with each class standing for re-election once every three years;
[bullet] Delaware law permits removal of directors of the REIT and the
Operating Company, other than upon expiration of their term, only
for cause;
[bullet] except as may be provided in a certificate of designations creating
a class or series of Preferred Stock or Series Common Stock, the
by-laws of each of the Companies do not permit shareholders to call
a special meeting of shareholders;
[bullet] the by-laws of each of the Companies contain restrictions on the
number of shares that may be owned by any stockholder and permit the
Companies to enforce those restrictions by purchasing shares from
shareholders or by refusing to transfer shares, (see "--Ownership
Limitations and Restrictions on Transfers" above);
[bullet] the REIT Charter and the Operating Company Charter permit the
issuance, without stockholder approval, of one or more series of
Preferred Stock or Series Common Stock with rights and preferences
to be determined by the Board of Directors;
[bullet] the by-laws of each of the Companies eliminate the right of
stockholders to take action by written consent;
[bullet] the by-laws of each of the Companies require that vacancies in the
Board of Directors and newly created directorships be filled by the
remaining directors (except as may otherwise be provided with
respect to any series of Preferred Stock); and
[bullet] the by-laws of each of the Companies require advance notice of
stockholder proposals and director nominations.
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DESCRIPTION OF PAIRED COMMON STOCK
General
The Paired Common Stock is currently listed on the NYSE under the symbol
"MT". As of the close of business on May 20, 1998, there were 89,875,628 shares
of REIT Common Stock outstanding and 88,570,251 shares of Operating Common
Stock outstanding.
Terms
Subject to provisions of law and the preferences of any series of
Preferred Stock or Series Common Stock outstanding, holders of Paired Common
Stock are entitled to receive dividends at such times and in such amounts as
may be declared from time to time by the respective Boards of Directors out of
funds legally available therefor. To maintain eligibility as a REIT, the
Corporation must in general distribute at least 95% of its "real estate
investment trust taxable income" before deduction of dividends paid (less any
net long-term capital gain and subject to certain other adjustments) to its
shareholders.
Holders of Paired Common Stock are entitled to one vote for each share
held on every matter submitted to a vote of shareholders of the respective
Companies. Except as otherwise provided by law, by the terms of the REIT's and
Operating Company's Series A Stock or authorized but unissued Junior Preferred
Stock, or by the terms of any other series of Preferred Stock or Series Common
Stock, the holders of the Paired Common Stock of each Company have sole voting
power.
Transfer Agent
The transfer agent and registrar for the Paired Common Stock is State
Street Bank and Trust Company, Boston, Massachusetts, acting through its
servicing agent, Boston EquiServe.
DESCRIPTION OF PREFERRED STOCK
The Board of Directors of each of the Companies may authorize the issuance
of shares of Preferred Stock of such Company in one or more series. The summary
of certain provisions of the Preferred Stock set forth below and the summary of
certain terms of a particular series of Preferred Stock set forth in the
applicable Prospectus Supplement do not purport to be complete and are subject
to and qualified in their entirety by reference to all of the provisions of the
REIT Charter and the Operating Company Charter, as applicable, and the by-laws
of the REIT and the Operating Company, as applicable, which have been filed or
incorporated by reference as exhibits to the Registration Statement, and the
form of certificate of designations (the "Certificate of Designations")
relating to such series of Preferred Stock which will be filed as an exhibit to
or incorporated by reference in the Registration Statement, all of which are
incorporated herein by reference and copies of which may be obtained as
described under "Available Information."
The following description of Preferred Stock sets forth certain general
terms and provisions of the series of Preferred Stock to which any Prospectus
Supplement may relate. Certain other terms of any particular series of
Preferred Stock, including Preferred Stock to be represented by Depositary
Shares, will be described in the applicable Prospectus Supplement. To the
extent that any particular terms of any Preferred Stock described in a
Prospectus Supplement differ from any of the terms described herein, then such
terms described herein shall be deemed to have been superseded by such
Prospectus Supplement.
General
Each of the Companies is authorized to issue 6,000,000 shares of Preferred
Stock, $.10 par value per share, in one or more series. No shares of Preferred
Stock were outstanding as of the date of this Prospectus. However, in
connection with the Rights Agreement, each of the Companies has authorized the
issuance of 200,000 shares of its respective Junior Preferred Stock. No shares
of Junior Preferred Stock were outstanding on the date of this Prospectus and
such shares will be issued only in connection with the exercise of Rights. See
"Description of Capital Stock--Rights Agreement."
Each of the Companies may offer shares of its Preferred Stock separately
from the other Company, or the Companies may offer shares of their respective
Preferred Stocks together, and the Preferred Stock of one Company may or may
not be paired with the Preferred Stock of the other Company. However, when
issued, the Preferred
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Stock of any series will represent an equity interest only in the Company which
issued such Preferred Stock and will not represent an equity interest in, and
will not otherwise be an obligation of, the other Company, even though the
Preferred Stock of one Company may be paired with the Preferred Stock of the
other Company. As used under this caption "Description of Preferred Stock," the
term "Issuing Company" means, with respect to any series of Preferred Stock
offered by a Prospectus Supplement, the Company which is issuing such Preferred
Stock.
Terms
Subject to the limitations prescribed by Delaware law and the REIT Charter
and the Operating Company Charter, as applicable, the Board of Directors of
each of the Companies is authorized to fix the number of shares constituting
each series of Preferred Stock and the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and liquidation
preference of any wholly unissued series of Preferred Stock and the designation
thereof. The Preferred Stock will, when issued, be fully paid and nonassessable
by the Issuing Company and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the series of
Preferred Stock offered thereby for specific terms thereof, including:
(1) the title of such series of Preferred Stock;
(2) the number of shares of such series of Preferred Stock offered, the
liquidation preference per share and the public offering price of such
Preferred Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) the date from which dividends on such Preferred Stock shall accrue, if
applicable, and whether dividends on such Preferred Stock shall be
cumulative or non-cumulative;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
(7) the provision for redemption, if applicable, of such Preferred Stock;
(8) any listing of such Preferred Stock on any securities exchange;
(9) the terms and conditions, if applicable, upon which such Preferred Stock
will be convertible into Paired Common Stock of the Companies, including
the conversion price or manner of calculation thereof;
(10) whether interests in such Preferred Stock will be represented by
Depositary Shares;
(11) the preferences of such Preferred Stock as to dividends and rights upon
liquidation, dissolution or winding up of the Issuing Company;
(12) in addition to the limitations described above under "Description of
Capital Stock--Ownership Limitations and Restrictions on Transfers", any
limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Corporation as a REIT; and
(13) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
Rank
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Preferred Stock of an Issuing Company will rank, with respect to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up of such Issuing Company, (i) senior to the Common
Stock of such Issuing Company and senior to all other capital stock of such
Issuing Company other than capital stock referred to in clauses (ii) and (iii)
of this sentence; (ii) on a parity with all capital stock of such Issuing
Company the terms of which specifically provide that such capital stock ranks
on a parity with the Preferred Stock of such series with respect to the payment
of dividends and the distribution of assets upon liquidation, dissolution or
winding up of such Issuing Company; and (iii) junior to all capital stock of
such Issuing Company the terms of which specifically provide that such capital
stock ranks senior to the Preferred Stock of such series with respect to the
payment of dividends and the distribution
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of assets upon liquidation, dissolution or winding up of such Issuing Company.
In that regard, the Board of Directors of an Issuing Company may from time to
time, without shareholder approval, authorize the issuance of one or more
series of Preferred Stock or Series Common Stock ranking on a parity with the
Preferred Stock of any other series. See "Description of Capital Stock" above
and "--Voting Rights" below.
Dividend and Redemption Restrictions
As described above, but subject to the limitations described below under
"--Voting Rights", the Issuing Company may from time to time issue capital
stock which ranks senior to the Preferred Stock offered by any Prospectus
Supplement as to dividends or rights upon liquidation, dissolution or winding
up of the Issuing Company. In addition, the Issuing Company and its
subsidiaries are or may in the future become parties to agreements and
instruments which restrict or prevent the payment of dividends on, or the
purchase or redemption of, the Issuing Company's Paired Common Stock, Preferred
Stock or Series Common Stock, including indirect restrictions (through, for
example, covenants requiring the maintenance of specified levels of net worth)
and direct restrictions. See "Risk Factors--Risks Related to Restrictions on
Dividends and Distributions; Risks Relating to Restrictive Debt Covenants and
Compliance with Debt Instruments."
In the event of a deterioration in the financial condition or results of
operations of the Corporation or the Operating Company, the terms of the
Revolving Loan Agreements, the Existing Indentures or other instruments or
agreements to which the Companies or their subsidiaries are or may in the
future become parties could limit or prohibit the payment of dividends on
shares of Paired Common Stock, Preferred Stock or Series Common Stock offered
by any Prospectus Supplement. Any failure of the Corporation to pay dividends
as required by the Code, whether as a result of restrictive covenants in its
debt instruments or otherwise, would result in the loss of its status as a REIT
under the Code. See "Risk Factors--Risks Related to Restrictions on Dividends
and Distributions; Risks Relating to Restrictive Debt Covenants and Compliance
with Debt Instruments."
Dividends
Subject to the preferential rights of the holders of any capital stock of
the Issuing Company ranking prior to any series of Preferred Stock as to
dividends, the holders of the Preferred Stock of each series will be entitled
to receive, when, as and if declared by the Board of Directors of the Issuing
Company, out of funds of the Issuing 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 Issuing
Company at the close of business on such record dates as shall be fixed by the
Board of Directors of the Issuing Company.
Dividends on any series of the Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will accumulate from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Issuing
Company fails to declare a dividend payable on a dividend payment date on any
series of the Preferred Stock for which dividends are noncumulative, then the
holders of such series of the Preferred Stock will have no right to receive a
dividend in respect of the dividend period ending on such dividend payment
date, and the Issuing 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 any shares of Preferred Stock of any series of an Issuing Company are
outstanding, no full dividends will be declared or paid or set apart for
payment on any capital stock of the Issuing Company of any other class or
series ranking, as to dividends, on a parity with or junior to the Preferred
Stock of such series for any period unless (i) if such series of Preferred
Stock 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 Stock of such
series for all past dividend periods (including, without limitation, any
dividend period terminating on the date upon which the dividends on such other
capital stock are declared or paid or set apart for payment, as the case may
be) or (ii) if such series of Preferred Stock 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 Stock of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon Preferred Stock of any series and the shares
of any other class or series of capital stock of the Issuing Company ranking on
a parity as to dividends with the Preferred Stock of such series, all dividends
declared upon the Preferred Stock of such series and any other class or series
of capital stock of the Issuing Company ranking on a parity as to dividends
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with the Preferred Stock of such series shall be declared pro rata so that the
amount of dividends declared per share of Preferred Stock of such series and
such other class or series of capital stock of the Issuing Company shall in all
cases bear to each other the same ratio that accrued and unpaid dividends per
share on the Preferred Stock of such series (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
Preferred Stock does not have a cumulative dividend) and such other class or
series of capital stock of the Issuing Company bear to each other. Holders of
shares of any series of Preferred Stock shall not be entitled to any dividends,
whether payable in cash, securities or other property, in excess of full
cumulative (if applicable) dividends on such series. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock 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 all past dividend periods (including, without
limitation, any dividend period terminating on the applicable Subject Date (as
defined below)), or (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock 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 shares of, or options, warrants or
rights to subscribe for or purchase shares of, Common Stock of the Issuing
Company or other capital stock of the Issuing Company ranking junior to the
Preferred Stock of such series as to dividends and as to the distribution of
assets upon liquidation, dissolution and winding up of the Issuing Company)
shall be declared or paid or set apart for payment or other distribution
declared or made upon the Common Stock of the Issuing Company or any other
capital stock of the Issuing Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or as to the distribution of
assets upon liquidation, dissolution or winding up of the Issuing Company, nor
shall any shares of Common Stock of the Issuing Company or any other capital
stock of the Issuing Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or as to the distribution of
assets upon liquidation, dissolution or winding up of the Issuing Company be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
paid to or made available for a sinking fund for the redemption of any such
shares of junior or parity stock) by the Issuing Company (except by conversion
into or exchange for other capital stock of the Issuing Company ranking junior
to the Preferred Stock of such series as to dividends and as to the
distribution of assets upon liquidation, dissolution and winding up of the
Issuing Company, except for the purchase of capital stock of the Issuing
Company pursuant to the provisions of its by-laws allowing it to purchase
shares of its capital stock to preserve the status of the Corporation as a REIT
for federal income tax purposes, and except for, if proposed Article Thirteenth
is added to the Charter of the Issuing Company, the purchase or conversion of
Excess Stock of such Issuing Company in accordance with the provisions of such
Article Thirteenth). As used in this paragraph, the term "Subject Date" means,
with respect to any series of Preferred Stock of an Issuing Company, any date
on which any dividends shall be declared or paid or set apart for payment or
other distribution declared or made upon the Common Stock of such Issuing
Company or any other capital stock of such Issuing Company ranking junior to or
on a parity with the Preferred Stock of such series as to dividends or as to
the distribution of assets upon liquidation, dissolution or winding up of such
Issuing Company or on which any shares of Common Stock of such Issuing Company
or any other capital stock of such Issuing Company ranking junior to or on a
parity with the Preferred Stock of such series as to dividends or as to the
distribution of assets upon liquidation, dissolution or winding up of such
Issuing Company shall be redeemed, purchased or otherwise acquired for any
consideration (or any moneys paid to or made available for a sinking fund for
the redemption of any such shares of junior or parity stock) by the Issuing
Company.
Redemption
If so provided in the applicable Prospectus Supplement, the Preferred
Stock offered thereby may be subject to mandatory redemption or redemption at
the option of the Issuing 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 Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Issuing 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 Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The
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redemption price may be payable in cash or other property, as specified in the
applicable Prospectus Supplement. If the redemption price for Preferred Stock
of any series is payable only from the net proceeds of the issuance of capital
stock of the Issuing Company, the terms of such Preferred Stock 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 Stock shall automatically and
mandatorily be converted into the applicable capital stock of the Issuing
Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Stock has a cumulative dividend, full cumulative dividends on all outstanding
shares of such series of Preferred Stock 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 (including, without limitation,
any dividend period terminating on the date of the redemption of shares of such
series of Preferred Stock referred to below), and (ii) if such series of
Preferred Stock does not have a cumulative dividend, full dividends on all
shares of Preferred Stock 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 shares of such
series of Preferred Stock shall be redeemed unless all outstanding shares of
Preferred Stock of such series are simultaneously redeemed; provided, however,
that the foregoing shall not prevent (a) the purchase or acquisition of
Preferred Stock of such series pursuant to the provisions of the by-laws of the
Issuing Company allowing it to purchase shares of its capital stock to preserve
the status of the Corporation as a REIT for federal income tax purposes or
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Preferred Stock of such series or (b) if proposed
Article Thirteenth is added to the Charter of such Issuing Company, the
purchase or conversion of Excess Stock of such Issuing Company in accordance
with the provisions of such Article Thirteenth. In addition, unless (i) if such
series of Preferred Stock has a cumulative dividend, full cumulative dividends
on all outstanding shares of such series of Preferred Stock 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
(including, without limitation, any dividend period terminating on the date of
the direct or indirect purchase or other acquisition of shares of such series
of Preferred Stock by the Issuing Company referred to below) and (ii) if such
series of Preferred Stock does not have a cumulative dividend, full dividends
on the Preferred Stock 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, the Issuing Company
shall not purchase or otherwise acquire, directly or indirectly, any shares of
Preferred Stock of such series (except by conversion into or exchange for
capital stock of such Issuing Company ranking junior to the Preferred Stock of
such series as to the payment of dividends and with respect to the distribution
of assets upon liquidation, dissolution and winding up of such Issuing
Company); provided, however, that the foregoing shall not prevent (a) the
purchase or acquisition of Preferred Stock of such series pursuant to the
provisions of the by-laws of the Issuing Company allowing it to purchase shares
of its capital stock to preserve the status of the Corporation as a REIT for
federal income tax purposes or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series or (b) if proposed Article Thirteenth is added to the Charter of such
Issuing Company, the purchase or conversion of Excess Stock of such Issuing
Company in accordance with the provisions of such Article Thirteenth.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed at the option of the Issuing Company, the number of
shares to be redeemed will be determined by the Issuing 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, if fractional shares are
outstanding, with such additional adjustments as the Issuing Company may elect
in order to effect the redemption of fractional shares) or by lot or any other
equitable manner determined by the Issuing Company (a) that will not give the
Issuing Company the right to purchase shares of Preferred Stock of such series
pursuant to the provisions in its by-laws allowing it to purchase shares of its
capital stock to preserve the status of the Corporation as a REIT for federal
income tax purposes and (b) if proposed Article Thirteenth is added to the
Charter of such Issuing Company, that will not result in the conversion of any
Preferred Stock of such series into Excess Stock of such Issuing 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 Preferred Stock of
any series to be redeemed at the address shown on the share transfer books of
the Issuing Company. Each notice shall state: (i) the redemption date; (ii) the
number of shares and series of the Preferred Stock to be redeemed; (iii) the
redemption price; (iv) the place or places (which shall include a place in the
Borough of Manhattan, the City of New York) where certificates for such
Preferred Stock 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;
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and (vi) the date upon which the holder's conversion rights, if any, as to such
shares shall terminate. If fewer than all of the outstanding shares of
Preferred Stock of any series are to be redeemed, the notice mailed to each
such holder thereof shall also specify the number of shares of Preferred Stock
to be redeemed from each such holder. If notice of redemption of any Preferred
Stock has been given and if the funds necessary for such redemption have been
set aside by the Issuing Company in trust for the benefit of the holders of the
shares of Preferred Stock so called for redemption, then from and after the
redemption date dividends will cease to accrue on shares of such Preferred
Stock so called for redemption, such shares of Preferred Stock shall no longer
be deemed outstanding, and all rights of the holders of such shares will
terminate, except the right to receive the redemption price together with, if
applicable, accrued and unpaid dividends thereon (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
series of Preferred Stock does not have cumulative dividends).
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the Issuing Company, then, before any distribution or payment shall be made
to the holders of any Common Stock or any other class or series of capital
stock of the Issuing Company ranking junior to the Preferred Stock of any
series with respect to the distribution of assets upon liquidation, dissolution
or winding up of the Issuing Company, but subject to the preferential rights of
holders of any capital stock of the Issuing Company ranking prior to the
Preferred Stock of such series with respect to such distribution of assets, the
holders of the shares of such series of Preferred Stock then outstanding shall
be entitled to receive out of assets of the Issuing Company legally available
for distribution to its stockholders liquidating distributions in the amount of
the liquidation preference per share (as 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 Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock of such series will
have no right or claim to any of the remaining assets of the Issuing Company.
If, upon any such voluntary or involuntary liquidation, dissolution or winding
up, the assets of the Issuing Company legally available therefor are
insufficient to pay the full amount of the liquidating distributions on all
outstanding shares of Preferred Stock of such series and the corresponding
amounts payable on all outstanding shares of any other classes or series of
capital stock of the Issuing Company ranking on a parity with the Preferred
Stock of such series with respect to the distribution of assets upon
liquidation, dissolution or winding up, then the holders of the Preferred Stock
of such series and all other such classes or series of capital stock will share
ratably in any such distribution of assets in proportion to the full
liquidating distributions (including, if applicable, accrued and unpaid
dividends) to which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders
of Preferred Stock of any series, the remaining assets of the Issuing Company
shall be distributed among the holders of any other classes or series of
capital stock of the Issuing Company ranking junior to the Preferred Stock of
such series upon liquidation, dissolution or winding up, according to their
respective rights and preferences. For the foregoing purposes, neither the
consolidation or merger of the Issuing Company with or into any other
corporation, trust or other entity, nor the sale, lease or conveyance of all or
substantially all of the property or business of the Issuing Company, shall be
deemed to constitute a liquidation, dissolution or winding up of the Issuing
Company.
Voting Rights
Holders of the Preferred Stock 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.
If the terms of the Certificate of Designations, as described in the
Prospectus Supplement relating thereto, creating a particular series of
Preferred Stock so provide, then whenever dividends on any shares of Preferred
Stock of such series shall be in arrears for six or more quarterly periods
(whether or not consecutive), the number of directors then constituting the
board of directors of the Corporation shall be automatically increased by two
(if not already increased by two by reason of the election of directors by the
holders of any other class or series of capital stock of the Corporation upon
which like voting rights have been conferred and are exercisable and with which
the Preferred Stock of such series is entitled to vote as a class with respect
to the election of such two directors) and the holders of shares of Preferred
Stock of such series (voting separately as a class with all other classes or
series of capital stock of the Issuing Company upon which like voting rights
have been conferred and are exercisable and which are entitled to vote as a
class with the Preferred Stock of such series in the election of such two
directors) will be entitled to vote for the election of such two directors of
the Issuing Company at a special meeting called
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by an officer of the Issuing Company at the request of the holders of record of
at least 10% of the outstanding shares of such series of Preferred Stock or by
the holders of any other class or series of capital stock of the Issuing
Company upon which like voting rights have been conferred and are exercisable
and which is entitled to vote as a class with such series of Preferred Stock in
the election of such two directors (unless such request is received less than
90 days before the date fixed for the next annual or special meeting of the
stockholders, in which case the vote for such two directors shall be held at
the earlier of the next such annual or special meeting of stockholders), and at
each subsequent annual meeting until (i) if such series of Preferred Stock has
a cumulative dividend, all dividends accumulated on such shares of Preferred
Stock for all 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 Stock 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, whereupon the right of the holders of the Preferred Stock of such
series to elect such two directors shall cease and (unless there are one or
more other classes or series of capital stock of the Issuing Company upon which
like voting rights have been conferred and are exercisable) the term of office
of such directors shall automatically terminate and the authorized number of
directors of the Issuing Company shall thereupon return to the number of
authorized directors otherwise in effect.
Unless provided otherwise for any series of Preferred Stock in the
applicable Prospectus Supplement, so long as any shares of Preferred Stock of
any series remain outstanding, the Issuing Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of the shares
of such series of Preferred Stock outstanding at the time, given in person or
by proxy (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 Stock with respect to payment
of dividends or the distribution of assets upon liquidation, dissolution or
winding up or reclassify any authorized capital stock of such Issuing Company
into such shares, or create, authorize or issue any obligation or security
convertible into, exchangeable or exercisable for, or evidencing the right to
purchase, any such shares; or (ii) amend, alter or repeal the provisions of the
Issuing Company's certificate of incorporation (including the Certificate of
Designation for such series of Preferred Stock), whether by merger or
consolidation (an "Event") or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of such series of
Preferred Stock or the holders thereof; provided, however, with respect to the
occurrence of any of the Events set forth in (ii) above, so long as the
Preferred Stock of such series remains outstanding or is converted into like
securities of the surviving entity, in each case with the terms thereof
materially unchanged, taking into account that upon the occurrence of such an
Event the Issuing Company may not be the surviving entity, the occurrence of
any such Event shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting power of the Preferred Stock of such
series or the holders thereof; and provided, further, that the Amendments to
the Charter of the Issuing Company to add Article Thirteenth and to authorize
the issuance of 25 million shares of Excess Stock as described under
"Description of Capital Stock--Ownership Limitations and Restrictions on
Transfer" shall not be deemed, with respect to the Series A Preferred Stock, to
be an amendment, alteration or repeal which materially and adversely affects
such rights, preferences, privileges or voting powers; and provided further
that any amendment to the Charter of the Issuing Company to authorize any
increase in the amount of the authorized Excess Stock, Preferred Stock or
Series Common Stock or the creation or issuance of any other series of
Preferred Stock or any shares or series of Excess Stock or Series Common Stock,
or any increase in the amount of authorized or outstanding shares of such
series of Preferred Stock or any other series of Preferred Stock or any shares
or series of Excess Stock or Series Common Stock, in each case ranking on a
parity with or junior to the Preferred Stock of such series with respect to
payment of dividends and 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 Stock 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 any series of Preferred Stock
is convertible into shares of Common Stock of the Issuing Company will be set
forth in the applicable Prospectus Supplement relating thereto. Such terms may
include the conversion price or rate (or manner of calculation thereof), the
conversion period,
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provisions as to whether conversion will be at the option of the holders of the
Preferred Stock of such series or the Issuing Company, the events requiring an
adjustment of the conversion price or rate and provisions affecting conversion
in the event of the redemption of such series of Preferred Stock.
Restrictions on Ownership and Transfer
The by-laws of each Issuing Company contain provisions and restrictions
intended to preserve the status of the Corporation as a REIT for federal income
tax purposes, including provisions permitting such Issuing Company to purchase
its capital stock from stockholders or to refuse to transfer its capital stock.
The Preferred Stock offered by any Prospectus Supplement will be subject to all
of such provisions and restrictions. In addition, the applicable Prospectus
Supplement may describe certain further restrictions on ownership and transfer
which will be applicable if proposed Article Thirteenth is added to the Charter
of such Issuing Company. See "Description of Capital Stock--Ownership
Limitations and Restrictions on Transfers."
Registrar and Transfer Agent
The Registrar and Transfer Agent for the Preferred Stock of any series
will be set forth in the applicable Prospectus Supplement.
DESCRIPTION OF DEPOSITARY SHARES
General
Each of the Companies may issue Depositary Shares, each of which will
represent a fractional interest in a share of a particular series of Preferred
Stock of such Company, as specified in the applicable Prospectus Supplement.
Shares of Preferred Stock of each series represented by Depositary Shares will
be deposited under a separate deposit agreement (each, a "Deposit Agreement")
among the Issuing Company (as defined below), the depositary named in such
Deposit Agreement (the "Preferred Stock Depositary"), and the holders from time
to time of the depositary receipts (the "Depositary Receipts") issued under
such Deposit Agreement. Subject to the terms of the applicable Deposit
Agreement, each owner of a Depositary Receipt will be entitled, in proportion
to the fractional interest in a share of a particular series of Preferred Stock
represented by the Depositary Shares evidenced by such Depositary Receipt, to
all the rights and preferences of the Preferred Stock represented by such
Depositary Shares (including dividend, voting, conversion (if any), redemption
(if any) and liquidation rights).
Each of the Companies may offer its Depositary Shares separately from the
other Company, or the Companies may offer their respective Depositary Shares
together, and the Depositary Shares of one Company may or may not be paired
with the Depositary Shares of the other Company. However, when issued, the
Preferred Stock of any series represented by Depositary Shares will represent
an equity interest only in the Company which issued such Preferred Stock and
will not represent an equity interest in, and will not otherwise be an
obligation of, the other Company, even though the Depositary Shares of one
Company may be paired with the Depositary Shares of the other Company. As used
under this caption "Description of Depositary Shares," the term "Issuing
Company" means, with respect to any Depositary Shares offered by a Prospectus
Supplement, the Company which is issuing the Preferred Stock represented by
such Depositary Shares.
The summary of certain provisions of a particular issue of Depositary
Shares and the related Depositary Receipts and Deposit Agreement set forth
herein and in the applicable Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to all of
the provisions of the form of such Deposit Agreement, together with the form of
related Depositary Receipt, which will be filed or incorporated by reference as
an exhibit to the Registration Statement and will be available as described
under "Available Information." The description of the Depositary Shares, the
Depositary Receipts and the Deposit Agreement herein sets forth certain general
terms and provisions thereof to which any Prospectus Supplement may relate.
Certain other terms of any issue of Depositary Shares and the related
Depositary Receipts and the Deposit Agreement may be described in the
applicable Prospectus Supplement. To the extent that any particular terms of
the Depositary Shares or the related Depositary Receipts or Deposit Agreement
described in a Prospectus Supplement differ from any of the terms described
herein, then such terms described herein shall be deemed to have been
superseded by such Prospectus Supplement. In particular, the applicable
Prospectus Supplement may describe certain different terms which may be
applicable in connection with the proposed Amendments described under
"Description of Capital Stock--Ownership Limitations and Restrictions on
Transfer."
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The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the Preferred Stock by the Issuing Company to the
applicable Preferred Stock Depositary, the Issuing Company will cause the
Preferred Stock Depositary to issue the Depositary Receipts on behalf of the
Issuing Company.
Depositary Receipts may be surrendered for transfer or exchange for new
Depositary Receipts of different authorized denominations at any office of the
applicable Preferred Stock Depositary maintained for such purpose, subject to
the terms of the related Deposit Agreement. Unless otherwise specified in the
applicable Prospectus Supplement, Depositary Receipts will be issued in
denominations evidencing any whole number of Depositary Shares. No service
charge will be made for any transfer or exchange of Depositary Receipts, but
the Issuing Company or the Preferred Stock Depositary may require payment of
any transfer tax or similar governmental charge payable in connection
therewith.
Dividends and Other Distributions
The Preferred Stock Depositary will be required to distribute all cash
dividends or other cash distributions received in respect of the applicable
Preferred Stock to the record holders of Depositary Receipts evidencing the
Depositary Shares representing such Preferred Stock in proportion, insofar as
possible, to the respective numbers of such Depositary Receipts owned by such
holders on the relevant record date, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to the Preferred Stock Depositary. The Preferred Stock Depositary
will distribute only such amount, however, as can be distributed without
attributing to any holder of Depositary Receipts a fraction of one cent, and
any balance not so distributed will be added to and treated as part of the next
sum, if any, received by the Preferred Stock Depositary for distribution to
record holders of Depositary Receipts evidencing Depositary Shares representing
the applicable Preferred Stock, and no interest will accrue on any such amount
not so distributed.
In the event of a distribution other than in cash, the Preferred Stock
Depositary will be required to distribute the property received by it to the
record holders of Depositary Receipts evidencing Depositary Shares representing
the applicable Preferred Stock entitled thereto in proportion, insofar as
possible, to the respective numbers of such Depositary Receipts owned by such
holders on the relevant record date, subject to certain obligations of holders
to file proofs, certificates, and other information and to pay certain charges
and expenses to the Preferred Stock Depositary, unless the Preferred Stock
Depositary determines that it is not feasible to make such distribution, in
which case the Preferred Stock Depositary may, with the approval of the Issuing
Company, sell such property and distribute the net proceeds from such sale to
such holders.
The amount distributed in any of the foregoing cases will be reduced by an
amount required to be withheld by the Issuing Company or the Preferred Stock
Depositary on account of taxes.
Notwithstanding the foregoing, in the event that proposed Article
Thirteenth is added to the Charter of an Issuing Company and, thereafter, any
Excess Stock is issued upon conversion of deposited Preferred Stock of such
Issuing Company, then the Depositary Shares which previously represented such
shares of Preferred Stock shall be deemed to represent such shares of Excess
Stock and (i) the Depositary Shares representing such Excess Stock shall not
represent a fractional interest in or be entitled to share in or receive any
monies, securities or other property payable, distributable or offered in
respect of the deposited Preferred Stock and (ii) the Depositary Shares
representing such deposited Preferred Stock shall not represent a fractional
interest in or be entitled to share in or receive any monies, securities or
other properties payable, distributable or offered in respect of such Excess
Stock. In addition, dividends and other distributions in respect of the
Depository Shares representing such Excess Stock will be paid to the persons
and in the manner specified in Article Thirteenth and the applicable Deposit
Agreement, which may be different than in the case of dividends and
distributions in respect of Depositary Shares representing deposited Preferred
Stock. In particular, dividends payable in respect of Depositary Shares
representing Excess Stock are, pursuant to Article Thirteenth, payable to a
trustee appointed by the applicable Issuing Company and not to investors.
Withdrawal of Preferred Stock
Upon surrender of Depositary Receipts at the designated office of the
Preferred Stock Depositary (unless the related Depositary Shares have
previously been called for redemption), the holders of such Depositary Receipts
will be entitled to delivery at such office, to or upon such holders' order, of
the number of whole or fractional shares
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of the related Preferred Stock and any money or other property represented by
the Depositary Shares evidenced by such Depositary Receipts. Holders of
Depositary Receipts will be entitled to receive whole or fractional shares of
the related Preferred Stock on the basis of the fractional interest in a share
of Preferred Stock represented by each Depositary Share as specified in the
applicable Prospectus Supplement. Shares of Preferred Stock so withdrawn,
however, may not be redeposited, subject to certain limited exceptions. If the
Depositary Receipts delivered by the holder evidence a number of Depositary
Shares in excess of the number of Depositary Shares representing the number of
shares of Preferred Stock to be withdrawn, the Preferred Stock Depositary will
deliver to such holder at the same time a new Depositary Receipt evidencing
such excess number of Depositary Shares. The Corporation and the Operating
Company do not expect that there will be any public market for shares of
Preferred Stock that are withdrawn as described in this paragraph.
If proposed Article Thirteenth is added to the Charter of an Issuing
Company and, thereafter, any deposited Preferred Stock of such Issuing Company
is converted into Excess Stock, then the provisions described in the
immediately preceding paragraph shall also generally apply to the withdrawal of
such Excess Stock.
Redemption of Depositary Shares
If a series of Preferred Stock represented by Depositary Shares is subject
to redemption at the option of the Issuing Company, then, whenever the Issuing
Company redeems shares of such Preferred Stock held by the applicable Preferred
Stock Depositary, the Preferred Stock Depositary will be required to redeem as
of the same redemption date the number of Depositary Shares representing the
shares of Preferred Stock so redeemed, provided the Issuing Company has paid in
full to the Preferred Stock Depositary the redemption price of the Preferred
Stock to be redeemed plus, unless otherwise provided in the applicable
Prospectus Supplement, an amount equal to any accrued and unpaid dividends to
the date fixed for redemption. The redemption price per Depositary Share will
be equal to the redemption price and any other amounts per share payable with
respect to one share of the Preferred Stock being redeemed multiplied by the
fraction of a share of such Preferred Stock represented by one such Depositary
Share. If fewer than all the Depositary Shares are to be redeemed, the
Depositary Shares to be redeemed will be selected pro rata (as nearly as may be
practicable without creating fractional Depositary Shares) or by lot or by any
other equitable method determined by the Issuing Company (a) that will not give
the Issuing Company the right to purchase Depositary Receipts, Depositary
Shares or shares of Preferred Stock represented by such Depositary Shares
pursuant to the provisions of its by-laws allowing the purchase of its capital
stock to preserve the status of the Corporation as a REIT for federal income
tax purposes and (b) if proposed Article Thirteenth is added to the Charter of
such Issuing Company, that will not result in the conversion of such Preferred
Stock into Excess Stock of the Issuing Company. If the Depositary Shares
evidenced by a Depositary Receipt are to be redeemed in part only, a new
Depositary Receipt will be issued for the Depositary Shares not so redeemed.
From and after the date fixed for redemption all dividends in respect of
the shares of Preferred Stock called for redemption will cease to accrue; the
Depositary Shares called for redemption will no longer be deemed to be
outstanding; and all rights of the holders of the Depositary Receipts
evidencing the Depositary Shares called for redemption will cease, except the
right to receive any monies payable upon such redemption and any money or other
property to which the holders of such Depositary Receipts were entitled upon
such redemption upon surrender of the Depositary Receipts to the Preferred
Stock Depositary.
If proposed Article Thirteenth is added to the Charter of an Issuing
Company and, thereafter, any deposited Preferred Stock of such Issuing Company
is converted into Excess Stock and any such Excess Stock is to be redeemed in
connection with the redemption of deposited Preferred Stock, then the foregoing
provisions for redemption of such Preferred Stock shall also generally apply to
such Excess Stock.
Voting of the Preferred Stock
Upon receipt of notice of any meeting at which the holders of the
applicable Preferred Stock are entitled to vote, the Preferred Stock Depositary
will be required to mail the information contained in such notice of meeting to
the record holders of the Depositary Receipts evidencing the Depositary Shares
that represent such Preferred Stock. Each record holder of Depositary Receipts
evidencing such Depositary Shares on the record date (which will be the same
date as the record date for the related Preferred Stock) will be entitled to
instruct the Preferred Stock Depositary as to the exercise of the voting rights
pertaining to the shares of Preferred Stock represented by such holder's
Depositary Shares. The Preferred Stock Depositary will be required to vote the
shares of Preferred Stock represented by such Depositary Shares in accordance
with such instructions, and the Issuing Company will
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agree to take all reasonable action that may be deemed necessary by the
Preferred Stock Depositary in order to enable the Preferred Stock Depositary to
do so. The Preferred Stock Depositary will be required to abstain from voting
the shares of Preferred Stock represented by such Depositary Shares to the
extent it does not receive specific instructions from the holders of Depositary
Receipts evidencing such Depositary Shares. The Preferred Stock Depositary will
not be responsible for any failure to carry out any instruction to vote or for
the manner or effect of any such vote made, as long as any such action or
inaction is in good faith and does not result from negligence or willful
misconduct of the Preferred Stock Depositary. If proposed Article Thirteenth is
added to the Charter of an Issuing Company, any Excess Stock issued upon
conversion of deposited Preferred Stock of such Issuing Company will generally
have the same voting rights as such Preferred Stock and such Excess Stock and
Preferred Stock will vote together as a class. However, Article Thirteenth
provides such voting rights in respect of Excess Stock may be exercised only by
a trustee appointed by the applicable Issuing Company.
Liquidation Preference
In the event of the liquidation, dissolution, or winding up of the Issuing
Company, whether voluntary or involuntary, the holder of each Depositary
Receipt evidencing Depositary Shares representing deposited Preferred Stock
will be entitled to an amount per Depositary Receipt equal to the liquidation
preference accorded one share of the related Preferred Stock plus accrued and
unpaid dividends thereon, if any, multiplied by the fraction of a share of
Preferred Stock represented by one such Depositary Share. The amounts payable
in respect of Depositary Shares representing Excess Stock under such
circumstances will be described in the applicable Prospectus Supplement.
Conversion of Preferred Stock
The Depositary Shares, as such, are not convertible at the option of the
holders of the related Depositary Receipts into Common Stock or any other
securities or property of the Issuing Company. Nevertheless, if the Preferred
Stock represented by Depositary Shares is convertible at the option of the
holders thereof into Common Stock or other securities of the Issuing Company as
specified in the applicable Prospectus Supplement, the related Depositary
Receipts may be surrendered by their holders to the applicable Preferred Stock
Depositary with written instructions to the Preferred Stock Depositary to
instruct the Issuing Company to cause conversion of the Preferred Stock
represented by the Depositary Shares evidenced by such Depositary Receipts into
whole shares of Common Stock or other applicable securities of the Issuing
Company, and the Issuing Company has agreed that upon receipt of such
instructions and any amounts payable in respect of such conversion, it will
cause the conversion utilizing the same procedures as those provided for
delivery of Preferred Stock to effect such conversion. The conversion rate or
price, as the case may be, per Depositary Share will be equal to the conversion
rate or price per share of the related Preferred Stock appropriately adjusted
by the fraction of a share of such Preferred Stock represented by one
Depositary Share. If the Depositary Shares evidenced by a Depositary Receipt
are to be converted in part only, a new Depositary Receipt will be issued for
any Depositary Shares not to be converted. No fractional shares of Common Stock
will be issued upon conversion, and if such conversion would result in a
fractional share of Common Stock being issued, an amount will be paid in cash
by the Issuing Company equal to the value of the fractional interest based upon
the closing price (as defined) of the Common Stock.
Amendment and Termination of a Deposit Agreement
The Depositary Receipts evidencing Depositary Shares and any provision of
a Deposit Agreement may at any time be amended by agreement between the Issuing
Company and the applicable Preferred Stock Depositary. However, any amendment
that materially and adversely alters the rights of the holders of Depositary
Receipts or that would be materially and adversely inconsistent with the rights
granted to the holders of the related Preferred Stock will not be effective
unless such amendment has been approved by the holders of Depositary Receipts
evidencing at least two-thirds of the Depositary Shares then outstanding. No
amendment may impair the right, subject to certain exceptions in the Deposit
Agreement, of any holder of Depositary Receipts evidencing Depositary Shares
representing deposited Preferred Stock to surrender any Depositary Receipt with
instructions to deliver to the holder the related Preferred Stock and all money
and other property, if any, represented by such Depositary Receipt, except in
order to comply with law. Every holder of an outstanding Depositary Receipt at
the time any such amendment becomes effective will be deemed, by continuing to
hold such Depositary Receipt, to consent and agree to such amendment and to be
bound by the applicable Deposit Agreement as amended thereby.
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A Deposit Agreement may be terminated by the Issuing Company upon not less
than 30 days' prior written notice to the applicable Preferred Stock Depositary
if (i) such termination is necessary to preserve the Corporation's status as a
REIT for federal income tax purposes or (ii) the holders of Depositary Receipts
evidencing at least a majority of the outstanding Depositary Shares consent to
such termination. Upon such termination, the Preferred Stock Depositary will be
required to deliver or make available to each holder of the related Depositary
Receipts, upon surrender of the Depositary Receipts held by such holder, the
number of whole or fractional shares of Preferred Stock or, if applicable,
Excess Stock that are represented by the Depositary Shares evidenced by such
Depositary Receipts, together with any cash or other property held by such
Preferred Stock Depositary with respect to such Depositary Receipts. The
Issuing Company will agree that, if a Deposit Agreement is terminated to
preserve the Corporation's status as a REIT, then the Issuing Company will use
its best efforts to list the related Preferred Stock on a national securities
exchange. In addition, a Deposit Agreement will automatically terminate if (i)
all outstanding Depositary Shares issued under such Deposit Agreement have been
redeemed, (ii) there has been a final distribution in respect of the related
Preferred Stock and, if applicable, Excess Stock in connection with any
liquidation, dissolution or winding up of the Issuing Company, and such
distribution has been distributed to the holders of Depositary Receipts
entitled thereto or (iii) in the case of Preferred Stock which is convertible
at the option of the holders thereof, each share of the related Preferred Stock
has been converted into stock or other securities of the Issuing Company not so
represented by Depositary Shares.
Charges of Preferred Stock Depositary
The Issuing Company will pay all transfer and other taxes and governmental
charges arising solely from the existence of a Deposit Agreement. In addition,
the Issuing Company will pay the fees and expenses of the Preferred Stock
Depositary in connection with the performance of its duties under a Deposit
Agreement; however, holders of Depositary Receipts will pay the charges and
expenses of the Preferred Stock Depositary for any duties requested by such
holders to be performed that are not required under the applicable Deposit
Agreement.
Resignation and Removal of Preferred Stock Depositary
A Preferred Stock Depositary will be permitted to resign at any time by
delivering to the Issuing Company notice of its election to do so, and the
Issuing Company will be permitted at any time to remove a Preferred Stock
Depositary, any such resignation or removal to take effect upon the appointment
of and acceptance thereof by a successor Preferred Stock Depositary. A
successor Preferred Stock Depositary will be required to be appointed within 60
days after delivery of the notice of resignation or removal and will be
required to be a bank or trust company having its principal office in the
United States and having a combined capital and surplus of at least $50
million.
Miscellaneous
The Preferred Stock Depositary will be required to forward to holders of
Depositary Receipts certain reports and communications from the Issuing Company
that are received by the Preferred Stock Depositary with respect to the related
Preferred Stock.
Neither the Preferred Stock Depositary nor the Issuing Company will be
liable if it is prevented from or delayed in, by law or by circumstances beyond
its control, performing its obligations under the related Deposit Agreement.
The obligations of the Issuing Company and the Preferred Stock Depositary under
the Deposit Agreement will be limited to performing their duties in good faith
and without negligence or willful misconduct, and the Issuing Company and the
Preferred Stock Depositary will not be obligated to prosecute or defend any
legal proceeding in respect of any Depositary Receipts, Depositary Shares, the
related shares of Preferred Stock or, if applicable, Excess Stock unless
satisfactory indemnity is furnished. The Issuing Company and the Preferred
Stock Depositary may rely on written advice of counsel or accountants,
information provided by persons presenting shares of Preferred Stock for
deposit, holders of Depositary Receipts, or other persons believed in good
faith to be competent to give such information, and on documents believed in
good faith to be genuine and signed by a proper party.
In the event the Preferred Stock Depositary receives conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Issuing Company, on the other hand, the Preferred Stock
Depositary will be entitled to act on such claims, requests or instructions
received from the Issuing Company.
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Restrictions on Ownership and Transfer
The by-laws of each Issuing Company contain provisions and restrictions
intended to preserve the status of the Corporation as a REIT for federal income
tax purposes, including provisions permitting such Issuing Company to purchase
its capital stock from stockholders or to refuse to transfer its capital stock.
In addition, each Issuing Company is soliciting the vote of its shareholders to
approve certain amendments to its Charter which, if approved, would add certain
additional, more stringent, restrictions on the ownership and transfer of its
capital stock. The Preferred Stock represented by the Depositary Shares offered
by any Prospectus Supplement, and the Depositary Receipts evidencing such
Depositary Shares, will be subject to all of such provisions and restrictions.
In particular, the applicable Deposit Agreement will contain provisions to the
effect that, among other things, the Depositary Receipts issued thereunder and
the related Depositary Shares will be subject to the provisions in the Issuing
Company's by-laws and, if approved by its shareholders, Article Thirteenth
intended to preserve the status of the Corporation as a REIT for federal income
tax purposes and (i) for purposes of applying those provisions, each holder of
any Depositary Receipts will be deemed to be the owner of the number of shares
(including fractional shares) of Preferred Stock represented by the Depositary
Shares evidenced by such Depositary Receipts and (ii) except as otherwise
expressly stated in the applicable Deposit Agreement, such provisions of the
Issuing Company's by-laws and, if approved by its shareholders, Article
Thirteenth shall apply to such holder and such Depositary Receipts and
Depositary Shares as if (A) such holder owned the shares (including fractional
shares) of Preferred Stock represented by such Depositary Shares directly, (B)
such Depositary Receipts evidenced such shares (including fractional shares) of
Preferred Stock and (C) each such Depository Share was a fractional share of
Preferred Stock, mutatis mutandis. Accordingly, the Issuing Company will be
entitled, among other things, to purchase, and to refuse to transfer,
Depositary Shares evidenced by Depositary Receipts on the same terms and
conditions as are applicable to the underlying Preferred Stock. In addition,
the applicable Prospectus Supplement may describe certain further restrictions
on ownership and transfer which may be applicable if proposed Article
Thirteenth is added to the Charter of such Issuing Company. See "Description of
Capital Stock--Ownership Limitations and Restrictions on Transfers."
DESCRIPTION OF SERIES COMMON STOCK
The Board of Directors of each of the Companies may authorize the issuance
of shares of Series Common Stock in one or more series. The summary of certain
provisions of the Series Common Stock set forth below and the summary of
certain terms of a particular series of Series Common Stock set forth in the
applicable Prospectus Supplement do not purport to be complete and are subject
to and qualified in their entirety by reference to all of the provisions of the
REIT Charter and the Operating Company Charter, as applicable, and the by-laws
of the REIT and the Operating Company, as applicable, which have been filed or
incorporated by reference as exhibits to the Registration Statement, and the
form of certificate of designations (the "Certificate of Designations")
relating to such series of Series Common Stock which will be filed as an
exhibit to or incorporated by reference in the Registration Statement, all of
which are incorporated herein by reference and copies of which may be obtained
as described under "Available Information."
The following description of Series Common Stock sets forth certain
general terms and provisions of the series of Series Common Stock to which any
Prospectus Supplement may relate. Certain other terms of any particular series
of Series Common Stock will be described in the applicable Prospectus
Supplement. To the extent that any particular terms of any Series Common Stock
described in a Prospectus Supplement differ from any of the terms described
herein, then such terms described herein shall be deemed to have been
superseded by such Prospectus Supplement.
General
Each of the Companies is authorized to issue 30,000,000 shares of its
Series Common Stock, $.10 par value per share, in one or more series. As of the
date of this Prospectus 8,500,000 shares of Series A Stock of the REIT and
8,500,000 shares of Series A Stock of the Operating Company were outstanding.
See "--Series A Non-Voting Convertible Common Stock" below.
Each of the Companies may offer shares of its Series Common Stock
separately from the other Company, or the Companies may offer shares of their
respective Series Common Stock together, and the Series Common Stock of one
Company may or may not be paired with the Series Common Stock of the other
Company. However, when issued, the Series Common Stock of any series will
represent an equity interest only in the Company which issued such Series
Common Stock and will not represent an equity interest in, and will not
otherwise be an obligation
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of, the other Company, even though the Series Common Stock of one Company may
be paired with the Series Common Stock of the other Company. As used under this
caption "Description of Series Common Stock," the term "Issuing Company" means,
with respect to any series of Series Common Stock offered by a Prospectus
Supplement, the Company which is issuing such Series Common Stock.
Terms
Subject to the limitations prescribed by Delaware law and the REIT Charter
and the Operating Company Charter, as applicable, the Board of Directors of
each of the Companies is authorized to fix the number of shares constituting
each series of Series Common Stock and the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, and liquidation
preference of any wholly unissued series of Series Common Stock and the
designation thereof. The Series Common Stock will, when issued, be fully paid
and nonassessable by the Issuing Company and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the series of
Series Common Stock offered thereby for specific terms, including:
(1) the title of such Series Common Stock;
(2) the number of shares of such series of Series Common Stock offered, the
liquidation preference per share and the public offering price of such
Series Common Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Series Common Stock;
(4) the date from which dividends on such Series Common Stock shall accrue,
if applicable, and whether dividends on such Series Common Stock shall
be cumulative or non-cumulative;
(5) the procedures for any auction and remarketing, if any, for such Series
Common Stock;
(6) the provision for a sinking fund, if any, for such Series Common Stock;
(7) the provision for redemption, if applicable, of such Series Common
Stock;
(8) any listing of such Series Common Stock on any securities exchange;
(9) the terms and conditions, if applicable, upon which such Series Common
Stock will be convertible into Paired Common Stock of the Companies,
including the conversion price or manner of calculation thereof;
(10) the preferences of such Series Common Stock as to dividend rights and
rights upon liquidation, dissolution or winding up of the Issuing
Company;
(11) in addition to the limitations described below under "--Restrictions on
Ownership and Transfer," any limitations on direct or beneficial
ownership and restrictions on transfer, in each case as may be
appropriate to preserve the status of the Corporation as a REIT; and
(12) any other specific terms, preferences, rights, limitations or
restrictions of such Series Common Stock.
Rank
The ranking of the Series Common Stock of any series will be described in
the applicable Prospectus Supplement. In that regard, the Board of Directors of
an Issuing Company may from time to time, without shareholder approval,
authorize the issuance of a series of Series Common Stock ranking on a parity
with or senior to the Common Stock of such Issuing Company and on a parity with
any series of Preferred Stock of such Issuing Company. See "Description of
Capital Stock."
Restrictions on Ownership and Transfer
The by-laws of each Issuing Company contain provisions and restrictions
intended to preserve the status of the Corporation as a REIT for federal income
tax purposes, including provisions permitting such Issuing Company to purchase
its capital stock from stockholders or to refuse to transfer its capital stock.
The Series Common Stock offered
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by any Prospectus Supplement will be subject to all of such provisions and
restrictions. In addition, the applicable Prospectus Supplement may describe
certain further restrictions on ownership and transfer which will be applicable
if proposed Article Thirteenth is added to the Charter of such Issuing Company.
See "Description of Capital Stock--Ownership Limitations and Restrictions on
Transfer."
Registrar and Transfer Agent
The registrar and transfer agent for the Series Common Stock of any series
will be set forth in the applicable Prospectus Supplement.
Series A Non-Voting Convertible Common Stock
The REIT and the Operating Company have each established a series of their
respective Series Common Stock comprised of 10,000,000 shares and designated as
the "Series A Non-Voting Convertible Common Stock" (the "Series A Stock"). The
holders of Series A Stock of each Company have the same rights and privileges
as the holders of the Common Stock of such Company, including dividend and
liquidation rights, except that they have no right to vote except as required
by law. The Series A Stock will convert into Paired Common Stock on the earlier
of (i) the next business day after the REIT and the Operating Company
shareholders approve the La Quinta Merger or (ii) the La Quinta merger
agreement is terminated. See "The Meditrust Companies--Recent Developments."
DESCRIPTION OF DEBT SECURITIES
Each of the Companies may issue Debt Securities from time to time in one
or more series. The Debt Securities of one Company will not be paired with the
Debt Securities of the other Company, and the Debt Securities of any series
will be the exclusive obligation of the Company which issued such Debt
Securities and not the joint obligations of the Companies. As used herein, the
term "Obligor" means, with respect to any series of Debt Securities offered by
a Prospectus Supplement, the Company which issued such Debt Securities.
The Prospectus Supplement will describe certain terms of any series of
Debt Securities offered hereby, including (i) the title of such Debt
Securities; (ii) any limit on the aggregate principal amount of such Debt
Securities and their purchase price; (iii) the date or dates on which such Debt
Securities will mature; (iv) the rate or rates per annum (or manner in which
interest is to be determined) at which such Debt Securities will bear interest,
if any, and the date from which such interest, if any, will accrue; (v) the
dates on which such interest, if any, on such Debt Securities will be payable
and the regular record dates for such interest payment dates; (vi) any
mandatory or optional sinking fund or analogous provisions; (vii) provisions,
if any, for the defeasance of such Debt Securities; (viii) the date, if any,
after which and the price or prices at which such Debt Securities may, pursuant
to any optional or mandatory redemption or repayment provisions, be redeemed
and the other terms and provisions of any such optional or mandatory redemption
or repayment provisions; (ix) whether such Debt Securities are to be issued in
whole or in part in registered form represented by one or more global
securities and, if so, the identity of the depository for such global security
or securities; (x) any provisions relating to security for payments due under
such Debt Securities; (xi) any provisions relating to the conversion or
exchange of such Debt Securities into or for Shares or Debt Securities of
another series; (xii) the terms, if any, pursuant to which such Debt Securities
may be made subordinate in right of payment to all Senior Indebtedness of the
Obligor, and the definition of any such Senior Indebtedness; (xiii) the
denominations in which such Debt Securities are authorized to be issued; (xiv)
the place or places where principal of, premium, if any, and interest, if any,
on such Debt Securities will be payable; (xv) any special United States Federal
income tax consequences and (xvi) any other terms of such Debt Securities,
including any additional events of default or covenants provided for with
respect to such Debt Securities, and any additions to, deletions from or other
changes in the related Indenture (as defined below) with respect to such Debt
Securities, in each case whether or not consistent with the other terms of such
Indenture.
The Debt Securities may be issued in one or more series under an Indenture
(an "Indenture") to be executed by the applicable Obligor and a trustee (the
"Trustee"). The terms of the Debt Securities may include those stated in the
Indenture and those made a part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended.
The following is a summary of certain provisions of the Indenture and the
Debt Securities and does not purport to be complete and is qualified in its
entirety by reference to the detailed provisions of the form of Indenture and
Debt Securities, including the definitions therein of certain terms, which have
been or will be filed or incorporated by reference to exhibits to the
Registration Statement and copies of which may be obtained as described under
"Available Information." Wherever particular provisions or sections of the
Indenture, the Debt Securities or terms defined therein are referred to herein,
such provisions or definitions are incorporated herein by reference.
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The following description sets forth certain general terms of any series
of Debt Securities and the related Indenture to which a Prospectus Supplement
may relate. Certain other specific terms of any particular series of Debt
Securities and the related Indenture will be described in the applicable
Prospectus Supplement. To the extent that any particular terms of the Debt
Securities or the related Indenture described in a Prospectus Supplement differ
from any of the terms described herein, then such terms described herein shall
be deemed to have been superseded by such Prospectus Supplement.
General. The Indenture does not limit the aggregate principal amount of
Debt Securities that may be issued thereunder and provides that Debt Securities
may be issued from time to time in one or more series.
Conversion Rights. The terms, if any, on which Debt Securities of any
series may be converted into Shares or Debt Securities of another series will
be set forth in the Prospectus Supplement relating thereto. To protect the
Corporation's status as a REIT, the Indenture will provide that the holders of
Debt Securities of any series ("Holders") may not convert any Debt Security,
and such Debt Security shall not be convertible by any Holder, if as a result
of such conversion any person obtains any ownership interest, directly or
indirectly, in REIT Capital Stock which is not in conformity with the
requirements of the Code pertaining to a REIT.
In the case of Debt Securities which are convertible into Shares, the
conversion price will be subject to adjustment under certain conditions,
including (i) the payment of dividends (and other distributions) in Shares on
any class or series of capital stock of the Companies; (ii) subdivisions,
combinations and reclassifications of Shares; (iii) the issuance to all or
substantially all holders of Shares of rights or warrants entitling them to
subscribe for or purchase Shares at a price per Share (or having a conversion
price per Share) less than the then current market price; and (iv)
distributions to all or substantially all holders of Shares of capital stock of
any other class or series, or evidences of indebtedness or assets (including
securities, but excluding those rights, warrants, dividends and distributions
referred to above and dividends and distributions not prohibited under the
terms of the Indenture) of the Companies, subject to the limitation that all
adjustments by reason of any of the foregoing shall not be made until they
result in a cumulative change in the conversion price of at least 1%. In the
event the Companies shall effect any capital reorganization or reclassification
of their respective Shares or shall consolidate or merge with or into any trust
or corporation (other than a consolidation or merger in which the Companies are
the surviving entities) or shall sell or transfer substantially all their
assets to any other trust or corporation, the Holders shall, if entitled to
convert such Debt Securities into Shares at any time after such transaction, be
entitled to receive upon conversion thereof, in lieu of the Shares into which
the Debt Securities of such series would have been convertible prior to such
transaction, the same kind and amount of stock and other securities, cash or
property as shall have been issuable or distributable in connection with such
transaction with respect to each Share.
The Companies may, at their option, make adjustments to the conversion
price of Debt Securities according to the provisions of the Debt Securities of
any series or, in addition to those set forth above, reductions in the
conversion price of Debt Securities of any series, as the Boards of Directors
of the Companies deem advisable to avoid or diminish any income tax to holders
of Shares resulting from any dividend or distribution of Shares (or rights to
acquire Shares) or from any event treated as such for income tax purposes or
for any other reason. The Boards of Directors will also have the power to
resolve any ambiguity or correct any error in the provisions relating to the
adjustment of the conversion price of the Debt Securities of such series and
its actions in so doing shall be final and conclusive.
Fractional Shares will not be issued upon conversion, but, in lieu
thereof, the Companies will pay a cash adjustment based upon market price.
The Holders of Debt Securities of any series at the close of business on
an interest payment record date shall be entitled to receive the interest
payable on such Debt Securities on the corresponding interest payment date
notwithstanding the conversion thereof. However, Debt Securities surrendered
for conversion during the period from the close of business on any record date
for the payment of interest to the opening of business on the corresponding
interest payment date must be accompanied by payment of an amount equal to the
interest payable on such interest payment date. Holders of Debt Securities of
any series who convert Debt Securities of such series on an interest payment
date will receive the interest payable by the Companies on such date and need
not include payment in the amount of such interest upon surrender of such Debt
Securities for conversion. Except as aforesaid, no payment or adjustment is to
be made on conversion for interest accrued on the Debt Securities of any series
or for dividends on Shares.
Optional Redemption. The Debt Securities of any series that are
convertible into Shares will be subject to redemption, in whole or from time to
time in part, at any time for certain reasons intended to protect the
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Corporation's status as a REIT at the option of the relevant Obligor on at
least 30 days' prior notice by mail at a redemption price equal to 100% of the
principal amount, plus interest accrued to the date of redemption. Except as
otherwise set forth in the accompanying Prospectus Supplement, the relevant
Obligor may exercise its redemption powers solely with respect to the Debt
Securities of the Holder or Holders which pose a threat to the Corporation's
REIT status and only to the extent deemed necessary by the Corporation's Board
of Directors to preserve such status.
Dividends, Distributions and Acquisitions of Shares. The Indenture
provides that the Obligor thereunder will not (i) declare or pay any dividend
or make any distribution on its Shares or to holders of its Shares (other than
dividends or distributions payable in its Shares or other than as the
Corporation determines is necessary to maintain its status as a REIT) or (ii)
purchase, redeem or otherwise acquire or retire for value any of its Shares or
permit any subsidiary to do so, if at the time of such action an Event of
Default (as defined in the Indenture) has occurred and is continuing or would
exist immediately after giving effect to such action.
Additional Covenants. Any additional covenants of the relevant Obligor
with respect to a series of its Debt Securities will be set forth in the
Prospectus Supplement relative thereto.
Modification of the Indenture. Under the Indenture, with certain
exceptions, the rights and obligations of the Obligor thereunder with respect
to any series of its Debt Securities and the rights of Holders of such series
may be modified by such Obligor and the Trustee with the consent of the Holders
of at least a majority in principal amount of the outstanding Debt Securities
of such series. However, without the consent of each Holder of any Debt
Securities affected, an amendment, waiver or supplement may not (i) reduce the
principal of, or the premium, if any, or rate of interest on, any Debt
Securities; (ii) change the stated maturity date of the principal of, or any
installment of principal of or interest on, any Debt Securities; (iii) waive a
default in the payment of the principal of, or interest on, or premium payable
on, any Debt Securities; (iv) change the currency for payment of the principal
of, or premium or interest on, any Debt Securities; (v) impair the right to
institute suit for the enforcement of any such payment when due; (vi) adversely
affect any right of the Holder of any Debt Securities to require such Obligor
to repay such Debt Securities at such Holder's option or to convert any Debt
Securities; (vii) reduce the amount of outstanding Debt Securities necessary to
consent to an amendment, supplement or waiver provided for in the Indenture; or
(viii) modify any provisions of the Indenture relating to the modification and
amendment of the Indenture or waivers of past defaults, except as otherwise
specified.
Modifications and amendments of the Indenture will be permitted to be made
by the applicable Obligor 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 entity to the Obligor as obligor under the Indenture;
(ii) to add to the covenants of the Obligor for the benefit of the Holders of
all or any series of Debt Securities or to surrender any right or power
conferred upon the Obligor 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
amend or supplement any provisions of the Indenture, provided that any such
amendment or supplement shall not be applicable to any outstanding Debt
Securities of any series created prior to the effective time of such amendment
or supplement which are entitled to the benefit of such provision; (v) to
establish the form or terms of Debt Securities of any series; (vi) to provide
for the acceptance of appointment by a successor Trustee or to facilitate the
administration of the trusts under the Indenture by more than one Trustee; and
(vii) 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.
Events of Default, Notice and Waiver. Except as otherwise set forth in the
accompanying Prospectus Supplement, the following is a summary of certain
provisions of the Indenture relating to events of default, notice and waiver.
The following are "Events of Default" under the Indenture with respect to
any series of Debt Securities: (i) default in the payment of any interest on
the Debt Securities of such series when due and payable, which continues for 30
days; (ii) default in the payment of any principal of (or premium, if any) on
the Debt Securities of such series when due, at maturity, upon redemption or
otherwise, which continues for five Business Days; (iii) failure to perform any
other covenant contained in the Indenture (other than a covenant which has been
included in the Indenture solely for the benefit of one or more other series of
Debt Securities) or the Debt Securities of such series which continues for 60
days after written notice to the Obligor under such Indenture from the Trustee
or the holders of a majority in principal amount of the Debt Securities of such
series then outstanding specifying the default, demanding that it be remedied
and stating that the notice is a "Notice of Default"; (iv) default under any
bond, debenture or other Indebtedness (as defined in the Indenture) of such
Obligor or any subsidiary if (a) either (x) such event of default results from
the failure to pay any
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such Indebtedness at maturity or (y) as a result of such event of default, the
maturity of such Indebtedness has been accelerated prior to its expressed
maturity and such acceleration shall not be rescinded or annulled or the
accelerated amount paid or such Indebtedness discharged within ten days after
notice to the Obligor under such Indenture from the Trustee or the holders of a
majority in principal amount of the Debt Securities of such series then
outstanding specifying the default, demanding that it be remedied and stating
that the notice is a "Notice of Default" and (b) the principal amount of such
Indebtedness, together with the principal amount of any other such Indebtedness
in default for failure to pay principal or interest thereon, or the maturity of
which has been so accelerated, aggregates $10,000,000 or more; (v) certain
events of bankruptcy, insolvency or reorganization relating to such Obligor;
and (vi) any other Event of Default provided with respect to the Debt
Securities of that series.
If an Event of Default occurs and is continuing with respect to the Debt
Securities of any series, either the Trustee or the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series
may declare such Debt Securities due and payable immediately. Upon certain
conditions, any such declaration of acceleration and its consequences may be
rescinded and annulled by the Holders of a majority in aggregate principal
amount of the outstanding Debt Securities of such series.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of any Default (as defined in the Indenture) or Event of Default
with respect to the Debt Securities of any series, give to the Holders of the
Debt Securities of such series notice of all uncured Defaults and Events of
Default known to it, but the Trustee will be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interest of such Holders, except in the case of a default in the payment of
the principal of (or premium, if any) or interest on any of the Debt Securities
of such series.
The Indenture provides that the Holders of a majority in aggregate
principal amount of the Debt Securities of any series then outstanding may
direct the time, method and place of conducting any proceedings for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Debt Securities of such series. The right of a
Holder to institute a proceeding with respect to the Indenture is subject to
certain conditions precedent including notice and indemnity to the Trustee, but
the Holder has an absolute right to receipt of principal of (and premium, if
any) and interest on such Holder's Debt Securities on or after the respective
due dates expressed in the Debt Securities, and to institute suit for the
enforcement of any such payments.
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series then outstanding may on behalf of the Holders of all
Debt Securities of such series waive certain past defaults, except a default in
payment of the principal of (or premium, if any) or interest on any Debt
Securities of such series or in respect of certain provisions of the Indenture
which cannot be modified or amended without the consent of the Holder of each
outstanding Debt Securities of such series affected thereby.
The Companies will be required to furnish to the Trustee annually a
statement of certain officers of the Companies stating whether or not they know
of any Default or Event of Default and, if they have knowledge of a Default or
Event of Default, a description of the efforts to remedy the same.
Consolidation, Merger, Sale or Conveyance. The Indenture provides that the
relevant Obligor may merge or consolidate with, or sell or convey all or
substantially all of its assets to, any other corporation, provided that (i)
either such Obligor shall be the continuing corporation, or the successor
corporation (if other than such Obligor) shall be a corporation organized and
existing under the laws of the United States or a state thereof or the District
of Columbia (although such Obligor may, in turn, be owned by a foreign
corporation) and such corporation shall expressly assume by supplemental
indenture all of the obligations of such Obligor under the Debt Securities of
each series and the Indenture, (ii) immediately after giving effect to such
transactions no Default or Event of Default shall have occurred and be
continuing, and (iii) such Obligor shall have delivered to the Trustee an
Officers' Certificate and opinion of counsel, stating that the transaction and
supplemental indenture comply with the Indenture. The Indenture does not
contain any provision requiring the relevant Obligor to repurchase the Debt
Securities of any series at the option of the Holders thereof in the event of a
leveraged buyout, recapitalization or similar restructuring of the Obligor,
even though the Obligor's creditworthiness and the market value of the Debt
Securities may decline significantly as a result of such transaction. The
Indenture does not protect Holders of the Debt Securities of any series against
any decline in credit quality, whether resulting from any such transaction or
from any other cause.
Global Securities. The Debt Securities of a series may be issued in whole
or in part in global form (the "Global Securities"). The Global Securities will
be deposited with a depository (the "Depository"), or with a
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nominee for a Depository, identified in the Prospectus Supplement. In such
case, one or more Global Securities will be issued in a denomination or
aggregate denominations equal to the portion of the aggregate principal amount
of outstanding Debt Securities of the series to be represented by such Global
Security or Securities. Unless and until it is exchanged in whole or in part
for Debt Securities in definitive form, a Global Security may not be
transferred except as a whole by the Depository for such Global Security to a
nominee of such Depository or by a nominee of such Depository to such
Depository or another nominee of such Depository or by such Depository or any
such nominee to a successor for such Depository or a nominee of such successor.
The Companies anticipate that the following provisions will apply to all
depository arrangements unless otherwise provided in the applicable Prospectus
Supplement.
Upon the issuance of a Global Security, the Depository for such Global
Security will credit, on its book entry registration and transfer system, the
respective principal amounts of the Debt Securities represented by such Global
Security to the accounts of persons that have accounts with such Depository
("participants"). The accounts to be credited shall be designated by any
underwriters or agents participating in the distribution of such Debt
Securities. Ownership of beneficial interests in a Global Security will be
limited to participants or persons that may hold interests through
participants. Ownership of beneficial interests in such Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the Depository for such Global Security (with respect to
interests of participants) or by participants or persons that hold through
participants (with respect to interests of persons other than participants). So
long as the Depository for a Global Security, or its nominee, is the registered
owner of such Global Security, such Depository or such nominee as the case may
be, will be considered the sole owner or Holder of the Debt Securities
represented by such Global Security for all purposes under the Indenture;
provided, however, that for purposes of obtaining any consents or directions
required to be given by the Holders of the Debt Securities, the relevant
Obligor, the Trustee and its agents will treat a person as the Holder of such
principal amount of Debt Securities as specified in a written statement of the
Depository.
Principal, premium, if any, and interest payments, if any, on Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made to such Depository or its nominee, as
the case may be, as the registered owner of such Global Security. None of the
Companies, the Trustee or any paying agent for such Debt Securities will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in such Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Companies expect that the Depository for any Debt Securities
represented by a Global Security, upon receipt of any payment of principal,
premium, if any, or interest will immediately credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of such Global Security as shown on the records of such
Depository. The Companies also expect that payments by participants will be
governed by standing instructions and customary practices, as is now the case
with the securities held for the accounts of customers registered in "street
names," and will be the responsibility of such participants.
If the Depository for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depository and a successor
Depository is not appointed by the relevant Obligor within 90 days, such
Obligor will issue Debt Securities of such series in definitive form to the
beneficial owners of interests in such Global Security in exchange for such
Global Security. In addition, the relevant Obligor may at any time and in its
sole discretion determine not to have any of its Debt Securities of a series
represented by one or more Global Securities and, in such event, will issue
Debt Securities of such series in definitive form in exchange for all of the
Global Security or Securities representing such Debt Securities.
The laws of some states may require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such laws may
impair the ability to transfer beneficial interests in Debt Securities
represented by Global Securities.
Governing Law. The Indenture and the Debt Securities will be governed by
and construed in accordance with the laws of the State of New York.
DESCRIPTION OF SECURITIES WARRANTS
The Companies may issue Securities Warrants for the purchase of Debt
Securities or Shares. Securities Warrants may be issued independently or
together with Debt Securities or Shares offered by any Prospectus Supplement
and may be attached to or separate from such Debt Securities or Shares. Each
series of Securities Warrants will be issued under
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a separate warrant agreement (a "Securities Warrant Agreement") to be entered
into between one or both of the Companies and a bank or trust company, as
Securities Warrant agent, all as set forth in the Prospectus Supplement
relating to the particular issue of offered Securities Warrants. As used herein
with respect to any Securities Warrant Agreement, the term "Issuer" means (i)
if both Companies are parties to such Securities Warrant Agreement, the
Companies collectively or (ii) if only one Company is a party to such
Securities Warrant Agreement, such Company. The Securities Warrant agent will
act solely as an agent of the Issuer in connection with the Securities Warrant
certificates relating to the Securities Warrants and will not assume any
obligation or relationship of agency or trust for or with any holders of
Securities Warrant certificate or beneficial owners of Securities Warrants. The
following summaries of certain provisions of the Securities Warrant Agreement
and Securities Warrants do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all the provisions of the form
of Securities Warrant Agreement and the form of Securities Warrant certificates
relating to each series of Securities Warrants which will be filed with the
Commission and incorporated by reference as an exhibit to the Registration
Statement of which this Prospectus is a part at or prior to the time of the
issuance of such series of Security Warrants, and copies of which may be
obtained as described under "Available Information."
The description set forth herein sets forth certain general terms and
provisions of any series of Securities Warrants and the related Securities
Warrant Agreement to which any Prospectus Supplement may relate. Certain other
specific terms of any series of Securities Warrants and the related Securities
Warrant Agreement will be described in the applicable Prospectus Supplement. To
the extent that any particular terms of the Securities Warrants or Securities
Warrant Agreement described in a Prospectus Supplement differ from any of the
terms described herein, then such terms described herein shall be deemed to
have been superseded by such Prospectus Supplement.
If Debt Securities Warrants are offered, the applicable Prospectus
Supplement will describe the terms of such Securities Warrants, including the
following where applicable: (i) the offering price, (ii) the denominations and
terms of the series of Debt Securities purchasable upon exercise of such
Securities Warrants, (iii) the designation and terms of any series of Debt
Securities with which such Securities Warrants are being offered and the number
of such Securities Warrants being offered with each such Debt Security, (iv)
the date, if any, on and after which such Securities Warrants and the related
Securities will be transferable separately, (v) the principal amount of the
series of Debt Securities purchasable upon exercise of each such Securities
Warrants and the price at which such principal amount of Debt Securities of
such series may be purchased upon such exercise, (vi) the date on which the
right to exercise such Securities Warrants shall commence and the date (the
"Expiration Date") on which such right shall expire, (vii) whether the
Securities Warrants will be issued in registered or bearer form, (viii) any
special United States Federal income tax consequences, (ix) the terms, if any,
on which the Issuer may accelerate the Expiration Date and (x) any other terms
of such Securities Warrants.
In the case of Share Warrants, the applicable Prospectus Supplement will
describe the terms of such Securities Warrants, including the following where
applicable: (i) the offering price, (ii) the aggregate number of Shares
purchasable upon exercise of such Securities Warrants and the exercise price,
(iii) the designation and terms of the Securities with which such Securities
Warrants are being offered, if any, and the number of such Securities Warrants
being offered with each such Security, (iv) the date, if any, on and after
which such Securities Warrants and the related Securities will be transferable
separately, (v) the date on which the right to exercise such Securities
Warrants shall commence and the Expiration Date, (vi) any special United States
Federal income tax consequences, (vii) whether the Securities Warrants will be
issued in registered or bearer form, (viii) the terms, if any, on which the
Issuer may accelerate the Expiration Date, and (ix) any other terms of such
Securities Warrants.
Securities Warrant certificates may be exchanged for new Securities
Warrant certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the Securities Warrant agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Debt
Securities Warrants, holders of such Securities Warrants will not have any of
the rights of holders of the Debt Securities purchasable upon such exercise,
including the right to receive payments of principal of, premium, if any, or
interest, if any, on such Debt Securities or to enforce covenants in the
applicable Indenture. Prior to the exercise of any Share Warrants, holders of
such Securities Warrants will not have any rights of holders of such Shares,
including the right to receive payments of dividends, if any, on such Shares,
or to exercise any applicable right to vote.
Certain Risk Considerations. Any Securities Warrants will involve a
certain degree of risk, including risks arising from the fluctuations in the
price of the underlying securities and, if applicable, general risks applicable
to the stock market (or markets) on which the underlying securities are traded.
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Prospective purchasers of the Securities Warrants should recognize that
the Securities Warrants may expire worthless and, thus, purchasers should be
prepared to sustain a total loss of the purchase price of their Securities
Warrants. This risk reflects the nature of a Securities Warrant as an asset
which, other factors held constant, tends to decline in value over time and
which may, depending on the price of the underlying securities, become
worthless when it expires. The trading price of a Securities Warrant at any
time is expected to increase as the price, or, if applicable, dividend rate on
the underlying securities increases. Conversely, the trading price of a
Securities Warrant is expected to decrease as the time remaining to expiration
of the Securities Warrant decreases and as the price or, if applicable,
dividend rate on the underlying securities, decreases. Assuming all other
factors are held constant, the more a Securities Warrant is "out of the money"
(i.e., the more the exercise price exceeds the price of the underlying
securities and the shorter its remaining term to expiration), the greater the
risk that a purchaser of the Securities Warrant will lose all or part of his or
her investment. If the price of the underlying securities does not rise before
the Securities Warrant expires to an extent sufficient to cover a purchaser's
cost of the Securities Warrant, the purchaser will lose all or part of his or
her investment in such Securities Warrant upon expiration.
In addition, prospective purchasers of the Securities Warrants should be
experienced with respect to options and option transactions and understand the
risks associated with options and should reach an investment decision only
after careful consideration, with their financial advisers, of the suitability
of the Securities Warrants in light of their particular financial circumstances
and the information discussed herein and, if applicable, the Prospectus
Supplement. Before purchasing, exercising or selling any Securities Warrants,
prospective purchasers and holders of Securities Warrants should carefully
consider, among other things, (i) the trading price of the Securities Warrants,
(ii) the price of the underlying securities at such time, (iii) the time
remaining to expiration and (iv) any related transaction costs. Some of the
factors referred to above are in turn influenced by various political, economic
and other factors that can affect the trading prices of the underlying
securities and should be carefully considered prior to making any investment
decisions.
Purchasers of the Securities Warrants should further consider that the
initial offering price of the Securities Warrants may be in excess of the price
that a purchaser of options might pay for a comparable option in a private,
less liquid transaction. In addition it is not possible to predict the price at
which the Securities Warrants will trade in the secondary market or whether any
such market will be liquid. The Companies may, but are not obligated to, file
an application to list any Securities Warrants issued on a United States
national securities exchange. To the extent that any Securities Warrants are
exercised, the number of Securities Warrants outstanding will decrease, which
may result in a lessening of the liquidity of the Securities Warrants. Finally,
the Securities Warrants will constitute direct, unconditional and unsecured
obligations of the Issuer and as such will be subject to any changes in the
perceived creditworthiness of the Issuer.
In addition, purchasers of Securities Warrants should further consider
that the Securities Warrants may be subject to purchase by the issuer in order
to maintain the Corporation's status as a REIT. See "Description of Capital
Stock--Ownership Limitations and Restrictions on Transfers."
Exercise of Securities Warrants. Each Securities Warrant will entitle the
holder thereof to purchase such principal amount of Debt Securities or number
of Shares, as the case may be, at such exercise price as shall in each case be
set forth in, or calculable from, the Prospectus Supplement relating to the
offered Securities Warrants. After the close of business on the Expiration Date
(or such later date to which such Expiration Date may be extended by the
Issuer), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities
Warrant agent payment as provided in the applicable Prospectus Supplement of
the amount required to purchase the Debt Securities or Shares, as the case may
be, purchasable upon such exercise together with certain information set forth
on the reverse side of the Securities Warrant certificate. Securities Warrants
will be deemed to have been exercised upon receipt of payment of the exercise
price, subject to the receipt within five Business Days of the Securities
Warrant certificate evidencing such Securities Warrants. Upon receipt of such
payment and the Securities Warrant certificate properly completed and duly
executed at the corporate trust office of the Securities Warrant agent or any
other office indicated in the applicable Prospectus Supplement, the Issuer
will, as soon as practicable, issue and deliver the Debt Securities or Shares,
as the case may be, purchasable upon such exercise. If fewer than all of the
Securities Warrants represented by such Securities Warrant certificate are
exercised, a new Securities Warrant certificate will be issued for the
remaining amount of Securities Warrants.
Amendments and Supplements to Securities Warrant Agreement. The Securities
Warrant Agreements may be amended or supplemented without the consent of the
holders of the Securities Warrants issued thereunder, to
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effect changes that are not inconsistent with the provisions of the Securities
Warrants and that do not adversely affect the interest of the holders of the
Securities Warrants.
Share Warrant Adjustments. Unless otherwise indicated in the applicable
Prospectus Supplement, the exercise price of and the number of Shares covered
by a Share Warrant are subject to adjustment in certain events, including (i)
payment of a dividend on the Shares payable in Shares, Share splits and
combinations or reclassification of Shares, (ii) issuance to all holders of
Shares of rights or warrants to subscribe for or purchase Shares at less than
their current market price (as defined in the Securities Warrant Agreement for
such series of Share Warrants) and (iii) certain distributions of evidences of
indebtedness or assets (including securities but excluding cash, dividends or
distributions paid out of consolidated earnings or retained earnings or
dividends payable in Shares or of subscription rights and warrants excluding
those referred to above).
No adjustments in the exercise price of and the number of Shares covered
by a Share Warrant will be made for regular quarterly or other periodic or
recurring cash dividends or distributions or for cash dividends or
distributions to the extent paid from consolidated earnings or retained
earnings. No adjustment will be required unless such adjustment would require a
change of at least 1% in the exercise price then in effect. Except as stated
above, the exercise price of and the number of Shares covered by a Share
Warrant will not be adjusted for the issuance of Shares or any securities
convertible into or exchangeable for Shares or carrying the right or option to
purchase or otherwise acquire the foregoing in exchange for cash, other
property or services.
In the event of any (i) consolidation or merger of the Companies with or
into any entities (other than a consolidation or a merger that does not result
in any reclassification, conversion, exchange or cancellation of outstanding
Shares), (ii) sale, transfer, lease or conveyance of all or substantially all
of the assets of the Companies or (iii) reclassification, capital
reorganization or change of the Shares (other than solely a change in par
value), then any holder of a Share Warrant will be entitled, on or after the
occurrence of any such event, to receive on exercise of such Share Warrant the
kind and amount of Shares or other securities, cash or other property (or any
combination thereof) that the holder would have received had such holder
exercised such holder's Share Warrant immediately prior to the occurrence of
such event. If the consideration to be received upon exercise of the Share
Warrant following any such event consists of common stock (or its equivalent)
of the surviving entity, then from and after the occurrence of such event, the
exercise price of such Share Warrant will be subject to the same anti-dilution
and other adjustments described in the second preceding paragraph, applied as
if such common stock were Shares.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a brief and general summary of the material federal
income tax considerations of an investment in the Corporation's and the
Operating Company's Securities to the extent those considerations relate to the
federal income taxation of the Corporation, the Operating Company and its U.S.
Stockholders (as defined below in "--Federal Income Taxation of Paired Capital
Stock--Taxation of Taxable U.S. Stockholders"). To the extent such
considerations relate to the specific tax treatment of Securities other than
the paired REIT Capital Stock and paired Operating Capital Stock (referred to
herein as "Paired Capital Stock"), they will be addressed in the applicable
Prospectus Supplement. For the particular provisions that govern the federal
income tax treatment of the Corporation and its stockholders, reference is made
to Sections 856 through 860 of the Code and the regulations thereunder. The
following summary is qualified in its entirety by such reference.
The statements in this discussion are based on current provisions of the
Code, Treasury Regulations, the legislative history of the Code, existing
administrative rulings and practices of the Internal Revenue Service (the
"IRS"), and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transaction entered into or contemplated prior
to the effective date of such changes.
EACH INVESTOR IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF AN INVESTMENT IN THE COMPANIES'
SECURITIES.
REIT Qualification of the Corporation
General
On November 5, 1997, the Corporation (formerly known as Santa Anita Realty
Enterprises, Inc. ("Realty")) merged with Meditrust, a Massachusetts business
trust ("Meditrust"), with the Corporation as the surviving corporation, and the
Operating Company (formerly known as Santa Anita Operating Company ("SAOC")),
merged
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with Meditrust Acquisition Company, a Massachusetts business trust ("MAC"),
with the Operating Company as the surviving corporation (collectively, the
"Santa Anita Mergers"). Upon completion of the Santa Anita Mergers, Realty
changed its corporate name to "Meditrust Corporation," and SAOC changed its
corporate name to "Meditrust Operating Company."
The Corporation has elected to be taxed as a real estate investment trust
under Sections 856 through 860 of the Code, commencing with its taxable year
ended December 31, 1980. Meditrust had elected to be taxed as a real estate
investment trust under Sections 856 through 860 of the Code, commencing with
its initial taxable year ended December 31, 1985, and through its last taxable
year ending November 5, 1997. The Corporation believes that commencing with its
taxable year ended December 31, 1980, it was organized and has been operated in
such a manner as to qualify for taxation as a REIT under the Code. In addition,
the Corporation believes that, commencing with its taxable year ended December
31, 1985 through its final taxable year ended November 5, 1997, Meditrust was
organized and operated in such a manner as to qualify for taxation as a REIT
under the Code. The Corporation intends to continue to operate in such a
manner, however, no assurance can be given that either the Corporation or
Meditrust qualified as a REIT under the Code for prior years or that the
Corporation will operate in a manner so as to qualify or remain qualified as a
REIT.
At the time of the Santa Anita Mergers, counsel to Realty and SAOC
rendered an opinion that, based on representations of management, for the
calendar year 1996, Realty met all the requirements of the Code for
qualification as a REIT and that the consummation of the Santa Anita Mergers
would not adversely affect the qualification of Realty as a REIT or its ability
to retain its status as grandfathered from the application of Section
269B(a)(3) of the Code. At the time of the Santa Anita Mergers, based on the
representations of management, Nutter, McClennen & Fish, LLP, counsel to
Meditrust and MAC, also rendered an opinion that immediately prior to the Santa
Anita Mergers, Meditrust qualified as a REIT and that the consummation of the
Santa Anita Mergers would not adversely affect the qualification of Realty as a
REIT. See "--Paired Shares" below.
In the opinion of Nutter, McClennen & Fish, LLP, special tax counsel to
the Corporation, (the "REIT Opinion"), (i) the Corporation's Predecessor was
organized and operated in conformity with the requirements for qualification
and taxation as a REIT under the Code since its taxable year ended December 31,
1989 through its final taxable year, and (ii) the Corporation has been
organized and operated in conformity with the requirements for qualification as
a REIT under the Code since its taxable year ended December 31, 1992 through
its taxable year ended December 31, 1997, and the Corporation's form of
organization and proposed method of operation will enable it to continue to
meet the requirements for qualification and taxation as a REIT under the Code.
The REIT Opinion is filed as an exhibit to the Registration Statement. The REIT
Opinion is based upon factual representations from the Corporation regarding
the Corporation's Predecessor and the Corporation's compliance with the
requirements for REIT qualification, and it will not be binding on the IRS.
Counsel is unable, however, to render an opinion regarding the
Corporation's qualification as a REIT in its taxable years ended December 31,
1989, 1990 and 1991 because it did not conduct the due diligence necessary to
render an opinion for such years. However, a revocation or termination of the
Corporation's qualification as a REIT in its taxable years ended December 31,
1989, 1990 or 1991 could potentially have prevented the Corporation from
qualifying as a REIT through its taxable years ended December 31, 1994, 1995
and 1996, respectively (even if otherwise organized and operated in conformity
with the requirements for qualification and taxation as a REIT under the Code),
but would not have precluded its qualification as a REIT for later years. This
is true because a revocation or termination of the Corporation's qualification
as a REIT could preclude the Corporation from re-electing REIT status for four
taxable years following the year during which qualification is lost. However,
the Corporation believes that any revocation or termination of the
Corporation's qualification as a REIT in its taxable years ended December 31,
1989, 1990 or 1991 or other failure to qualify as a REIT in such years would
not have a material adverse tax effect on the Corporation or its shareholders
if such event caused the Corporation to fail to qualify as a REIT in its
taxable years ended December 31, 1994, 1995 or 1996. The Corporation believes
that any failure of the Corporation to have qualified as a REIT in its taxable
year ended December 31, 1994 and 1996 would not have an adverse tax effect on
the Corporation or its shareholders because the Corporation sustained a net
loss for those years, as indicated on its federal income tax return, and thus
would not have incurred any federal income tax even if it had been precluded
from qualifying as a REIT for such years. With respect to the Corporation's
taxable year ended December 31, 1995, any failure to have qualified as a REIT
for such year would not have a material adverse tax effect on the Corporation
or its shareholders because the Corporation's tax liability would have
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been nominal on a per share basis. Any adjustment to tax for years prior to
1994 generally would be precluded by the statute of limitations.
The Corporation's qualification and taxation as a REIT following the
Cobblestone merger and, if consummated the La Quinta merger will depend on the
Corporation's continuing ability to meet, through actual operating results, the
income and asset requirements, distribution levels, diversity of stock
ownership and other requirements for qualification as a REIT under the Code.
Counsel has not reviewed and will not review the Corporation's compliance with
these tests on a continuing basis. Moreover, qualification as a REIT involves
the application of highly technical and complex Code provisions for which there
are only limited judicial or administrative interpretations and the
determination of various factual matters and circumstances not entirely within
the Corporation's control. The complexity of these provisions is greater in the
case of a REIT that owns real estate and leases it to a corporation with which
its stock is paired. Accordingly, no assurance can be given that the
Corporation will satisfy such tests on a continuing basis or that the IRS will
not challenge the status of the Corporation as a REIT prior to or after the
offering made by any Prospectus Supplement. See "Risk Factors--Tax Risks
Related to Real Estate Investment Trusts."
In rendering the REIT Opinion, Nutter, McClennen & Fish, LLP has relied
upon the representations of the Corporation that it will distribute, with
respect to the taxable year in which each merger closes, all earnings and
profits inherited from Cobblestone (if any) and La Quinta. If the IRS were to
determine that La Quinta's actual earnings and profits (if any) for federal
income tax purposes exceeded the amount distributed, or that Cobblestone in
fact had current or accumulated earnings and profits for federal income tax
purposes, the Corporation would be disqualified as a REIT. See "--Distribution
of Earnings and Profits" below.
If the Corporation (including in certain instances, Meditrust or Realty,
as predecessors to the Corporation) failed to qualify as a REIT in any taxable
year, the Corporation would be subject to federal income taxation as if it were
a domestic "C" corporation, and the Corporation's stockholders would be taxed
in the same manner as the stockholders of ordinary corporations. In this event,
the Corporation could be subject to potentially significant tax liabilities,
and the amount of cash available for distribution to stockholders and to pay
debt service would be reduced and possibly eliminated.
To qualify for tax treatment as a REIT under the Code, the Corporation
must meet the following requirements, among others:
(1) At least 95% of the Corporation's gross income each taxable year must be
derived from:
(a) rents from real property;
(b) gain from the sale or disposition of real property that is not held
primarily for sale to customers in the ordinary course of business;
(c) interest on obligations secured by mortgages on real property (with
certain minor exceptions);
(d) dividends or other distributions from, or gains from the sale of,
shares of qualified REITs that are not held primarily for sale to
customers in the ordinary course of business;
(e) abatements and refunds of real property taxes;
(f) income and gain derived from foreclosure property;
(g) most types of commitment fees related to either real property or
mortgage loans;
(h) gains from sales or dispositions of real estate assets that are not
"prohibited transactions" under the Code;
(i) dividends;
(j) interest on obligations other than those secured by mortgages on
properties; and
(k) gains from sales or dispositions of securities not held primarily for
sale to customers in the ordinary course of business.
In addition, at least 75% of the Corporation's gross income each taxable
year must be derived from items (a) through (h) above and from income
attributable to stock or debt instruments acquired with the proceeds from the
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sale of stock or certain debt obligations ("new capital") of the Corporation
received during a one-year period beginning on the day such proceeds were
received ("qualified temporary investment income").
For purposes of these requirements, the term "rents from real property" is
defined in the Code to include charges for services customarily furnished or
rendered in connection with the rental of real property, whether or not such
charges are separately stated. The term "rents from real property" also
includes rent attributable to incidental personal property that is leased
under, or in connection with, a lease of real property, provided that the rent
attributable to such personal property for the taxable year does not exceed 15%
of the total rent for the taxable year attributable to both the real and
personal property leased under such lease. The term "rents from real property"
is also defined to exclude: (i) any amount received or accrued with respect to
real property, if the determination of such amount depends in whole or in part
on the income or profits derived by any person from the property (except that
any amount so received or accrued shall not be excluded from "rents from real
property" solely by reason of being determined on the basis of a fixed
percentage of receipts or sales); (ii) any amount received or accrued, directly
or indirectly, from any person or corporation if ownership of a 10% or greater
interest in the stock, assets or net profits of such person or corporation is
attributed to the Corporation; (iii) any amount received or accrued from
property that the Corporation manages or operates or for which the Corporation
furnishes services to the tenants, which would constitute unrelated trade or
business income if received by certain tax-exempt entities, either itself or
through another person who is not an "independent contractor" (as defined in
the Code) from whom the Corporation does not derive or receive income; and (iv)
any amount received or accrued from property with respect to which the
Corporation furnishes (whether or not through an independent contractor)
services not customarily rendered to tenants, other than a de minimis amount
(defined in the Code as 1% of all amounts received or accrued with respect to
the property), in properties of a similar class in the geographic market in
which the property is located. The amount received for any service for this
purpose shall be deemed to be not less than 150% of the direct cost to the
Corporation in furnishing or rendering the service. The Corporation believes
that any services furnished to tenants are not, and will not be, of a type that
would cause any rents to fail to qualify as rents from real property, or, if
so, that the amount of income derived from those activities will not jeopardize
the Corporation's REIT status.
If the Corporation should fail to satisfy the foregoing income tests but
otherwise satisfies the requirements for taxation as a REIT and if such failure
is held to be due to reasonable cause and not willful neglect and if certain
other requirements are met, then the Corporation would continue to qualify as a
REIT but would be subject to a 100% tax on the excessive unqualified income
reduced by an approximation of the expenses incurred in earning that income.
(2) At the close of each quarter of its taxable year, the Corporation must
also satisfy three tests relating to the nature of its assets. First, at least
75% of the value of the Corporation's total assets must be represented by real
estate assets (including (i) assets held by the Corporation's qualified REIT
subsidiaries and the Corporation's allocable share of real estate assets held
by partnerships in which the Corporation owns an interest and (ii) stock or
debt instruments held for not more than one year purchased with the proceeds of
a stock offering or a long-term (at least five years) public debt offering of
the Corporation), cash, cash items and government securities. Second, not more
than 25% of the Corporation's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the
Corporation may not exceed 5% of the value of the Corporation's total assets
and the Corporation may not own more than 10% of any one issuer's outstanding
voting securities. The Corporation's share of income earned or assets held by a
partnership in which the Corporation is a partner will be characterized by the
Corporation in the same manner as they are characterized by the partnership for
purposes of the assets and income requirements described in this paragraph (2)
and in paragraph (1) above.
(3) The shares of the Corporation must be "transferable" and beneficial
ownership of them must be held by 100 or more persons during at least 335 days
of each taxable year (or a proportionate part of a short taxable year). More
than 50% by value of the outstanding stock may not be owned, directly or
indirectly, actually or constructively, by or for five or fewer "individuals"
at any time during the last half of any taxable year. For the purpose of such
determination, shares owned directly or indirectly by or for a corporation,
partnership, estate or trust are considered as being owned proportionately by
its shareholders, partners or beneficiaries; an individual is considered as
owning shares directly or indirectly owned by or for members of his family; and
the holder of an option to acquire shares is considered as owning such shares.
In addition, because of the lessor-lessee relationship between the Corporation
and LATC, no person may own, actually or constructively, 10% or more of the
outstanding voting power or total number of shares of stock of the two
Companies. The bylaws of Operating Company and the Corporation preclude any
transfer of shares which would cause the ownership of shares not to be in
conformity with the above requirements. Each year the Corporation must
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demand written statements from the record holders of designated percentages of
its shares disclosing the actual owners of the shares and must maintain, within
the Internal Revenue District in which it is required to file its federal
income tax return, permanent records showing the information it has thus
received as to the actual ownership of such shares and a list of those persons
failing or refusing to comply with such demand. Failure to comply with the
foregoing would not result in the loss of REIT status; however, it would result
in a penalty of $25,000 ($50,000 for intentional violations) for any year in
which the REIT does not comply with the ownership regulations.
(4) The Corporation must distribute to its shareholders dividends in an
amount at least equal to the sum of 95% of its "real estate investment trust
taxable income" before the deduction for dividends paid (i.e., taxable income
less any net capital gain and less any net income from foreclosure property or
from property held primarily for sale to customers, and subject to certain
other adjustments provided in the Code); plus (i) 95% of the excess of the net
income from foreclosure property over the tax imposed on such income by the
Code; less (ii) a portion of certain noncash items of the Corporation that are
required to be included in income, such as the amounts includable in gross
income under Section 467 of the Code (relating to certain payments for use of
property or services). The distribution requirement is reduced by the amount by
which the sum of such noncash items exceeds 5% of real estate investment trust
taxable income. Such undistributed amount remains subject to tax at the tax
rate then otherwise applicable to corporate taxpayers. Each year, the
Corporation has, or will be deemed to have, distributed at least 95% of its
real estate investment trust taxable income as adjusted.
For this purpose, certain dividends paid by the Corporation after the
close of the taxable year may be considered as having been paid during the
taxable year. However, if the Corporation does not actually distribute each
year at least the sum of: (i) 85% of its real estate investment trust taxable
income; (ii) 95% of its capital gain net income; and (iii) any undistributed
taxable income from prior periods, then the amount by which such sums exceed
the actual distributions during the taxable year will be subject to a 4% excise
tax.
If a determination (by a court or by the IRS requires an adjustment to the
Corporation's taxable income that results in a failure to meet the percentage
distribution requirements (e.g., a determination that increases the amount of
the Corporation's real estate investment trust taxable income), the Corporation
may, by following the "deficiency dividend" procedure of the Code, cure the
failure to meet the annual percentage distribution requirement by distributing
a dividend within 90 days after the determination, even though this deficiency
dividend is not distributed to the shareholders in the same taxable year as
that in which income was earned. The Corporation will, however, be liable for
interest based on the amount of the deficiency dividend.
(5) The directors of the Corporation must have authority over the
management of the Corporation, the conduct of its affairs and, with certain
limitations, the management and disposition of the Corporation's property.
(6) The Corporation must have the calendar year as its annual accounting
period.
(7) The Corporation must satisfy certain procedural requirements.
Distribution of Earnings and Profits
To maintain its qualification as a REIT, in the event the proposed La
Quinta Merger is consummated, the Corporation will be required to distribute
any current and accumulated earnings and profits inherited from La Quinta in
the merger (as determined for federal income tax purposes). Following the La
Quinta Merger, the Corporation intends to make a distribution of earnings and
profits in the amount determined by the Corporation to be necessary for federal
income tax purposes. The distribution will be taken into account by the
Corporation's taxable U.S. shareholders as ordinary income to the extent it is
made out of the Corporation's current or accumulated earnings and profits as
determined for federal income tax purposes, and will not be eligible for the
dividends received deduction generally available for corporations.
It is a condition to the obligation of the Companies to consummate the
proposed La Quinta Merger that, at the closing date of the La Quinta Merger, La
Quinta and the Corporation shall have obtained a report prepared by KPMG Peat
Marwick LLP ("KPMG") of the accumulated and current earnings and profits of La
Quinta (as determined for federal income tax purposes) as of the most recent
date through which the earnings and profits are ascertainable as well as a
reasonable estimate of any earnings and profits from such most recent date
through the closing date of the La Quinta Merger, and Coopers & Lybrand LLP
shall have reviewed and approved in the exercise of its reasonable judgment the
report and workpapers of KPMG. La Quinta has provided a report of the earnings
and profits calculation through December 31, 1996 from KPMG.
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As a condition to the obligation of the Companies to consummate the
Cobblestone Merger, Cobblestone obtained a report of the independent
accountants of Cobblestone to the effect that Cobblestone had no current or
accumulated earnings and profits (as determined for federal income tax
purposes) as of September 30, 1997, and a certification from Cobblestone's
Chief Financial Officer to the effect that, as of the closing date of the
Cobblestone Merger, Cobblestone had no such current or accumulated earnings and
profits.
If the IRS were to determine that La Quinta's actual current and
accumulated earnings and profits exceeded the amount distributed by the
Corporation following the proposed La Quinta Merger (due to miscalculation,
insufficient funds or any other reason), or that Cobblestone, in fact, had
current or accumulated earnings and profits, the Corporation would be
disqualified as a REIT. Certain technical provisions of the Relief Act
facilitate the distribution of inherited earnings and profits, but do not
change the basic requirement that inherited earnings and profits must be
distributed.
Paired Shares
On October 16, 1979, the IRS issued a Private Letter Ruling (the "Ruling")
to Realty in which the IRS held that the pairing of the Realty shares and SAOC
shares would not preclude Realty from qualifying as a REIT. Subsequent to the
issuance of the Ruling, (i) the IRS announced that it would no longer issue
rulings to the effect that a REIT whose shares are paired with those of a
non-REIT will qualify as a REIT if the activities of the paired entities are
integrated, and (ii) Congress, in 1984, enacted Section 269B of the Code.
Section 269B(a)(3) of the Code provides that if the shares of a REIT and a
non-REIT are paired, then the REIT and the non-REIT shall be treated as one
entity for purposes of determining whether either company qualifies as a REIT.
If Section 269B(a)(3) of the Code applied to the Corporation and the Operating
Company, then the Corporation would not be eligible to be taxed as a REIT.
Section 269B(a)(3) does not apply, however, if the shares of the REIT and the
non-REIT were paired on June 30, 1983 and the REIT was taxable as a REIT on
June 30, 1983. The Corporation believes that, as a result of this
"grandfathering" rule, Section 269B(a)(3) of the Code does not apply to the
Corporation and the Operating Company. By its terms, this "grandfathering" rule
continues to apply to the Corporation after the Santa Anita Mergers. At the
time of the Santa Anita Mergers, Nutter, McClennen & Fish, LLP rendered an
opinion that the Santa Anita Mergers did not result in Section 269B of the Code
becoming applicable to the Corporation. There are, however, no judicial or
administrative authorities interpreting this "grandfathering" rule in the
context of a merger or otherwise, and this opinion, as well as the opinions
described above regarding Realty's and the Corporation's qualification as a
REIT and related matters, are based solely on the literal language of the
statute. There can be no assurance that the IRS will not seek to deny the
Corporation REIT status despite its grandfathered status.
On February 2, 1998, the Department of Treasury released an explanation of
the revenue proposals included in the Clinton Administration's fiscal 1999
budget (the "Administration Tax Proposals"). The Administration Tax Proposals,
among other things, include a freeze on the grandfathered status of paired
share REITs such as the Companies. Under these proposals, the Corporation and
Operating Company would be treated as one entity with respect to properties
acquired on or after the date of the first Congressional committee action with
respect to such proposals and with respect to activities or services relating
to such properties that are undertaken or performed by one of the paired
entities on or after such date. The Administration Tax Proposals would prevent
the Companies from using their paired share structure to operate properties
acquired on or after the date of such first Congressional committee action. The
Administration Tax Proposals also would prohibit REITs from holding stock of a
corporation possessing more than 10% (and less than 100%) of the vote or value
of all classes of stock of the corporation. These proposals would be effective
with respect to stock acquired on or after the date of the first Congressional
committee action with respect to the proposals; provided that the proposals
would apply to stock acquired before such effective date if, on or after such
date, the subsidiary corporation engaged in a new trade or business or acquired
substantial new assets.
On March 26, 1998, Representative William Archer, Chairman of the House
Ways and Means Committee, and Senator William V. Roth, Jr., Chairman of the
Senate Finance Committee, introduced similar legislation to limit this
"grandfathering" rule applicable to paired share REITs (the "Tax Proposals").
Under the Tax Proposals, the anti-pairing rules provided in the Code would
apply to real property interests acquired after March 26, 1998 by the
Companies, or a subsidiary or partnership in which a ten percent or greater
interest is owned by the Companies (collectively, the "REIT Group"), unless (1)
the real property interests are acquired pursuant to a written agreement which
was binding on March 26, 1998 and at all times thereafter or (2) the
acquisition of such real property interests was described in a public
announcement or in a filing with the SEC on or before March 26, 1998. On May 7,
1998,
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the Senate unanimously passed The Internal Revenue Service Restructuring and
Reform Bill of 1998 (the "Bill"), which contains the Tax Proposals described
above. Moreover, the Bill provides that any property acquired after March 26,
1998 by a company that is acquired by a paired share REIT, other than property
acquired pursuant to a written agreement that was binding on March 26, 1998,
would be subject to the anti-pairing rules.
Under the Tax Proposals and the Bill as currently proposed, the properties
to be acquired in the proposed merger of the Corporation with La Quinta and
acquired through the May 29, 1998 merger of the Corporation and Cobblestone
would not be subject to these anti-pairing rules. However, any property
acquired by the Companies, La Quinta or Cobblestone after March 26, 1998, other
than property acquired pursuant to a written agreement that was binding on
March 26, 1998, would be subject to the anti-pairing rules. Moreover, there can
be no assurance that the Tax Proposals or the Bill will be adopted in their
current forms, with a consequence that the properties to be acquired from La
Quinta and acquired from Cobblestone or other properties of the Companies could
become subject to the anti-pairing rules of the Code in the future. In
addition, the Tax Proposals and the Bill also provide that a property held by
the Companies that is not subject to the anti-pairing rules would become
subject to such rules in the event of either (1) an improvement placed in
service after December 31, 1999 that changes the use of the property and the
cost of which is greater than 200 percent of (A) the undepreciated cost of the
property (prior to the improvement) or (B) in the case of property acquired
where there is a substituted basis (e.g., the properties to be acquired from La
Quinta and acquired from Cobblestone), the fair market value of the property on
the date it was acquired by the Companies; or (2) an addition or improvement
that expands beyond the boundaries of the land included in such property. There
is an exception for improvements placed in service before January 1, 2004
pursuant to a binding contract in effect on December 31, 1999 and at all times
thereafter. This proposed restriction on property improvements would apply to
the properties to be acquired from La Quinta and acquired from Cobblestone, as
well as all other properties owned by the Companies, and would limit the
ability of the Companies to improve or change the use of those properties after
December 31, 1999.
If adopted in their present form, the restrictions on the activities of a
grandfathered REIT provided in the Administration Tax Proposals and the Tax
Proposals and the Bill may in the future make it impractical or undesirable for
the Companies to continue to maintain their paired share structure.
Restructuring the operations of the Corporation and the Operating Company to
comply with the rules contemplated by the Administration Tax Proposals, the Tax
Proposals or the Bill could cause the Companies to incur substantial tax
liabilities, to recognize an impairment loss on their goodwill assets, or
otherwise materially adversely affect the Companies and their ability to make
distributions to shareholders and to pay amounts due on their indebtedness.
In addition, a significant component of the Companies' strategy is to grow
through acquisitions. The Companies believe that the current tax treatment of
their paired share structure may provide them with certain advantages in making
acquisitions, and the Tax Proposals and the Bill could therefore make it more
difficult to make acquisitions in the future.
Effects of Compliance with REIT Requirements
Operating income derived from health care related facilities, hotels, golf
courses or a racetrack does not constitute qualifying income under the REIT
requirements. Accordingly, all of the Corporation's facilities have been leased
to lessees, and the Corporation intends to continue to lease such facilities
for as long as the Corporation owns such facilities. Similarly, the Corporation
has leased the Race Track to a subsidiary of the Operating Company, and the
Corporation intends to continue to lease the Race Track for so long as the
Corporation owns the Race Track. In addition, the hotels to be acquired in the
La Quinta Merger, as well as the golf courses acquired from Cobblestone, IRI
and others, also will be leased to subsidiaries of the Operating Company. Rent
derived from such leases will be qualifying income under the REIT requirements,
provided several requirements are satisfied. Among other requirements, a lease
may not have the effect of giving the Corporation a share of the net income of
the lessee, and the amount of personal property leased under the lease must not
exceed the 15% rent described above. The Corporation also may not provide
services, other than customary services, except for a de minimis amount, to the
lessee or their subtenants. In addition, the leases must also qualify as "true"
leases for federal income tax purposes (as opposed to service contracts, joint
ventures or other types of arrangements). There are, however, no controlling
Treasury Regulations, published rulings, or judicial decisions that discuss
whether leases similar to the Corporation's leases constitute "true" leases.
Therefore, there can be no complete assurance that the IRS will not
successfully assert a contrary position.
Payments under a lease will not constitute qualifying income for purposes
of the REIT requirements if the Corporation owns, directly or indirectly, 10%
or more of the ownership interests in the relevant lessee. Constructive
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ownership rules apply, such that, for instance, the Corporation is deemed to
own the assets of stockholders who own 10% or more in value of the stock of the
Corporation. The by-laws of each of the Companies are therefore designed to
prevent a stockholder of the Corporation from owning REIT stock or Operating
Company stock that would cause the Corporation to own, actually or
constructively, 10% or more of the ownership interests in a lessee (including
the Operating Company). See "Description of Capital Stock -- Ownership
Limitations and Restrictions on Transfer." However, because the relevant
constructive ownership rules are broad and it is not possible to monitor
continually direct and indirect transfers of Paired Shares, and because the
by-law provisions referred to above may not be effective, no assurance can be
given that such transfers or other events will not cause the Corporation to own
constructively 10% or more of one or more lessees at some future date.
Taxation of the Corporation
As a REIT, the Corporation is subject to Federal corporate income tax on
its taxable income, which is computed taking into account a deduction for
dividends paid and certain other special rules. Thus, if the Corporation does
not distribute all its net capital gains or distributes more than 95% but less
than 100% of its other REIT income, the Corporation will be subject to Federal
corporate income tax (including any applicable alternative minimum tax) on the
undistributed portion of such income (in the case of capital gains taxes paid
by the Corporation, each shareholder of the Corporation shall be entitled to a
tax credit based on the amount of such taxes). Such undistributed income also
may be subject to the 4% excise tax mentioned earlier. The Corporation expects
to distribute all its income on a current basis so it will not incur any
Federal income or excise tax (although it may incur some amount of state and
local tax in jurisdiction whose tax laws do not conform to the Federal income
tax treatment of REITs).
In addition to the considerations discussed above, the REIT requirements
will impose a number of other restrictions on the operations of the
Corporation. For example, net income from sales of property sold to customers
in the ordinary course of business (other than inventory acquired by reason of
certain foreclosures) is subject to a 100% tax unless eligible for a certain
safe harbor. Minimum distribution requirements also generally require the
Corporation to distribute each year at least 95% of its taxable income for the
year (excluding any net capital gain). In addition, certain asset tests limit
the Corporation's ability to acquire non-real estate assets.
Federal Income Taxation of Operating Company; Non-Controlled Subsidiaries
As a "C" corporation under the Code, the Operating Company will be subject
to U.S. federal income tax on its taxable income at corporate rates. Any
income, net of taxes, will be available for retention in the Operating
Company's business or for distribution to shareholders as dividends. However,
there is no tax provision that requires the Operating Company to distribute any
of its after-tax earnings and the Operating Company does not expect to pay cash
dividends in the foreseeable future. As non-REIT subsidiaries, the corporate
subsidiaries of the Corporation that are not controlled by it will also be
subject to federal income tax in the same manner as the Operating Company.
State and Local Taxation
The Companies and their stockholders may be subject to state and local
taxes in various jurisdictions, including those in which it or they transact
business, own property, or reside. The state and local tax treatment of such
entities or persons may not conform to the federal income tax consequences
discussed above. Consequently, the Companies and their stockholders should
consult their own tax advisers regarding the effect of state and local tax laws
on the ownership of Paired Common Stock.
Federal Income Taxation of Paired Capital Stock
Separate Taxation
Notwithstanding that Paired Capital Stock may only be transferred as a
unit, holders of Paired Capital Stock will be treated for U.S. federal income
tax purposes as holding equal numbers of shares of Corporation Capital Stock
and of Operating Capital Stock. The tax treatment of distributions to
stockholders and of any gain or loss upon sale or other disposition of the
Paired Capital Stock (as well as the amount of gain or loss) must therefore be
determined separately with respect to each share of Corporation Capital Stock
and each share of Operating Capital Stock contained within each share of Paired
Capital Stock. The tax basis and holding period for each share of Corporation
Capital Stock and each share of Operating Capital Stock also must be determined
separately. Upon a taxable sale of a share of Paired Capital Stock, the amount
realized should be allocated between the Corporation Capital Stock and the
Operating Capital Stock based on their then relative values.
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Taxation of Taxable U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of Paired
Capital Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate, the income of which is subject to U.S.
federal income taxation regardless of its source or (iv) a trust, if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust and (v) is not an
entity that has a special status under the Code (such as a tax-exempt
organization or a dealer in securities).
As long as the Corporation qualifies as a REIT, distributions made to the
Corporation's taxable U.S. Stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. For
purposes of determining whether distributions on Corporation Capital Stock are
out of earnings and profits, earnings and profits will be allocated first to
any outstanding REIT Preferred Stock and then allocated to any outstanding REIT
Common Stock. Subject to the discussion below regarding changes to the capital
gains tax rates, distributions that are designated as capital gain dividends
will be taxed as capital gains (to the extent they do not exceed the
Corporation's actual net capital gain for the taxable year) without regard to
the period for which the stockholder has held his Corporation Capital Stock.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Corporation Capital Stock, but rather will
reduce the adjusted basis of such stock. To the extent that such distributions
in excess of current and accumulated earnings and profits exceed the adjusted
basis of a stockholder's Corporation Capital Stock, such distributions will be
included in income as long-term capital gain (or, in the case of individuals,
trusts and estates, mid-term capital gain if the Corporation Capital Stock has
been held for more than 12 months but not more than 18 months or in the case of
all taxpayers short-term capital gain if the Corporation Capital Stock has been
held for 12 months or less) assuming shares are a capital asset in the hands of
the stockholder. In addition, any distribution declared by the Corporation in
October, November or December of any year and payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Corporation and received by the stockholder on December 31 of such year,
provided that the distribution is actually paid by the Corporation during
January of the following calendar year.
Distributions on Operating Capital Stock from the Operating Company up to
the amount of the Operating Company's current or accumulated earnings and
profits (allocable first to any Operating Preferred Stock and then to any
Operating Common Stock) will be taken into account by U.S. Stockholders as
ordinary income and generally will be eligible for the dividends-received
deduction for corporations (subject to certain limitations). Distributions in
excess of the Operating Company's current and accumulated earnings and profits
will not be taxable to a holder to the extent that they do not exceed the
adjusted basis of the holder's Operating Capital Stock, but rather will reduce
the adjusted basis of such Operating Capital Stock. To the extent that such
distributions exceed the adjusted basis of a holder's Operating Capital Stock
they will be included in income as long-term capital gain (or, in the case of
individuals, trusts and estates, mid-term capital gain if the Operating Capital
Stock has been held for more than 12 months but not more than 18 months or in
the case of all taxpayers, short-term capital gain if the Operating Capital
Stock has been held for 12 months or less) assuming the shares are a capital
asset in the hands of the stockholder.
For taxable years beginning after December 31, 1997, the Corporation may
elect to retain and pay income tax on net long-term capital gains recognized
during the taxable year. If the Corporation so elects for a taxable year, its
stockholders would include in income as capital gain their proportionate share
of such of its long-term capital gains as the Corporation may designate. A
stockholder would be deemed to have paid its share of the tax paid by the
Corporation, which would be credited or refunded to the stockholder. The
stockholders' basis in its shares of Corporation Capital Stock would be
increased by the amount of undistributed capital gains (less the capital gains
tax paid by the Corporation) included in the stockholder's capital gains. If
the Corporation so elects for a taxable year beginning before January 1, 1998,
no such credit or increase in basis is available to the Corporation's
stockholders even though the stockholders would still include in income as
capital gain their proportionate share of long-term capital gain designated by
the Corporation.
Taxable distributions from the Corporation or the Operating Company and
gain or loss from the disposition of shares of Corporation Capital Stock and
Operating Capital Stock will not be treated as passive activity income
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and, therefore, stockholders generally will not be able to apply any passive
activity losses (such as losses from certain types of limited partnerships in
which the stockholder is a limited partner) against such income. In addition,
taxable distributions from the Corporation or the Operating Company generally
will be treated as investment income for purposes of the investment interest
deduction limitations. Capital gain dividends, capital gains (other than
short-term capital gains) from the disposition of Paired Capital Stock and
actual or deemed distributions from either company treated as such, including
capital gains (other than short-term capital gains) recognized on account of
distributions in excess of a stockholder's basis or any deemed capital gain
distributions to a Corporation stockholder on account of retained capital gains
of the Corporation, will be treated as investment income for purposes of the
investment interest deduction limitations only if and to the extent the
stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates to the extent of the election. The Corporation and the
Operating Company will notify stockholders after the close of their taxable
years as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and (in the case of the
Corporation) capital gain. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the
Corporation or of the Operating Company.
The Taxpayer Relief Act of 1997 (the "Relief Act") alters the taxation of
capital gain income. Under the Relief Act, individuals, trusts and estates that
hold certain investments for more than 18 months may be taxed at a maximum
long-term capital gain rate of 20% on the sale or exchange of those
investments. Individuals, trusts and estates that hold certain assets for more
than 12 months but not more than 18 months may be taxed at a maximum mid-term
capital gain rate of 28% on the sale or exchange of those investments. The
Relief Act also provides a maximum rate of 25% for "unrecaptured section 1250
gain" for individuals, trusts and estates, special rules for "qualified 5-year
gain," as well as other changes to prior law. The Relief Act allows the IRS to
prescribe regulations on how the Relief Act's new capital gain rates will apply
to sales of capital assets by (or interests in) "pass-thru entities," which
include REITs such as the Corporation. To date regulations have not yet been
prescribed, however, the IRS has issued a notice discussing the rates which
will be prescribed under the Regulations.
The notice provides that a REIT may designate (subject to certain limits)
whether a capital gain dividend is taxable to U.S. Stockholders (other than
corporations) as a 20 percent rate gain distribution (for capital gains
recognized by the REIT with respect to capital assets held for more than 18
months), a 28 percent rate gain distribution (for capital gains recognized by
the REIT with respect to capital assets held for more than one year but not
more than 18 months), or a Section 1250 gain distribution taxed at a 25 percent
rate (for a portion of the gain, recognized by the REIT with respect to
dispositions of certain real property held for more than 18 months, equal to
the amount of all prior depreciation deductions not otherwise required to be
taxed as ordinary depreciation recapture income). This designation will apply
to distributed and undistributed capital gain dividends. Investors are urged to
consult their own tax advisors with respect to the new rules contained in the
Relief Act. No change was made to the capital gains rate or holding period for
corporations under the Relief Act.
Taxation of Stockholders on the Disposition of Paired Capital Stock
In general, and assuming the taxpayer has the same holding period for the
Corporation Capital Stock and the Operating Capital Stock, any gain or loss
realized upon a taxable disposition of Paired Capital Stock by a stockholder
who is not a dealer in securities will be treated as long-term capital gain or
loss if the Paired Capital Stock has been held for more than 12 months, (or, in
the case of individuals, trusts and estates, mid-term capital gain or loss if
the Paired Capital Stock has been held for more than 12 months but not more
than 18 months, and long-term capital gain or loss if the Paired Capital Stock
has been held for more than 18 months) and otherwise as short-term capital gain
or loss. In addition, any loss upon a sale or exchange of Corporation Capital
Stock by a stockholder who has held such stock for six months or less (after
applying certain holding period rules), will be treated as a long-term capital
loss to the extent of distributions from the Corporation or undistributed
capital gains required to be treated by such stockholder as long-term capital
gain. However, the IRS has indicated in a recent notice that it is examining
the proper tax treatment of a long-term capital loss upon a sale or exchange of
corporation capital stock by a stockholder who has held the stock for less than
six months. All or a portion of any loss realized upon a taxable disposition of
Paired Capital Stock may be disallowed if other Paired Capital Stock is
purchased within 30 days before or after the disposition.
Information Reporting Requirements and Backup Withholding
The Corporation and the Operating Company will each report to their U.S.
Stockholders and the IRS the amount of distributions paid during each calendar
year, and the amount of tax withheld, if any. Under the backup withholding
rules, a stockholder may be subject to backup withholding at the rate of 31%
with respect to distributions paid unless
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such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with the applicable requirements of
the backup withholding rules. A stockholder who does not provide the
Corporation and the Operating Company with his, her or its correct taxpayer
identification number also may be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Corporation and the Operating Company
may be required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their non-foreign status to the Corporation
and the Operating Company.
The Treasury Department recently issued new regulations (the "New
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
Taxation of Tax-Exempt Stockholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. They are, however, subject
to taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, amounts distributed by the
Corporation to Exempt Organizations generally should not constitute UBTI, nor
should dividends paid by the Operating Company generally constitute UBTI.
However, if an Exempt Organization finances its acquisition of Paired Capital
Stock with debt, a portion of its income from the Corporation and the Operating
Company will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under paragraphs (7), (9), (17), and (20),
respectively, of section 501(c) of the Code are subject to different UBTI
rules, which generally will require them to characterize distributions from the
Corporation and the Operating Company as UBTI.
Investors are urged to consult their own tax advisors with respect to the
appropriateness of an investment in the Securities offered hereby and with
respect to the tax consequences arising under federal law and the laws of any
state, municipality or other taxing jurisdiction, including tax consequences
resulting from such investor's own tax characteristics. In particular, foreign
investors should consult their own tax advisors concerning the tax consequences
of an investment in the Corporation and Operating Company including the
possibility of U.S. income tax withholding on distributions.
PLAN OF DISTRIBUTION
The Companies, together or individually, may sell Securities in any of
three ways: (i) through underwriting syndicates represented by one or more
managing underwriters, or through one or more underwriters without a syndicate;
(ii) through agents designated from time to time; and (iii) directly to
investors. The names of any underwriters or agents of the Companies involved in
the sale of the Securities in respect of which this Prospectus is being
delivered and any applicable commissions or discounts will be set forth in the
Prospectus Supplement. The net proceeds to the Companies from such sale will
also be set forth in the Prospectus Supplement.
The distribution of the Securities may be effected from time to time in
one or more transactions at a fixed price or prices (which may be changed from
time to time), at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The
Prospectus Supplement will describe the method of distribution of the
Securities.
In connection with the sale of Securities, underwriters or agents acting
on the Companies' behalf may receive compensation from the Companies or from
purchasers of Securities for whom they may act as agents, in the form of
discounts, concessions or commissions. The underwriters, dealers and agents
that participate in the distribution of Securities may be deemed to be
underwriters under the Securities Act and any discounts or commissions received
by them and any profit on the resale of Securities by them may be deemed to be
underwriting discounts and commissions under the Securities Act. Any such
underwriter or agent will be identified and any such compensation will be
described in the Prospectus Supplement.
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Agents and underwriters may be entitled under agreements entered into with
the Companies to indemnification by the Companies against certain liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may engage in transactions with or perform
services for the Companies in the ordinary course of business.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Companies by Nutter, McClennen & Fish, LLP. In addition, Nutter, McClennen &
Fish, LLP will pass upon certain Federal income tax matters relating to the
Companies. The name of any legal counsel for any underwriter or agent will be
set forth in the applicable Prospectus Supplement.
INTERESTS OF NAMED EXPERTS AND COUNSEL
Michael J. Bohnen, a partner in the law firm Nutter, McClennen & Fish,
LLP, currently serves as Secretary of the Operating Company. Paul R. Eklund,
also a partner in the law firm Nutter, McClennen & Fish, LLP, currently serves
as Assistant Secretary of the Corporation. Nutter, McClennen & Fish, LLP,
serves as counsel to the Companies, and has rendered a legal opinion with
respect to the validity of the Securities being offered pursuant to this
Prospectus and as to certain Federal income tax matters.
EXPERTS
The combined consolidated financial statements of the REIT and the
Operating Company and the consolidated financial statements of the REIT as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and
1995, and the consolidated financial statements of the Operating Company as of
December 31, 1997 and for the initial period ended December 31, 1997,
incorporated herein by reference to the Companies' Joint Current Report on Form
8-K, event date February 26, 1998, have been audited by Coopers & Lybrand
L.L.P., independent accountants, as stated in their reports, which are
incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The combined balance sheets of La Quinta Inns, Inc. as of December 31,
1997 and 1996, and the related combined statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, incorporated herein by reference to the Companies' Joint
Current Report on Form 8-K, event date March 31, 1998, have been audited by
KPMG Peat Marwick LLP, independent auditors as set forth in their report
thereon included therein and incorporated herein by reference and have been so
incorporated herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Cobblestone Holdings, Inc. for
each of the three years in the period ended September 30, 1997, incorporated
herein by reference from Meditrust Corporation and Meditrust Operating
Company's Joint Current Report on Form 8-K, dated May 13, 1998, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance on such report given upon the authority of such firm as experts in
accounting and auditing.
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