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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM
_____________ TO _______________
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<S> <C>
Commission file number 0-9109 Commission file number 0-9110
MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY
(Exact name of registrant as specified (Exact name of registrant as specified
in its charter) in its charter)
Delaware Delaware
(State or other jurisdiction (State or other jurisdiction of
of incorporation or organization) incorporation or organization)
95-3520818 95-3419438
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
197 First Avenue, Suite 300 197 First Avenue, Suite 100
Needham Heights, Needham Heights,
Massachusetts 02194-9127 Massachusetts 02194-9127
(Address of principal executive (Address of principal executive
offices including zip code) offices including zip code)
(781) 433-6000 (781) 453-8062
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Securities registered pursuant to Section 12(b) of the Act:
<CAPTION>
Title of each class and name of each exchange Title of each class and name of each exchange
on which registered on which registered
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Common Stock $.10 Par Value, Common Stock $.10 Par Value,
New York Stock Exchange New York Stock Exchange
9% Convertible Debentures due 2002,
New York Stock Exchange
7-1/2% Convertible Debentures due 2001,
New York Stock Exchange
7.375% Notes due 2000,
New York Stock Exchange
7.6% Notes due 2001,
New York Stock Exchange
Cumulative Redeemable Preferred
Stock represented by depository shares representing 1/10th of
a share of Preferred Stock, New York Stock Exchange
----------------
Securities registered pursuant to Section 12(g) of the Act:
None None
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Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [ ]
Aggregate market value of the paired voting stock of Meditrust Corporation
and of Meditrust Operating Company held by non-affiliates as of December 31,
1998 was $2,258,552,000. The number of shares of common stock, par value $.10
per share, outstanding as of December 31, 1998 for Meditrust Corporation was
150,631,102 and Meditrust Operating Company was 149,325,725.
The following documents are incorporated by reference into the indicated
Part of this Form 10-K.
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Document Part
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Definitive Proxy Statement for the June 25, 1999 Annual Meeting of
Shareholders, to be filed pursuant to Regulation 14A III
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Certain matters discussed herein constitute forward-looking statements
within the meaning of the Federal securities laws. The Meditrust Companies (the
"Companies"), consisting of Meditrust Corporation ("Realty") and Meditrust
Operating Company ("Operating"), intend such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements, and are
including this statement for purposes of complying with these safe harbor
provisions. Although the Companies believe the forward-looking statements are
based on reasonable assumptions, the Companies can give no assurance that their
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 conditions of the
capital markets at the time of the proposed spin-off of the healthcare
division, the identification of satisfactory prospective buyers for the
non-strategic assets and the availability of financing for such prospective
buyers, the availability of equity and debt financing for the Companies'
capital investment program, interest rates, competition for hotel services and
healthcare facilities in a given market, the satisfaction of closing conditions
to pending transactions described in this Joint Annual Report, the enactment of
legislation further impacting the Companies' status as a paired share real
estate investment trust ("REIT") or Realty's status as a REIT, unanticipated
delays or expenses on the part of the Companies and their suppliers in
achieving year 2000 compliance and other risks detailed from time to time in
the filings of Realty and Operating with the Securities and Exchange Commission
("SEC"), including, without limitation, those risks described in the Section of
this Joint Annual Report on Form 10-K entitled "Certain Factors You Should
Consider" beginning on page 64 hereof.
Item 1. Business
THE MEDITRUST COMPANIES
General
The Meditrust Companies consists of two separate companies, Meditrust
Corporation and Meditrust Operating Company, whose shares of common stock trade
as a single unit (symbol MT) on the New York Stock Exchange (the "NYSE") under
a stock pairing arrangement. Meditrust Corporation ("Realty") is a real estate
investment trust ("REIT") and Meditrust Operating Company ("Operating") is a
taxable corporation. Realty and Operating were each incorporated in the State
of Delaware in 1979. As used herein, the terms "Realty" and "Operating" include
wholly owned subsidiaries of Realty and Operating unless the context requires
otherwise. References to "The Meditrust Companies" or "Companies" refer to
Realty and Operating, collectively. This document constitutes the Joint Annual
Report on Form 10-K for both Realty and Operating.
The Meditrust Companies maintain an organizational structure called a
"paired share structure" such that the shares of capital stock of both
companies trade and are transferable as a single unit. A predecessor of Realty
("Meditrust's Predecessor") which was organized as a Massachusetts business
trust and was known as "Meditrust", acquired the paired share structure in 1997
by acquiring, together with an affiliate of Meditrust's Predecessor, Santa
Anita Realty Enterprises Inc. and Santa Anita Operating Company (collectively,
the "Santa Anita Companies"). The Santa Anita Companies had operated under the
paired share structure since 1979. The paired share structure permitted the
shareholders of The Meditrust Companies to enjoy the economic benefits of
owning a company that owns and leases real estate, namely Realty, and a company
that operates a business that uses real estate, namely Operating. The benefits
attributable to future use of the paired share structure have been limited,
however, by Federal legislation, which is described in more detail in this
Joint Annual Report, which was adopted in July 1998.
Realty
During 1998, Realty invested in real estate in three principal areas:
healthcare related real property, lodging facilities, and golf properties. As a
REIT, Realty is not permitted to operate the businesses conducted at or with
the real estate that it owns, rather, Realty must lease its properties to the
operators of the businesses. In the case of its healthcare related real
properties, Realty (taking into account the activities of Meditrust's
Predecessor) either leases facilities that it owns or invests in, or provides
financing to, third-party operators principally of long-term care, retirement
and assisted living facilities, rehabilitation hospitals and medical office
buildings. In the case of its lodging facilities and golf
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properties, Realty owns, maintains leasehold interest in or invests in real
estate that it leases to Operating. As more fully described below, Operating
operates the lodging and golf businesses conducted on the real estate that it
leases from Realty. During 1998, Realty also owned and leased to Operating
Santa Anita Park, a horse racing complex based in California, and invested in
certain related real estate. The Santa Anita real estate assets, which were
acquired at the time Meditrust's Predecessor acquired the paired share
structure, were sold by The Meditrust Companies, together with the operations
conducted thereon.
Operating
Operating operates the lodging and golf related real estate owned by
Realty. Operating does not conduct any activities related to Realty's
healthcare related real estate. The lodging portion of Operating's business is
conducted under the La Quinta[RegTM] brand name and is presently headquartered
in San Antonio, Texas. As more fully described below, the La Quinta[RegTM]
brand name, lodging facilities and operations were acquired by The Meditrust
Companies in July 1998. The golf portion of Operating's business is conducted
by the Cobblestone Golf Group, which was acquired by The Meditrust Companies in
May 1998, as more fully described below. Cobblestone is headquartered in San
Diego, California. The Meditrust Companies have entered into an agreement to
sell their subsidiaries which own the golf related real estate, together with
the operations conducted thereon. This sale is expected to close on or prior to
March 31, 1999. Operating also conducted the operating activities at Santa
Anita Park until December 1998 when the Companies sold these activities,
together with the Santa Anita real estate, to a third party.
Divisions
The Meditrust Companies conduct their businesses and make their
investments through three principal divisions: healthcare related real estate,
lodging and golf. As described above, Operating does not conduct any operations
in the healthcare related real estate business. Rather, this division, which is
headquartered in Needham, Massachusetts at the Companies' corporate
headquarters, is conducted solely through Realty. The lodging and golf
businesses, which are conducted through the La Quinta[RegTM] and Cobblestone
divisions, consist of real estate assets owned by Realty and operations
performed by Operating.
Healthcare Related Real Estate--Realty owns, invests in and provides
financing for 421 geographically dispersed healthcare facilities operated by
nearly 30 different third-party operators. In addition, Realty manages 43
medical office buildings, including all the medical office buildings owned by
Realty. As described below, during 1998 and into 1999, Realty has been selling
its interests in certain non-strategic healthcare properties.
Lodging--The Companies' lodging business is conducted under the La
Quinta[RegTM] brand name. At March 26, 1999, the La Quinta[RegTM] division owns
and operates an aggregate of 232 La Quinta[RegTM] Inns and 61 La Quinta[RegTM]
Inns & Suites in 28 states with over 37,000 hotel rooms. La Quinta[RegTM] is a
recognized brand name in the mid-priced lodging segment that appeals to many
business travelers. Realty acquired La Quinta Inns, Inc. and its subsidiaries
and its unincorporated partnership and joint venture entities (collectively,
"La Quinta") on July 17, 1998 by merging La Quinta Inns, Inc. into Realty (the
"La Quinta Merger"). Immediately prior to the La Quinta Merger, La Quinta
transferred all of its assets other than its real estate and brand name assets
to Operating to enable Operating to conduct the operating portion of La
Quinta's business.
La Quinta, which is a fully-integrated lodging company that focuses on the
ownership, operation and development of mid-priced hotels in the western and
southern regions of the United States, has continued to operate as an
independent division from its headquarters in San Antonio, Texas. On March 16,
1999, the Companies' announced that as a component of the merger with the
Meditrust Companies La Quinta's headquarters were being moved to Dallas, Texas.
Golf--The Companies' golf business is conducted under the Cobblestone
brandname. The Cobblestone division owns or leases and operates 43 golf course
facilities in 6 states. Realty acquired Cobblestone Holdings, Inc. and its
wholly owned subsidiary Cobblestone Golf Group, Inc. (together with its
subsidiaries, "Cobblestone") by merging Cobblestone Holdings, Inc. into Realty
on May 29, 1998 (the "Cobblestone Merger"). Immediately prior to the
Cobblestone Merger, Cobblestone Golf Group, Inc. and its subsidiaries
transferred all of their assets other than their real estate interests and the
Cobblestone trade name to Operating to enable Operating to conduct the golf
business at the golf course properties owned by Realty after the Cobblestone
Merger. Realty also acquired additional golf properties prior to and after the
Cobblestone Merger that are also operated by the Cobblestone Division.
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As described more fully below, the Companies have entered into a
definitive agreement to sell Cobblestone's golf course properties and
operations for $393 million.
Comprehensive Restructuring Plan
The Meditrust Companies consummated the Cobblestone Merger and the La
Quinta Merger on May 29, 1998 and July 17, 1998 respectively. On July 22, 1998,
the President signed into law the Internal Revenue Service Restructuring and
Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to
continue to grow through the use of the paired share structure. While the
Companies' use of the paired share structure in connection with the Cobblestone
Merger and the La Quinta Merger were each "grandfathered" under the Reform Act,
the ability to continue to use the paired share structure to acquire real
estate and the operating businesses conducted with the real estate assets
(included in the golf and lodging industries) has been substantially limited.
In addition, during the summer of 1998, the debt and equity capital markets
available to REITs generally, and healthcare and lodging REITs specifically,
deteriorated, thus limiting the Companies' access to cost-efficient capital.
The Companies began an analysis of the impact of the Reform Act, the
Companies' limited ability to access the capital markets and the operating
strategy of the Companies' existing businesses. This analysis included advice
from outside professional advisors and presentations by management on the
different alternatives available to the Companies. The analysis culminated in
the development of a comprehensive restructuring plan (the "Plan") designed to
strengthen the Companies' financial position and clarify its investment and
operating strategy by focusing on the Companies' healthcare and lodging
business segments. The Plan was announced on November 12, 1998 and included the
following component parts:
o Pursue the separation of the Companies' primary businesses, healthcare and
lodging, by creating two separately traded publicly listed REITs. The
Companies intend to spin off the healthcare financing business into a
stand-alone REIT;
o Continue to operate the Companies' healthcare and lodging businesses using
the existing paired-share REIT structure until the healthcare spin-off
takes place;
o Sell more than $1 billion of non-strategic assets, including the portfolio
of golf-related real estate and operating properties, the Santa Anita
Racetrack and approximately $550 million of non-strategic healthcare
properties;
o Use the proceeds from these asset sales to achieve significant near-term
debt reduction;
o Settle fully the Companies' forward equity issuance transaction ("FEIT")
with certain affiliates of Merrill Lynch & Co.;
o Reduce capital investments to respond to current operating conditions in
each industry;
o Reset Realty's annual dividend to $1.84 per common share, an amount that
Realty deems sustainable and comparable to the Companies' peer groups;
During 1998 and in early 1999, the Companies made significant progress in
implementing, and in some cases completing, significant components of the Plan.
The following summarizes the status of the Plan by substantive component parts:
o Completed the sale of $613 million of the $1 billion in planned asset sales,
including: $436 million of non-strategic healthcare assets, the Santa
Anita Racetrack and the related horse racing operation, the Companies'
interest in the Santa Anita Fashion Mall and related land held for
development and artwork originally acquired in the acquisition of the
Santa Anita Companies;
o Entered into letters of intent for the sale of an additional $155 million of
healthcare assets.
o Reduced the amount of its FEIT to $103 million as of December 31, 1998 ($89
million as of March 25, 1999) from the original $277 million.
o Reduced the Companies' outstanding debt by $274 million.
o Refocused the Companies' capital investment program to respond to industry
trends by reducing planned healthcare investments to $100 million in 1999
and ceasing construction of any new hotels after completion of the 13 La
Quinta[RegTM] Inns & Suites currently under development.
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o Reduced Realty's annual dividend to $1.84 per common share.
o Entered into a definitive agreement to sell Cobblestone Golf Group for
$393,000,000 and an agreement with its lenders and Merrill Lynch to settle
the FEIT.
Recent Developments
On February 11, 1999, The Meditrust Companies announced that they had
entered into a definitive agreement to sell (the "Cobblestone Sale") the
capital stock of the entities which comprise the Cobblestone golf division to
Golf Acquisitions, L.L.C., an affiliate of ClubCorp, Inc. for an aggregate
purchase price of $393 million, subject to adjustment for, among other things,
the debt of Cobblestone. The Cobblestone Sale, which is subject to customary
closing conditions, is expected to close on or prior to March 31, 1999. After
the consummation of the Cobblestone Sale, The Meditrust Companies will no
longer own, lease or operate golf course facilities and their activities will
consist of owning and investing in healthcare related real estate and owning
and operating lodging properties.
On March 10, 1999, Realty executed an agreement with its senior lenders to
amend its credit facility. The amendment, which is subject to the successful
completion of the sale of Cobblestone, permits the Companies to pay a portion
of the net cash sale proceeds from the sale of Cobblestone in further
settlement of a portion of the FEIT. The amendment also provides for, among
other things, deletion of limitations on certain healthcare investments and
reducing the borrowing availability on the credit facility's revolving portion
from $1,000,000,000 to $850,000,000. In addition, The Meditrust Companies also
entered into an agreement with Merrill Lynch and certain of its affiliates to
use the proceeds from the sale of Cobblestone in excess of $300 million to
settle the FEITs. Merrill Lynch has agreed not to sell any shares of the
existing FEIT until at least March 31, 1999 while the Companies complete the
sale of Cobblestone. At March 25, 1999, the balance of the FEITs was
approximately $89 million.
For a discussion of certain factors that could impact the financial
condition, results of operations and/or business of Realty or the successful
implementation of the Plan and each of its component parts, you are encouraged
to read the section entitled "Certain Factors You Should Consider" beginning on
page 64 of this Joint Annual Report on Form 10-K. In addition, discussions of
each of Realty's and Operating's individualized businesses commence on page 8
and 14, respectively of this Joint Annual Report on Form 10-K.
Unless otherwise specified, information regarding the Companies' business
is given as of December 31, 1998.
Capital Raising Transactions
Forward Equity Transaction
On February 26, 1998, the Companies entered into transactions (the
"Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch
International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc.
(collectively with its agent and successor in interest, "MLI"). Pursuant to the
terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A
Non-Voting Convertible Common Stock par value $.10 per share from each of the
Companies at a purchase price of $32.625 per share (collectively with the
paired common shares the shares of Series A Non-voting Convertible Common Stock
are convertible into, the "Notional Shares"). The Series A Non-Voting
Convertible Common Stock converted on a one to one basis to paired common stock
of the Companies on June 18, 1998. Total proceeds from the issuance were
approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from
the issuance were approximately $272,000,000, and were used by the Companies to
repay existing indebtedness. The Companies and MLI also entered into a Purchase
Price Adjustment Agreement under which the Companies would, within one year
from the date of MLI's purchase, on a periodic basis, adjust the purchase price
based on the market price of the paired common stock at the time of any interim
or final adjustments, so as to provide MLI with a guaranteed return of LIBOR
plus 75 basis points (the "Return"). The paired common shares issued receive
the same dividend as the Companies' paired common stock; however, the
difference between LIBOR plus 75 basis points and the dividend payments
received by MLI will be included as an additional adjustment under the Purchase
Price Adjustment Agreement. Such adjustments were to be effected by deliveries
of additional
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paired common shares to, or, receipts of paired common shares from, MLI. In the
event that the market price for the paired shares is not high enough to provide
MLI with the Return, the Companies would have to deliver additional paired
shares to MLI, which would have a dilutive effect on the capital stock of the
Companies. This dilutive effect increases significantly as the market price of
the paired shares declines further below the original purchase price. Moreover,
settlement of the FEIT transaction, whether at maturity or at an earlier date,
may force the Companies to issue paired shares at a depressed price, which may
heighten this dilutive effect on the capital stock of the Companies. Prior to
the settlement, MLI shall hold any paired common shares delivered by the
Companies under the Purchase Price Adjustment Agreement in a collateral account
(the "Collateral Shares"). Under the adjustment mechanism, the Companies
delivered approximately 9,700,000 Collateral Shares in 1998, all of which were
returned to the Companies when the Companies settled in cash a portion of the
adjustment transaction in December 1998.
The FEIT has been accounted for as an equity transaction with the Notional
Shares treated as outstanding from their date of issuance until the respective
date of repurchase, if any, for both basic and diluted earnings per share
purposes. For diluted earnings per share purposes, at the end of the quarterly
period, the then outstanding Reference Amount (as defined herein) is divided by
the quoted market price of a paired common share, and the excess, if
applicable, of that number of paired common shares over the Notional Shares
(the "Contingent Shares") is added to the denominator. Contingent Shares are
included in the calculation of year to date diluted earnings per share weighted
for the interim periods in which they were included in the computation of
diluted earnings per share.
The "Reference Amount" equals the Initial Reference Amount plus the Return
and net of any cash distributions on the Notional Shares or any other cash paid
or otherwise delivered to MLI under the FEIT.
Payments that reduce the Reference Amount in effect satisfy all necessary
conditions for physically settling that portion of the Reference Amount and are
accounted for in a manner similar to treasury stock. Therefore, payments that
reduce the Reference Amount are divided by the quoted market price of a paired
common share on the date of payment. The calculated number is then multiplied
by the fractional number of days in the period prior to the payment date and
the resulting number of paired common shares is included in the calculation of
diluted earnings per share for the period.
On November 11, 1998, the Companies entered into an agreement with MLI to
amend the FEIT. Under the agreement, Realty agreed to grant a mortgage on the
Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the
FEIT with cash generated in part from the sale of certain assets, including the
Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the
settlement agreement, not to sell any shares of the existing FEIT until
February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152
million ($127 million of which was from the sale of certain assets including
the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and
the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional
Shares outstanding were reduced to approximately 6,865,000 paired common shares
and there were no Contingent Shares issuable.
On March 10, 1999, the Companies entered into an agreement with MLI and
certain of its affiliates to use the proceeds from the sale of Cobblestone Golf
Group in excess of $300 million to purchase all or a portion of the remaining
Notional Shares. Merrill Lynch has agreed not to sell any shares of the
remaining Notional Shares until March 31, 1999 while the Companies complete the
sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference
Amount is $89 million.
Series A Preferred Stock
On June 10, 1998, Realty issued 7,000,000 depositary shares. Each
depositary share represents one-tenth of a share of 9% Series A Cumulative
Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds
from this issuance of approximately $168,666,000 were used by Realty primarily
to repay existing indebtedness.
New Credit Agreement
On July 17, 1998, Realty executed an agreement for an unsecured bank
facility ("New Credit Agreement") for a total of $2,250,000,000 bearing
interest at the lenders' prime rate plus .50% or LIBOR plus 1.375%. The
facility is comprised of three tranches with term loans at various maturity
dates between
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July 17, 1999 and July 17, 2001 and a revolving tranche with availability of
$1,000,000,000 maturing July 17, 2001.
On November 23, 1998 Realty executed an agreement with its bank group to
amend the New Credit Agreement. The amendment provided for Realty's delivery of
cash in settlement of a portion of its FEIT, and the amendment of certain
financial covenants to accommodate asset sales by Realty, to exclude the impact
of non-recurring charges, and to provide for future operating flexibility. The
amendment also provided for an increase to the LIBOR pricing of the credit
facility by approximately 125 basis points, and the pledge of stock of the
Companies' subsidiaries. This pledge of subsidiary stock also extended on a pro
rata basis to entitled bondholders. Realty also agreed to a 25 basis point
increase to the LIBOR pricing in the event that an equity offering of at least
$100,000,000 was not consummated by February 1, 1999. On February 1, 1999 this
increase went into effect.
On March 10, 1999, Realty executed a second agreement with the bank group
to further amend its New Credit Agreement. The second amendment, which is
subject to the successful completion of the sale of Cobblestone, permits the
Companies to pay a portion of the net cash sale proceeds from the sale of
Cobblestone in further settlement of a portion of the FEIT. The second
amendment also provides for, among other things, deletion of limitations on
certain healthcare investments and reducing the borrowing availability on
Tranche A to $850,000,000.
Of the $1,000,000,000 revolving tranche, $353,000,000 was available at
December 31, 1998, bearing interest at the Base rate (8.25%) or LIBOR plus
2.625% (7.98% at December 31, 1998). As of March 5, 1999, $244,000,000 was
available on the revolving tranche.
Shelf Registration Statement
The Companies have an effective shelf registration statement on file with
the Securities and Exchange Commission (the "SEC") under which the Companies
may issue up to $1,825,000,000 of securities including common stock, preferred
stock, debt, series common stock, convertible debt and warrants to purchase
common stock, preferred stock, debt, series common stock and convertible debt.
Realty believes that various sources of capital available over the next
twelve months are adequate to finance pending acquisitions, mortgage financings
and dividends. Over the next twelve months, as Realty identifies appropriate
investment opportunities, Realty may raise additional capital through the sale
of assets, common shares or preferred shares, the issuance of additional
long-term debt or through a securitization transaction.
Capital Requirements and Availability of Financing
Realty's business is capital intensive, and it will have significant
capital requirements in the future. Realty's leverage could affect its ability
to obtain financing in the future or to undertake refinancings on terms and
subject to conditions deemed acceptable by Realty. In the event that Realty's
cash flow and working capital are not sufficient to fund Realty's expenditures
or to service its indebtedness, it would be required to raise additional funds
through the sale of additional equity securities, the refinancing of all or
part of its indebtedness, the incurrence of additional permitted indebtedness
or the sale of assets. There can be no assurance that any of these sources of
funds would be available in amounts sufficient for Realty to meet its
obligations. Moreover, even if Realty were able to meet its obligations, its
leveraged capital structure could significantly limit its ability to finance
its construction program and other capital expenditures, to compete effectively
or to operate successfully under adverse economic conditions. Additionally,
financial and operating restrictions contained in Realty's existing
indebtedness may limit Realty's ability to secure additional financing, and may
prevent Realty from engaging in transactions that might otherwise be beneficial
to Realty and to holders of Realty's common stock. Realty's ability to satisfy
its obligations will also be dependent upon its future performance, which is
subject to prevailing economic conditions and financial, business and other
factors beyond Realty's control.
Short-Term Investments
Realty invests its cash in certain short-term investments during interim
periods between the receipt of revenues and distributions to shareholders. Cash
not invested in facilities may be invested in interest-bearing bank accounts,
certificates of deposit, short-term money-market securities, short-term United
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States government securities, mortgage-backed securities guaranteed by the
Government National Mortgage Association, mortgages insured by the Federal
Housing Administration or guaranteed by the Veterans Administration, mortgage
loans, mortgage loan participations, and certain other similar investments.
Realty's ability to make certain of these investments may be limited by tax
considerations. Realty's return on these short-term investments may be more or
less than its return on real estate investments.
Borrowing Policies
Realty may incur additional indebtedness when, in the opinion of the
Directors, it is advisable. For short-term purposes, Realty may, from time to
time, negotiate lines of credit, arrange for other short-term borrowings from
banks or others or issue commercial paper. Realty may arrange for long-term
borrowing from banks, insurance companies, public offerings or private
placements to institutional investors.
In addition, Realty may incur mortgage indebtedness on real estate which
it has acquired through purchase, foreclosure or otherwise. When terms are
deemed favorable, Realty may invest in properties subject to existing loans or
mortgages. Realty also may obtain financing for unleveraged properties in which
it has invested or may refinance properties acquired on a leveraged basis.
There is no limitation on the number or amount of mortgages which may be placed
on any one property, but overall restrictions on mortgage indebtedness are
provided under documents pertaining to certain existing indebtedness.
Legislative Developments
On July 22, 1998, the President signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act"). Included in
the Reform Act is a freeze on the grandfathered status of paired share REITs
such as the Companies. Under this legislation, the anti-pairing rules provided
in the Code, apply to real property interests acquired after March 26, 1998 by
the Companies, or by a subsidiary or partnership in which a ten percent or
greater interest is owned by the Companies, unless (1) the real property
interests are acquired pursuant to a written agreement that 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.
Under the Reform Act, the properties acquired in connection with the July
17, 1998 La Quinta Merger and in connection with the May 29, 1998 Cobblestone
Merger generally are not 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 or described in a public announcement or in a filing
with the SEC on or before March 26, 1998, is subject to the anti-pairing rules.
Moreover, under the Reform Act any otherwise grandfathered property will become
subject to the anti-pairing rules if a lease or renewal with respect to such
property is determined to exceed an arm's length rate. In addition, the Reform
Act also provides that a property held by the Companies that is not subject to
the anti-pairing rules will become subject to such rules in the event of 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 acquired from La Quinta and Cobblestone), the fair market value of
the property on the date it was acquired by the Companies.
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 restriction on property improvements applies to the
properties acquired from La Quinta and Cobblestone, as well as all other
properties owned by the Companies, and limits the ability of the Companies to
improve or change the use of those properties after December 31, 1999. The
Companies are considering various steps which they might take in order to
minimize the effect of the Reform Act. As part of their restructuring plan
announced in November 1998, the Companies intend to operate their healthcare
and lodging business using the paired share structure until the healthcare
spin-off takes place.
Further, restructuring the operations of Realty and Operating to comply
with the recent legislation may cause the Companies to incur substantial tax
liabilities, to recognize an impairment loss on their goodwill asset or
otherwise adversely affect the Companies.
7
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REALTY
General
Realty is a self administered real estate investment trust which operates
under the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and is incorporated in the State of Delaware. During 1998, Realty
invested primarily in (i) healthcare facilities located throughout the United
States, (ii) an entity which invests in healthcare facilities in the United
Kingdom, (iii) lodging properties located throughout the western and southern
United States, and (iv) golf course properties located in the southern United
States. As of December 31, 1998, Realty had investments in 765 facilities
consisting of 421 healthcare facilities, 301 lodging properties and 43 golf
courses. Thirty of these facilities are presently under construction and are
expected to be completed during the next twelve months.
Realty intends to continue to make and manage its investments (including
the sale or disposition of property or other investments) and to operate
(including through its business relationships with Operating) in a manner
consistent with the requirements of the Code and the regulations thereunder in
order to qualify as a REIT. As long as Realty complies with the Code and its
regulations regarding REIT qualification requirements, Realty will not be
taxed, except in limited circumstances, under the Federal income tax laws on
that portion of its taxable income that it distributes to its shareholders.
Realty has historically distributed, and intends to continue to distribute,
substantially all of its real estate investment trust taxable income to its
shareholders.
Realty had a net increase in gross real estate investments of
$2,645,236,000 during 1998 consisting of the following:
<TABLE>
<CAPTION>
Transactions Increasing Transactions Decreasing
Real Estate Portfolio Real Estate Portfolio
- - ---------------------------------------------- -------------------------------------------
<S> <C>
o Acquiring lodging properties in the La o Sale of non-strategic healthcare assets
Quinta Merger
o Acquiring golf courses in the Cobblestone o Sale of Santa Anita Racetrack and Santa
Merger Anita Fashion Mall
o Entering into sale/leaseback transactions o Repayment of principal on permanent
with third-party operators of healthcare mortgage loans and development loans
properties
o Providing permanent mortgage loan and o Adjustments for real estate asset
development loan financing to third-party impairments
operators of healthcare properties
</TABLE>
As described above, The Meditrust Companies announced a comprehensive
restructuring plan on November 12, 1998 that is designed to clarify the
Companies' investment and operating strategy by focusing on the healthcare and
lodging business segments. As a result, prior to December 31, 1998, Realty sold
its interest in a number of non-strategic real estate assets including the
Santa Anita Racetrack, the Santa Anita Fashion Mall and related land held for
development and approximately $436 million of non-strategic healthcare assets.
In addition, Realty, together with Operating, has entered into a definitive
agreement to sell all of its subsidiaries that have interests in golf course
properties. Accordingly, Realty's business, once the sale of the Cobblestone
golf entities is completed, will thereafter be focused on healthcare and
lodging related real estate.
Realty's principal executive offices are located at 197 First Avenue,
Suite 300, Needham, Massachusetts 02494, and its telephone number is (781)
433-6000.
For a discussion of certain factors that could impact the financial
condition, results of operations and/or business of Realty or the successful
implementation of the Plan and each of its component parts, you are encouraged
to read the section entitled "Certain Factors You Should Consider" beginning on
page 64 of this Joint Annual Report on Form 10-K.
Healthcare Related Real Estate
As of December 31, 1998, Realty had investments in 421 healthcare
facilities including 221 long-term care facilities, 157 retirement and assisted
living facilities, 34 medical office buildings, one acute
8
<PAGE>
care hospital campus and eight other healthcare facilities. Of Realty's 421
healthcare facilities, 244 are directly owned by Realty. Third-party operators
lease 220 of the healthcare facilities, 24 medical office buildings are leased
to tenants of the facilities and 177 constitute investments through the
provision of permanent mortgage loan or development loan financing. Realty
generally invests in high-quality healthcare facilities that are managed by a
diverse group of experienced third party operators. Realty achieves diversity
in its healthcare property portfolio by investing in several different sectors
of the healthcare industry and in different geographic regions and by providing
financing to or leasing properties to a number of different third-party
operators. Realty's healthcare properties are located in 38 states and are
operated by 30 different operators. A private healthcare company and Sun
Healthcare Group, Inc. operate approximately 38% of Realty's healthcare real
estate investments. No other healthcare operator operates more than 10% of
Realty's healthcare real estate investments.
Investments
Sale/Leaseback Transactions--During 1998, Realty acquired 15 assisted
living facilities and 23 medical office buildings for an aggregate purchase
price of $276,075,000. In addition, during 1998, Realty provided net funding of
$54,467,000 for the construction of 17 assisted living facilities and
$1,820,000 for the construction of an addition to one of Realty's existing
long-term care facilities. Realty leases 220 of its healthcare investments to
third-party operators. Substantially all of Realty's healthcare facilities
which are the subject of sale-leaseback transactions are leased under triple
net leases which are accounted for as operating leases and generally require
that the third-party operator pay for all maintenance, repairs, insurance and
taxes on the property. Realty generally earns fixed monthly rents, although in
some circumstances Realty may also earn periodic additional rents. Generally,
multiple leases with one operator are cross-collateralized and contain
cross-default provisions tied to each of the operator's other leases with
Realty.
Permanent Mortgage Loan Financing--During 1998, Realty provided permanent
mortgage loan financing of $76,260,000 for two long-term care facilities, one
medical office building and for a 135 acre development stage property. Realty
also provided $2,945,000 in additional construction loan financing to construct
additions at facilities for which Realty already held a permanent mortgage on.
The permanent mortgage financing provided by Realty generally consists of
either construction or development loans made to a third-party operator to
construct a new healthcare facility which are converted to a permanent mortgage
loan or permanent mortgage loan financing that was put in place at the time the
third-party operator bought or refinanced an existing healthcare facility. The
permanent mortgage loans are secured by first mortgage liens on the underlying
real estate and personal property of the mortgagor.
Development Loan Financing--During 1998, Realty provided new development
funding of $33,061,000 to third-party operators for the construction of two
long-term care facilities and one medical office building. Realty also provided
$110,258,000 of development funding for ongoing construction at facilities for
which development commenced prior to January 1, 1998. Generally, Realty
provides development and construction financing with a view towards converting
the financing into a permanent mortgage loan or acquiring the developed
property and leasing it back to the third-party operator.
Repayments and Other Transactions--During 1998, Realty received an
aggregate of $407,241,000 of principal payments on permanent mortgage loans
from third-party operators of healthcare facilities. Realty also received net
proceeds of $320,135,000 from the sale of one long-term care facility, 32
assisted living facilities and nine rehabilitation facilities, which included
certain assets sold in connection with the implementation of the Companies'
comprehensive restructuring plan. In addition, Realty has also entered into
letters of intent to sell additional healthcare assets at an aggregate gross
purchase price of approximately $155 million. In the event Realty sells or
otherwise disposes of any of its properties, Realty's Directors will determine
whether and to what extent Realty will acquire additional properties or
distribute the proceeds to the shareholders.
Equity Investments--Between July 1996 and August 1998, Realty invested an
aggregate of approximately $57,204,000 to purchase 26,606,000 shares of common
stock, representing a 19.99% interest in, Nursing Home Properties plc ("NHP
plc"), a property investment group that specializes in the financing, through
sale/leaseback transactions, of nursing homes located in the United Kingdom.
Realty
9
<PAGE>
does not have the right to vote in excess of 9.99% of the shares of common
stock of NHP plc. As of November 24, 1998, NHP plc had invested approximately
L377,000,000 in 200 nursing homes with a total of approximately 10,800 beds.
The facilities are leased to 24 different United Kingdom-based nursing home
operators on terms and conditions similar to those contained in Realty's leases
with its third-party operators. As of December 31, 1998, the market value of
this investment was $66,591,080 and is included in Realty's and the Companies'
financial statements. The resulting difference, $9,387,000, between the current
market value and the aggregate cost of the NHP plc shares is included in
shareholders' equity in Realty's and the Companies financial statements.
Realty also has an investment consisting of 331,000 shares of capital
stock and warrants to purchase an additional 1,008,000 shares of capital stock
in Balanced Care Corporation, a healthcare operator. This investment has a
market value of $8,688,000 at December 31, 1998 and is included in Realty's and
the Companies' financial statements. The difference of $7,584,000 between the
market value and the aggregate cost of the shares and the warrants is included
in shareholders' equity in Realty's and the Companies' financial statements.
Future Healthcare Investments--As part of the Plan, Realty has reduced its
capital investment program to respond to changing industry conditions and
demand for new healthcare facilities. Realty has historically invested in
healthcare related facilities which have included long-term care facilities,
rehabilitation hospitals, retirement and assisted living facilities, medical
office buildings, alcohol and substance abuse treatment facilities, psychiatric
hospitals, and other healthcare related facilities. Realty has also invested in
other entities which invest in similar facilities abroad. These investments
have been made primarily for the production of income. Realty will continue to
make these types of investments, though the level of capital investment will be
less than Realty's historical investment level. As part of Realty's capital
plan, it may , however, continue to diversify its portfolio in order to
minimize risks inherent in investing in healthcare related real estate industry
by broadening its geographic base, providing financing to more operators,
diversifying the type of healthcare and other facilities in its portfolio and
diversifying the types of financing methods provided.
In evaluating potential investments, Realty considers factors such as: (1)
the current and anticipated cash flow and its adequacy to meet operational
needs and other obligations and to provide a competitive market return on
equity to Realty's shareholders; (2) the geographic area, type of property and
demographic profile; (3) the location, construction quality, condition and
design of the property; (4) the potential for capital appreciation, if any; (5)
the growth and regulatory environment of the communities in which the
properties are located; (6) occupancy and demand for similar healthcare or
other facilities in the same or nearby communities; (7) for healthcare
investments, an adequate mix of private and governmental-sponsored patients;
(8) potential alternative uses of the facilities; and (9) prospects of
liquidity through financing or refinancing.
Management reviews and verifies market research for a significant amount
of potential investments on behalf of Realty. Management also reviews the value
of the property, the interest rates and debt service coverage requirements of
any debt to be assumed and the anticipated sources of repayment for such debt.
In the event Realty sells or otherwise disposes of any of its properties,
Realty's Directors will determine whether and to what extent Realty will
acquire additional properties or distribute the proceeds to the shareholders.
Competition in Healthcare Industry
For healthcare investments, Realty competes, primarily on the basis of
knowledge of the industry, economics of the transaction and flexibility of
financing structure, with real estate partnerships, other real estate
investment trusts, banks and other investors generally in the acquisition,
leasing and financing of healthcare related facilities.
The operators of the facilities compete on a local and regional basis with
other operators of comparable facilities. They compete with independent
operators as well as companies managing multiple facilities, some of which are
substantially larger and have greater resources than the operators
10
<PAGE>
of the facilities. Some of these facilities are operated for profit while
others are owned by governmental agencies or tax-exempt not-for-profit
organizations.
Government Regulation
Realty recognizes a portion of revenue from percentage, supplemental
and/or additional rent or interest. This revenue can be a contractual amount or
be based on the healthcare facility operator's gross revenues, which, in most
cases, is subject to changes in the reimbursement and licensure policies of
federal, state and local governments. In addition, the acquisition of
healthcare facilities is generally subject to state and local regulatory
approval.
Medicare, Medicaid, Blue Cross and Other Payors
Certain of the third-party healthcare operators who lease facilities from
Realty or who obtained loan financing from Realty receive payments for patient
care from federal Medicare programs for elderly and disabled patients, state
Medicaid programs for medically indigent and cash grant patients, private
insurance carriers, employers and Blue Cross plans, health maintenance
organizations, preferred provider organizations and directly from patients.
Historically, Medicare payments for long-term care services, psychiatric care,
and rehabilitative care were based on allowable costs plus a return on equity
for proprietary facilities. On August 5, 1997, President Clinton signed into
law the Balanced Budget Act ("BBA") which included among other things, sweeping
changes to Medicare reimbursement for long-term care services. The new
reimbursement system is intended to reduce the growth in Medicare spending by
creating incentives for the lowest cost delivery of long-term care services.
The prospective payment system ("PPS") is being implemented over a twelve month
period (based upon each facility's year-end cost report) beginning July 1,
1998, with the majority of nursing homes converting to PPS on January 1, 1999.
Reimbursement under the new PPS rates will be phased in over the next four
years. PPS may result in reduced Medicare revenue for long-term care facilities
with significant Medicare patient populations. Success under PPS is dependent
on several factors, including the third-party operator's management team's
effectiveness.
Payments from state Medicaid programs for psychiatric care are based on
reasonable costs or are at fixed rates. Long-term care facilities are generally
paid by the various states' Medicaid programs at rates based upon cost
reimbursement principles. Reimbursement rates are typically determined by the
state from cost reports filed annually by each facility on a prospective or
retrospective basis. Most Medicare and Medicaid payments are below retail
rates. Payments from other payors are generally also below retail rates. Blue
Cross payments in different states and areas are based on costs, negotiated
rates or retail rates.
Regulation of Healthcare Properties and Third-Party Operators
Long-Term Care Facilities--Regulation of long-term care facilities is
exercised primarily through the licensing of such facilities. The particular
agency having regulatory authority and the license qualification standards vary
from state to state and, in some instances, from locality to locality.
Licensure standards are constantly under review and undergo periodic revision.
Governmental authorities generally have the power to review the character,
competence and community standing of the operator and the financial resources
and adequacy of the facility, including its plant, equipment, personnel and
standards of medical care. Long-term care facilities may be certified under the
Medicare program and are normally eligible to qualify under state Medicaid
programs, although not all participate in the Medicaid programs.
Rehabilitation Hospitals--Rehabilitation hospitals are also subject to
extensive federal, state and local legislation and regulation. Rehabilitation
hospitals are subject to periodic inspections and licensure requirements.
Inpatient rehabilitation facilities are cost-reimbursed, receiving the lower of
reasonable costs or reasonable charges. Typically, the fiscal intermediary pays
a set rate per day based on the prior year's costs for each facility. Annual
cost reports are filed with the operator's fiscal intermediary and adjustments
are made, if necessary.
Medical Office Buildings--The individual physicians, groups of physicians
and healthcare providers which occupy medical office buildings are subject to a
variety of federal, state and local regulations
11
<PAGE>
applicable to their specific areas of practice. Since medical office buildings
may contain numerous types of medical services, a wide variety of regulations
may apply. In addition, medical office buildings must comply with the
requirements of municipal building codes, health codes and local fire
departments.
Acute Care Hospitals--Acute care hospitals are subject to extensive
federal, state and local legislation and regulation relating to, among other
things, the adequacy of medical care, equipment, personnel, hygiene, operating
policies and procedures, fire prevention, rate-setting and compliance with
building codes and environmental protection laws. Hospitals must maintain
strict standards in order to obtain their state hospital licenses from a
department of health or other applicable agency in each state. In granting and
renewing licenses, the department of health considers, among other things, the
physical buildings and equipment, the qualifications of the administrative
personnel and nursing staff, the quality of care and continuing compliance with
the laws and regulations relating to the operation of the facilities. State
licensing of facilities is a prerequisite to certification under the Medicare
and Medicaid programs. Various other licenses and permits also are required in
order to dispense narcotics, operate pharmacies, handle radioactive materials
and operate certain equipment. Hospital facilities are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with the various standards necessary for their licensing and accreditation.
Retirement and Assisted Living--Residential communities such as retirement
and assisted living facilities are subject to varying degrees of regulation and
licensing by local and state health and social service agencies, and other
regulatory authorities specific to their location. Typically these regulations
and licensing requirements relate to fire safety, sanitation, staff training,
staffing levels and living accommodations, as well as requirements specific to
certain health related services offered. Levels of service provided and
corresponding regulation vary considerably from operator to operator as some
are similar to long-term care facilities, while others fall into the relatively
unregulated care of a retirement community.
Alcohol and Substance Abuse Treatment Facilities--Alcohol and substance
abuse treatment facilities must comply with the licensing requirements of
federal, state and local health agencies and with the requirements of municipal
building codes, health codes and local fire departments. In granting and
renewing a facility's license, a state health agency considers, among other
things, the physical buildings and equipment, the qualifications of the
administrative personnel and healthcare staff, the quality of nursing and other
services and the continuing compliance of such facility with the laws and
regulations applicable to its operations.
Psychiatric Hospitals--Psychiatric hospitals generally are subject to
extensive federal, state and local legislation and regulation. Licensing for
psychiatric hospitals is subject to periodic inspections regarding standards of
medical care, equipment and hygiene. In addition, there are specific laws
regulating civil commitment of patients and disclosure of information regarding
patients being treated for chemical dependency. Many states have adopted a
"patient's bill of rights" which sets forth standards, such as using the least
restrictive treatment, allowing patient access to the telephone and mail,
allowing the patient to see a lawyer and requiring the patient to be treated
with dignity. Insurance reimbursement for psychiatric treatment generally is
more limited than for general healthcare.
Lodging Related Real Estate
As of December 31, 1998, Realty had investments in 301 lodging facilities
including 226 La Quinta[RegTM] Inns and 57 La Quinta[RegTM] Inns & Suites which
are presently operating and wholly-owned by Realty, two presently operating La
Quinta[RegTM] Inns which Realty owns 50% or more of, three lodging properties
owned by Realty which are marketed under a brand name other than La
Quinta[RegTM], and 13 La Quinta[RegTM] Inns & Suites under construction. Realty
anticipates that these properties under construction will be completed by the
end of the second quarter of 1999. These lodging facilities, which are located
in 28 states and have an aggregate of 37,000 rooms in service, are leased by
Realty (or the respective property owning subsidiary) to a subsidiary of
Operating. A complete discussion of the lodging business and inventory is
presented in Operating's portion of the Business section of this Joint Annual
Report on Form 10-K.
La Quinta Merger
Realty acquired the real estate assets of La Quinta Inns, Inc. on July 17,
1998 by merging La Quinta Inns, Inc. with and into Realty. The real estate
assets acquired consisted of 233 La Quinta[RegTM] Inns and 47
12
<PAGE>
La Quinta[RegTM] Inns & Suites in service as of the date of the La Quinta
Merger, and 23 La Quinta[RegTM] Inns & Suites under construction and additional
land held for development. The properties in service at the time of the La
Quinta Merger consisted of 280 lodging facilities, containing a total of
approximately 36,000 rooms located in 28 states, concentrated in the western
and southern regions of the United States. Substantially all of those
properties were wholly-owned by La Quinta Inns, Inc. and were operated under
the La Quinta[RegTM] Inns and La Quinta[RegTM] Inns & Suites brand names.
Lodging Properties In Service
Realty's portfolio of lodging properties consist principally of
wholly-owned lodging facilities. Realty (including through its predecessor, La
Quinta Inns, Inc.) has historically acquired either directly or with a
development partner, real estate upon which to develop a lodging facility.
Realty's hotel division generally identifies real estate that is located in
well-traveled areas in order to offer the business traveler, which is La
Quinta's principal customer type, convenient access to the facilities and
services needed to conduct his or her job. Realty (including through its
predecessor) develops and leases two types of lodging properties, La
Quinta[RegTM] Inns and La Quinta[RegTM] Inns & Suites. La Quinta[RegTM] Inns
consist of hotel properties with an average of 130 single rooms per property
and are operated in the mid-priced lodging segment. La Quinta[RegTM] Inns &
Suites consist of two room suites that contain additional room and on-site
amenities and are operated at the high-end of the mid-priced segment.
Lodging Properties in Development
During 1998, Realty's lodging division completed construction of 24 new La
Quinta[RegTM] Inns & Suites and has an additional 13 inns under construction to
be completed by June 1999.
Future Development Activities
As part of the Plan, Realty will not commence any new construction of
lodging facilities until market conditions will foster such new development and
the capital markets are more appropriately accessible to finance any such new
development. As of December 31, 1998 the 13 La Quinta[RegTM] Inns & Suites
under construction will be completed by the end of the second quarter of 1999,
although no new construction is planned or will be commenced in the near term.
Instead, Realty's lodging division will evaluate and concentrate on lodging
facilities in services in order to maximize the overall return from Realty's
lodging portfolio. Once market conditions warrant and the capital markets are
accessible at an acceptable cost to Realty, Realty intends to pursue
development opportunities for lodging facilities, including La Quinta[RegTM]
Inns and La Quinta[RegTM] Inns & Suites, when, as and if appropriate.
Golf Related Real Estate
As of December 31, 1998, Realty had investments in 43 golf courses,
including 34 golf courses that it owns either directly or through subsidiaries
and 9 golf courses that it leases from third parties. In addition, Realty is
currently developing 2 additional golf courses in Texas. All of Realty's owned
and leased golf course are leased or subleased, as the case may be, to a
subsidiary of Operating.
On February 11, 1999, Realty, together with Operating, announced that it
had entered into a definitive agreement to sell the subsidiaries that own
Realty's golf course properties, together with the operations conducted
thereon, to Golf Acquisitions, L.L.C., an affiliate of ClubCorp., Inc. for an
aggregate purchase price of approximately $393 million, subject to certain
adjustments. The transaction, which is subject to customary closing conditions,
is scheduled to close on or prior to, March 31, 1999. Upon completion of this
transaction, Realty will no longer own interests, directly or indirectly, in
any golf course properties.
Cobblestone Merger
Realty acquired the real estate assets of Cobblestone Holdings, Inc. and
its subsidiaries on May 29, 1998 by merging Cobblestone Holdings, Inc. with and
into Realty. The real estate assets acquired consisted of 25 golf courses, 19
of which were owned and 6 of which were leased. Cobblestone's properties were
concentrated primarily in the southern United States.
Additional Acquisitions of Golf Course Properties
During, 1998, Realty, through its golf division, also acquired an
additional 18 golf courses, 15 of which were owned and 3 of which were leased.
These courses were principally located in the southeastern United States.
13
<PAGE>
Lease of Golf Course Properties to Operating
All of Realty's golf courses are either leased, in the case of its owned
golf courses, or subleased, in the case of its leased golf courses, to a
subsidiary of Operating. A discussion of the golf business and industry is
presented in Operating's portion of the Business section of this Joint Annual
Report on Form 10-K.
Golf Properties in Development
During 1998, Realty's golf division commenced construction of two new golf
courses. In addition, one nine-hole course that was under construction at the
beginning of 1998 was completed and put in service during 1998.
Employees
As of December 31, 1998, the operations of Realty were maintained by 83
employees. Realty has not experienced any significant labor problems and
believes that its employee relations are good.
Legal Proceedings
Realty is, and is likely in the future to be, subject to certain types of
litigation, including negligence and other tort claims. The costs and effects
of such legal and administrative cases and proceedings (whether civil or
criminal), settlements and investigations are indeterminate. The costs and
effects of any such legal proceeding could be material to Realty's operations.
For further discussion of these issues see Item 3, "Legal Proceedings".
General Real Estate Investment Risks
Realty's ownership of real property is substantial. Realty's investments
are subject to varying degrees of risk generally incident to the ownership of
real property. Real estate values and income from Realty's properties may be
adversely affected by changes in national economic conditions, changes in local
market conditions due to changes in general or local economic conditions and
neighborhood characteristics, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements, changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including earthquakes and other natural disasters
(which may result in uninsured losses), acts of war, adverse changes in zoning
laws and other factors which are beyond the control of Realty. A significant
portion of revenue for third party operators of Realty's Portfolio arises from
government reimbursement of various healthcare services. Changes in
reimbursement rates could adversely affect third-party operators' cash flow and
calculating for operating expenses.
Value and Liquidity of Real Estate
Real estate investments are relatively illiquid. The ability of Realty to
vary its portfolio in response to changes in economic and other conditions is
limited. If Realty must sell an investment, there can be no assurance that
Realty will be able to dispose of it in the time period it desires or that the
sales price of any investment will recoup or exceed the amount of Realty's
investment.
Property Taxes
Each of Realty's lodging facilities is subject to real property taxes. The
real property taxes on the inns may increase or decrease as property tax rates
change and as the properties are assessed or reassessed by taxing authorities.
If property taxes increase, Realty's operations could be adversely affected.
OPERATING
General
Operating is a Delaware corporation which operates the business conducted
on Realty's lodging and golf related real estate. Operating does not operate
any businesses conducted on, or related to, Realty's healthcare related real
estate. As of December 31, 1998, Operating leased from Realty and
14
<PAGE>
managed 299 lodging facilities and 43 golf courses. In addition, until it was
sold on December 10, 1998, Operating also leased from Realty and operated the
Santa Anita Racetrack, one of the United States' preeminent thoroughbred
racetracks. Operating's activities are conducted primarily on real estate
either leased or subleased from Realty. Operating neither leases real estate
from, nor manages real estate on behalf of, any third-party. Rather,
Operating's activities are currently principally intended to enhance the
Companies' shareholders participation in the income produced by Realty.
As described above, The Meditrust Companies announced a comprehensive
restructuring plan on November 12, 1998 that is designed to clarify the
Companies investment and operating strategy by focusing on the healthcare and
lodging business segments. As a result, prior to December 31, 1998, Operating,
together with Realty, sold the Santa Anita Racetrack and the Santa Anita
horseracing operations. In addition, Operating, together with Realty, has
entered into a definitive agreement to sell all of its subsidiaries that
operate the businesses conducted on Realty's golf course properties.
Accordingly, Operating's business, once the sale of the Cobblestone golf
entities is completed, will thereafter be focused on the lodging business.
Operating's principal executive offices are based at 197 First Avenue,
Suite 300, Needham, Massachusetts 02494, and its telephone number is (781)
453-8062.
For a discussion of certain factors that could impact the financial
condition, results of operations and/or business of Operating or the successful
implementation of the comprehensive restructuring plan and each of its
component parts, you are encouraged to read the section entitled "Certain
Factors You Should Consider" beginning on page 64 of this Joint Annual Report
on Form 10-K.
Lodging
The lodging portion of Operating's business is conducted under the La
Quinta[RegTM] brand name. La Quinta is one of the largest operators of hotels in
the mid-priced segment of the lodging industry in the United States. La Quinta
achieved an occupancy percentage of 67.0% and an average daily room rate ("ADR")
of $59.29 for the period subsequent to the La Quinta Merger and an occupancy
percentage of 68.7% and an ADR of $60.25 for the year ended December 31, 1998.
La Quinta has Inns located in 28 states, concentrated in the western and
southern United States. La Quinta operated Inns and Inn & Suites hotels with a
combined total of approximately 37,000 rooms at the end of 1998.
Product
La Quinta[RegTM] Inns appeal to guests who desire high-quality rooms,
convenient locations and attractive prices, but who do not require banquet and
convention facilities, in-house restaurants, cocktail lounges or room service.
By eliminating the costs of these management-intensive facilities and services,
La Quinta believes it offers its customers exceptional value by providing rooms
that are comparable in quality to full-service hotels at lower prices.
The typical La Quinta Inn contains approximately 130 spacious, quiet and
comfortably furnished guest rooms averaging 300 square feet in size. Guests at
a La Quinta Inn are offered a wide range of amenities and services, such as its
complimentary First Light[TM] breakfast program which includes cereal and fresh
fruit, free unlimited local telephone calls, a swimming pool, same-day laundry
and dry cleaning, fax services, 24-hour front desk message service and free
parking. Room amenities include new 25 inch remote control televisions with
expanded free television channel choices, movies-on-demand, interactive video
games from Nintendo[RegTM], in room coffee makers and dataport telephones for
computer connections. Additional amenities available at La Quinta Inn & Suites
include two room suites with microwaves and refrigerators, fitness centers and
courtyards with gazebos and spas. La Quinta guests typically have convenient
access to food service at adjacent free-standing restaurants, including
national chains such as Cracker Barrel, International House of Pancakes,
Denny's and Perkins. Realty has an ownership interest in 120 of these adjacent
buildings, which are generally leased to restaurant operators.
La Quinta's strategy is to continue to operate as a high-quality provider
in the mid-priced segment of the hotel industry, focusing on enhancing
revenues, cash flow and profitability. Specifically, La Quinta's strategy
centers upon:
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<PAGE>
Continued Focus on Mid-priced Segment--Hotels in this price category
provide cost-conscious business travelers with high-quality rooms and
convenient locations at a moderate price. Because La Quinta competes
primarily in the mid-priced segment, management's attention is totally
focused on meeting the needs of La Quinta's target customers.
La Quinta Ownership and Management of Inns--In contrast to many of its
competitors, La Quinta manages and has ownership interests through
Operating and Realty in all of its inns. At March 26, 1999, Realty and
Operating owned 100% of 290 La Quinta inns including 61 Inns & Suites, and
50% or more of an additional two inns. As a result, La Quinta believes it
is able to achieve a higher level of consistency in both product quality
and service than its competition. In addition, La Quinta's position as one
of the few owner-operated chains enables La Quinta to offer new services,
direct expansion, establish pricing strategy and to make other marketing
decisions on a system-wide or local basis as conditions dictate, without
consulting third-party owners, management companies or franchisees as
required of most other lodging chains. La Quinta's management of the inns
also enables it to control costs and allocate resources effectively to
provide excellent value to the consumer.
Operations
Management of the La Quinta chain is coordinated from its headquarters in
San Antonio, Texas. Centralized corporate services and functions include
marketing, financing, accounting and reporting, purchasing, quality control,
development, legal, reservations and training.
Inn operations are currently organized into Eastern, Western and Central
divisions with each division headed by a Divisional Vice President. Regional
Managers report to the Divisional Vice Presidents and are each responsible for
approximately 15 inns. Regional Managers are responsible for the service,
cleanliness and profitability of the inns in their regions.
Inn managers receive inn management training which includes an emphasis on
service, cleanliness, cost controls, sales and basic repair skills. Because La
Quinta's professionally trained managers are substantially relieved of
responsibility for food service, they are able to devote their attention to
assuring friendly guest service and quality facilities, consistent with
chain-wide standards.
At December 31, 1998, La Quinta employed approximately 8,000 persons, of
whom approximately 90% were compensated on an hourly basis. Approximately 340
individuals were employed at the corporate headquarters and 7,660 were employed
directly in inn operations. La Quinta's employees are not currently represented
by labor unions. Management believes its ongoing labor relations are good.
Customer Base and Marketing
La Quinta's combination of consistent, high-quality accommodations and
good value is attractive to business customers, who account for more than 70%
of rooms rented. These core customers typically visit a given area several
times a year, and include salespersons covering a specific territory,
government and military personnel and technicians. La Quinta also targets both
vacation travelers and senior citizens. For the convenience of these targeted
customer groups, inns are generally located near suburban office parks, major
traffic arteries or destination areas such as airports and convention centers.
La Quinta has developed a strong following among its customers. An
external industry survey shows La Quinta's heavy users are among the most loyal
of the mid-priced segment. La Quinta focuses a number of its marketing programs
on maintaining a high number of repeat customers. For example, La Quinta
promotes a "Returns[RegTM] Club" offering members preferred status and rates at
La Quinta inns, along with rewards for frequent stays. The Returns[RegTM] Club
had approximately 360,000 members as of December 31, 1998.
La Quinta focuses on reaching its target markets through advertising,
direct sales, repeat traveler incentive programs and other marketing programs
targeted at specific customer segments. It advertises through television, radio
and print advertisements which focus on quality and value. La Quinta uses the
same campaign concept throughout the country with minor modifications made to
address regional
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<PAGE>
differences. La Quinta also uses billboard advertisements posted along major
highways to advertise the existence and location of La Quinta inns or Inn &
Suites hotels in the proximity.
La Quinta markets directly to companies and other organizations through
its direct sales force of over 90 sales representatives and managers. This
sales force calls on companies which have a significant number of individuals
traveling in the regions in which La Quinta operates and which are capable of
producing a high volume of room nights.
La Quinta provides a central reservation system, "teLQuik[RegTM]," which
currently accounts for advance reservations for approximately 34% of room
nights. The teLQuik[RegTM] system allows customers to make reservations by
dialing 1-800-NUROOMS (1-800-687-6667) or 1-800-531-5900 toll free, or from
reservations phones placed in all La Quinta inns. These phones enable guests to
make their next night's reservation from their previous night's La Quinta inn.
In addition, approximately 40% of room nights reflect advance reservations made
directly with individual inns and forwarded to the central reservation system.
In total, advance reservations account for approximately 74% of room nights. La
Quinta operates two reservation centers with state-of-the-art technology in
processing reservations as one virtual center. La Quinta, through its national
sales managers, markets its reservation services to travel agents and corporate
travel planners who may access teLQuik[RegTM] through five major airline
reservation systems.
Information regarding inn locations, services and amenities, as well as
reservation capabilities and a virtual reality tour of the new Gold Medal
rooms, is available on La Quinta's Travel Web site at http://www.laquinta.com.
Competition
Each La Quinta inn competes in its market area with numerous full service
lodging brands, especially in the mid-priced segment, and with numerous other
hotels, motels and other lodging establishments. Chains such as Hampton Inns,
Fairfield Inns and Drury Inns are direct competitors of La Quinta. Other
competitors include Holiday Inns, Ramada Inns, Red Roof Inns and Comfort Inns.
There is no single competitor or group of competitors of La Quinta that is
dominant in the lodging industry. Competitive factors in the industry include
reasonableness of room rates, quality of accommodations, service level and
convenience of locations.
The profitability of inns operated by La Quinta is 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 generally operates inns in markets that contain numerous competitors,
and the continued success of its inns will be dependent, in large part, upon
the ability of these facilities to compete in such areas as reasonableness of
room rates, quality of accommodations, service level and convenience of
locations. There can be no assurance that demographic, geographic or other
changes in markets will not adversely affect the convenience or desirability of
the locations of La Quinta's inns. Furthermore, there can be no assurance that,
in the markets in which La Quinta inns operate, competing hotels will not
provide greater competition for guests than currently exists, and that new
hotels will not enter such markets.
The lodging industry in general, including La Quinta, may be adversely
affected by national and regional economic conditions and government
regulations. The demand for accommodations at a particular inn may be adversely
affected by many factors including changes in travel and weather patterns,
local and regional economic conditions and the degree of competition with other
lodging establishments in the area.
Seasonality
The lodging industry is seasonal in nature. Generally, La Quinta's inn
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenue, profit margins and net earnings of La Quinta.
Supply and Demand
In some years, construction of lodging facilities in the United States
resulted in an excess supply of available rooms, and the oversupply had an
adverse effect on occupancy levels and room rates in
17
<PAGE>
the industry. Although the relationship between supply and demand has been
favorable in recent years, the lodging industry may be adversely affected in
the future by (i) an oversupply of available rooms, (ii) national and regional
economic conditions, (iii) changes in travel patterns, (iv) taxes and
government regulations which influence or determine wages, prices, interest
rates, construction procedures and costs, and (v) the availability of credit.
Employment and Other Governmental Regulation
La Quinta's business is subject to extensive federal, state and local
regulatory requirements, including building and zoning requirements, all of
which can prevent, delay, make uneconomic or significantly increase the cost of
constructing additional lodging facilities. In addition, La Quinta is subject
to laws governing its relationship with employees, including minimum wage
requirements, overtime pay, 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 La
Quinta. 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. While La Quinta believes that its inns
are substantially in compliance with these requirements, a determination that
La Quinta is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. These and other initiatives
could adversely affect La Quinta as well as the lodging industry in general.
Employees
La Quinta's future success will depend, in part, on its continuing ability
to attract, retain and motivate highly qualified personnel, who are in great
demand.
Lodging Industry Operating Risks
La Quinta is subject to all operating risks common to the lodging
industry. These risks include, among other things, (i) competition for guests
from other hotels, a number of which may have greater marketing and financial
resources than La Quinta, (ii) increases in operating costs due to inflation
and other factors, which increases may not have been offset in recent years,
and may not be offset in the future, by increased room rates, (iii) dependence
on business and commercial travelers and tourism, which business may fluctuate
and be seasonal, (iv) increases in energy costs and other expenses of travel,
which may deter travelers, and (v) adverse effects of general and local
economic conditions.
Construction
La Quinta may from time to time experience shortages of materials or
qualified tradespeople or volatile increases in the cost of certain
construction materials, resulting in longer than normal construction and
remodeling periods, loss of revenue and increased costs. La Quinta relies
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 delays, increased cost and loss of revenue.
Golf Course Operations
As of December 31, 1998, Operating operated 43 golf courses in 7 states.
Operating leases or subleases, as the case may be, these golf course properties
from Realty. Operating directly manages these golf courses through its
Cobblestone golf division, which is headquartered in San Diego, California.
Cobblestone's individual golf course properties are locally managed, although
regional managers, each of whom report to Cobblestone's senior management team,
are responsible for oversight of a number of Cobblestone's golf course
facilities.
On February 11, 1999, Operating, together with Realty, announced that it
had entered into a definitive agreement to sell the subsidiaries that conduct
the golf businesses at the golf courses owned and leased by Realty, together
with the golf course related real estate owned and/or leased by Realty, to Golf
Acquisitions, L.L.C., an affiliate of ClubCorp., Inc. for an aggregate purchase
price of approximately $393 million, subject to certain adjustments. The
transaction, which is subject to customary closing conditions, is scheduled to
close on or prior to, March 31, 1999. Upon completion of this transaction,
Operating will no longer operate a golf course related business.
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<PAGE>
Income Tax Matters
Operating pays ordinary corporate income taxes on its taxable income. Any
income, net of taxes, will be available for retention in Operating's business
or for distribution to shareholders as dividends. Any dividends distributed by
Operating will be subject to tax at ordinary rates and generally will be
eligible for the dividends received deduction for corporate shareholders to the
extent of Operating's current or accumulated earnings and profits. However,
there is no tax provision which requires Operating to distribute any of its
after-tax earnings and Operating does not expect to pay cash dividends in the
foreseeable future.
Legal Proceedings
Operating is, and is likely in the future to be, subject to certain types
of litigation, including negligence and other tort claims. The costs and
effects of such legal and administrative cases and proceedings (whether civil
or criminal), settlements and investigations are indeterminate. The costs and
effects of any such legal proceeding could be material to Operating's
operations. For further discussion of these issues see Item 3, "Legal
Proceedings".
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<PAGE>
Item 2. Properties
The following table sets forth certain information as of December 31, 1998
regarding the Companies' healthcare, golf and hotel facilities:
<TABLE>
<CAPTION>
Annual
Purchase Base Rent
Number Number Price See or
of of or Mortgage References Interest
Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3)
- - ----------------------- ------------ ---------------- ------------------------ ------------ -----------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C>
LONG-TERM CARE
FACILITIES
Alabama 1 230 $ 7,759 $ 941
Arkansas 1 94 8,392 881
Arizona 6 1,054 41,957 (4) 978
California 10 919 78,837 (5) 6,571
Colorado 15 1,432 70,484 (4) 6,957
Connecticut 14 1,980 109,779 (6) 13,547
Florida 17 2,111 120,154 (7) 14,133
Georgia 1 83 2,474 (4) 10,817
Idaho 4 808 43,113 (4) 2,159
Indiana 13 1,723 71,264 (8) 2,739
Kansas 3 379 8,440 (4)
Kentucky 2 283 15,380 (9) 1,599
Massachusetts 31 4,785 318,573 (10) 33,583
Maryland 1 170 18,188 1,910
Michigan 4 458 23,044 (11) 2,658
Missouri 19 2,526 83,444 (12) 10,178
North Carolina 1 118 2,011 (4)
Nebraska 3 413 12,564 (4)
New Hampshire 7 642 46,598 3,657
New Jersey 8 1,423 123,841 (13) 12,743
New Mexico 1 206 12,763 (4) 1,162
Nevada 3 564 29,887 (4) 2,227
New York 5 512 51,044 (14) 900
Ohio 8 956 44,502 (15) 4,016
Pennsylvania 3 381 18,392 (16) 2,192
Rhode Island 2 332 14,936 (4) 1,519
South Carolina 1 88 3,907 (4) 389
Tennessee 10 1,321 45,855 (4) 2,387
Texas 5 660 40,375 (17) 3,284
Utah 2 240 7,902 (4)
Washington 10 1,267 58,120 (18) 12,999
Wisconsin 1 119 13,888 1,035
West Virginia 7 615 29,406 (19) 2,906
Wyoming 2 312 14,527 (4) 1,720
-- ----- ---------- --------
TOTAL LONG TERM CARE 221 29,204 $1,591,800 $162,787
--- ------ ---------- --------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Annual
Purchase Base Rent
Number Number Price See or
of of or Mortgage References Interest
Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3)
- - -------------------------- ------------ ---------------- ------------------------ ------------ -----------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSISTED LIVING
Arkansas 5 255 $ 20,143 $ 1,986
Arizona 3 215 13,196 590
California 2 196 16,100 1,504
Colorado 1 62 5,273 (4) 459
Connecticut 1 115 12,718 622
Florida 24 1,790 167,004 (20) 14,167
Idaho 4 250 18,721 (21) 1,894
Kansas 5 144 7,925 903
Massachusetts 1 57 5,423 526
Maryland 1 110 2,814 81
Michigan 15 802 72,619 (22) 6,268
Minnesota 6 119 7,211 659
North Carolina 4 232 22,945 2,097
New York 2 180 10,490 863
Ohio 9 651 33,097 2,483
Oklahoma 2 59 3,335 174
Oregon 1 53 3,050 303
Pennsylvania 14 856 57,609 4,534
South Carolina 3 225 18,540 1,776
Tennessee 3 226 4,744 140
Texas 22 915 47,670 4,930
Virginia 3 239 8,111 500
Washington 4 339 18,827 (23) 1,821
Wisconsin 18 384 21,507 1,994
West Virginia 1 66 4,090 183
-- ----- --------- --------
TOTAL ASSISTED LIVING 154 8,540 $ 603,162 $ 51,457
--- ----- --------- --------
REHABILITATON HOSPITALS
Kansas 1 80 $ 11,649 $ 752
--- ----- --------- --------
MEDICAL OFFICE BUILDINGS
Arizona 2 $ 38,453 (24) $ 3,014
California 3 48,022 4,354
Florida 18 164,621 (25) 16,490
Massachusetts 2 1,850 268
New Jersey 2 44,055 (26) 4,092
Nevada 1 2,771 (27) 281
Tennessee 2 32,880 (4) 2,599
Texas 4 51,194 5,734
--- --------- --------
TOTAL MEDICAL OFFICE
BUILDINGS 34 $ 383,846 $ 36,832
--- --------- --------
ACUTE CARE HOSPITAL
Arizona 1 492 $ 65,650 $ 7,222
--- ----- --------- --------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Annual
Purchase Base Rent
Number Number Price See or
of of or Mortgage References Interest
Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3)
- - -------------------------- ------------ ---------------- ------------------------ ------------ -----------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C>
RETIREMENT LIVING FACILITIES
North Carolina 1 190 $ 5,380 (4) $ 477
Ohio 1 104 6,624 (4) 644
Utah 1 287 8,921 (4) 986
- --- ---------- --------
TOTAL RETIREMENT LIVING 3 581 $ 20,925 $ 2,107
- --- ---------- --------
PSYCHIATRIC HOSPITALS AND
ALCOHOL AND SUBSTANCE ABUSE
California 1 61 $ 5,750 $ 719
Florida, New York and
Oklahoma 5 524 32,345 (4) 3,575
Texas 1 99 4,689 400
- --- ---------- --------
TOTAL PSYCHIATRIC AND
ALCOHOL AND
SUBSTANCE ABUSE 7 684 $ 42,784 $ 4,694
- --- ---------- --------
TOTAL HEALTHCARE 421 39,581 $2,719,816 $265,851
--- ------ ---------- --------
GOLF COURSES
Arizona 4 $ 33,636 $ 1,558
California 6 64,107 4,192
Florida 4 33,425 1,445
Georgia 4 33,247 1,323
North Carolina 6 39,101 2,102
Texas 16 142,964 8,238
Virginia 3 24,477 825
--- ---------- --------
TOTAL GOLF COURSES 43 $ 370,957 $ 19,683
--- ---------- --------
LAND UNDER DEVELOPMENT
California $ 330
Florida 13,508 (4) 1,366
---------- --------
TOTAL LAND UNDER
DEVELOPMENT $ 13,838 $ 1,366
---------- --------
OTHER
California $ 5,273 (4) $ 710
---------- --------
HOTELS
Alabama 8 1,002 $ 60,636
Arkansas 5 603 30,486 (29) $ 8
Arizona 12 1,555 116,360
California 17 2,436 193,270 (29) 75
Colorado 15 1,868 155,986
Florida 34 4,502 336,359
Georgia 17 2,169 114,723
Illinois 7 913 57,557
Indiana 3 365 19,552
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Annual
Purchase Base Rent
Number Number Price See or
of of or Mortgage References Interest
Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3)
- - ---------------------------- ------------ ---------------- ------------------------ ------------ -----------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Kansas 2 228 $ 10,790 (29) $ 30
Kentucky 1 129 6,251
Louisiana 15 2,058 153,007 (29) 197
Missouri 2 235 12,893
Mississippi 2 245 8,419
North Carolina 10 1,309 86,501
Nebraska 1 130 4,845
New Mexico 7 834 60,315
Nevada 4 625 31,550 (29) 365
Ohio 1 122 5,049
Oklahoma 8 963 61,664
Pennsylvania 1 128 6,653
South Carolina 6 713 37,080
Tennessee 11 1,402 76,648
Texas 102 13,212 856,687 (29) 54
Utah 4 467 37,369
Virginia 4 511 17,944
Washington 3 418 33,016
Wyoming 1 105 3,346
--- ------ ---------- --------
TOTAL HOTELS 303 39,247 $2,594,956 729
--- ------ ---------- --------
TOTAL ALL FACILITIES (28) 767 78,828 $5,704,840 $288,339
=== ====== ========== ========
</TABLE>
Other Healthcare Investments
At various dates between July, 1996 and August 1998, Realty invested
approximately $57,204,000 in exchange for 26,606,000 shares of common stock,
representing 19.99% of NHP Plc, a property investment group that specializes in
the financing, through sale and leaseback transactions, of nursing homes
located in the United Kingdom. Realty does not have the right to vote more than
9.99% of the shares of NHP Plc. As of November 24, 1998, NHP Plc had invested
or committed to invest approximately L377,000,000 in 200 nursing homes,
totaling 10,841 beds. The facilities are leased to 24 nursing home operators in
the United Kingdom with terms and conditions similar to those contained in
Realty's leases.
(1) Includes 39,581 total beds for healthcare facilities and 39,247 rooms for
hotels. The La Quinta hotels have an average occupany of 67.0%. Based upon
information provided by the operators of the healthcare facilities, the
average occupancy of Realty's portfolio of operating healthcare
facilities, including start-up facilities, for the nine months ended
September 30, 1998, was as follows: 84% long-term care facilities, 50%
rehabilitation hospitals, 76% alcohol and substance abuse treatment
facilities, 68% assisted living, 92% retirement living facilities, and 57%
acute care hospitals. Generally, average occupancy rates are determined by
dividing the number of patient days in each period by the average number
of licensed bed days during such period.
(2) Represents purchase price or mortgage amount at December 31, 1998 for
operating facilities and the funded loan amounts for facilities under
construction.
(3) The annual base rentals/interest payments under the healthcare leases or
mortgages are generally projected to be approximately 9%-13% of the
purchase price or mortgage amount, in accordance with the terms of the
respective agreements. Base rent excludes additional and percentage rent
and interest. Additional and percentage rent and interest for the year
ended December 31, 1998 was an aggregate of $12,401,000 for all of the
facilities. Additional and percentage rent and interest are calculated
based upon a percentage of a facility's revenues over an agreed upon base
amount or an automatic annual escalation.
23
<PAGE>
(4) Permanent mortgage loans
(5) Includes permanent mortgage loans of $52,278,000
(6) Includes permanent mortgage loans of $30,570,000
(7) Includes permanent mortgage loans of $45,374,000 and construction loans of
$24,995,000
(8) Includes permanent mortgage loans of $63,937,000
(9) Includes permanent mortgage loans of $5,380,000
(10) Includes permanent mortgage loans of $148,897,000
(11) Includes permanent mortgage loans of $7,739,000
(12) Includes permanent mortgage loans of $74,646,000
(13) Includes permanent mortgage loans of $55,184,000
(14) Includes a permanent mortgage loan of $218,000
(15) Includes a construction loan of $7,035,000
(16) Includes a permanent mortgage loan of $6,860,000
(17) Includes permanent mortgage loans of $33,816,000
(18) Includes permanent mortgage loans of $52,259,000
(19) Includes a permanent mortgage loan of $12,206,000
(20) Includes permanent mortgage loans of $98,598,000
(21) Includes a permanent mortgage loan of $3,744,000
(22) Includes a permanent mortgage loan of $4,574,000 and construction loans of
$4,558,000
(23) Includes a permanent mortgage loan of $3,365,000
(24) Includes a permanent mortgage loan of $30,123,000
(25) Includes permanent mortgage loans of $6,173,000
(26) Includes a construction loan of $20,298,000
(27) Includes a permanent mortgage loan of $2,771,000
(28) Investments by Realty in facilities operated by Life Care Centers of
America, Inc., Sun Healthcare Group, Inc., and Alternative Living Services
represented 12%, 8%, and 4%, respectively, of Realty's total portfolio as
of December 31, 1998.
(29) Represents annual base rent on ground operating leases.
Long-Term Care Facilities. The long-term care facilities offer
restorative, rehabilitative and custodial nursing care for patients not
requiring more extensive and sophisticated treatment available at acute care
hospitals. The facilities are designed to provide custodial care and to
supplement hospital care and many have transfer agreements with one or more
acute care hospitals.
Assisted Living Facilities. The assisted living facility provides a
combination of housing, supportive services, personalized assistance and
healthcare designed to respond to individual needs for daily living and
instrumental activities. Support services are generally available 24 hours a
day to meet scheduled and unscheduled needs.
Retirement Living Facilities. The retirement living facilities offer
specially designed residential units for active and ambulatory elderly
residents and provide various ancillary services. They may contain nursing
facilities to provide a continuum of care. The retirement living facilities
offer their residents an opportunity for an independent lifestyle with a range
of social and health services.
24
<PAGE>
Rehabilitation Hospitals. The rehabilitation hospitals provide treatment
to restore physical, psycho-social, educational, vocational and economic
usefulness and independence to disabled persons. Rehabilitation concentrates on
physical disabilities and impairments and utilizes a coordinated
multidisciplinary team approach to help patients attain measurable goals.
Medical Office Buildings. Medical office building facilities contain
individual physician, physician group and other healthcare provider offices for
the administration and treatment of patients, usually in close proximity to the
general service acute care hospital to which the physicians are affiliated. The
types of services provided in a medical office building may include outpatient
therapy, clinics, examination facilities and the provision of other medical
services in a non-hospital setting.
Acute Care Hospitals. Acute care hospitals provide services that include,
among others, general surgery, internal medicine, obstetrics, emergency room
care, radiology, diagnostic services, coronary care, pediatric services and
psychiatric services. On an outpatient basis, the services include, among
others, same day surgery, diagnostic radiology (e.g. magnetic resonance
imaging, CT scanning, X-ray), rehabilitative therapy, clinical laboratory
services, pharmaceutical services and psychiatric services.
Alcohol and Substance Abuse Treatment Facilities. These facilities provide
inpatient treatment for alcohol and substance abuse, including medical
evaluation, detoxification and rehabilitation. Specialized programs offer
treatment for adults, adolescents, families and chronic abusers.
Psychiatric Hospitals. The psychiatric hospitals offer comprehensive,
multidisciplinary adult, adolescent and substance abuse psychiatric programs.
Patients are evaluated upon admission and an individualized treatment plan is
developed. Elements of the treatment plan include individual, group and family
therapy, activity therapy, educational programs and career and vocational
planning.
Golf Courses. These facilities include private country clubs, semi-private
clubs and daily fee courses. Revenue is generated from the following sources --
initiation dues at private and semi-private golf courses, which are amortized
over the expected life of the memberships, and from green fees, golf cart
rentals, driving range fees, retail merchandise, food and beverage concessions
and lodging fees.
Lodging Properties. La Quinta inns appeal to guests who desire
high-quality rooms, convenient locations and attractive prices, but who do not
require banquet and convention facilities, in-house restaurants, cocktail
lounges or room service.
The new Inn & Suites hotels offer rooms designed to accommodate the needs
of the guest irrespective of the purpose or length of the stay. The King Plus
Extra rooms and deluxe two-room suites include features that may be desirable
for longer stays. In addition, the Inn & Suites hotels offer fitness centers
and courtyards with gazebos and spas. Typically, food service for La Quinta
guests is provided by adjacent, free-standing restaurants.
To maintain the overall quality of La Quinta's inns, each inn undergoes
refurbishments and capital improvements as needed. Historically, refurbishing
has been provided at intervals of between five and seven years, based on an
annual review of the condition of each inn. La Quinta spent approximately
$11,975,000 in capital improvements to existing inns during the period
subsequent to the July 17, 1998 merger. La Quinta has made approximately
$301,175,000 in investments in La Quinta Inns during the period 1995-1998. As a
result of these expenditures, La Quinta believes it has been able to maintain a
chainwide quality of rooms and common areas at its properties unmatched by any
other national mid-priced hotel chain.
LEASES
Healthcare Facilities
Generally, each healthcare facility (which includes the land, buildings,
improvements, related easements, and rights and fixtures (the "Leased
Properties") that is owned by Realty is leased pursuant to a long-term triple
net lease (collectively, the "Leases") which typically contains terms as
outlined below. Leased Properties usually do not include major movable
equipment.
The Leases generally have a fixed term of approximately 10 years and
contain multiple renewal options. Some Leases are subject to earlier
termination upon the occurrence of certain contingencies described in the
Lease.
25
<PAGE>
Realty's Leased Properties aggregated approximately $1,893,259,000 of
gross real estate investments at December 31, 1998. The base rents range from
approximately 7.56% to 13.75% per annum of Realty's equity investment in the
Leased Properties. The base rents for the renewal periods are generally fixed
rents for the initial renewal periods and market rates for later renewal
periods. All Leases provide for either an automatic fixed annual rent
escalation or additional variable rents in addition to the base rent, based on
revenues exceeding specified base revenues. Realty typically also charges a
lease commitment fee at the initiation of the sale/leaseback transaction.
Each Lease is a triple net lease requiring the lessee to pay rent and all
additional charges incurred in the operation of the Leased Property. The
lessees are required to repair, rebuild and maintain the Leased Properties.
The obligations under the Leases are generally guaranteed by the parent
corporation of the lessee, if any, or affiliates or individual principals of
the lessee. Some obligations are further backed by letters of credit, cash
collateral or pledges of certificates of deposit from various financial
institutions which may cover up to one full year's lease payments and which
remain in effect until the expiration of a fixed time period or the fulfillment
of certain performance criteria.
Realty also obtains other credit enhancement devices similar to those it
may obtain with respect to permanent mortgage loans. See "Permanent Mortgage
Loans" for description.
With respect to two of the facilities, Realty leases the land pursuant to
ground leases and in turn subleases the land to the operator of the facility.
Such subleases contain terms substantially similar to those found in the
Leases.
Hotel Facilities
Generally, each hotel facility (including land, easements and rights,
buildings, improvements, furniture, fixtures and equipment) that is owned by
Realty is leased to the Operating Company pursuant to long-term lease
arrangements.
The lease agreements have fixed terms of 5 years. Realty's gross real
estate investment in the leased hotel facilities aggregate approximately
$2,575,251,000 at December 31, 1998. The base rents range from 3.53% to 19.27%
per annum of Realty's equity investment in the leased hotel facilities. The
hotel facility lease arrangements between Realty and Operating Company include
quarterly base or minimum rents plus contingent or percentage rents based on
quarterly gross revenue thresholds for each facility.
Operating Company is required to pay rent and all operating expenses of
the hotel facilities while Realty assumes costs attributable to real estate
taxes and insurance. Operating Company is required to provide for all repairs,
replacements and alterations to the leased facilities which are not considered
capital additions or material structural work, as defined in the lease
agreements. Realty will provide for all capital additions and material
structural work.
PERMANENT MORTGAGE LOANS
Realty's permanent mortgage loan program is comprised of secured loans
which are structured to provide Realty with interest income, additional
interest based upon the revenue growth of the operating facility or a fixed
rate increase, principal amortization and commitment fees. Virtually all of the
approximately $1,216,625,000 of permanent mortgage loans at face value as of
December 31, 1998 are first mortgage loans.
The interest rates on Realty's investments in permanent mortgage loans for
operating facilities range from approximately 7.6% to 12.5% per annum on the
outstanding balances. The yield to Realty on permanent mortgage loans depends
upon a number of factors, including the stated interest rate, average principal
amount outstanding during the term of the loan, the amount of the commitment
fee charged at the inception of the loan, the interest rate adjustments and the
additional interest earned.
The permanent mortgage loans for operating facilities made through
December 31, 1998 are generally subject to 10-year terms with up to 20 to
30-year amortization schedules that provide for a balloon payment of the
outstanding principal balance at the end of the tenth year. Some of the
mortgages
26
<PAGE>
include an interest adjustment in the fifth year which generally provides for
interest to be charged at the greater of the current interest rate or 300 to
400 basis points over the five-year United States Treasury securities' yield at
the time of adjustment.
Realty generally requires a variety of additional forms of security and
collateral beyond that which is provided by the lien of the mortgage. For
example, Realty requires one or more of the following items: (a) a guaranty of
the complete payment and performance of all obligations associated with each
mortgage loan from the borrower's parent corporation, if any, other affiliates
of the borrower and/or one or more of the individual principals controlling
such borrower; (b) a collateral assignment from the borrower of the leases and
the rents relating to the mortgaged property; (c) a collateral assignment from
the borrower of all permits, licenses, approvals and contracts relating to the
operation of the mortgaged property; (d) a pledge of all, or substantially all,
of the equity interest held in the borrower; (e) cash collateral or a pledge of
a certificate of deposit, for a negotiated dollar amount typically equal to
three months to one year's principal and interest on the loan (which cash
collateral or pledge of certificate of deposit typically remains in effect
until the later to occur of (i) three years after the closing of the mortgage
loan or (ii) the achievement by the facility of an agreed-upon cash flow debt
coverage ratio for three consecutive fiscal quarters and, in the event that
after the expiration of the letter of credit or pledge of certificate of
deposit, the agreed-upon financial covenants are not maintained throughout the
loan term, the borrower is often required to reinstate the cash collateral or
pledge of certificate of deposit); (f) an agreement by any affiliate of the
borrower or operator of the facility to subordinate all payments due to it from
the borrower to all payments due to Realty under the mortgage loan; and (g) a
security interest in all of the borrower's personal property, including, in
some instances, the borrower's accounts receivable. In addition, the mortgage
loans are generally cross-defaulted and cross-collateralized with any other
mortgage loans, leases or other agreements between the borrower or any
affiliate of the borrower and Realty.
DEVELOPMENT INVESTMENTS AND LOANS
Realty makes development investments or loans, which by their terms are,
or convert into, sale/
leaseback transactions or permanent mortgage loans upon the completion of the
facilities. Generally, the interest or yield rates on the outstanding balances
of Realty's developments are up to 125-200 basis points over the prime rate of
a specified financial institution. Realty also typically charges a commitment
fee at the commencement of the project. The development period generally
commences upon the funding of such investments or loans and terminates upon the
earlier of the completion of development of the applicable facility or a
specific date. This period is generally 12 to 18 months. During the development
term, funds are advanced pursuant to draw requests in accordance with the terms
and conditions of the applicable agreement which require a site visit prior to
the advancement of funds. Monthly payments based on an interest or yield rate
only, are made on the total amount of the investment or loan proceeds advanced
during the development period.
At December 31, 1998 Realty had outstanding development financing of
$180,286,000 and was committed to providing additional financing of
approximately $161,000,000, of which $119,000,000 relates to healthcare
transactions. As with Realty's sale/leaseback transactions or permanent
mortgage financing programs, the developments generally include a variety of
additional forms of security and collateral. See "Leases" and "Permanent
Mortgage Loans." During the development period, Realty generally requires
additional security and collateral in the form of either payment and
performance completion bonds or completion guarantees by either one, or a
combination of, the lessee's or borrower's parent entity, other affiliates, or
one or more of the individual principals..
As a further safeguard during the development period, Realty generally
will retain a portion of the funding equal to 10% of the transaction amount
until it has received satisfactory evidence that the project has been fully
completed in accordance with the applicable plans and specifications and the
period during which liens may be perfected with respect to any work performed,
or labor or materials supplied, in connection with the construction of the
project has expired. Realty also monitors the progress of the development of
each project, the construction budget and the accuracy of the borrower's draw
requests by having its own inspector perform on-site inspections of the project
prior to the release of any requested funds.
27
<PAGE>
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
an owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The costs
of investigation, removal or remediation of such substances may be substantial,
and the presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances may also be
liable for the costs of removal or remediation of a release of such substances
at a disposal treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials ("ACMs") into the air and third
parties may seek recovery from owners or operators of real properties for
personal injury associated with ACMs. In connection with the ownership (direct
or indirect), operation, management and development of real properties, the
Companies may be considered an owner or operator of such properties or as
having arranged for the disposal or treatment of hazardous or toxic substances
and therefore, potentially liable for removal or remediation costs, as well as
certain other related costs, including governmental fines and injuries to
persons and property.
Item 3. Legal Proceedings
A purported class action complaint that had been filed by Barbara J.
Gignac in October 1996 in the Superior Court of Los Angeles County, California,
naming as defendants the Companies, certain of their officers and directors and
Colony Capital, Inc. was dismissed.
On January 8, 1998 the Companies received notice that they were named as a
defendant in an 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 a defendant in an 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 are almost
identical (i) allege, in part, that La Quinta and its directors violated their
fiduciary duty, duty of care and loyalty to La Quinta shareholders by entering
into a merger agreement with the Companies without having first invited other
bidders, and the Companies aided and abetted La Quinta and its directors in the
alleged breaches, and (ii) seek injunctive relief enjoining the merger with La
Quinta and compensatory damages.
The parties negotiated and entered into an agreement in principle to
settle the actions, dated on or about May 8, 1998 (the "Memorandum of
Understanding"). The Memorandum of Understanding set forth the principal bases
for the settlement, which included 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 in the
joint proxy statement/prospectus prepared for the shareholder meetings which
described the Forward Equity Issuance Transaction with MLI.
The parties negotiated and entered into a Stipulation and Agreement of
Compromise, Settlement and Release (the "Stipulation" or "Settlement"), dated
on or about October 8, 1998. On October 8, 1998, the Texas Court entered an
Order Re: Preliminary Approval ("Order") which, among other things, (i)
preliminarily approved the Settlement; (ii) conditionally approved the
Settlement Class; (iii) approved the Notice of Pendency and Settlement of Class
Action for mailing to the Settlement Class; and (iv) scheduled a Settlement
Hearing. On November 9, 1998, the Texas Court entered an amended Order which
set the date for the Settlement Hearing to January 19, 1999. At the Settlement
Hearing on January 19, 1999, a Final Judgement was entered, (i) finally
approving the Settlement; (ii) declaring the Action and the Settlement Claims
(as defined in the Stipulation) to be finally and fully compromised and
settled; (iii) deeming the Representative Plaintiffs, the Settlement Class and
the Settlement Class Members fully, finally and forever settled and releasing
any and all Settled Claims against the Released Parties (as defined in the
Stipulation); and (iv) dismissing the Action on the merits and with prejudice.
Pursuant to the Settlement, La Quinta on February 22, 1999 paid the class
plaintiffs attorney's fees totaling $700,000 which were awarded by the Texas
court.
28
<PAGE>
The Companies are also a party to a number of other claims and lawsuits
arising out of the normal course of business; the Companies believe that none
of these claims or pending lawsuits, either individually or in the aggregate,
will have a material adverse affect on the Companies' business or on their
consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4a. Executive Officers of the Registrants
The following information relative to Realty's executive officers is given
as of March 30, 1999:
<TABLE>
<CAPTION>
Name Age Position with Realty
- - --------------------- ----- -----------------------------------------------------
<S> <C> <C>
Thomas M. Taylor 56 Chairman
David F. Benson 49 Chief Executive Officer, President and Director
Michael F. Bushee 41 Chief Operating Officer
Michael S. Benjamin 41 Senior Vice President, Secretary and General Counsel
Laurie T. Gerber 41 Chief Financial Officer
John G. Demeritt 39 Controller
Stephen C. Mecke 36 Vice President of Acquisitions
Debora A. Pfaff 35 Vice President of Operations
Richard W. Pomroy 41 Vice President of Development
</TABLE>
Thomas M. Taylor has been Acting Chairman of the Board of Realty since
August 1998. Prior to that he was Chairman of the Board of La Quinta Inns, Inc.
from 1994 to 1998, and President of Thomas M. Taylor & Co. (an investment
consulting firm) since 1985, President of TMT-FW (a diversified investment
firm) since September 1989. Mr. Taylor is also Director of Kirby Corporation,
MacMillan Bloedel Limited, Moore Corporation, Agrium Inc., Loewen Group, Inc.
and John Wiley & Sons, Inc., and Chairman of the Board of Encal Energy, Ltd.
David F. Benson has been Acting Chief Executive Officer of Realty since
August 1998, President of Realty since September 1991 and Treasurer since 1996.
Prior to that, he was Treasurer of Realty from January 1986 to May 1992. He was
Treasurer of Mediplex from January 1986 through June 1987. He was previously
associated with Coopers & Lybrand, independent accountants, from 1979 to 1985.
Mr. Benson is also a Trustee of Mid-Atlantic Realty Trust, a shopping center
REIT, traded on the American Stock Exchange, a Director of Harborside
Healthcare Corporation, a long-term care company, and a Director of Nursing
Home Properties, Plc, a UK company specializing in the purchase and leasing of
purpose-built nursing homes.
Michael F. Bushee has been Chief Operating Officer of Realty since
September 1994. He was Senior Vice President of Operations of Realty from
November 1993 through August 1994, Vice President from December 1989 to October
1993, Director of Development from January 1988 to December 1989 and has been
associated with Realty since April 1987. He was previously associated with The
Stop & Shop Companies, Inc., a retailer of food products and general
merchandise, for three years and Wolf & Company, P.C., independent accountants,
for four years.
Michael S. Benjamin has been Senior Vice President, Secretary and General
Counsel of Realty since October 1993. He was Vice President, Secretary and
General Counsel from May 1992 to October 1993, Secretary and General Counsel
from December 1990 to May 1992 and Assistant Counsel to Realty from November
1989 to December 1990. His previous association was with the law firm of Brown,
Rudnick, Freed & Gesmer, from 1983 to 1989.
Laurie T. Gerber, a Certified Public Accountant, joined Realty in December
1996 as Chief Financial Officer. Prior to joining Realty, she was a partner in
the accounting firm of Coopers & Lybrand, L.L.P., where she worked for 14
years.
John G. Demeritt, a Certified Public Accountant, has been Controller of
Realty since October 1995. Prior to that, he was Corporate Controller of CMG
Information Services, Inc., an information service provider, from 1994 to 1995.
He was Vice President of Finance and Treasurer of Salem Sportswear
29
<PAGE>
Corporation, a manufacturer and marketer of licensed sports apparel, from June
1991 to November 1993. He was Controller of Scitex America Corporation, a
manufacturer and distributor of electronic prepress equipment, from August 1986
to June 1991, and was previously associated with Laventhol & Horwath,
independent accountants, from 1983 to 1986.
Stephen C. Mecke has been Vice President of Acquisitions since October
1995 and has been Realty's Director of Acquisitions since June 1992. He was
previously the Manager of Underwriting at Continental Realty Credit Inc., a
commercial mortgage company, from October 1988 to June 1992.
Debora A. Pfaff has been Vice President of Operations since October 1995
and has been Realty's Director of Operations since September 1992. Ms. Pfaff
was previously a Senior Manager with KPMG Peat Marwick where she worked from
1985 to 1992.
Richard W. Pomroy has been Vice President of Development since October
1997 and has been Director of Development since 1994. Prior to joining Realty,
he was a project manager responsible for the management and development of
construction projects at Continuum Care Corporation, an operator of nursing
homes, subacute healthcare centers, and rehabilitation facilities. Mr. Pomroy
began his career in the real estate industry as an architectural project
manager, and gained additional property management experience as senior project
manager, and later as vice president of construction, for several Boston area
general contracting firms.
The following information relative to Operating and Lodging executive
officers is given as of March 30, 1999:
<TABLE>
<CAPTION>
Name Age Position with Operating
- - ---------------------- ----- -------------------------------------------------------
<S> <C> <C>
Thomas M. Taylor 56 Chairman
William C. Baker 66 President
Lodging:
Ezzat S. Coutry 54 Chief Executive Officer, La Quinta Inns
John F. Schmutz 51 Senior Vice President and General Counsel
William S. McCalmont 43 Senior Vice President and Chief Financial Officer
Steven T. Schultz 52 Executive Vice President and Chief Development Officer
Thomas J. Chevins 42 Senior Vice President
Vito Stellato 46 Senior Vice President
Thomas Hall 51 Senior Vice President-Operations
</TABLE>
Thomas M. Taylor has been Acting Chairman of the Board of Operating since
August 1998. Prior to that he was Chairman of the Board of La Quinta Inns, Inc.
from 1994 to 1998, and President of Thomas M. Taylor & Co. (an investment
consulting firm) since 1985, President of TMT-FW (a diversified investment
firm) since September 1989. Mr. Taylor is also Director of Kirby Corporation,
MacMillan Bloedel Limited, Moore Corporation, Agrium Inc., Loewen Group, Inc.
and John Wiley & Sons, Inc., and Chairman of the Board of Encal Energy, Ltd.
William C. Baker has been the President of Operating since August 1998 and
a Director of Operating since November 1997. Prior to such date, he served as
Chairman of the Board of Santa Anita Realty Enterprises, Inc., and Chairman of
the Board and Chief Executive Officer of Santa Anita Operating Company from
August 1996 through the completion of the Santa Anita Mergers and as a Director
from 1991 through the completion of the Santa Anita Mergers. Mr. Baker was
Chief Executive Officer of Santa Anita Realty Enterprises from April 1996 to
August 1996. Mr. Baker was the President of Red Robin International, Inc.
(restaurant company) from 1993 to 1995, a private investor from 1988 to 1992
and Chairman of the Board and Chief Executive Officer of Del Taco, Inc.
(restaurant franchises) from 1976 to 1988. He has also served as Chairman of
the Board of Coast Newport Properties (real estate brokers) since 1991. Mr.
Baker is a Director of Callaway Golf Company (golf equipment) and Public
Storage, Inc. (REIT)
Ezzat S. Coutry has been Chief Executive Officer of Lodging since July
1998. Prior to that he was Executive Vice President and Chief Operating Officer
of La Quinta Inns, Inc. since November 1996. He
30
<PAGE>
served as Regional Vice President of the Midwest Region for Marriott Hotels,
Resorts & Suites from July 1990 to October 1996. He served as Senior Vice
President of Sales for Marriott Hotels, Resorts & Suites from July 1989 to June
1990 and Senior Vice President of Rooms Operations for Marriott Hotels, Resorts
& Suites from January 1989 to June 1989.
John F. Schmutz has been Senior Vice President and General Counsel of
Lodging since July 1998. Prior to that he was Vice President-General Counsel
and Secretary of La Quinta Inns, Inc. since June 1992. He served as Vice
President-General Counsel of Sbarro, Inc. from May 1991 to June 1992. He served
as Vice President-Legal of Hardee's Food Systems, Inc. from April 1983 to May
1991.
William S. McCalmont has been Senior Vice President and Chief Financial
Officer of Lodging since July 1998. Prior to that he was Senior Vice President
and Chief Financial Officer of La Quinta Inns, Inc. since October 1997. He
served as Senior Vice President and Chief Financial Officer of FelCor Suite
Hotels from July 1996 to October 1997. He served as Vice President-Treasurer of
Harrah's Entertainment from June 1995 to July 1996. He served as Vice
President-Treasurer of The Promus Companies from November 1991 to June 1995.
Steven T. Schultz has been Executive Vice President and Chief Development
Officer of Lodging since July 1998. Prior to that he was Executive Vice
President and Chief Development Officer of La Quinta Inns, Inc. since December
1997. He served as Senior Vice President-Development of La Quinta Inns, Inc.
from June 1992 to December 1997. He served as Senior Vice President-Development
of Embassy Suites from October 1986 to June 1992.
Thomas J. Chevins is the Senior Vice President - Marketing of Lodging
since January, 1999. Prior to joining La Quinta, he was Regional Vice
President, Sales and Marketing for Marriott Lodging, Midwest Region. He also
served as Regional Director of Sales and Marketing in Marriott's Midwest
region.
Vito Stellato is the Senior Vice President - Human Resources of Lodging
since December of 1998. Prior to that, he was Vice President of Human Resources
for Harrah's Entertainment, Inc. at their Las Vegas and New Orleans properties.
He was Vice President of Human Resources for Embassy Suites Hotels and has also
held positions with Holiday Inns and U.S. Office of Personnel Management.
Thomas Hall is the Senior Vice President-Operations of Lodging since
December 1998. Prior to that he held various Senior Executive positions with
Harrah's Entertainment, Inc. Prior to Harrah's he held senior level positions
within Promus Companies as Vice President Operations for Embassy Suites'
Eastern Region and Vice President Operations for Hampton Inns Inc.
31
<PAGE>
PART II
Item 5a. Market for Registrants' Common Equity and Related Stockholder Matters
Paired Shares of Common Stock
Market Information. The Companies' Shares are paired and trade together on
the New York Stock Exchange under the symbol MT. The following table sets
forth, for the periods shown, the high and low sales prices for the Shares (as
reported on the New York Stock Exchange Composite Tape) as adjusted for the
Mergers:
<TABLE>
<CAPTION>
1998 1997
- - --------------------------------------- -------------------------------------
Quarter High Low Quarter High Low
- - ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
First $ 36.75 $ 29.19 First $ 33.81 $ 30.48
Second $ 31.56 $ 25.13 Second $ 33.19 $ 29.54
Third $ 27.50 $ 13.69 Third $ 34.54 $ 31.21
Fourth $ 18.94 $ 11.81 Fourth $ 39.00 $ 34.59
</TABLE>
Holders. There were approximately 14,396 holders of record of the
Companies' Shares as of March 9, 1999. Included in the number of shareholders
of record are Shares held in "nominee" or "street" name.
Dividends. Realty has declared the following distributions on the Shares
during its two most recent fiscal years. The 1997 distributions have been
adjusted for the exchange of Shares pursuant to the Mergers. Pursuant to
Internal Revenue Code Section 857 (b) (3) (C), for the year ended December 31,
1998, Realty designates the following cash distributions to holders of Shares
as capital gains dividends, in the amounts set forth below:
<TABLE>
<CAPTION>
Common Shares
CUSIP 58501T306
25% 20% Non-taxable
Date Date of Per Share Ordinary Capital Capital Return of
Declared Record Pay Date Amount Income Gain Gain Capital
- - ---------------- ----------- ----------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
9-Jan-98 30-Jan-98 13-Feb-98 $ 0.60625 $ 0.36016 $ 0.03845 $ 0.18284 $ 0.02480
14-Apr-98 30-Apr-98 15-May-98 0.61125 0.36313 0.03876 0.18434 0.02502
9-Jul-98 31-Jul-98 14-Aug-98 0.61625 0.36610 0.03908 0.18585 0.02522
17-Jul-98 28-Aug-98 11-Sep-98 0.88361 0.52493 0.05603 0.26648 0.03617
15-Oct-98 30-Oct-98 13-Nov-98 0.62125 0.36907 0.03940 0.18736 0.02542
--------- ---------- ---------- ---------- ----------
Total $ 3.33861 $ 1.98339 $ 0.21172 $ 1.00687 $ 0.13663
========= ========== ========== ========== ==========
Percentage 100% 59.40794% 6.34157% 30.15842% 4.09207%
========= ========== ========== ========== ==========
</TABLE>
Pursuant to Internal Revenue Code Section 857 (b) (3) (C), for the year
ended December 31, 1997, Realty designates the following cash distributions to
holders of Shares as dividends in the amounts set forth below:
<TABLE>
<CAPTION>
Common Shares
CUSIP 58501T306
Non-taxable
Date Date of Per Share Ordinary Return of
Declared Record Pay Date Amount Income Capital
- - ---------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
10-Jan-97 31-Jan-97 14-Feb-97 $ 0.5888 $ 0.4023 $ 0.1865
8-Apr-97 30-Apr-97 15-May-97 0.5930 0.4052 0.1878
8-Jul-97 31-Jul-97 15-Aug-97 0.5971 0.4080 0.1891
7-Oct-97 31-Oct-97 14-Nov-97 0.6013 0.4109 0.1904
-------- -------- --------
Total $ 2.3802 $ 1.6264 $ 0.7538
======== ======== ========
Percentage 100% 68.33 % 31.67 %
======== ======== ========
</TABLE>
32
<PAGE>
Realty intends to distribute to its shareholders on a quarterly basis a
majority of cash flow from operating activities available for distribution.
Cash flow from operating activities available for distribution to shareholders
of Realty will be derived primarily from the rental payments and interest
payments derived from its real estate investments. All distributions will be
made by Realty at the discretion of the Board of Directors and will depend on
the earnings of Realty, its financial condition and such other factors as the
Directors deem relevant. The distribution of $0.88361 per share represented a
special distribution that was made to the holders of stock of Realty in order
to comply with the requirements that Realty distribute the profits and earnings
it inherited from LaQuinta when it acquired LaQuinta on July 17, 1998. In order
to qualify for the beneficial tax treatment accorded to real estate investment
trusts by Sections 856 to 860 of the Internal Revenue Code, Realty is required
to make distributions to holders of its Shares of at least 95% of its "real
estate investment trust taxable income".
Series A Preferred Stock
Market Information. On June 10, 1998, Realty issued 7,000,000 depositary
shares (the "Series A Depositary Shares"). Each Series A Depositary Share
represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred
Stock with a par value of $.10 per share ("Series A Preferred Stock"). Net
proceeds from this issuance of approximately $168,666,000 were used by Realty
primarily to repay existing indebtedness.
<TABLE>
<CAPTION>
1998
- - --------------------------------------
Quarter High Low
- - ---------- ----------- -----------
<S> <C> <C>
First -- --
Second $ 25.25 $ 25.00
Third $ 25.38 $ 19.13
Fourth $ 23.00 $ 19.00
</TABLE>
Holders. There were approximately 209 holders of record of Realty's Series
A Depositary Shares as of March 9, 1999. Included in the number of holders of
record are Series A Depositary Shares held in "nominee" or "street" name.
Dividends. Realty has declared the following distributions on its Series A
Preferred Stock (adjusted to reflect amounts per Series A Depositary Share)
during 1998 and no distributions during 1997 as the Series A Preferred Stock
was issued during 1998. Pursuant to Internal Revenue Code Section 857
(b)(3)(C), for the year ended December 31, 1998, Realty designates the
following cash distributions to its holders of Series A Depositary Shares as
capital gains dividends, in the amount set forth below:
<TABLE>
<CAPTION>
Preferred Shares
CUSIP 58501T405
25% 20%
Date Date of Per Share Ordinary Capital Capital
Declared Record Pay Date Amount Income Gain Gain
- - ----------------- ----------- ----------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
8-Sep-98 15-Sep-98 30-Sep-98 $ 0.64375 $ 0.39876 $ 0.04256 $ 0.20243
1-Dec-98 15-Dec-98 31-Dec-98 0.56250 0.34843 0.03719 0.17688
---------- ---------- ---------- ----------
Total $ 1.20625 $ 0.74719 $ 0.07975 $ 0.37931
========== ========== ========== ==========
Percentage 100% 61.94268% 6.61214% 31.44518%
========== ========== ========== ==========
</TABLE>
33
<PAGE>
Item 6. Selected Financial Information
The following data sets forth certain financial information for the
Companies, Realty, and Operating Company. This information is based and should
be read in conjunction with the financial statements and the notes thereto
appearing elsewhere in this joint annual report.
<TABLE>
<CAPTION>
For the Combined Meditrust Companies
1998 1997 1996 1995 1994
(In thousands except per share data) ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenue ................................ $ 639,377 $289,038 $254,024 $209,369 $172,993
---------- -------- -------- -------- --------
Expenses:
Hotel operations ...................... 125,246
Depreciation and amortization ......... 87,228 26,838 21,651 16,620 15,615
Amortization of goodwill .............. 13,265 2,349 1,556 1,556 1,556
Interest expense ...................... 178,458 87,412 64,216 64,163 67,479
Rental property operating
expenses ............................. 15,638 210
General and administrative expenses 21,436 10,257 8,625 7,058 7,883
Other ................................. 111,215
(Income) Loss from
unconsolidated joint venture ......... (906) 10
Gain on sale of assets and
securities, net ...................... (48,483)
---------- -------- -------- -------- --------
Total expenses ..................... 503,097 127,076 96,048 89,397 92,533
---------- -------- -------- -------- --------
Income (Loss) from continuing
operations before benefit of
income taxes .......................... 136,280 161,962 157,976 119,972 80,460
Income tax benefit ..................... 4,800
---------- -------- -------- -------- --------
Income (Loss) from continuing
operations ............................ 141,080 161,962 157,976 119,972 80,460
Discontinued operations, net ........... (294,227) 450
---------- -------- -------- -------- --------
Net income (loss) before
extraordinary item .................... (153,147) 162,412 157,976 119,972 80,460
Loss on prepayment of debt ............. 33,454
---------- -------- -------- -------- --------
Net income (loss) ...................... (153,147) 162,412 157,976 86,518 80,460
Preferred stock dividends .............. (8,444)
---------- -------- -------- -------- --------
Net income (loss) available to Paired
Common shareholders ................... $ (161,591) $162,412 $157,976 $ 86,518 $ 80,460
========== ======== ======== ======== ========
</TABLE>
34
<PAGE>
For the Combined Meditrust Companies
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(In thousands except per share data) --------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Per Share Data:
Basic earnings (loss) per Paired
Common Share:
Income (Loss) from continuing
operations ............................... $ 1.17 $ 2.13 $ 2.21 $ 2.10 $ 1.90
Discontinued operations, net .............. (2.44) 0.01 -- --
------------ ---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item ....................... (1.27) 2.14 2.21 2.10 1.90
Loss on prepayment of debt ................ ( 0.59) --
------------ ---------- ---------- ---------- ----------
Net income (loss) ......................... (1.27) 2.14 2.21 1.51 1.90
Preferred stock dividends ................. (0.07)
------------ ---------- ---------- ---------- ----------
Net income (loss) available to Paired
Common shareholders ...................... $ (1.34) $ 2.14 $ 2.21 $ 1.51 $ 1.90
============ ========== ========== ========== ==========
Diluted earnings (loss) per Paired
Common Share:
Income (Loss) from continuing
operations ............................... $ 1.12 $ 2.12 $ 2.20 $ 2.09 $ 1.89
Discontinued operations, net .............. (2.35)
------------ ---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item ....................... (1.23) 2.12 2.20 2.09 1.89
Loss on prepayment of debt ................ ( 0.58) --
------------ ---------- ---------- ---------- ----------
Net income (loss) ......................... (1.23) 2.12 2.20 1.51 1.89
Preferred stock dividends ................. (0.06)
------------ ---------- ---------- ---------- ----------
Net income (loss) available to Paired
Common shareholders ...................... $ (1.29) $ 2.12 $ 2.20 $ 1.51 $ 1.89
============ ========== ========== ========== ==========
Weighted average shares
outstanding:
Basic ..................................... 120,515 76,070 71,445 57,152 42,433
------------ ---------- ---------- ---------- ----------
Diluted ................................... 125,508 76,524 71,751 57,457 42,564
------------ ---------- ---------- ---------- ----------
Distributions paid ........................ $ 3.34 $ 2.38 $ 2.31 $ 2.25 $ 2.18
------------ ---------- ---------- ---------- ----------
Cash Flow Data:
Cash provided by operating
activities ............................... $ 176,171 $ 184,412 $ 188,551 $ 149,997 $ 100,819
Cash used in investing activities ......... (1,104,060) (571,325) (437,150) (310,135) (284,996)
Cash provided by financing activities 1,189,613 387,919 247,077 164,449 207,808
December 31,
----------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Real estate investments, net .............. $ 5,086,736 $2,935,772 $2,188,078 $1,777,798 $1,484,229
Total assets .............................. 6,459,551 3,280,283 2,316,875 1,891,852 1,595,130
Indebtedness .............................. 3,301,722 1,377,438 858,760 762,291 765,752
Total liabilities ......................... 3,508,623 1,454,544 931,934 830,097 824,983
Total shareholders' equity ................ 2,950,928 1,825,739 1,384,941 1,061,755 770,147
</TABLE>
35
<PAGE>
For Meditrust Corporation
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(In thousands except per share data) ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenue ................................ $ 518,872 $ 289,119 $ 254,024 $ 209,369 $ 172,993
---------- --------- --------- --------- ---------
Expenses:
Hotel operations ...................... 1,063
Depreciation and amortization ......... 84,327 26,838 21,651 16,620 15,615
Amortization of goodwill .............. 12,505 2,214 1,556 1,556 1,556
Interest expense ...................... 178,374 87,412 64,216 64,163 67,479
Rental property operating
expenses ............................. 15,638 210
General and administrative
expenses ............................. 19,371 10,111 8,625 7,058 7,883
Other ................................. 96,052
(Income) Loss from
unconsolidated joint venture ......... (906) 10
Gain on sale of assets and
securities, net ...................... (48,483)
---------- --------- --------- --------- ---------
Total expenses ..................... 357,941 126,795 96,048 89,397 92,533
---------- --------- --------- --------- ---------
Income (Loss) from continuing
operations before benefit of
income taxes .......................... 160,931 162,324 157,976 119,972 80,460
Income tax benefit .....................
Income (Loss) from continuing
operations ............................ 160,931 162,324 157,976 119,972 80,460
---------- --------- --------- --------- ---------
Discontinued operations, net ........... (295,875) 688
---------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item .................... (134,944) 163,012 157,976 119,972 80,460
Loss on prepayment of debt ............. 33,454
---------- --------- --------- --------- ---------
Net income (loss) ...................... (134,944) 163,012 157,976 86,518 80,460
Preferred stock dividends .............. (8,444)
---------- --------- --------- --------- ---------
Net income (loss) available to Paired
Common shareholders ................... $ (143,388) $ 163,012 $ 157,976 $ 86,518 $ 80,460
========== ========= ========= ========= =========
Per Share Data:
Basic earnings (loss) per Paired
Common Share:
Income (Loss) from continuing
operations ............................ $ 1.32 $ 2.13 $ 2.21 $ 2.10 $ 1.90
Discontinued operations, net ........... ( 2.43) 0.01 -- -- --
---------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item .................... ( 1.11) 2.14 2.21 2.10 1.90
Loss on prepayment of debt ............. -- -- 0.59 --
---------- --------- --------- --------- ---------
Net income (loss) ...................... ( 1.11) 2.14 2.21 1.51 1.90
Preferred stock dividends .............. ( 0.07) -- -- -- --
---------- --------- --------- --------- ---------
Net income (loss) available to Paired
Common shareholders ................... $ (1.18) $ 2.14 $ 2.21 $ 1.51 $ 1.90
========== ========= ========= ========= =========
</TABLE>
36
<PAGE>
For Meditrust Corporation
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
(In thousands except per share data) --------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per Paired
Common Share:
Income (Loss) from continuing
operations ............................... $ 1.27 $ 2.11 $ 2.20 $ 2.09 $ 1.89
Discontinued operations, net .............. ( 2.33) 0.01
------------ ---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item ....................... ( 1.06) 2.12 2.20 2.09 1.89
Loss on prepayment of debt ................ 0.58 --
------------ ---------- ---------- ---------- ----------
Net income (loss) ......................... ( 1.06) 2.12 2.20 1.51 1.89
Preferred stock dividends ................. ( 0.07)
------------ ---------- ---------- ---------- ----------
Net income (loss) available to Paired
Common shareholders ...................... $ (1.13) $ 2.12 $ 2.20 $ 1.51 $ 1.89
============ ========== ========== ========== ==========
Weighted average shares
outstanding:
Basic ..................................... 121,820 76,274 71,445 57,152 42,433
------------ ---------- ---------- ---------- ----------
Diluted ................................... 126,813 77,007 71,751 57,457 42,564
------------ ---------- ---------- ---------- ----------
Distributions paid ........................ $ 3.34 $ 2.38 $ 2.31 $ 2.25 $ 2.18
------------ ---------- ---------- ---------- ----------
Cash Flow Data:
Cash provided by operating
activities ............................... $ 187,606 $ 185,195 $ 188,551 $ 149,997 $ 100,819
Cash used in investing activities ......... (1,128,412) (580,560) (437,150) (310,135) (284,996)
Cash provided by financing activities 1,209,441 376,698 247,077 164,449 207,808
December 31,
----------------------------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Real estate investments, net .............. $ 5,067,217 $2,935,772 $2,188,078 $1,777,798 $1,484,229
Total assets .............................. 6,320,985 3,215,928 2,316,875 1,891,852 1,595,130
Indebtedness .............................. 3,301,722 1,377,438 858,760 762,291 765,752
Total liabilities ......................... 3,447,632 1,423,688 931,934 830,097 824,983
Total shareholders' equity ................ 2,873,353 1,792,240 1,384,941 1,061,755 770,147
</TABLE>
37
<PAGE>
For Meditrust Operating Company
<TABLE>
<CAPTION>
Year Initial Period
Ended Ended
December 31, December 31,
1998 1997
-------------- ---------------
(In thousands, except per share data)
<S> <C> <C>
Operating Data:
Revenue ................................................................ $ 253,249 $ 48
Expenses:
Hotel operations ...................................................... 124,183
Depreciation and amortization ......................................... 2,901
Amortization of goodwill .............................................. 760 135
Interest expense ...................................................... 796 129
General and administrative expenses ................................... 2,065 146
Royalty to Meditrust Corporation ...................................... 6,326
Rent to Meditrust Corporation ......................................... 125,706
Other ................................................................. 15,163
---------- ---------
Total expenses ......................................................... 277,900 410
---------- ---------
Loss from continuing operations before benefit of income taxes ......... (24,651) (362)
Income tax benefit ..................................................... (4,800)
---------- ---------
Loss from continuing operations ........................................ (19,851) (362)
Discontinued operations ................................................ 1,648 (238)
---------- ---------
Net loss ............................................................... $ (18,203) $ (600)
========== =========
Per Share Data:
Basic earnings (loss) per common share:
Loss from continuing operations ........................................ $ (0.16) $ (0.01)
Discontinued operations, net ........................................... 0.01 --
---------- ---------
Net loss ............................................................... $ (0.15) $ (0.01)
========== =========
Diluted earnings (loss) per common share:
Loss from continuing operations ........................................ $ (0.16) $ (0.01)
Discontinued operations, net ........................................... 0.01 --
---------- ---------
Net loss ............................................................... $ (0.15) $ (0.01)
========== =========
Weighted average shares outstanding
Basic .................................................................. 120,515 82,490
Diluted ................................................................ 120,515 82,490
Cash Flow Data:
Cash used in operating activities ...................................... $ 11,435 $ 783
Cash provided by (used in) investing activities ........................ 24,352 (34,427)
Cash provided by (used in) financing activities ........................ (19,828) 54,883
December 31,
-------------------------------
(In thousands) 1998 1997
------------ ---------
Balance Sheet Data:
Total assets ........................................................... $ 198,190 $ 120,426
Total liabilities ...................................................... 119,683 63,338
Total shareholders' equity ............................................. 78,507 57,088
</TABLE>
38
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Certain matters discussed herein constitute forward-looking statements
within the meaning of the Federal securities laws. The Meditrust Companies (the
"Companies"), consisting of Meditrust Corporation ("Realty") and Meditrust
Operating Company ("Operating"), intend such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements, and are
including this statement for purposes of complying with these safe harbor
provisions. Although the Companies believe the forward-looking statements are
based on reasonable assumptions, the Companies can give no assurance that their
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 conditions of the
capital markets at the time of the proposed spin-off of the healthcare
division, the identification of satisfactory prospective buyers for the
non-strategic assets and the availability of financing for such prospective
buyers, the availability of equity and debt financing for the Companies'
capital investment program, interest rates, competition for hotel services and
healthcare facilities in a given market, the satisfaction of closing conditions
to pending transactions described in this Joint Annual Report, the enactment of
legislation further impacting the Companies' status as a paired share real
estate investment trust ("REIT") or Realty's status as a REIT, unanticipated
delays or expenses on the part of the Companies and their suppliers in
achieving year 2000 compliance and other risks detailed from time to time in
the filings of Realty and Operating with the Securities and Exchange Commission
("SEC"), including, without limitation, those risks described in the Section of
this Joint Annual Report on Form 10-K entitled "Certain Factors You Should
Consider" beginning on page 66 hereof.
Overview
The basis of presentation includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the combined and separate SEC
registrants. Management of the Companies believes that the combined
presentation is most beneficial to the reader. However, it should be noted that
combined results of operations for the year ended December 31, 1997 are
principally related to the activity of Realty, as Operating commenced
operations on October 3, 1997.
On November 5, 1997, Meditrust merged with Santa Anita Realty Enterprises,
Inc., with Santa Anita Realty Enterprises, Inc. as the surviving corporation,
and Meditrust Acquisition Company merged with Santa Anita Operating Company,
with Santa Anita Operating Company as the surviving corporation (hereafter
referred to as the "Santa Anita Merger" or "Santa Anita Mergers"). Upon
completion of the Santa Anita Mergers, Santa Anita Realty Enterprises, Inc.
changed its corporate name to "Meditrust Corporation" and Santa Anita Operating
Company changed its corporate name to "Meditrust Operating Company." The Santa
Anita Mergers were accounted for as reverse acquisitions whereby Meditrust and
Meditrust Acquisition Company were treated as the acquirers for accounting
purposes. Accordingly, the financial history is that of Meditrust and Meditrust
Acquisition Company prior to the Santa Anita Mergers. For the year ended
December 31, 1996, all share and per share amounts have been retroactively
adjusted to reflect the 1.2016 exchange of shares of beneficial interest for
paired common shares of the Companies.
After completing the Santa Anita Merger, the Companies began pursuing a
strategy of diversifying into additional new businesses. Implementation of this
strategy included the evaluation of numerous potential acquisition targets. On
January 3, and January 11, 1998, Realty entered into definitive merger
agreements for La Quinta Inns, Inc. and its wholly owned subsidiaries and its
unincorporated partnership and joint venture (collectively "La Quinta" and "La
Quinta Merger") and Cobblestone Holdings, Inc. and its wholly owned subsidiary
(collectively "Cobblestone" and "Cobblestone Merger"), respectively. In
February 1998, legislation was proposed which limited the ability of the
Companies to utilize the paired share structure. Accordingly, the Companies
began a process of evaluating its healthcare portfolio and ceased any further
evaluation of potential merger candidates.
The Companies consummated the Cobblestone Merger and the La Quinta Merger
on May 29, 1998 and July 17, 1998 respectively. On July 22, 1998, President
William J. Clinton signed into law the Internal Revenue Service Restructuring
and Reform Act of 1998 (the "Reform Act"), which limits the Companies'
39
<PAGE>
ability to grow through use of the paired share structure. While the Companies'
use of the paired share structure in connection with the Cobblestone Merger and
the La Quinta Merger was "grandfathered" under the Reform Act, the ability to
use the paired share structure to acquire additional real estate and operating
businesses conducted with the real estate assets (including the golf and
lodging industries) was substantially limited. In addition, during the summer
of 1998, the debt and equity capital markets available to REITs deteriorated,
thus limiting the Companies' access to cost-efficient capital.
The Companies began an analysis of the impact of the Reform Act, the
Companies' limited ability to access the capital markets, and the operating
strategy of the Companies' existing businesses. This analysis included advice
from outside professional advisors and presentations by management on the
different alternatives available to the Companies. The analysis culminated in
the development of a comprehensive restructuring plan (the "Plan") designed to
strengthen the Companies' financial position and clarify its investment and
operating strategy by focusing on the healthcare and lodging business segments.
The Plan was announced on November 12, 1998 and included the following
components:
o Pursue the separation of the Companies' primary businesses, healthcare and
lodging, by creating two separately traded publicly listed REITs. The
Companies intend to spin off the healthcare financing business into a
stand-alone REIT;
o Continue to operate the Companies' healthcare and lodging businesses using
the existing paired share REIT structure until the healthcare spin-off
takes place;
o Sell more than $1 billion of non-strategic assets, including the portfolio
of golf-related real estate and operating properties ("Cobblestone Golf
Group"), the Santa Anita Racetrack and approximately $550 million of
non-strategic healthcare properties;
o Use the proceeds from these asset sales to achieve significant near-term
debt reduction;
o Settle fully the Companies' forward equity issuance transaction ("FEIT")
with Merrill Lynch;
o Reduce capital investments to reflect the current operating condition in
each industry;
o Reset Realty's annual dividend to $1.84 per common share, an amount that
Realty deems sustainable and comparable to its peer groups:
During 1998 and in early 1999, the Companies made significant progress in
implementing, and in some cases completing, significant components of the Plan.
The following summarizes the status of the Plan by substantial components:
o Completed the sale of $613 million of $1 billion in planned asset sales,
including: $436 million of non-strategic healthcare assets, the Santa Anita
Racetrack and the related horseracing operation, its interest in the Santa
Anita Fashion Mall and related land held for development and artwork
originally acquired in the acquisition of the Santa Anita Companies;
o Entered into letters of intent for the sale of an additional $155 million
of healthcare assets.
o Reduced the amount of the FEIT to $103 million as of December 31, 1998 ($89
million as of March 25, 1999) from the original $277 million.
o Reduced the Companies' outstanding debt by $274 million.
o Refocused the Companies' capital investment program to respond to industry
trends by reducing planned healthcare investments to $100 million in 1999
and ceasing construction of any new hotels after completion of the 13 La
Quinta Inn & Suites currently under development.
o Reduced Realty's annual dividend to $1.84 per common share.
o Entered into a definitive agreement to sell Cobblestone Golf Group for
$393,000,000 and an agreement with its lenders and Merrill Lynch to settle
the FEIT.
As part of the comprehensive restructuring plan, the Companies classified
golf and horseracing activities as discontinued operations for financial
reporting purposes. Accordingly, management's
40
<PAGE>
discussion and analysis of the results of operations are focused on the
Companies primary businesses, healthcare and lodging.
The Meditrust Companies--Combined Results of Operations
Year ended December 31, 1998 vs. Year ended December 31, 1997
Revenue for the year ended December 31, 1998 was $639,377,000 compared to
$289,038,000 for the year ended December 31, 1997, an increase of $350,339,000.
Revenue growth was primarily attributable to the addition of hotel operating
revenue of $258,423,000 and increased rental and interest income of $55,929,000
as a result of additional real estate investments made over the last year net
of the affect of mortgage repayments and asset sales. Other non-recurring
income for the year ended December 31, 1998 of $35,987,000 included prepayment
and lease breakage fees arising from early mortgage repayments and asset sales.
Hotel operating revenue includes the post-acquisition period from July 17, 1998
through December 31, 1998. Hotel operating revenue generally are measured as a
function of the average daily rate ("ADR") and occupancy. The ADR for the
period July 17, 1998 through December 31, 1998 increased to $59.29 as compared
to ADR in the second half of 1997 of $56.69, an increase of $2.60 or 4.6%.
Occupancy percentage decreased 1.8 percentage points to 67.0% from 68.8% for
the same periods. Revenue per available room (RevPAR), which is a product of
the occupancy percentage and ADR, increased 1.6% in the 1998 post-merger period
over the second half of 1997.
For the year ended December 31, 1998, total recurring operating expenses
increased by $151,853,000. This increase was primarily attributable to the
addition of operating expenses from hotel operations of $125,246,000. Hotel
operating expenses include costs associated with the operation such as salaries
and wages, utilities, repair and maintenance, credit card discounts and room
supplies as well as corporate expenses, such as the costs of general
management, office rent, training and field supervision of hotel managers and
other marketing and administrative expenses. During the year ended December 31,
1998, rental property operating expenses were $15,638,000, $8,439,000 of which
is related to the lodging segment and $7,199,000 of which is related to the
healthcare business. Rental property operating expenses for the year ended
December 31, 1998 related to the healthcare business increased by $6,989,000
compared to the year ended December 31, 1997. The increase arose primarily from
expenses related to the management and operation of medical office buildings
that were purchased in 1998. Rental property operating costs attributed to the
lodging segment which were incurred during the post acquisition period from
July 17, 1998 through December 31, 1998, principally consist of property taxes
on hotel facilities. General and administrative expenses increased by
$11,179,000 primarily due to a higher level of operating costs associated with
the management and activity of the portfolio and as a result of the mergers.
The Companies consider contribution from each primary business in
evaluating performance. Contribution includes revenue from each business,
excluding non-recurring or unusual income, less operating expenses, rental
property operating expenses and general and administrative expenses. The
combined contribution of the healthcare and lodging businesses was $441,070,000
for the year ended December 31, 1998 and $278,571,000 for the healthcare
business for the year ended December 31, 1997.
The healthcare contribution for the year ended December 31, 1998 was
$316,332,000 compared to $278,571,000 for the year ended December 31, 1997. The
increase is primarily due to increased rental and interest income as a result
of real estate investments made over the last year, net of the effect of
mortgage repayments and asset sales. These increases were partially offset by a
higher level of operating costs associated with the management and activity of
the portfolio, and from expenses related to management of medical office
buildings that were purchased in 1998.
The lodging contribution for the post-merger period of July 17, 1998
through December 31, 1998 was $124,738,000 or 48% of lodging revenues during
the same period, compared to 47% for the second half of 1997. This improvement
is reflective of a greater number of Inn & Suites hotels which generally
operate at higher margins than La Quinta Inns and a continuing focus on cost
controls and reduced corporate overhead.
Interest expense increased by $91,046,000 due to increases in debt
outstanding resulting from additional real estate investments made over the
past year and the acquisitions of La Quinta and
41
<PAGE>
Cobblestone. Depreciation and amortization increased by $71,306,000 which was
primarily a result of increased real estate investments and amortization of
goodwill from the La Quinta Merger completed on July 17, 1998 and the Santa
Anita Merger completed in 1997.
Goodwill associated with the Santa Anita Merger primarily relates to the
value of the paired-share structure and, due to the permanent nature of the
structure, is being amortized over a 40 year period. Accordingly, the goodwill
recorded as part of the Santa Anita Merger is expected to remain even though
the Santa Anita Racetrack was sold in 1998, as long as the Companies continue
to utilize the paired share structure.
Asset Sales
During the year ended December 31, 1998, Realty realized gains on the sale
of real estate assets of $52,642,000. Sale of healthcare properties, pursuant
to the comprehensive restructuring plan accounted for $52,096,000 of the total
and included one long-term care facility, 32 assisted living facilities and
nine rehabilitation facilities. Realty also sold a 50% interest in a joint
venture holding a fashion mall, as well as the land where the fashion mall is
located, that resulted in a net gain of $546,000. Realty also sold securities
resulting in a loss of $4,159,000.
Other Expenses
During the three months ended March 31, 1998, the Companies pursued a
strategy of diversifying into new business lines including lodging and golf.
Consistent with this strategy, Realty commenced a reevaluation of its
intentions with respect to certain existing healthcare real estate facilities
and other assets. This process included review of the valuation of facilities
in the portfolio, including those with deteriorating performance, and other
assets and receivables that were unrelated to its historical primary business.
As a result of this on-going analysis Realty identified assets which would be
held for sale and recorded provisions to adjust the carrying value of certain
facilities, other assets and receivables and a valuation reserve for certain
mortgage loans receivable. Following the quarter ended March 31, 1998 one
facility was sold and certain other assets and receivables were written off.
On July 22, 1998, the President signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits
the Companies' ability to continue to grow through use of the paired share
structure. While the Companies' use of the paired share structure in connection
with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under
the Reform Act, the ability to continue to use the paired share structure to
acquire additional real estate and operating businesses conducted with the real
estate assets (including the golf and lodging industries) was substantially
limited. In addition, during the summer of 1998, the debt and equity capital
markets available to REITs deteriorated, thus limiting the Companies' access to
cost-efficient capital.
As a result of these events, the Companies commenced a strategic
evaluation of their business which included an extensive review of their
healthcare properties and mortgage loan portfolio, an analysis of the impact of
the Reform Act, the Companies' limited ability to access the capital markets,
and the operating strategy of the Companies' existing businesses. The analysis
culminated in the development of a comprehensive restructuring plan, which was
announced on November 12, 1998, which included the sale of approximately $550
million of non-strategic healthcare assets.
Based upon the analysis described above, other expenses were recorded for
the year ended December 31, 1998, as follows:
<TABLE>
<S> <C>
Asset related: (In thousands)
Provision for assets held for sale ...................................... $33,218
Provision for real estate assets ........................................ 14,700
Provision for loss on real estate mortgage and loans receivable ......... 16,036
Provision for loss on working capital and other receivables ............. 16,400
-------
Subtotal ................................................................ 80,354
</TABLE>
42
<PAGE>
<TABLE>
<S> <C>
(In thousands)
Comprehensive restructuring plan:
Employee severance ..................................... 7,149
Write-off of capitalized pre-development costs ......... 8,720
External consulting fees ............................... 11,882
--------
Subtotal ............................................... 27,751
Other
Costs of transactions not consummated .................. 3,110
--------
Total .................................................. $111,215
========
</TABLE>
As a result of continued deteriorating performance at five healthcare
facilities, management committed to a plan to sell these facilities as soon as
practicable. As of December 31, 1998, Realty had recorded a provision, net of
one facility that was sold prior to the end of the year, of $33,218,000 to
reduce the carrying value of these facilities to estimated fair value less
expected costs of sale. Management expects that the remaining assets will be
disposed of during 1999.
As part of the review of the healthcare portfolio, management identified
four properties where recent events or changes in circumstances, including
physical plant and licensure issues, indicated that the carrying value of the
assets may not be recoverable. Management determined that the estimated
undiscounted future cash flows for these assets was below the carrying value
and, accordingly, Realty reduced the carrying value of these assets by
$14,700,000 to estimated fair value.
Management also identified one mortgage loan collateralized by a
rehabilitation facility where continued eroding margins and an expiring
guarantee indicated that the Companies will likely not be able to collect all
amounts due according to the contractual terms of the loan agreement.
Accordingly, the Companies provided a loan loss for this asset of approximately
$8,000,000. In addition, Realty has also provided for the establishment of an
additional $8,036,000 mortgage loan valuation reserve primarily in response to
the implementation of new government reimbursement regulations impacting many
of its third-party operators during the second half of 1998.
Realty also held working capital and other receivables that were unrelated
to its historical primary business of healthcare financing. Management
determined that certain of these accounts were uncollectible and protracted
collection efforts for these assets would be an inefficient use of its
resources and therefore recorded provisions of approximately $16,400,000 and
then wrote off these assets.
Pursuant to its comprehensive restructuring plan, the Companies announced
plans to refocus their capital investment program by reducing healthcare
investments and ceasing development of any new hotels other than the completion
of those La Quinta[RegTM] Inns and Suites currently under construction.
Accordingly, the Companies recorded non recurring costs of $8,720,000 for the
write-off of certain previously capitalized costs associated with lodging
development, and $7,149,000 for severance related costs attributable to
workforce reductions of 87 employees at the Companies' lodging and healthcare
divisions.
The Companies have also recorded $11,882,000 in costs incurred for various
consultants engaged to assist in the development and implementation of the
comprehensive restructuring plan.
The Companies also incurred approximately $3,110,000 in costs related to
the evaluation of certain acquisition targets, which the Companies are no
longer pursuing.
Discontinued operations
During the latter part of 1997 and the first half of 1998, the Companies
pursued a strategy of diversifying into new businesses including horseracing,
golf and lodging. During the third quarter of 1998, the Companies reassessed
these business segments. In addition, a review of investment and operating
strategies for the Companies was initiated. As a result, on November 11, 1998,
the Companies approved a comprehensive restructuring plan including the
disposal of the horseracing and golf segments as well as the sale of certain
healthcare and other non-strategic assets.
43
<PAGE>
Accordingly, the Companies have classified approximately $10,721,000 of
income from the horseracing and golf segments as discontinued during the year
ended December 31, 1998, and $450,000 of income from the horseracing segment
during the year ended December 31, 1997. The horseracing segment was sold on
December 10, 1998, resulting in a net loss on disposal of $67,913,000. The
Companies have also recorded a provision for loss on disposal, based upon the
estimated proceeds to be realized upon sale, of the Cobblestone Golf Group, of
approximately $237,035,000. Subsequent to the end of 1998, The Companies
entered into a definitive agreement to sell the Cobblestone Golf Group for
$393,000,000 and expect the transaction to close in early 1999 which should not
change the estimated loss on disposal presented herein.
Net Loss
The resulting net loss available for common shareholders, after deducting
preferred share dividends, for the year ended December 31, 1998, was
$161,591,000 compared to net income of $162,412,000 for the year ended December
31, 1997. The net loss per paired common share for the year ended December 31,
1998 was $1.34 compared to net income per paired common share of $2.14 for the
year ended December 31, 1997. The per paired common share amount decreased
primarily due to the provisions for impairment and discontinued operations,
loss on sale of assets and restructuring charges, and additional paired common
shares being issued to consummate mergers. In connection with the Cobblestone
and La Quinta mergers, 8,177,000 and 43,280,000 additional paired common shares
are now outstanding, respectively.
Year ended December 31, 1997 vs. Year ended December 31, 1996
Revenues and expenses for the years ended December 31, 1997 and 1996 are
principally related to healthcare related real estate activities.
Revenue for the year ended December 31, 1997 was $289,038,000 compared to
$254,024,000 for the year ended December 31, 1996, an increase of $35,014,000
or 14%. Revenue growth was primarily attributed to increased rental income of
$28,749,000 and increased interest income of $6,265,000. These increases
resulted from additional real estate investments in healthcare facilities made
over the last twelve months.
For the year ended December 31, 1997, total expenses increased by
$31,028,000. Interest expense increased by $23,196,000 due to increases in debt
outstanding resulting from additional real estate investments made over the
past twelve months. This increase was partially offset by lower interest rates
compared to 1996. Depreciation and amortization increased by $5,187,000, as a
result of increased real estate investments and associated debt issuance costs.
General and administrative and other expenses increased by $1,852,000
principally due to a higher level of operating costs associated with portfolio
growth. Amortization of goodwill increased by $793,000 as a result of
amortization of the excess purchase price over the fair value of assets
acquired in the Santa Anita Merger.
Goodwill associated with the Santa Anita Merger primarily relates to the
value of the paired-share structure and, due to the permanent nature of the
structure, is being amortized over a 40 year period. Accordingly, the goodwill
recorded as part of the Santa Anita Merger is expected to remain even though
the Santa Anita Racetrack was sold in 1998, as long as the Companies continue
to utilize the paired share structure.
On November 11, 1998, the Companies approved a comprehensive restructuring
plan including the disposal of the horseracing segment. Accordingly, the
Companies have classified approximately $450,000 of income from the horseracing
segment as discontinued during the year ended December 31, 1997. Prior to 1997,
the Companies were not engaged in horseracing.
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 paired 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 share decrease was primarily due to dilution
caused by the Santa Anita Merger. Per share amounts have been restated to
reflect the exchange of
44
<PAGE>
Meditrust Shares of Beneficial Interest for paired common shares of the
Companies pursuant to the Santa Anita Merger.
The Meditrust Companies -- Combined Liquidity and Capital Resources
Cash flows from operating activities
The principal source of cash to be used to fund the Companies' future
operating expenses, interest expense, recurring capital expenditures and
distribution payments will be cash flow provided by operating activities. The
Companies' anticipate that cash flow provided by operating activities will
provide the necessary funds on a short and long-term basis to meet operating
cash requirements including all distributions to shareholders.
Cash flows from investing and financing activities
The Companies provide funding for new investments and costs associated
with the restructuring through a combination of long-term and short-term
financing including, both debt and equity, as well as the sale of assets. The
Companies obtain long-term financing through the issuance of shares, long-term
unsecured notes, convertible debentures and 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 February 26, 1998, the Companies entered into transactions (the
"Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch
International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc.
(collectively with its agent and successor in interest, "MLI"). Pursuant to the
terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A
Non-Voting Convertible Common Stock par value $.10 per share from each of the
Companies at a purchase price of $32.625 per share (collectively with the
paired common shares the shares of Series A non-voting convertible common stock
are convertible into, the "Notional Shares"). The Series A Non-Voting
Convertible Common Stock converted on a one to one basis to paired common stock
of the Companies on June 18, 1998. Total proceeds from the issuance were
approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from
the issuance were approximately $272,000,000, and were used by the Companies to
repay existing indebtedness. The Companies and MLI also entered into a Purchase
Price Adjustment Agreement under which the Companies would, within one year
from the date of MLI's purchase, on a periodic basis, adjust the purchase price
based on the market price of the paired common stock at the time of any interim
or final adjustments, so as to provide MLI with a guaranteed return of LIBOR
plus 75 basis points (the "Return"). The paired common shares issued receive
the same dividend as the Companies' paired common stock; however, the
difference between LIBOR plus 75 basis points and the dividend payments
received by MLI will be included as an additional adjustment under the Purchase
Price Adjustment Agreement. Such adjustments were to be effected by deliveries
of additional paired common shares to, or, receipts of paired common shares
from, MLI. In the event that the market price for the paired shares is not high
enough to provide MLI with the Return, the Companies would have to deliver
additional paired shares to MLI, which would have a dilutive effect on the
capital stock of the Companies. This dilutive effect increases significantly as
the market price of the paired shares declines further below the original
purchase price. Moreover, settlement of the FEIT transaction, whether at
maturity or at an earlier date, may force the Companies to issue paired shares
at a depressed price, which may heighten this dilutive effect on the capital
stock of the Companies. Prior to the settlement, MLI shall hold any paired
common shares delivered by the Companies under the Purchase Price Adjustment
Agreement in a collateral account (the "Collateral Shares"). Under the
adjustment mechanism, the Companies delivered approximately 9,700,000
Collateral Shares in 1998, all of which were returned to the Companies when the
Companies settled in cash a portion of the adjustment transaction in December
1998.
The FEIT has been accounted for as an equity transaction with the Notional
Shares treated as outstanding from their date of issuance until the respective
date of repurchase, if any, for both basic and
45
<PAGE>
diluted earnings per share purposes. For diluted earnings per share purposes,
at the end of the quarterly period, the then outstanding Reference Amount (as
defined herein) is divided by the quoted market price of a paired common share,
and the excess, if applicable, of that number of paired common shares over the
Notional Shares (the "Contingent Shares") is added to the denominator.
Contingent shares are included in the calculation of year to date diluted
earnings per share weighted for the interim periods in which they were included
in the computation of diluted earnings per share.
The "Reference Amount" equals the Initial Reference Amount plus the Return
and net of any cash distributions on the Notional Shares or any other cash paid
or otherwise delivered to MLI under the FEIT.
Payments that reduce the Reference Amount in effect satisfy all necessary
conditions for physically settling that portion of the Reference Amount and are
accounted for in a manner similar to treasury stock. Therefore, payments that
reduce the Reference Amount are divided by the quoted market price of a paired
common share on the date of payment. The calculated number is then multiplied
by the fractional number of days in the period prior to the payment date and
the resulting number of paired common shares is included in the calculation of
diluted earnings per share for the period.
On November 11, 1998, the Companies entered into an agreement with MLI to
amend the FEIT. Under the agreement, Realty agreed to grant a mortgage of the
Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the
FEIT with cash generated in part from the sale of certain assets, including the
Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the
settlement agreement, not to sell any shares of the existing FEIT until
February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152
million ($127 million of which was from the sale of certain assets including
the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and
the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional
Shares outstanding were reduced to approximately 6,865,000 paired common shares
and there were no Contingent Shares issuable.
On March 10, 1999, the Companies entered into an agreement with MLI and
certain of its affiliates to use the proceeds from the sale of Cobblestone Golf
Group in excess of $300 million to purchase all or a portion of the remaining
Notional Shares. Merrill Lynch has agreed not to sell any shares of the
remaining Notional Shares until March 31, 1999 while the Companies complete the
sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference
Amount was $89 million.
On May 29, 1998, Realty completed its merger with Cobblestone and each
share of common stock of Cobblestone was converted into the right to receive
3.867 paired common shares and each share of preferred stock of Cobblestone was
converted into the right to receive .2953 paired common shares. The total
number of paired common shares issued in connection with the Cobblestone Merger
was approximately 8,177,000, with an aggregate market value of approximately
$230,000,000 plus the issuance of approximately 452,000 options valued at
$10,863,000. In addition, Realty advanced monies in order for Cobblestone to
satisfy approximately $170,000,000 of Cobblestone's debt and associated costs.
The total consideration paid in connection with the Cobblestone Merger was
approximately $455,467,000. The excess of the purchase price, including costs
of the Cobblestone Merger, over the fair value of the net assets acquired
approximated $152,031,000 and is being amortized over 20 years.
On June 10, 1998, Realty issued 7,000,000 depositary shares. Each
depositary share represents one-tenth of a share of 9% Series A Cumulative
Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds
from this issuance of approximately $168,666,000 were used by Realty primarily
to repay existing indebtedness.
On July 17, 1998, Realty completed its merger with La Quinta and each
share of common stock of La Quinta was converted into the right to receive
0.736 paired common shares, reduced by the amount to be received in an earnings
and profits distribution. Approximately 43,280,000 paired common shares, with
an aggregate market value of approximately $1,172,636,000, and approximately
$956,054,000 in cash were exchanged in order to consummate the La Quinta
Merger. In addition, $851,479,000 of La Quinta's debt and associated costs were
assumed. Accordingly, the operations of La Quinta are included in the combined
and consolidated financial statements since consummation of the La Quinta
Merger. The total consideration paid in connection with the La Quinta Merger
was approximately $2,980,169,000.
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<PAGE>
The excess of the purchase price, including costs of the La Quinta Merger, over
the fair value of the net assets acquired approximated $301,977,000, and is
being amortized over 20 years.
On July 17, 1998, Realty executed an agreement for an unsecured bank
facility ("New Credit Agreement") for a total of $2,250,000,000 bearing
interest at the lenders' prime rate plus .50% or LIBOR plus 1.375%. The
facility is comprised of three tranches with term loans at various maturity
dates between July 17, 1999 and July 17, 2001 and a revolving tranche with a
total commitment of $1,000,000,000 maturing July 17, 2001.
On November 23, 1998, Realty reached an agreement with its bank group to
amend its New Credit Agreement. The amendment provided for Realty's cash
repayment of a portion of its FEIT and the amendment of certain financial
covenants to accommodate asset sales, to exclude the impact of non-recurring
charges, and to provide for future operating flexibility. The amendment also
provided for an increase to the LIBOR pricing of the credit facility by
approximately 125 basis points, and the pledge of stock of the Companies'
subsidiaries. This pledge of subsidiary stock will also extend on a pro rata
basis to entitled bondholders. Realty also agreed to a 25 basis point increase
to the LIBOR pricing in the event that an equity offering of at least
$100,000,000 had not been issued by February 1, 1999. On February 1, 1999 this
increase went into effect.
On November 11, 1998 the Boards of Directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan include the sale of Cobblestone Golf Group, the Santa Anita
Racetrack, and certain healthcare properties. In conjunction with this plan,
the assets related to horseracing operations at the Santa Anita Racetrack, as
well as adjacent land, were sold on December 10, 1998 for $126,000,000.
Additionally, a 50% ownership in a joint venture holding a fashion mall, as
well as the land on which the fashion mall is located, were sold for
$40,000,000. Also in response to the plan, healthcare assets were sold in the
fourth quarter for $314,645,000 and mortgage investments of $122,645,000 were
repaid. On February 11, 1999, the Companies signed a definitive agreement to
sell the Cobblestone Golf Group real estate and operations for aggregate
consideration, including assumed debt, of approximately $393,000,000. The
transaction is expected to close by the end of the first quarter of 1999. Also,
the Companies have entered into letters of intent for the sale of an additional
$155,000,000 of healthcare assets.
As of December 31, 1998, the Companies' gross real estate investments
totaled approximately $5,333,883,000 consisting of 221 long-term care
facilities, 157 retirement and assisted living facilities, 34 medical office
buildings, one acute care hospital campus, eight other healthcare facilities
and 303 hotel facilities. As of December 31, 1998, the Companies' outstanding
commitments for additional financing totaled approximately $161,000,000 for the
completion of 11 assisted living facilities, five long-term care facilities,
one medical office building and 13 hotel facilities currently under
construction and additions to existing facilities in the portfolio.
On March 10, 1999, Realty reached a second agreement with its bank group
to amend its New Credit Agreement. The second amendment, which is effective
upon the successful completion of the sale of Cobblestone Golf Group, provides
for a portion of the sale proceeds to be applied to the FEIT. The second
amendment also provides for, among other things, eliminating certain limits on
healthcare investments and lowering the commitment on the revolving tranche to
$850,000,000.
Of the $1,000,000,000 revolving tranche commitment, $353,000,000 was
available at December 31, 1998, at Realty's option of the base rate (8.25%) or
LIBOR plus 2.625% (7.98% at December 31, 1998). As of March 15, 1999,
$244,000,000 of the revolving tranche commitment was available.
On August 17, 1998, Realty redeemed $100,000,000 of Remarketed Reset Notes
due August 15, 2002 at par value. On September 11, 1998, Realty redeemed
$120,000,000 of 9-1/4% Senior Subordinated Notes due 2003 at 103.46% of par.
Realty's credit facility was used to finance both redemptions.
The Companies had shareholders' equity of $2,950,928,000 and debt
constituted 53% of the Companies' total capitalization as of December 31, 1998.
On January 14, 1999, Realty declared a common dividend of $0.46 per share
payable on February 16, 1999 to common shareholders of record on January 29,
1999. This dividend relates to the quarter ended December 31, 1998.
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<PAGE>
On March 5, 1999, Realty declared a dividend of $.5625 per depository
share on its 9% Series A Cumulative Redeemable Preferred Stock to shareholders
of record on March 15, 1999. This dividend will be paid on March 31, 1999.
The Companies have an effective shelf registration statement on file with
the SEC under which the Companies may issue $1,825,000,000 of securities
including paired common shares, preferred shares, debt, series common stock,
convertible debt and warrants to purchase shares, preferred shares, debt,
series common stock and convertible debt.
The Companies believe that their various sources of capital are adequate
to finance their operations as well as their existing commitments, including
the acquisition and/or mortgage financing of certain healthcare facilities, the
completion of the La Quinta Inn & Suites currently under development and
repayment of the debt maturing during 1999.
Combined funds from operations
Combined Funds from Operations of the Companies was $277 million and $192
million for the years ended December 31, 1998 and 1997, respectively.
Management considers Funds from Operations to be a key external
measurement of REIT performance. Funds from Operations represents net income or
loss available to common shareholders (computed in accordance with generally
accepted accounting principles), excluding real estate related depreciation,
amortization of goodwill and certain intangible assets, gains and losses from
the sale of assets and non-recurring income and expenses. For 1998,
non-recurring income primarily consists of gains attributable to the prepayment
of loans and lease breakage fees, while non-recurring expenses include charges
related to the sale of discontinued operations, asset impairments and
comprehensive restructuring costs. Funds from Operations should not be
considered an alternative to net income or other measurements under generally
acceptable accounting principals as an indicator of operating performance or to
cash flows from operating, investing, or financing activities as a measure of
liquidity. Funds from Operations does not reflect working capital changes, cash
expenditures for capital improvements or principal payments on indebtedness.
The following reconciliation of net income and loss available to common
shareholders to Funds from Operations illustrates the difference between the
two measures of operating performance for the years ended December 31, 1998 and
1997. Certain reconciling items include amounts reclassified from income from
operations of discontinued operations and, accordingly, do not necessarily
agree to revenue and expense captions in the Companies' financial statements.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
(In thousands) -------------- -----------
<S> <C> <C>
Net income (loss) available to common shareholders ............... $ (161,591) $162,412
Depreciation of real estate and intangible amortization ......... 106,272 29,099
Provision for loss on sale of discontinued operations ........... 237,809
Other capital gains and losses .................................. 19,562
Other income .................................................... (35,987)
Other expenses .................................................. 111,215
---------- --------
Funds from Operations ............................................ $ 277,280 $191,511
---------- --------
Weighted average paired common shares outstanding:
Basic ............................................................ 120,515 71,445
---------- --------
Diluted .......................................................... 125,508 71,751
---------- --------
</TABLE>
Realty--Results of Operations
Year ended December 31, 1998 vs. Year ended December 31, 1997
Revenue for the year ended December 31, 1998 was $518,872,000 compared to
$289,119,000 for the year ended December 31, 1997, an increase of $229,753,000.
Revenue growth was primarily
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<PAGE>
attributable to the addition of rent and royalty income and interest of
$132,744,000 and other income of $5,781,000 from Operating, related to hotel
facilities acquired in the La Quinta Merger. Revenue growth also arose from
increased rental and interest income of $55,370,000 due to additional real
estate investments made over the last year, net of the effect of mortgage
prepayments and asset sales. Other non-recurring income for the year ended
December 31, 1998 of $35,987,000 included prepayment and lease breakage fees
resulting from early mortgage repayments and asset sales.
For the year ended December 31, 1998, total recurring expenses increased
by $183,577,000. Interest expense increased $90,962,000 due to increases in
debt outstanding resulting from additional real estate investments made over
the past year and the acquisitions of La Quinta and Cobblestone. Depreciation
and amortization increased by $67,780,000 which was primarily a result of
increased real estate investments and amortization of goodwill from the La
Quinta acquisition completed on July 17, 1998 and the Santa Anita Merger
completed in 1997.
Goodwill associated with the Santa Anita Merger primarily relates to the
value of the paired-share structure and, due to the permanent nature of the
structure, is being amortized over a 40 year period. Accordingly, the goodwill
recorded as part of the Santa Anita Merger is expected to remain even though
the Santa Anita Racetrack was sold in 1998, as long as the Companies continue
to utilize the paired share structure.
General and administrative and other expenses increased by $8,344,000
primarily due to a higher level of operating costs associated with the
management and activity of the portfolio and as a result of the La Quinta
Merger. Rental and hotel property operating expenses increased by $16,491,000
primarily due to property taxes incurred at hotel facilities and expenses
related to the management and operation of medical office buildings that were
purchased in 1998.
Asset Sales
During the year ended December 31, 1998, Realty realized gains on sale of
assets of $52,642,000. Sale of healthcare properties, pursuant to the
comprehensive restructuring plan accounted for $52,906,000 of the total and
included one long-term care facility, 32 assisted living facilities and nine
rehabilitation facilities. Realty also sold its 50% interest in a joint venture
holding a fashion mall, as well as the land where the fashion mall is located,
that resulted in a net gain of $546,000. Realty also sold securities resulting
in a loss of $4,159,000.
Other expenses
During the three months ended March 31, 1998, the Companies pursued a
strategy of diversifying into new business lines including lodging and golf.
Consistent with this strategy, Realty commenced a reevaluation of its
intentions with respect to certain existing healthcare real estate facilities
and other assets. This process included review of the valuation of facilities
in the portfolio, including those with deteriorating performance, and other
assets and receivables that were unrelated to its historical primary business.
As a result of this on-going analysis Realty identified assets which would be
held for sale and recorded provisions to adjust the carrying value of certain
facilities, other assets and receivables and a valuation reserve for certain
mortgage loans receivable. Following the quarter ended March 31, 1998 one
facility was sold and certain other assets and receivables were written off.
On July 22, 1998, the President signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits
the Companies' ability to continue to grow through use of the paired share
structure. While the Companies' use of the paired share structure in connection
with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under
the Reform Act, the ability to continue to use the paired share structure to
acquire additional real estate and operating businesses conducted with the real
estate assets (including the golf and lodging industries) was substantially
limited. In addition, during the summer of 1998, the debt and equity capital
markets available to REITs deteriorated, thus limiting the Companies' access to
cost-efficient capital.
As a result of these events, the Companies commenced a strategic
evaluation of their business which included an extensive review of their
healthcare properties and mortgage loan portfolio, an analysis of the impact of
the Reform Act, the Companies' limited ability to access the capital markets,
and the operating strategy of the Companies' existing businesses. The analysis
culminated in the
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<PAGE>
development of a comprehensive restructuring plan, which was announced on
November 12, 1998, which included the sale of approximately $550 million of
non-strategic healthcare assets.
Based upon the analysis described above, other expenses were recorded on
the books of Realty for the year ended December 31, 1998, as follows:
<TABLE>
<S> <C>
Asset related: (In thousands)
Provision for assets held for sale ...................................... $33,218
Provision for real estate assets ........................................ 14,700
Provision for loss on real estate mortgage and loans receivable ......... 16,036
Provision for loss on working capital and other receivables ............. 16,400
-------
Subtotal ................................................................ 80,354
Comprehensive restructuring plan:
Employee severance ....................................................... 706
External consulting fees ................................................. 11,882
-------
Subtotal ................................................................ 12,588
Other
Costs of transactions not consummated ................................... 3,110
-------
Total ................................................................... $96,052
=======
</TABLE>
As a result of continued deteriorating performance at five healthcare
facilities, management committed to a plan to sell these facilities as soon as
practicable. As of December 31, 1998, Realty had recorded a provision, net of
one facility that was sold prior to the end of the year, of $33,218,000 to
reduce the carrying value of these facilities to estimated fair value less
expected costs of sale. Management expects that the remaining assets will be
disposed of during 1999.
As part of the review of the healthcare portfolio, management identified
four properties where recent events or changes in circumstances, including
physical plant and licensure issues, indicated that the carrying value of the
assets may not be recoverable. Management determined that the estimated
undiscounted future cash flows for these assets was below the carrying value
and, accordingly, Realty reduced the carrying value of these assets by
$14,700,000 to estimated fair value.
Management also identified one mortgage loan collateralized by a
rehabilitation facility where continued eroding margins and an expiring
guarantee indicated that the Companies will likely not be able to collect all
amounts due according to the contractual terms of the loan agreement.
Accordingly, the Companies provided a loan loss for this asset of approximately
$8,000,000. In addition, Realty has also provided for the establishment of an
additional $8,036,000 mortgage loan valuation allowance primarily in response
to the implementation of new government reimbursement regulations impacting
many of its operators during the second half of 1998.
Realty also held working capital and other receivables that were unrelated
to its historical primary business of healthcare financing. Management
determined that certain of these accounts were uncollectible and protracted
collection efforts for these assets would be an inefficient use of its
resources and therefore recorded provisions of approximately $16,400,000 and
then wrote off these assets.
Pursuant to its comprehensive restructuring plan, the Companies announced
plans to refocus their capital investment program by reducing new healthcare
investments for 1999 and ceasing development of any hotels other than the
completion of those Inns and Suites currently under construction. Accordingly,
Realty recorded non-recurring costs of $12,588,000 during 1998. These costs
included severance attributable to workforce reductions of approximately 11
employees, primarily from Realty property management, marketing and acquisition
departments of $706,000. In addition, Realty recorded $11,882,000 in costs
associated incurred for various consultants engaged to assist in the
development and implementation of the comprehensive restructuring plan.
Realty also incurred $3,110,000 in costs related to the evaluation of
certain acquisition targets, which Realty is no longer pursuing.
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<PAGE>
Discontinued operations
During the latter part of 1997 and the first half of 1998, the Companies
pursued a strategy of diversifying into new businesses including horseracing,
golf and lodging. During the third quarter of 1998, the Companies reassessed
these business segments. In addition, a review of investment and operating
strategies for the Companies was initiated. As a result, on November 11, 1998,
the Companies approved a comprehensive restructuring plan including the
disposal of the horseracing and golf segments as well as the sale of certain
healthcare and other non-strategic assets.
Accordingly, Realty has classified approximately $14,635,000 of income
from the horseracing and golf segments as discontinued during the year ended
December 31, 1998 and $688,000 of income from the horseracing segment during
the year ended December 31, 1997. The horseracing segment was sold on December
10, 1998, resulting in a net loss on disposal of $82,953,000. Realty also
recorded a provision for loss on disposal of approximately $227,557,000, based
upon the estimated proceeds to be realized upon sale, of the golf-related
assets. Subsequent to the end of 1998, The Companies entered into a definitive
agreement to sell the Cobblestone Golf Group for $393,000,000 and expect the
transaction to close in early 1999 which should not change the estimated loss
on disposal presented herein.
Net Loss
The resulting net loss available for common shareholders, after deducting
preferred share dividends, for the year ended December 31, 1998, was
$143,388,000 compared to net income of $163,012,000 for the year ended December
31, 1997. The net loss available per common share for the year ended December
31, 1998 was $1.18 compared to net income per common share of $2.14 for the
year ended December 31, 1997. The per common share amount decreased primarily
due to the provisions for impairment and discontinued operations, loss on sale
of assets and restructuring charges, and additional common shares being issued
to consummate mergers. In connection with the Cobblestone and La Quinta
mergers, 8,177,000 and 43,280,000 additional paired common shares are now
outstanding, respectively.
Year ended December 31, 1997 vs. Year ended December 31, 1996
Revenue for the year ended December 31, 1997 was $289,119,000 compared to
$254,024,000 for the year ended December 31, 1996, an increase of $35,095,000
or 14%. Revenue growth was primarily attributed to increased rental income of
$28,749,000 and increased interest income of $6,346,000. These increases
resulted primarily from additional real estate investments made over the last
twelve months.
For the year ended December 31, 1997, total expenses increased by
$30,747,000. Interest expense increased by $23,196,000 due to increases in debt
outstanding resulting from additional real estate investments made over the
past twelve months. This increase was partially offset by lower interest rates
compared to 1996. Depreciation and amortization increased by $5,187,000, as a
result of increased real estate investments and associated debt issuance costs.
General and administrative and other expenses increased by $1,706,000
principally due to a higher level of operating costs associated with portfolio
growth. Amortization of goodwill increased by $658,000 as a result of
amortization of the excess purchase price over the fair value of assets
acquired in the Santa Anita Merger.
Goodwill associated with the Santa Anita Merger primarily relates to the
value of the paired-share structure and, due to the permanent nature of the
structure, is being amortized over a 40 year period. Accordingly, the goodwill
recorded as part of the Santa Anita Merger is expected to remain even though
the Santa Anita Racetrack was sold in 1998, as long as the Companies continue
to utilize the paired share structure.
On November 11, 1998, the Companies approved a comprehensive restructuring
plan including the disposal of the horseracing segment. Accordingly, Realty has
classified approximately $688,000 of income from the horseracing segment as
discontinued during the year ended December 31, 1997. Prior to 1997, The
Companies were not engaged in horseracing
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
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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 Merger.
Per share amounts have been restated to reflect the exchange of Meditrust
Shares of Beneficial Interest for paired common shares of the Companies
pursuant to the Santa Anita Merger.
Realty--Liquidity and Capital Resources
Cash flows from operating activities
The principal source of cash to be used to fund Realty's future operating
expenses, interest expense, recurring capital expenditures and distribution
payments will be cash flow provided by operating activities. Realty anticipates
that cash flow provided by operating activities will provide the necessary
funds on a short and long-term basis to meet operating cash requirements
including all distributions to shareholders.
Cash flows from investing and financing activities
Realty provides funding for new investments and costs associated with the
restructuring through a combination of long-term and short-term financing
including, both debt and equity, as well as the sale of assets. Realty obtains
long-term financing through the issuance of shares, long-term unsecured notes,
convertible debentures and the assumption of mortgage notes. Realty 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, Realty may
utilize interest rate caps or swaps to attempt to hedge interest rate
volatility. It is Realty's objective to match mortgage and lease terms with the
terms of their borrowings. Realty attempts to maintain an appropriate spread
between its 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 Realty will
satisfactorily achieve, if at all, the objectives set forth in this paragraph.
On February 26, 1998, the Companies entered into transactions (the
"Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch
International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc.
(collectively with its agent and successor in interest, "MLI"). Pursuant to the
terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A
Non-Voting Convertible Common Stock par value $.10 per share from each of the
Companies at a purchase price of $32.625 per share (collectively with the
paired common shares the shares of Series A non-voting convertible common stock
are convertible into, the "Notional Shares"). The Series A Non-Voting
Convertible Common Stock converted on a one to one basis to paired common stock
of the Companies on June 18, 1998. Total proceeds from the issuance were
approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from
the issuance were approximately $272,000,000, and were used by the Companies to
repay existing indebtedness. The Companies and MLI also entered into a Purchase
Price Adjustment Agreement under which the Companies would, within one year
from the date of MLI's purchase, on a periodic basis, adjust the purchase price
based on the market price of the paired common stock at the time of any interim
or final adjustments, so as to provide MLI with a guaranteed return of LIBOR
plus 75 basis points (the "Return"). The paired common shares issued receive
the same dividend as the Companies' paired common stock; however, the
difference between LIBOR plus 75 basis points and the dividend payments
received by MLI will be included as an additional adjustment under the Purchase
Price Adjustment Agreement. Such adjustments were to be effected by deliveries
of additional paired common shares to, or, receipts of paired common shares
from, MLI. In the event that the market price for the paired shares is not high
enough to provide MLI with the Return, the Companies would have to deliver
additional paired shares to MLI, which would have a dilutive effect on the
capital stock of the Companies. This dilutive effect increases significantly as
the market price of the paired shares declines further below the original
purchase price. Moreover, settlement of the FEIT transaction, whether at
maturity or at an earlier date, may force the Companies to issue paired shares
at a depressed price, which may heighten this dilutive effect on the capital
stock of the Companies. Prior to the settlement, MLI shall hold any paired
common shares delivered by the Companies under the Purchase Price Adjustment
Agreement in a collateral account (the "Collateral Shares"). Under the
adjustment mechanism, the Companies delivered approximately 9,700,000
Collateral Shares in 1998, all of which were returned
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to the Companies when the Companies settled in cash a portion of the adjustment
transaction in December 1998.
The FEIT has been accounted for as an equity transaction with the Notional
Shares treated as outstanding from their date of issuance until the respective
date of repurchase, if any, for both basic and diluted earnings per share
purposes. For diluted earnings per share purposes, at the end of the quarterly
period, the then outstanding Reference Amount (as defined herein) is divided by
the quoted market price of a paired common share, and the excess, if
applicable, of that number of paired common shares over the Notional Shares
(the "Contingent Shares") is added to the denominator. Contingent shares are
included in the calculation of year to date diluted earnings per share weighted
for the interim periods in which they were included in the computation of
diluted earnings per share.
The "Reference Amount" equals the Initial Reference Amount plus the Return
and net of any cash distributions on the Notional Shares or any other cash paid
or otherwise delivered to MLI under the FEIT.
Payments that reduce the Reference Amount in effect satisfy all necessary
conditions for physically settling that portion of the Reference Amount and are
accounted for in a manner similar to treasury stock. Therefore, payments that
reduce the Reference Amount are divided by the quoted market price of a paired
common share on the date of payment. The calculated number is then multiplied
by the fractional number of days in the period prior to the payment date and
the resulting number of paired common shares is included in the calculation of
diluted earnings per share for the period.
On November 11, 1998, the Companies entered into an agreement with MLI to
amend the FEIT. Under the agreement, Realty agreed to grant a mortgage on the
Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the
FEIT with cash generated in part from the sale of certain assets, including the
Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the
settlement agreement, not to sell any shares of the existing FEIT until
February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152
million ($127 million of which was from the sale of certain assets including
the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and
the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional
Shares outstanding were reduced to approximately 6,865,000 paired common shares
and there were no Contingent Shares issuable.
On March 10, 1999, the Companies entered into an agreement with MLI and
certain of its affiliates to use the proceeds from the sale of Cobblestone Golf
Group in excess of $300 million to purchase all or a portion of the remaining
Notional Shares. Merrill Lynch has agreed not to sell any shares of the
remaining Notional Shares until March 31, 1999 while the Companies complete the
sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference
Amount was $89 million.
On May 29, 1998, Realty completed its merger with Cobblestone and each
share of common stock of Cobblestone was converted into the right to receive
3.867 paired common shares and each share of preferred stock of Cobblestone was
converted into the right to receive .2953 paired common shares. The total
number of paired common shares issued in connection with the Cobblestone Merger
was approximately 8,177,000, with an aggregate market value of approximately
$230,000,000 plus the issuance of approximately 452,000 options valued at
$10,863,000. In addition, Realty advanced monies in order for Cobblestone to
satisfy approximately $170,000,000 of Cobblestone's debt and associated costs.
The total consideration paid in connection with the Cobblestone Merger was
approximately $455,467,000. The excess of the purchase price, including costs
of the Cobblestone Merger, over the fair value of the net assets acquired
approximated $152,031,000 and is being amortized over 20 years.
On June 10, 1998, Realty issued 7,000,000 depositary shares. Each
depositary share represents one-tenth of a share of 9% Series A Cumulative
Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds
from this issuance of approximately $168,666,000 were used by Realty primarily
to repay existing indebtedness.
On July 17, 1998, Realty completed its merger with La Quinta and each
share of common stock of La Quinta was converted into the right to receive
0.736 paired common shares, reduced by the amount to be received in an earnings
and profits distribution. Approximately 43,280,000 paired common shares, with
an aggregate market value of approximately $1,172,636,000, and approximately
$956,054,000 were
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exchanged in order to consummate the La Quinta Merger. In addition,
$851,479,000 of La Quinta's debt and associated costs were assumed.
Accordingly, the operations of La Quinta are included in the combined and
consolidated financial statements since consummation of the La Quinta Merger.
The total consideration paid in connection with the La Quinta Merger was
approximately $2,980,169,000. The excess of the purchase price, including costs
of the La Quinta Merger, over the fair value of the net assets acquired
approximated $301,977,000, and is being amortized over 20 years.
On July 17, 1998, Realty executed an agreement for an unsecured bank
facility ("New Credit Agreement") for a total of $2,250,000,000 bearing
interest at the lenders' prime rate plus .50% or LIBOR plus 1.375%. The
facility is comprised of three tranches with term loans at various maturity
dates between July 17, 1999 and July 17, 2001 and a revolving tranche with a
total commitment of $1,000,000,000 maturing July 17, 2001.
On November 23, 1998, Realty reached an agreement with its bank group to
amend its New Credit Agreement. The amendment provided for Realty's cash
repayment of a portion of its FEIT and the amendment of certain financial
covenants to accommodate asset sales, to exclude the impact of non-recurring
charges, and to provide for future operating flexibility. The amendment also
provided for an increase to the LIBOR pricing of the credit facility by
approximately 125 basis points, and the pledge of stock of the Companies'
subsidiaries. This pledge of subsidiary stock will also extend on a pro rata
basis to entitled bondholders. Realty also agreed to a 25 basis point increase
to the LIBOR pricing in the event that an equity offering of at least
$100,000,000 had not been issued by February 1, 1999. On February 1, 1999 this
increase went into effect.
On November 11, 1998 the Boards of Directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan include the sale of Cobblestone Golf Group, the Santa Anita
Racetrack, and certain healthcare properties. In conjunction with this plan,
the assets related to horseracing operations at the Santa Anita Racetrack, as
well as adjacent land, were sold on December 10, 1998 for $126,000,000.
Additionally, a 50% ownership in a joint venture holding a fashion mall, as
well as the land on which the fashion mall is located, were sold for
$40,000,000. Also in response to the plan, healthcare assets were sold in the
fourth quarter for $314,645,000 and mortgage investments of $122,645,000 were
repaid. On February 11, 1999, the Companies signed a definitive agreement to
sell the Cobblestone Golf Group real estate and operations for aggregate
consideration, including assumed debt, of approximately $393,000,000. The
transaction is expected to close by the end of the first quarter of 1999. Also,
the Companies have entered into letters of intent for the sale of an additional
$155,000,000 of healthcare assets.
As of December 31, 1998, Realty's gross real estate investments totaled
approximately $5,314,178,000 consisting of 221 long-term care facilities, 157
retirement and assisted living facilities, 34 medical office buildings, one
acute care hospital campus, eight other healthcare facilities and 288 hotel
facilities in service with 13 more under construction. As of December 31, 1998,
Realty's outstanding commitments for additional financing totaled approximately
$161,000,000 for the completion of 11 assisted living facilities, five
long-term care facilities, one medical office building and 13 hotel facilities
currently under construction and additions to existing facilities in the
portfolio.
On March 10, 1999, Realty reached a second agreement with its bank group
to amend its New Credit Agreement. The second amendment, which is effective
upon the successful completion of the sale of Cobblestone Golf Group, provides
for a portion of the sale proceeds to be applied to the FEIT. The second
amendment also provides for, among other things upon the sale of Cobblestone
Golf Group, elimination of limitations on certain healthcare investments and
lowering the commitment on the revolving tranche to $850,000,000.
Of the $1,000,000,000 revolving tranche commitment, $353,000,000 was
available at December 31, 1998, at Realty's option of the base rate (8.25%) or
LIBOR plus 2.625% (7.98% at December 31, 1998). As of March 15, 1999,
$244,000,000 of the revolving tranche commitment was available.
On August 17, 1998, Realty redeemed $100,000,000 of Remarketed Reset Notes
due August 15, 2002 at par value. On September 11, 1998, Realty redeemed
$120,000,000 of 91/4% Senior Subordinated Notes due 2003 at 103.46% of par.
Realty's credit facility was used to finance both redemptions.
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Realty had shareholders' equity of $2,873,353,000 and debt constituted 53%
of the Companies' total capitalization as of December 31, 1998.
On January 14, 1999, Realty declared a common dividend of $0.46 per share
payable on February 16, 1999 to common shareholders of record on January 29,
1999. This dividend relates to the quarter ended December 31, 1998.
On March 5, 1999, Realty declared a dividend of $.5625 per depository
share on its 9% Series A Cumulative Redeemable Preferred Stock to shareholders
of record on March 15, 1999. This dividend will be paid on March 31, 1999.
The Companies have an effective shelf registration statement on file with
the SEC under which the Companies may issue $1,825,000,000 of securities
including paired common shares, preferred shares, debt, series common stock,
convertible debt and warrants to purchase shares, preferred shares, debt,
series common stock and convertible debt.
Realty believes that various sources of capital are adequate to finance
operations as well as existing commitments, including the acquisition and/or
mortgage financing of certain healthcare facilities, the completion of the La
Quinta Inn & Suites currently under development and repayment of the debt
maturing during 1999.
Operating--Results of Operations
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
Operating derived its revenue primarily from hotel operations during the
post-acquisition period from July 17, 1998 through December 31, 1998. Hotel
revenues for this period were $252,642,000. Approximately $241,868,000 or 96%
of hotel revenues were derived from room rentals. Hotel operating revenues
generally are measured as a function of the ADR and occupancy percentage. The
ADR for the period July 17, 1998 through December 31, 1998 increased to $59.29
as compared to ADR in the second half of 1997 of $56.69, an increase of $2.60
or 4.6%. Occupancy percentage decreased 1.8 percentage points to 67.0% from
68.8% for the same periods. RevPAR, which is a product of the occupancy
percentage and ADR, increased 1.6% in the 1998 post-merger period over the
second half of 1997. Other sources of hotel revenues during the post merger
period included guest services revenue of approximately $5,699,000 derived from
charges to guests for long distance service, fax use and laundry service.
Commission revenue of approximately $1,271,000 was earned on phone, movie and
vending services.
At the merger date, La Quinta operated 280 hotels (including 233 Inns and
47 Inn & Suites) with approximately 36,000 rooms. During the post-merger
period, 10 new Inn & Suites were opened adding over 1,400 rooms.
Interest and other income was $607,000 for the year ended December 31,
1998 compared to $48,000 for the year ended December 31, 1997. Prior to July
17, 1998, Operating derived its revenue from horseracing and golf course
operations, which are now classified as discontinued operations (see below) and
thus are not included in revenue in 1998 or 1997.
For the year ended December 31, 1998, total recurring expenses were
$262,737,000. Expenses were primarily attributable to hotel operating expenses,
interest, rent and royalties paid to Realty. Hotel operating costs of
$124,183,000 were incurred during the La Quinta post-merger period from July
17, 1998 to December 31, 1998. Salaries, wages and related costs, represent
approximately 41.3% of operating expenses. Other major categories of lodging
operating expense include utilities, supplies, advertising and administrative
costs. Interest, royalty and rent expenses paid to Realty of $132,744,000 were
also incurred during the post-merger period. General and administrative and
other expenses were $2,149,000, which arose from unallocated overhead expenses
related to the management of Operating's businesses during 1998. Depreciation
and amortization expense increased to $3,661,000, which was primarily related
to depreciation of furniture and fixtures and other intangible assets acquired
in the La Quinta Merger and a full year of amortization of goodwill, which
resulted from the excess purchase price over the fair value of assets acquired
in the Santa Anita Merger.
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Goodwill associated with the Santa Anita Merger primarily relates to the
value of the paired-share structure and, due to the permanent nature of the
structure, is being amortized over a 40 year period. Accordingly, the goodwill
recorded as part of the Santa Anita Merger is expected to remain even though
the Santa Anita Racetrack was sold in 1998, as long as the Companies continue
to utilize the paired share structure.
Other Expenses:
On July 22, 1998, the President signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits
the Companies' ability to continue to grow through use of the paired share
structure. While the Companies' use of the paired share structure in connection
with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under
the Reform Act, the ability to continue to use the paired share structure to
acquire additional real estate and operating businesses conducted with the real
estate assets (including the golf and lodging industries) was substantially
limited. In addition, during the summer of 1998, the debt and equity capital
markets available to REITs deteriorated, thus limiting the Companies' access to
cost-efficient capital.
As a result of these events, the Companies' began an analysis of the
impact of the Reform Act, the Companies' limited ability to access the capital
markets, and the operating strategy of the Companies' existing businesses. The
analysis culminated in the development of a comprehensive restructuring plan,
which was announced on November 12, 1998, designed to strengthen the Companies'
financial position and clarify its investment and operating strategy by
focusing on the healthcare and lodging business segments.
Other expenses, which arose from the comprehensive restructuring plan,
that were recorded on the books of Operating for the year ended December 31,
1998, are as follows:
<TABLE>
<S> <C>
Comprehensive restructuring plan: (In thousands)
Employee severance ..................................... $ 6,443
Write-off of capitalized pre-development costs ......... 8,720
-------
Total .................................................. $15,163
-------
</TABLE>
Pursuant to the comprehensive restructuring plan, Operating incurred
approximately $15,163,000 of non-recurring costs during 1998. These costs
included the write-off of certain costs associated with discontinuing lodging
development of $8,720,000 and severance of $6,443,000 attributable to workforce
reductions of approximately 76 employees, primarily from the Operating's
construction, marketing and acquisition departments.
Discontinued operations
During the latter part of 1997 and the first half of 1998, the Companies
pursued a strategy of diversifying into new businesses including horseracing,
golf and lodging. During the third quarter of 1998, the Companies reassessed
these business segments. In addition, a review of investment and operating
strategies for the Companies was initiated. As a result, on November 11, 1998,
the Companies approved a comprehensive restructuring plan including the
disposal of the horseracing and golf segments as well as the sale of certain
healthcare and other non-strategic assets.
Accordingly, Operating has classified approximately $3,914,000 of losses
from the horseracing and golf segments as discontinued during the year ended
December 31, 1998 and $238,000 of income from the horseracing segment during
the year ended December 31, 1997. The horseracing segment was sold on December
10, 1998, resulting in a net gain on disposal of $15,040,000. Operating has
also recorded a provision for loss on disposal, based upon the estimated
proceeds to be realized upon sale, of the golf-related assets and operations,
of approximately $9,478,000. Subsequent to the end of 1998, The Companies
entered into a definitive agreement to sell Cobblestone Golf Group for
$393,000,000 and expect the transaction to close in early 1999 which should not
result in a change in the estimated loss on disposal provided herein.
Net Loss
The resulting net loss available for common shareholders for the year
ended December 31, 1998, was $18,203,000 compared $600,000 for the year ended
December 31, 1997. The net loss per common
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share for the year ended December 31, 1998 was $0.15 compared to $0.01 for the
year ended December 31, 1997. The per common share amount decreased primarily
due to the comprehensive restructuring charges, and additional common shares
being issued to consummate mergers. In connection with the Cobblestone and La
Quinta mergers, 8,177,000 and 43,280,000 additional common shares are now
outstanding, respectively.
Operating--Liquidity and Capital Resources
Cash flows from operating activities
The principal source of cash to be used to fund Operating's future
operating expenses and recurring capital expenditures will be cash flow
provided by operating activities. Operating anticipates that cash flow provided
by operating activities will provide the necessary funds on a short and
long-term basis to meet operating cash requirements.
Cash flows from investing and financing activities
Operating provides funding for costs associated with the restructuring
through a combination of long-term and short-term financing including, both
debt and equity, as well as the sale of assets. Operating obtains long-term
financing through the issuance of common shares and unsecured notes. Operating
obtains short-term financing through borrowings from Realty. There is, however,
no assurance that the Companies will satisfactorily achieve, if at all, the
objectives set forth in this paragraph.
On February 26, 1998, the Companies entered into transactions (the
"Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch
International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc.
(collectively with its agent and successor in interest, "MLI"). Pursuant to the
terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A
Non-Voting Convertible Common Stock par value $.10 per share from each of the
Companies at a purchase price of $32.625 per share (collectively with the
paired common shares the shares of Series A non-voting convertible common stock
are convertible into, the "Notional Shares"). The Series A Non-Voting
Convertible Common Stock converted on a one to one basis to paired common stock
of the Companies on June 18, 1998. Total proceeds from the issuance were
approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from
the issuance were approximately $272,000,000, and were used by the Companies to
repay existing indebtedness. The Companies and MLI also entered into a Purchase
Price Adjustment Agreement under which the Companies would, within one year
from the date of MLI's purchase, on a periodic basis, adjust the purchase price
based on the market price of the paired common stock at the time of any interim
or final adjustments, so as to provide MLI with a guaranteed return of LIBOR
plus 75 basis points (the "Return"). The paired common shares issued receive
the same dividend as the Companies' paired common stock; however, the
difference between LIBOR plus 75 basis points and the dividend payments
received by MLI will be included as an additional adjustments under the
Purchase Price Adjustment Agreement. Such adjustments were to be effected by
deliveries of additional paired common shares to, or, receipts of paired common
shares from, MLI. In the event that the market price for the paired shares is
not high enough to provide MLI with the Return, the Companies would have to
deliver additional paired shares to MLI, which would have a dilutive effect on
the capital stock of the Companies. This dilutive effect increases
significantly as the market price of the paired shares declines further below
the original purchase price. Moreover, settlement of the FEIT transaction,
whether at maturity or at an earlier date, may force the Companies to issue
paired shares at a depressed price, which may heighten this dilutive effect on
the capital stock of the Companies. Prior to the settlement, MLI shall hold any
paired common shares delivered by the Companies under the Purchase Price
Adjustment Agreement in a collateral account (the "Collateral Shares"). Under
the adjustment mechanism, the Companies delivered approximately 9,700,000
Collateral Shares in 1998, all of which were returned to the Companies when the
Companies settled in cash a portion of the adjustment transaction in December
1998.
The FEIT has been accounted for as an equity transaction with the Notional
Shares treated as outstanding from their date of issuance until the respective
date of repurchase, if any, for both basic and diluted earnings per share
purposes. For diluted earnings per share purposes, at the end of the quarterly
period, the then outstanding Reference Amount (as defined herein) is divided by
the quoted market price of a paired common share, and the excess, if
applicable, of that number of paired common shares over
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the Notional Shares (the "Contingent Shares") is added to the denominator.
Contingent shares are included in the calculation of year to date diluted
earnings per share weighted for the interim periods in which they were included
in the computation of diluted earnings per share.
The "Reference Amount" equals the Initial Reference Amount plus the Return
and net of any cash distributions on the Notional Shares or any other cash paid
or otherwise delivered to MLI under the FEIT.
Payments that reduce the Reference Amount in effect satisfy all necessary
conditions for physically settling that portion of the Reference Amount and are
accounted for in a manner similar to a treasury transaction. Therefore,
payments that reduce the Reference Amount are divided by the quoted market
price of a paired common share on the date of payment. The calculated number is
then multiplied by the fractional number of days in the period prior to the
payment date and the resulting number of paired common shares is included in
the calculation of diluted earnings per share for the period.
On November 11, 1998, the Companies entered into an agreement with MLI to
amend the FEIT. Under the agreement, Realty agreed to grant a mortgage on the
Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the
FEIT with cash generated in part from the sale of certain assets, including the
Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the
settlement agreement, not to sell any shares of the existing FEIT until
February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152
million ($127 million of which was from the sale of certain assets including
the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and
the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional
Shares outstanding were reduced to approximately 6,865,000 paired common shares
and there were no Contingent Shares issuable.
On March 10, 1999, the Companies entered into an agreement with MLI and
certain of its affiliates to use the proceeds from the sale of Cobblestone Golf
Group in excess of $300 million to purchase all or a portion of the remaining
Notional Shares. Merrill Lynch has agreed not to sell any shares of the
remaining Notional Shares until March 31, 1999 while the Companies complete the
sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference
Amount is $89 million.
On May 29, 1998, Realty completed its merger with Cobblestone and each
share of common stock of Cobblestone was converted into the right to receive
3.867 paired common shares and each share of preferred stock of Cobblestone was
converted into the right to receive .2953 paired common shares. The total
number of paired common shares issued in connection with the Cobblestone Merger
was approximately 8,177,000, with an aggregate market value of approximately
$230,000,000 plus the issuance of approximately 452,000 options valued at
$10,863,000. In addition, Realty advanced monies in order for Cobblestone to
satisfy approximately $170,000,000 of Cobblestone's debt and associated costs.
The total consideration paid in connection with the Cobblestone Merger was
approximately $455,467,000. The excess of the purchase price, including costs
of the Cobblestone Merger, over the fair value of the net assets acquired
approximated $152,031,000 and is being amortized over 20 years.
On June 10, 1998, Realty issued 7,000,000 depositary shares. Each
depositary share represents one-tenth of a share of 9% Series A Cumulative
Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds
from this issuance of approximately $168,666,000 were used by Realty primarily
to repay existing indebtedness.
On July 17, 1998, Realty completed its merger with La Quinta and each
share of common stock of La Quinta was converted into the right to receive
0.736 paired common shares, reduced by the amount to be received in an earnings
and profits distribution. Approximately 43,280,000 paired common shares, with
an aggregate market value of approximately $1,172,636,000, and approximately
$956,054,000 were exchanged in order to consummate the La Quinta Merger. In
addition, $851,479,000 of La Quinta's debt and associated costs were assumed.
Accordingly, the operations of La Quinta are included in the combined and
consolidated financial statements since consummation of the La Quinta Merger.
The total consideration paid in connection with the La Quinta Merger was
approximately $2,980,169,000. The excess of the purchase price, including costs
of the La Quinta Merger, over the fair value of the net assets acquired
approximated $301,977,000, and is being amortized over 20 years.
On November 11, 1998 the Boards of Directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan include the sale of Cobblestone Golf
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Group, the Santa Anita Racetrack, and certain healthcare properties. In
conjunction with this plan, the assets related to horseracing operations at the
Santa Anita Racetrack, as well as adjacent land, were sold on December 10, 1998
for $126,000,000. Additionally, a 50% ownership in a joint venture holding a
fashion mall, as well as the land on which the fashion mall is located, were
sold for $40,000,000. Also in response to the plan, healthcare assets were sold
in the fourth quarter for $314,645,000 and mortgage investments of $122,645,000
were repaid. On February 11, 1999, the Companies signed a definitive agreement
to sell the Cobblestone Golf Group real estate and operations for aggregate
consideration, including assumed debt, of approximately $393,000,000. The
transaction is expected to close by the end of the first quarter of 1999. Also,
the Companies have entered into letters of intent for the sale of an additional
$155,000,000 of healthcare assets.
Operating had shareholders' equity of $78,507,000 as of December 31, 1998.
The Companies have an effective shelf registration statement on file with
the SEC under which the Companies may issue $1,825,000,000 of securities
including shares, preferred stock, debt, series common stock, convertible debt
and warrants to purchase shares, preferred shares, debt, series common stock
and convertible debt.
Operating believes that various sources of capital available over the next
twelve months are adequate to finance operations as well as pending
acquisitions. Over the next twelve months, as Operating identifies appropriate
operating or investment opportunities, Operating may raise additional capital
through the sale of shares, series common stock or preferred stock, or through
the issuance of long-term debt.
Recent Legislative Developments
On July 22, 1998, the President of the United States signed into law the
Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform
Act"). Included in the Reform Act is a freeze on the grandfathered status of
paired share REITs such as the Companies. Under this legislation, the anti-
pairing rules provided in the Internal Revenue Code of 1986, as amended (the
"Code"), apply to real property interests acquired after March 26, 1998 by the
Companies, or by a subsidiary or partnership in which a ten percent or greater
interest is owned by the Companies, unless (1) the real property interests are
acquired pursuant to a written agreement that 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.
Under the Reform Act, the properties acquired in connection with the July
17, 1998 La Quinta Merger and in connection with the May 29, 1998 Cobblestone
Merger generally are not subject to these anti-pairing rules. However, any
property acquired by the Companies after March 26, 1998, other than property
acquired pursuant to a written agreement that was binding on March 26, 1998 or
described in a public announcement or in a filing with the SEC on or before
March 26, 1998, is subject to the anti-pairing rules. Moreover, under the
Reform Act any otherwise grandfathered property will become subject to the
anti-pairing rules if a lease or renewal with respect to such property is
determined to exceed an arm's length rate. In addition, the Reform Act also
provides that a property held by the Companies that is not subject to the
anti-pairing rules will become subject to such rules in the event of 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 acquired from La Quinta and Cobblestone), the fair market value of
the property on the date it was acquired by the Companies.
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 restriction on property improvements applies to the
properties acquired from La Quinta and Cobblestone, as well as all other
properties owned by the Companies, and limits the ability of the Companies to
improve or change the use of those properties after December 31, 1999. The
Companies are considering various steps which they might take in order to
minimize the effect of the Reform Act.
In its Fiscal Year 2000 Budget released on February 1, 1999, the Clinton
Administration proposed legislation that could significantly affect the use of
taxable subsidiaries by The Meditrust Companies.
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Under the proposed legislation, a REIT would be prohibited from owning more
than 10 percent by vote or value of the securities of an issuer, other than
qualified REIT subsidiaries or a new category of subsidiaries termed "taxable
REIT subsidiaries." Under the Administration proposal, stock in taxable REIT
subsidiaries could not exceed 15 percent of a REIT's assets, and of this 15
percent amount, no more than 5 percent of the REIT's assets could consist of
stock of subsidiaries that provide services to the REIT's tenants. In contrast,
the current law 10 percent ownership limitation is on a vote rather than a vote
or value basis, and the total value of interests in taxable subsidiaries is
limited only by the overall limitation of non-real estate assets to 25 percent
of a REIT's total assets. The Administration proposal would also eliminate all
interest deductions to a taxable REIT subsidiary on debt funded directly or
indirectly by the REIT and would impose a 100 percent excise tax on excess
payments to ensure arm's length (1) pricing for services provided to REIT
tenants and (2) allocation of shared expenses between the REIT and the taxable
REIT subsidiary. As proposed, the legislation would be effective after the date
of enactment but would apply to existing arrangements, and it could limit the
ability of The Meditrust Companies to acquire and operate through taxable
subsidiaries non-grandfathered property subject to the anti-pairing rules. It
is unclear whether, or in what form, this proposed legislation will be enacted.
Restructuring the operations of Realty and Operating to comply with the
recent legislation may cause the Companies to incur substantial tax
liabilities, to recognize an impairment loss on their goodwill asset or
otherwise adversely affect the Companies.
Other Events
On November 11, 1998, the Boards of Directors of Realty and Operating
unanimously approved a comprehensive restructuring plan designed to strengthen
the Companies' financial position and clarify their investment and operating
strategy by focusing on the healthcare and lodging business segments.
The comprehensive plan includes pursuing the separation of its primary
businesses, healthcare and lodging, by creating two separately-listed,
publicly-traded REITs to be accomplished by a spin-off of the healthcare
financing business into a stand-alone REIT during the latter part of 1999. The
plan contemplates continuation of operation of the healthcare and lodging
businesses using the existing paired-share structure until the healthcare
spin-off takes place.
The plan also contemplates that the Companies will sell over
$1,000,000,000 of non-strategic assets, including the Cobblestone Golf Group,
the Santa Anita Racetrack and approximately $550,000,000 of non-strategic
healthcare properties. Proceeds from the sales of these assets will be used to
achieve significant near-term debt reduction. During the fourth quarter, the
Companies made significant progress towards achieving these goals. On December
10, 1998, the Santa Anita Racetrack was sold for $126,000,000. Additionally,
healthcare assets were sold for $314,645,000, mortgage investments of
$122,645,000 were repaid, and a 50% interest in a joint venture which holds a
fashion mall, as well as the land on which the fashion mall is located, was
sold for $40,000,000. On February 11, 1999, the Companies signed a definitive
agreement to sell the Cobblestone Golf Group real estate and operations for
aggregate consideration, including assumed debt of approximately $393,000,000.
The transaction is expected to close by the end of the first quarter of 1999.
Also, the Companies have entered into letters of intent for the sale of an
additional $155,000,000 of healthcare assets.
The comprehensive restructuring plan also includes goals related to
reducing capital investments to reflect current industry operating conditions
and resetting the annual dividend amount to $1.84 per paired common share, an
amount that is considered sustainable and represents a comparable payout ratio
to that of its peer groups.
On November 11, 1998, the Companies entered into an agreement with MLI and
certain of its affiliates to settle the FEIT. Under the agreement, Realty
agreed to grant a mortgage of the Santa Anita Racetrack to Merrill Lynch and
repay Merrill Lynch approximately 50% of the FEIT in cash generated in part
from the sale of certain assets. It is anticipated that the remaining FEIT will
be discharged from the proceeds of the sale of equity securities of the
Companies which, if offered publicly will be offered pursuant to a prospectus.
Merrill Lynch agreed, subject to the terms of the settlement agreement, not to
sell any shares of the existing FEIT until February 28, 1999 while the
Companies complete the sale of equity securities and certain assets.
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On August 3, 1998, Abraham D. Gosman resigned his position as Director and
Chairman of the Boards of Directors of the Companies and Chief Executive
Officer and Treasurer of Operating. In connection with his resignation, Mr.
Gosman is seeking severance payments and the Companies are evaluating whether
certain severance or other payments should be made to Mr. Gosman. As part of
this evaluation, the Companies are considering the applicability of Mr.
Gosman's employment contract and whether such severance or other payments are
appropriate. The results of the Companies' evaluation are currently uncertain
and depending upon the results of this evaluation and the results of ongoing
discussions with Mr. Gosman, Mr. Gosman may initiate litigation against the
Companies.
The ultimate outcome of this matter is not predictable and management is
not able to make a meaningful estimate of the amount or range of loss that
could result from an unfavorable outcome. It is possible that an unfavorable
outcome of this matter could have a material adverse effect on the Companies'
results of operations in a particular quarter or annual period. However, the
Companies believe any such claim, even if materially adverse to the Companies'
results of operations, should not have a material adverse effect on the
Companies' financial position.
Newly Issued Accounting Standards
Financial Accounting Standards Board Statement No. 133 ("SFAS 133"):
"Accounting for Derivative Instruments and Hedging Activities" is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, although
early application is encouraged. SFAS 133 requires that all derivative
investments be recorded in the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction, and if it is the type of hedge transactions. The Companies
anticipate that due to its limited use of derivative instruments the adoption
of SFAS 133 implementation will not have a material effect on the financial
statements.
Year 2000
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998. This "Year 2000 problem" is due to the fact that many
existing computer programs and embedded chip technology systems were developed
using only the last two digits to indicate a year. Thus, such systems may not
have the capability of recognizing a year that begins with "20" as opposed to
"19." As a consequence, these systems could fail altogether, or produce
erroneous results.
The Companies' State of Readiness. The Companies have developed a
five-phase plan to address their Year 2000 issues (their "Year 2000 Plan"). The
five phases are: (i) Awareness, (ii) Assessment, (iii) Remediation, (iv)
Testing and (v) Implementation.
Awareness. The Companies have implemented a program to insure the relevant
employees are aware of the Year 2000 issue and have collected information from
such employees regarding systems that might be affected. Management has
assembled a Year 2000 Steering Committee to determine and assess the risks of
the Year 2000 issue, plan and implement necessary upgrades or changes to make
the Companies Year 2000 compliant or institute mitigating actions to minimize
those risks and oversee the Companies' progress with respect to the
implementation of their Year 2000 Plan.
Assessment. The Companies have substantially completed an assessment of
their internally and externally developed computer information systems.
Operating is in the process of obtaining written verification from vendors to
the effect that externally developed computer information systems acquired from
such vendors correctly distinguish dates before the Year 2000. Operating
expects to obtain such verifications, or a commitment from the relevant vendors
to provide a solution, by no later than the second quarter of 1999. In
addition, the Companies have engaged outside consultants to review the plan and
assessment. Realty is in the process of obtaining written verification from its
externally developed general ledger information system and payroll service
provider to ensure that the system correctly distinguishes dates before the
Year 2000.
The Companies are currently evaluating and assessing their other
electronic systems that include embedded technology, such as
telecommunications, security, HVAC, elevator, fire and safety systems,
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and expect that the assessment will be completed by the second quarter of 1999.
The Companies are aware that such systems contain embedded chips that are often
difficult to identify and test and may require complete replacement because
they cannot be repaired. Failure of the Companies to identify or remediate any
embedded chips (either on an individual or aggregate basis) on which
significant business operations depend, such as phone systems, could have a
material adverse impact on the Companies' business, financial condition and
results of operations. To the extent such issues impact property level systems
the Companies may be required to fund capital expenditures for upgraded
equipment and software if necessary. In addition to the Companies' systems and
those of its vendors and suppliers, there exist others that could have a
material impact on the Companies' businesses if not Year 2000 compliant. Such
systems could affect airline operations and other segments of the lodging and
travel industries. These systems are outside of the Companies' control and
their compliance is not verifiable by the Companies.
The Companies' primary financial service providers are its primary bank,
credit card and payroll processors each of which will be required to provide
written verification to the Companies that they will be Year 2000 compliant.
For the foregoing reasons, the Companies do not believe that there is a
significant risk related to the failure of vendors or third-party service
providers to prepare for the Year 2000; however, the costs and timing of
third-party Year 2000 compliance is not within the Companies' control and no
assurances can be given with respect to the cost or timing of such efforts or
the potential effects of any failure to comply.
Remediation. Operating's primary uses of software systems are the hotel
reservation and front desk system, accounting, payroll and human resources
software. Upgrades to the hotel reservation system to address some Year 2000
compliance issues were installed and implemented during the fourth quarter of
1997 through the second quarter of 1998. Testing of various airline interfaces
with the hotel reservation system was completed by December 1998. Operating
plans to implement a new hotel front desk system by the end of 1999, for which
it has assurance that it is Year 2000 compliant. Operating is in the process of
testing Year 2000 compliant releases of existing accounting, payroll and human
resource systems. Implementation of these Year 2000 compliant upgrades is
expected by the end of the second quarter of 1999. In addition, Operating has
engaged outside consultants to assist in this process with respect to certain
Year 2000 compliance efforts. Operating has received written verification from
the vendors of accounting and payroll and human resource systems that the
general releases currently available are Year 2000 compliant.
Testing. To attempt to confirm that their computer systems are Year 2000
compliant, the Companies expect to perform limited testing of their computer
information systems and their other computer systems that do not relate to
information technology but include embedded technology; however, unless Year
2000 issues arise in the course of their limited testing, the Companies will
rely on the written verification received from each vendor of their computer
systems that the relevant system is Year 2000 compliant. Nevertheless, there
can be no assurance that the computer systems on which the Companies' business
relies will correctly distinguish dates before the Year 2000 from dates in and
after the Year 2000. Any such failures could have a material adverse effect on
the Companies' business, financial condition and results of operations. The
Companies currently anticipate that testing will commence no later than the
first quarter of 1999 and expect that their testing will be complete by the end
of the third quarter of 1999.
Implementation. The Companies have begun implementation of Year 2000
compliant software and software upgrades and expect to have them completed by
December, 1999.
Costs to Address the Companies' Year 2000 Issues. Based on current
information from their review to date, the Companies budgeted $1,100,000 for
the cost of repairing, updating and replacing their standard computer
information systems. The Companies anticipate that the primary cost of Year
2000 compliance will be the cost of consultants and payroll and related
expenses. The Companies currently expect that the installation of above
mentioned upgrades and software will cost approximately $1,100,000, and as of
the end of fiscal year 1998, the Companies have spent approximately $200,000 in
connection therewith. In addition, the Companies expect that they will spend
approximately $200,000 to address other Year 2000 related issues, including
upgrades of certain systems with embedded technology. Because the Companies'
Year 2000 assessment is ongoing and additional funds may be required as a
result of future findings, the Companies are not currently able to estimate the
final aggregate
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cost of addressing the Year 2000 issue. While these efforts will involve
additional costs, the Companies believe, based on available information, that
these costs will not have a material adverse effect on their business,
financial condition or results of operations. The Companies expect to fund the
costs of addressing the Year 2000 issue from cash flows resulting from
operations. While the Companies believe that they will be Year 2000 compliant
by December 31, 1999, if these efforts are not completed on time, or if the
costs associated with updating or replacing the Companies' computer systems
exceed the Companies' estimates, the Year 2000 issue could have a material
adverse effect on the Companies' business, financial condition and results of
operations.
Risks Presented by Year 2000 Issues. The Companies are still in the
process of evaluating potential disruptions or complications that might result
from Year 2000 related problems; however, at this time the Companies have not
identified any specific business functions that will suffer material disruption
as a result of Year 2000 related events. It is possible, however, that the
Companies may identify business functions in the future that are specifically
at risk of Year 2000 disruption. The absence of any such determination at this
point represents only the Companies' current status of evaluating potential
Year 2000 related problems and facts presently known to the Companies, and
should not be construed to mean that there is no risk of Year 2000 related
disruption. Moreover, due to the unique and pervasive nature of the Year 2000
issue, it is impracticable to anticipate each of the wide variety of Year 2000
events, particularly outside of the Companies, that might arise in a worst case
scenario which might have a material adverse impact on the Companies' business,
financial condition and results of operations.
The Companies' Contingency Plans. The Companies intend to develop
contingency plans for significant business risks that might result from Year
2000 related events. Because the Companies have not identified any specific
business function that will be materially at risk of significant Year 2000
related disruptions, and because a full assessment of the Companies risk from
potential Year 2000 failures is still in process, the Companies have not yet
developed detailed contingency plans specific to Year 2000 problems.
Development of these contingency plans is currently scheduled to occur by the
second quarter of 1999 and as otherwise appropriate. As a part of their
contingency planning, the Companies are analyzing the most reasonably likely
worst-case scenario that could result from Year 2000-related failures. Failures
by third parties to achieve Year 2000 compliance might result in short-term
disruptions in travel patterns, and potential temporary disruptions in the
supply of utility, telecommunications and financial services, most likely
regional or local in scope. These events could cause temporary disruptions in
the operations of hotel properties, and/or lead travelers to postpone travel,
or to cancel travel plans, thereby affecting lodging patterns and occupancy.
The preceding "Year 2000 readiness disclosure" contains various
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements represent the
Companies' beliefs or expectations regarding future events. All forward-looking
statements involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors that
may cause these differences include, but are not limited to, the availability
of qualified personnel and other information technology resources; the ability
to identify and remediate all date sensitive lines of computer code or to
replace embedded computer chips in affected systems or equipment; and the
actions of governmental agencies or other third parties with respect to Year
2000 problems.
Seasonality
The lodging industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in revenue,
profit margins and net earnings. In addition, opening of new construction
hotels and/or timing of hotel acquisitions may cause variation of revenue from
quarter to quarter.
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CERTAIN FACTORS YOU SHOULD CONSIDER
Presented below are certain factors that you should consider with respect
to investing in the Companies' securities.
With respect to investing in the Companies' securities, you should be
aware that there are various risks, including those described below, which may
materially impact your investment in the Companies securities or may in the
future, and, in some cases, already do, materially affect us and our business,
financial condition and results of operations. You should consider carefully
these risk factors with respect to investing in our securities. This section
includes or refers to certain forward-looking statements; you should read the
explanation of the qualifications and limitations on such forward-looking
statements discussed on page 71.
Tax Risks Related to Real Estate Investment Trusts
Dependence on Qualification as a REIT; General. Realty operates and
intends to operate in the future so as to qualify as a real estate investment
trust for federal income tax purposes. However, there is no assurance that
Realty 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 Realty. Qualification as
a REIT also involves the determination of various factual matters and
circumstances not entirely within Realty's control. In addition, Realty'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 Realty from qualifying as a REIT. Subject to the discussion below of
recent legislation, 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, Realty (which was then known as Santa Anita Realty Enterprises,
Inc. ("Santa Anita Realty")) was paired with the Operating Company (which was
then known as Santa Anita Operating Company ("SAOC," and together with Santa
Anita Realty, "Santa Anita")). There are, however, no judicial or
administrative authorities interpreting this "grandfathering" rule. Moreover,
if for any reason Realty failed to qualify as a REIT in 1983, the benefit of
the "grandfathering" rule would not be available to Realty, in which case
Realty would not qualify as a REIT for any taxable year from and after 1983.
Failure of Realty 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.
Legislation, as well as regulations, administrative interpretations or
court decisions, also could change the tax law with respect to Realty's
qualification as a REIT and the federal income tax consequence of such
qualification. See "--Recent Legislation May Curb Use of Paired Share
Structure" below. 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. In addition, this legislation prevents the
Companies from growing as originally intended at the time of the Santa Anita
Mergers (as defined below).
If Realty 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. Failure to qualify as a REIT would result in
additional tax liability to Realty for the year or years involved. In addition,
the failure to qualify as a REIT would also constitute a default under certain
debt obligations of Realty, 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.
Recent Legislation Curbs Use of Paired Share Structure. On July 22, 1998,
the President signed into law the Internal Revenue Service Restructuring and
Reform Act of 1998 (the "Reform Act"). Included in the Reform Act is a freeze
on the grandfathered status of paired share REITs such as the Companies. Under
this legislation, the anti-pairing rules provided in the Code apply to real
property interests acquired after March 26, 1998 by the Companies, or by a
subsidiary or partnership in which a ten percent or greater interest is owned
by the Companies, unless (1) the real property interests are acquired pursuant
to a
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written agreement that 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.
The restrictions on the activities of a grandfathered REIT provided in the
Reform Act may in the future make it impractical or undesirable for the
Companies to continue to maintain their paired share structure. Restructuring
the operations of Realty and Operating to comply with the rules provided by the
Reform Act could cause the Companies to incur 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.
Adverse Effects of REIT Minimum Distribution Requirements. In order to
qualify as a REIT Realty 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 Realty were to dispose of assets acquired in certain
acquisitions during the ten-year period following the acquisition, Realty would
be required to distribute at least 95% of the amount of any "built-in gain"
attributable to such assets that Realty recognizes in the disposition, less the
amount of any tax paid with respect to such recognized built-in gain. Realty
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.
Risks Related to the Implementation and Effects of the Comprehensive
Restructuring Plan
We believe that the successful implementation of the comprehensive
restructuring plan, which includes pursuing the separation of the Companies'
healthcare and lodging businesses, is in the best long-term interests of the
Companies and their stockholders. However, there are a number of potentially
negative or adverse factors that you should be aware of in connection with both
the implementation of the comprehensive restructuring plan, as well as the
effects of the comprehensive restructuring plan.
Implementation. The comprehensive restructuring plan involves a number of
component parts that require a substantial commitment of our resources to
implement. In order to successfully implement each part of the comprehensive
restructuring plan, a significant amount of the available time and effort of
the management of The Meditrust Companies must be utilized. For example, each
transaction involving the sale of a non-strategic asset requires that the
personnel who oversee that asset or group of assets not only continue to
operate or monitor that asset consistent with past practice, but also that they
prepare it for sale, meet with potential buyers, negotiate, and/or assist in
the negotiation with the ultimate buyer. In addition, The Meditrust Companies
have expended, and will continue to expend significant financial resources to
implement the comprehensive restructuring plan. Each transaction of the type
described above generally involves the payment of fees and expenses of outside
professionals, including investment bankers, attorneys, independent accountants
and consultants.
Our ability to successfully implement the comprehensive restructuring plan
is also impacted by external factors, such as: (i) the performance of the
economy generally and real estate markets in particular, (ii) the ability of
The Meditrust Companies to access the capital markets, (iii) changes in
applicable law and (iv) the identification of satisfactory buyers of
non-strategic assets. After the spin-off, each of the lodging and health care
business segments will need to separately access the capital markets to the
extent that additional capital is required. However, we can not be certain that
the capital markets, will be amenable to the spin-off and the creation of the
two distinct, separately traded entities. In addition, changes in the capital
markets, which are beyond our control, may materially impact our ability to
successfully implement the spin-off, as well as other component parts of the
comprehensive restructuring plan.
Effects: The structure of The Meditrust Companies will be significantly
altered from our structure today and from our structure six months ago. Today,
each holder of paired shares of The Meditrust Companies owns interests in a
combined business which owns and invests in health care properties, owns and
operates lodging properties and owns and operates golf related properties.
Until recently, The Meditrust Companies also owned and operated a horse racing
facility and related property. After completion of the comprehensive
restructuring plan, and assuming a shareholder continues to hold the
65
<PAGE>
securities issued to the shareholders in the spin-off, shareholders will own an
equity interest in a lodging business and in a separate health care financing
business. The lodging business and the health care financing business will be
operated independently, they will be financed separately and their securities
will be traded independently on the New York Stock Exchange. A shareholder will
no longer hold an interest in either the horse racing or golfing businesses as
these businesses have been, or will be sold. On February 11, 1999, the
Companies entered into a definitive agreement to sell the subsidiaries that
conduct the golf businesses at the golf courses owned and leased by Realty
together with the golf course related real estate owned and/or leased by
Realty, to Golf Acquisitions, L.L.C., an affiliate of ClubCorp., Inc. The
transaction, which is subject to customary closing conditions, is scheduled to
close on or prior to March 31, 1999. In addition, the health care financing
business will be somewhat smaller than it has been historically, as certain
non-strategic assets, most of which relate to the health care business, have
been sold and the funding of new health care investments has been reduced as
part of our reduction of capital expenditures.
Substantial Leverage Risks
Realty has substantial leverage. In that regard, on July 17, 1998, Realty
entered into the Credit Agreement, which provides Realty with up to $2.25
billion in credit facilities. The degree of leverage of Realty could have
important consequences to investors, including the following: (i) Realty's
ability to obtain additional financing may be impaired, both currently and in
the future; (ii) a substantial portion of Realty's cash flow from operations
must be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to Realty for other purposes; (iii) as
described below, certain of Realty's borrowings are and will continue to be at
variable rates of interest, which will expose Realty to the risk of increased
interest rates; (iv) Realty may be substantially more leveraged than certain of
its competitors, which may place Realty at a competitive disadvantage; and (v)
Realty'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.
The foregoing risks associated with the debt obligations of the Companies
may adversely affect the market price of securities issued by the Companies and
may inhibit the ability of the Companies to raise capital in both the public
and private markets.
Health Care Industry Risks
Operating Risks. One of Realty'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 Realty; 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 Company Operators in Long-term Care Industry. The
long-term care businesses of the third-party operators of Realty's health care
related real estate, and the health care industry generally, are subject to
extensive federal, state and local regulation governing the licensing and
conduct of operations at health care facilities, certain capital expenditures,
the quality of services provided, the manner in which the services are
provided, financial and other arrangements between health care providers and
reimbursement for services rendered. The failure of any third-party operator to
comply with such laws, requirements and regulations could adversely affect its
ability to operate the facility or facilities and could adversely affect such
operator's ability to make payments to Realty, thereby adversely affecting the
Companies.
Concentration of Credit Risks; Reliance on Major Operators. As of December
31, 1998, long-term care facilities comprised 28% of Realty's real estate
investments and Realty's investments in facilities of its two largest health
care operators totaled approximately 20% of Realty'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.
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Realty's third-party operators manage long-term care facilities on each of
Realty's properties. The financial position of Realty may be adversely affected
by financial difficulties experienced by any of such operators, or any other
major operator of Realty, including a bankruptcy, insolvency or general
downturn in the business of any such operator, or in the event any such
operator does not renew its leases as they expire and Realty can not lease
these facilities to other operators on comparable terms.
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 changes 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 Realty and its operators (including Operating) or limit the amounts that
operators may charge for services. Realty's 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.
Health Care Reform. The Balanced Budget Act of 1997, which was signed by
the President on August 5, 1997 (the "1997 Act"), enacted significant changes
to the Medicare and Medicaid programs designed to modernize payment and health
care delivery systems while achieving substantial budgetary savings. In seeking
to limit Medicare reimbursement for long term care services, the 1997 Act
mandated the establishment of a prospective payment system for skilled nursing
facilities to replace the current cost-based reimbursement system. The
cost-based system reimburses skilled nursing facilities for reasonable direct
and indirect allowable costs incurred in providing "routine services" as well
as capital costs and ancillary costs, subject to limits fixed for the
particular geographic area served by the skilled nursing facility. Under the
prospective payment system, skilled nursing facilities will be paid a federal
per diem rate for covered services. The per diem payment will cover routine
service, ancillary, and capital-related costs. The prospective payment system
will be phased in over a four year period beginning on or after July 1, 1998.
Under provisions of the 1997 Act, states will be provided additional
flexibility in managing their Medicaid program. Among other things, the 1997
Act repealed a federal law's payment standard, which had required states to pay
"reasonable and adequate" payments to cover the costs of efficiently and
economically operated hospitals, nursing facilities and certain intermediate
care facilities. These health care reforms may reduce reimbursement to levels
that are insufficient to cover the cost of providing patient care, which could
adversely affect the revenues of Realty's third-party borrowers and lessees and
thereby adversely affect those borrowers' and lessees' abilities to make their
loan or lease payments to Realty. Failure of the borrowers or lessees to make
their loan or lease payments would have a direct and material adverse impact on
the Companies.
Reliance on Third-Party Payors; Availability of Reimbursement. The cost of
many of the services offered by the current operators of Realty'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 Realty'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.
A significant portion of the revenue from the third-party operators who
lease or receive financing from Realty is derived from governmentally-funded
reimbursement programs, such as Medicare and Medicaid. These programs are
highly regulated and subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations, and administrative and judicial
interpretations of existing law. In recent years, there have been fundamental
changes in the Medicare program which have resulted in reduced levels of
payment for a substantial portion of health care services. Moreover, health
care facilities have experienced increasing pressures from private payers
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<PAGE>
such as health maintenance organizations attempting to control health care
costs. Reimbursement from private payers has in many cases effectively been
reduced to levels approaching those of government payers. Concern regarding
health care costs may result in significant reductions in payment to health
care facilities, and there can be no assurance that future payment rates from
either governmental or private health care plans will be sufficient to cover
cost increases in providing services to patients. In many instances, revenues
from Medicaid programs are already insufficient to cover the actual costs
incurred in providing care to those patients. Any changes in reimbursement
policies which reduce reimbursement to levels that are insufficient to cover
the cost of providing patient care could adversely affect revenues from the
third-party operators who lease or receive financing from Realty and thereby
adversely affect those entities' ability to make their lease or loan payments
to Realty. Failure of these entities to make their lease or loan payments would
have a direct and material adverse impact on the Company.
Fraud and Abuse Enforcement. In the past several years, due to rising
health care costs, there has been an increased emphasis on detecting and
eliminating fraud and abuse in the Medicare and Medicaid programs. Payment of
any remuneration to induce the referral of Medicare and Medicaid patients is
generally prohibited by federal and state statutes. Both federal and state
self-referral statutes severely restrict the ability of physicians to refer
patients to entities in which they have a financial interest. The 1997 Act
provided the federal government with expanded enforcement powers to combat
waste, fraud and abuse in the delivery of health care services. In addition,
the Office of Inspector General and the Health Care Financing Administration
now have increased investigation and enforcement activity of fraud and abuse,
specifically targeting nursing homes, home health providers and medical
equipment suppliers. Failure to comply with the foregoing fraud and abuse laws
or government program integrity regulations may result in sanctions including
the loss of licensure or eligibility to participate in reimbursement programs
(including Medicare and Medicaid), asset forfeitures and civil and criminal
penalties.
It is anticipated that the trend toward increased investigation and
informant activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. In the event that any borrower or lessee were to
be found in violation of the applicable laws regarding fraud, abuse or
self-referral, that borrower's or lessee's license or certification to
participate in government reimbursement programs could be jeopardized, or that
borrower or lessee could be subject to civil and criminal fines and penalties.
Either of these occurrences could have a material adverse affect on the
Companies by adversely affecting the borrower's or lessee's ability to make
debt or lease payments to Realty.
The foregoing factors could adversely affect the ability of the operators
of Realty's health care facilities to generate revenues and make payments to
Realty. 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
The Companies, through their acquisition of La Quinta, have made a
significant investment in hotels and related lodging facilities. La Quinta is
operated by a subsidiary of Operating and its real estate assets are owned by
Realty or a subsidiary of Realty.
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
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<PAGE>
affect the convenience or desirability of the locations of La Quinta's hotels.
Furthermore, no assurance can be given that, 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
Operating 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.
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.
Construction. If Realty resumes La Quinta's historical strategy of growing
through new construction, Realty 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.
Realty 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.
Real Estate Investment Risks
General Risks. Realty's investments will be subject to the risks inherent
in owning real estate. The underlying value of Realty'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 Operating to operate Realty'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
Realty.
Results of operations of Realty's properties may also be adversely
affected by, among other things:
o changes in national economic conditions, changes in local market
conditions due to changes in general or local economic conditions and
neighborhood characteristics;
o changes in interest rates and in the availability, cost and terms of
financing;
o the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory requirements;
o the ongoing need for capital improvements, particularly in older
structures;
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<PAGE>
o changes in real estate tax rates and assessments and other operating
expenses;
o adverse changes in governmental rules and fiscal policies;
o adverse changes in zoning and other land use laws; and
o civil unrest, earthquakes and other natural disasters (which may
result in uninsured losses) and other factors which are beyond its
control.
Dependence on Rental Income from Real Property. Realty's cash flow,
results of operations and value of its assets would be adversely affected if a
significant number of third-party operators of the Realty's properties fail to
meet their lease obligations. The bankruptcy or insolvency of a major operator
may have an adverse effect on a property. At any time, an operator also may
seek protection under the bankruptcy laws, which could result in rejection and
termination of such operator's lease and thereby cause a reduction in the cash
flow of the property. If an operator rejects its lease, the owner's claim for
breach of the lease would (absent collateral securing the claim) be treated as
a general unsecured claim. Generally, the amount of the claim would be capped
at the amount owed for unpaid pre-petition lease payments unrelated to the
rejection, plus the greater of one year's lease payments or 150% of the
remaining lease payments payable under the lease (but not to exceed the amount
of three years' lease payments).
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
Realty and Operating. 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 Realty'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 Realty's properties,
Realty, Operating 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 Realty or Operating is not in compliance with the ADA could result in the
imposition of fines and/or an award of damages to private litigants. If Realty
or Operating 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 Realty'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 Operating) 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. Realty will use
its discretion in determining amounts, coverage
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limits and deductibility provisions of insurance, with a view to maintaining
appropriate insurance coverage on the investments of Realty and Operating 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 Realty or Operating might not be adequate to
restore its economic position with respect to such property.
Real Estate Financing Risks
Financing and Maturities. Realty is subject to the normal risks associated
with debt and preferred stock financing, including the risk that Realty'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 Realty were unable to refinance the indebtedness
on acceptable terms, or at all, Realty might be forced to dispose of one or
more of its properties on disadvantageous terms, which might result in losses
to Realty, which losses could have a material adverse effect on Realty 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 Realty 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 Realty. Foreclosures could also create taxable
income without accompanying cash proceeds, thereby hindering Realty's ability
to meet the REIT distribution requirements of the Code.
Risk of Rising Interest Rates. Realty has incurred and expects in the
future to incur indebtedness which bears interest at variable rates.
Accordingly, increases in interest rates would increase Realty'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 Realty
and its ability to make distributions to shareholders and to pay amounts due on
its indebtedness or cause Realty 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.
Cautionary Statements Concerning Forward-Looking Statements
Any statements included in this Joint Annual Report on Form 10-K 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, (iv) the policies
of the Companies, Cobblestone and La Quinta regarding investments,
acquisitions, dispositions, financings, conflicts of interest and other
matters, (v) the qualification of Realty and Realty'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 La Quinta's
financial condition or results
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of operations, (xii) the effect of acquisitions (including the Cobblestone and
La Quinta acquisitions) 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) Realty'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 in this Joint Annual Report on Form 10-K,
including, without limitation, the information set forth in "Certain Factors
You Should Consider," 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The table below provides information about the Companies' derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
For fixed rate debt obligations, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. For
variable rate debt obligations, the table presents principal cash flows by
expected maturity date and contracted interest rates as of the report date. For
the interest rate swap the table presents notional amount and interest rate by
the expected (contractual) maturity date. Notional amounts are used to
calculate the contractual payments to be exchanged under the contract. The
variable interest rate represents the contractual LIBOR rate as of the
reporting date.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
There- Face Fair
(In thousands) 1999 2000 2001 2002 2003 after Value Value
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt Obligations
- - ----------------------------------------------------------------------------------------------------------------------------
Long Term Debt:
- - ----------------------------------------------------------------------------------------------------------------------------
Fixed Rate 28,785 219,422 248,639 92,659 207,301 686,676 1,483,482 1,454,784
- - ----------------------------------------------------------------------------------------------------------------------------
Average interest rate 7.547% 7.569% 7.644% 7.770% 7.354% 7.367% 7.470%
- - ----------------------------------------------------------------------------------------------------------------------------
Variable rate 750,000 1,108,000 1,858,000 1,839,162
- - ----------------------------------------------------------------------------------------------------------------------------
Average interest rate 7.980% 7.980% 7.980%
- - ----------------------------------------------------------------------------------------------------------------------------
Interest rate derivatives
- - ----------------------------------------------------------------------------------------------------------------------------
Interest rate swap:
- - ----------------------------------------------------------------------------------------------------------------------------
Notional amount 500,000 250,000 500,000 1,250,000 11,323
- - ----------------------------------------------------------------------------------------------------------------------------
Pay rate 5.680% 5.685% 5.700% 5.689%
- - ----------------------------------------------------------------------------------------------------------------------------
Receive rate (a) (a) (a) (a)
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Receive rate is based on LIBOR rates at the time of each
borrowing.
Realty
All indebtedness, including notes payable, convertible debentures, bank
notes payable and bonds and mortgages payable are liabilities on Realty. See
quantitative and qualitative disclosures about the Companies' market risk
above.
Operating
Operating is a guarantor of all of the obligations of Realty under the New
Credit Agreement.
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Item 8. Financial Statements and Supplementary Data
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
(In thousands, except per share amounts) ------------- -------------
<S> <C> <C>
Assets
Real estate investments, net .................................... $5,086,736 $2,935,772
Cash and cash equivalents ....................................... 305,456 43,732
Fees, interest and other receivables ............................ 54,712 23,650
Goodwill, net ................................................... 486,051 194,893
Net assets of discontinued operations ........................... 305,416 --
Other assets, net ............................................... 221,180 82,236
---------- ----------
Total assets ................................................... $6,459,551 $3,280,283
========== ==========
Liabilities and Shareholders' Equity
Indebtedness:
Notes payable, net .............................................. $1,155,837 $ 900,594
Convertible debentures, net ..................................... 185,013 234,000
Bank notes payable, net ......................................... 1,831,336 179,527
Bonds and mortgages payable, net ................................ 129,536 63,317
---------- ----------
Total indebtedness ............................................. 3,301,722 1,377,438
Accounts payable, accrued expenses and other liabilities ......... 206,901 77,106
---------- ----------
Total liabilities .............................................. 3,508,623 1,454,544
========== ==========
Commitments and contingencies .................................... -- --
Shareholders' equity:
Meditrust Corporation Series A Preferred Stock, $.10 par value;
6,000 shares authorized; 700 shares issued and outstanding in
1998; stated liquidation preference of $250 per share ......... 70 --
Paired Common Stock, $.20 combined par value; 270,000 shares
authorized; 149,326 and 88,128 paired shares issued and
outstanding in 1998 and 1997, respectively .................... 29,865 17,626
Additional paid-in-capital ...................................... 3,891,987 1,997,517
Treasury stock at cost, 1,635 paired shares in 1998 ............. (163,326) --
Unearned compensation ........................................... (6,718) --
Accumulated other comprehensive income .......................... 16,971 3,569
Distributions in excess of earnings ............................. (817,921) (192,973)
---------- ----------
Total shareholders' equity ...................................... 2,950,928 1,825,739
---------- ----------
Total liabilities and shareholders' equity ..................... $6,459,551 $3,280,283
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
73
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------
1998 1997 1996
(In thousands, except per share amounts) ------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Rental .............................................. $ 191,874 $ 137,868 $ 109,119
Interest ............................................ 153,093 151,170 144,905
Hotel ............................................... 258,423 -- --
Other ............................................... 35,987 -- --
---------- --------- ---------
639,377 289,038 254,024
---------- --------- ---------
Expenses:
Interest ............................................ 178,458 87,412 64,216
Depreciation and amortization ....................... 87,228 26,838 21,651
Amortization of goodwill ............................ 13,265 2,349 1,556
General and administrative .......................... 21,436 10,257 8,625
Hotel operations .................................... 125,246 -- --
Rental property operations .......................... 15,638 210 --
Loss on sale of securities .......................... 4,159 -- --
Gain on sale of assets .............................. (52,642) -- --
Income from unconsolidated joint venture ............ (906) 10 --
Other ............................................... 111,215 -- --
---------- --------- ---------
503,097 127,076 96,048
---------- --------- ---------
Income from continuing operations before benefit for
income taxes ........................................ 136,280 161,962 157,976
Income tax benefit ................................... (4,800) -- --
---------- --------- ---------
Income from continuing operations .................... 141,080 161,962 157,976
Discontinued operations:
Income from operations, net ......................... 10,721 450 --
Loss on disposal of Santa Anita, net ................ (67,913) -- --
Provision for loss on disposition of Cobblestone Golf
Group, net .......................................... (237,035) -- --
---------- --------- ---------
Net income (loss) .................................... (153,147) 162,412 157,976
Preferred stock dividends ............................ (8,444) -- --
---------- --------- ---------
Net income (loss) available to Paired
Common shareholders ................................. $ (161,591) $ 162,412 $ 157,976
========== ========= =========
Basic earnings per Paired Common Share:
Income from continuing operations ................... $ 1.10 $ 2.13 $ 2.21
Discontinued operations ............................. (2.44) .01 --
---------- --------- ---------
Net income (loss) ................................... $ (1.34) $ 2.14 $ 2.21
========== ========= =========
Diluted earnings per Paired Common Share:
Income from continuing operations ................... $ 1.06 $ 2.12 $ 2.20
Discontinued operations ............................. (2.35) -- --
---------- --------- ---------
Net income (loss) ................................... $ (1.29) $ 2.12 $ 2.20
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
74
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Shares of
Beneficial Interest
or Paired
Common Shares
------------------------
Additional
Preferred Paid-in Treasury
Shares Amount Stock Capital Stock
(In thousands) -------- --------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 61,494 $ 1,192,612
Proceeds from issuance of
shares of beneficial
interest, net of offering
costs of $16,316 ............... 11,055 296,484
Issuance of shares of
beneficial interest for:
Conversion of debentures,
net of unamortized issue
costs of $259 ................. 644 15,707
Employee compensation
and stock options ............. 524 13,123
Distributions paid ..............
Net income for the year
ended December 31, 1996
Change in market value of
equity investment in
excess of cost ................. ------ --------- ----------- ----------- -----------
Balance, December 31, 1996 73,717 1,517,926
Distribution of MAC shares to
Meditrust shareholders ......... 43,662
Effect of merger with The
Santa Anita Companies .......... 12,366 (1,544,370) $1,939,426
Issuance of Paired Common
Shares for:
Conversion of debentures,
net of unamortized issue
costs of $168 ................. 1,589 318 47,675
<CAPTION>
Accumulated
Other Distributions
Unearned Comprehensive in Excess of Comprehensive
Compensation Income Earnings Total Income (loss)
(In thousands) -------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ (130,857) $1,061,755
Proceeds from issuance of
shares of beneficial
interest, net of offering
costs of $16,316 ............... 296,484
Issuance of shares of
beneficial interest for:
Conversion of debentures,
net of unamortized issue
costs of $259 ................. 15,707
Employee compensation
and stock options ............. 13,123
Distributions paid .............. (162,632) (162,632)
Net income for the year
ended December 31, 1996 157,976 157,976 $157,976
Change in market value of
equity investment in
excess of cost ................. $2,528 2,528 2,528
-------------- ------ ---------- ---------- --------
Balance, December 31, 1996 2,528 (135,513) 1,384,941 $160,504
========
Distribution of MAC shares to
Meditrust shareholders ......... (43,662)
Effect of merger with The
Santa Anita Companies .......... 395,056
Issuance of Paired Common
Shares for:
Conversion of debentures,
net of unamortized issue
costs of $168 ................. 47,993
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Shares of
Beneficial
Interest
or Paired
Common Shares
-----------------
Additional
Preferred Paid-in Treasury
Shares Amount Stock Capital Stock
(In thousands) -------- -------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Employee compensation
and stock options ............ 456 90 10,416
Distributions paid .............
Net income for the year
ended December 31, 1997
Change in market value of
equity investment in
excess of cost ................
Balance, December 31, 1997 88,128 17,626 1,997,517
------ ------ --------- --------- -----------
Proceeds from issuance of
Paired Common Shares,
net of offering costs of
$5,874 ........................ 8,500 1,700 269,738
Proceeds from issuance of
Preferred Stock, net of
offering costs of $6,334 ...... $70 168,596
Purchase of treasury stock ..... $(163,326)
Effect of merger with
Cobblestone ................... 8,177 1,636 239,510
Effect of merger with La
Quinta ........................ 43,280 8,656 1,163,980
Issuance of restricted stock
grants ........................ 315 63 7,026
Issuance of Paired Common
Shares for:
Conversion of debentures,
net of unamortized issue
costs of $1 ................... 284 56 7,110
Employee compensation
and stock options ............. 642 128 5,348
Dividends ......................
Property dividend .............. 33,162
Net loss for the year ended
December 31, 1998 .............
<CAPTION>
Accumulated
Other Distributions
Unearned Comprehensive in Excess of Comprehensive
Compensation Income Earnings Total Income (loss)
(In thousands) -------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Employee compensation
and stock options ............ 10,506
Distributions paid ............. (176,210) (176,210)
Net income for the year
ended December 31, 1997 162,412 162,412 $ 162,412
Change in market value of
equity investment in
excess of cost ................ 1,041 1,041 1,041
----- -------- -------- ----------
Balance, December 31, 1997 3,569 (192,973) 1,825,739 $ 163,453
==========
Proceeds from issuance of
Paired Common Shares,
net of offering costs of
$5,874 ........................ 271,438
Proceeds from issuance of
Preferred Stock, net of
offering costs of $6,334 ...... 168,666
Purchase of treasury stock ..... (163,326)
Effect of merger with
Cobblestone ................... 241,146
Effect of merger with La
Quinta ........................ 1,172,636
Issuance of restricted stock
grants ........................ $(6,718) 371
Issuance of Paired Common
Shares for:
Conversion of debentures,
net of unamortized issue
costs of $1 ................... 7,166
Employee compensation
and stock options ............. 5,476
Dividends ...................... (438,639) (438,639)
Property dividend .............. (33,162)
Net loss for the year ended
December 31, 1998 ............. (153,147) (153,147) $ (153,147)
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Shares of
Beneficial Interest
or Paired
Common Shares
--------------------
Additional
Preferred Paid-in Treasury
Shares Amount Stock Capital Stock
(In thousands) --------- ---------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Change in market value of
equity investments in
excess of cost ...............
------- ------- --- ---------- ----------
Balance, December 31, 1998 149,326 $29,865 $70 $3,891,987 $ (163,326)
======= ======= === ========== ==========
<CAPTION>
Accumulated
Other Distributions
Unearned Comprehensive in Excess of Comprehensive
Compensation Income Earnings Total Income (loss)
(In thousands) -------------- --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Change in market value of
equity investments in
excess of cost ............... 13,402 13,402 13,402
-------- ------- ---------- ---------- ----------
Balance, December 31, 1998 $ (6,718) $16,971 $ (817,921) $2,950,928 $ (139,745)
======== ======= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
77
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------
1998 1997 1996
(In thousands) -------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ...................................................... $ (153,147) $ 162,412 $ 157,976
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation of real estate ........................................... 90,446 26,750 21,269
Goodwill amortization ................................................. 15,826 2,349 1,557
Loss on sale of assets ................................................ 19,430 -- --
Shares issued for compensation ........................................ 438 1,994 2,039
Equity in income of joint venture, net of dividends received .......... 544 -- --
Other depreciation, amortization and other items, net ................. 19,777 1,538 1,211
Other non cash expenses ............................................... 326,064 -- --
------------ ---------- ----------
Cash Flows from Operating Activities Available for Distribution ......... 319,378 195,043 184,052
Net change in other assets and liabilities of discontinued
operations ............................................................. (18,331) -- --
Net change in other assets and liabilities .............................. (124,876) (10,631) 4,499
------------ ---------- ----------
Net cash provided by operating activities ........................... 176,171 184,412 188,551
------------ ---------- ----------
Cash Flows from Financing Activities:
Proceeds from issuance of paired common and Realty preferred
stock ................................................................. 456,713 -- 312,800
Purchase of treasury stock ............................................. (163,326) -- --
Proceeds from borrowings on bank notes payable ......................... 2,445,000 1,078,000 476,000
Repayment of bank notes payable ........................................ (767,000) (512,015) (370,000)
Repayment of notes payable ............................................. (220,000) -- --
Equity offering and debt issuance costs ................................ (47,393) (5,896) (19,235)
Repayment of convertible debentures .................................... (43,152) -- --
Principal payments on bonds and mortgages payable ...................... (37,625) (5,098) (940)
Dividends/distributions to shareholders ................................ (438,639) (176,210) (162,632)
Proceeds from exercise of stock options ................................ 5,035 9,138 11,084
------------ ---------- ----------
Net cash provided by financing activities ........................... 1,189,613 387,919 247,077
------------ ---------- ----------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding ..................... (636,989) (292,607) (325,789)
Investment in real estate mortgages and development funding ............ (222,524) (299,861) (265,084)
Prepayment proceeds and principal payments received on real
estate mortgages ...................................................... 407,241 54,618 162,247
Proceeds from sale of assets ........................................... 484,467 6,173 4,701
Proceeds from sale of securities ....................................... 3,606 -- --
Payment of Santa Anita merger related costs ............................ -- (16,979) --
Cash acquired from Santa Anita merger .................................. -- 30,249 --
Acquisition of Cobblestone ............................................. (178,523) -- --
Acquisition of La Quinta ............................................... (956,054) -- --
Cash acquired in Cobblestone merger .................................... 723 -- --
Cash acquired in La Quinta merger ...................................... 18,004 -- --
Working capital and notes receivable advances, net of
repayments and collections ............................................ 6,211 (210) 284
Investment in equity securities ........................................ (30,222) (52,708) (13,509)
------------ ---------- ----------
Net cash used in investing activities ............................... (1,104,060) (571,325) (437,150)
------------ ---------- ----------
Net increase (decrease) in cash and cash equivalents ................ 261,724 1,006 (1,522)
Cash and cash equivalents at:
Beginning of year ...................................................... 43,732 42,726 44,248
------------ ---------- ----------
End of year ............................................................ $ 305,456 $ 43,732 $ 42,726
============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
78
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
(In thousands, except per share amounts) ------------- -------------
<S> <C> <C>
Assets
Real estate investments, net ..................................... $5,067,217 $2,935,772
Cash and cash equivalents ........................................ 292,694 24,059
Fees, interest and other receivables ............................. 42,039 21,070
Goodwill, net .................................................... 451,672 162,408
Due from Meditrust Operating Company ............................. -- 18,490
Net assets of discontinued operations ............................ 280,330 --
Other assets, net ................................................ 187,033 54,129
---------- ----------
Total assets .................................................. $6,320,985 $3,215,928
========== ==========
Liabilities and Shareholders' Equity
Indebtedness:
Notes payable, net .............................................. $1,155,837 $ 900,594
Convertible debentures, net ..................................... 185,013 234,000
Bank notes payable, net ......................................... 1,831,336 179,527
Bonds and mortgages payable, net ................................ 129,536 63,317
---------- ----------
Total indebtedness ............................................ 3,301,722 1,377,438
---------- ----------
Due to Meditrust Operating Company ............................... 29,169 --
Accounts payable, accrued expenses and other liabilities ......... 116,741 46,250
---------- ----------
Total liabilities ............................................. 3,447,632 1,423,688
---------- ----------
Commitments and contingencies -- --
Shareholders' equity:
Series A Preferred Stock, $.10 par value; 6,000 shares authorized;
700 shares issued and outstanding in 1998; stated liquidation
preference of $250 per share.................................... 70 --
Common Stock, $.10 par value; 270,000 shares authorized; 150,631
and 89,433 shares issued and outstanding in 1998 and 1997,
respectively ................................................... 15,063 8,943
Additional paid-in-capital ....................................... 3,820,436 1,985,229
Treasury stock at cost 1,635 shares in 1998 ...................... (160,223) --
Unearned compensation ........................................... (6,718) --
Accumulated other comprehensive income .......................... 16,971 3,569
Distributions in excess of earnings .............................. (799,118) (192,373)
---------- ----------
2,886,481 1,805,368
Note receivable--Meditrust Operating Company ..................... (13,128) (13,128)
---------- ----------
Total shareholders' equity ..................................... 2,873,353 1,792,240
---------- ----------
Total liabilities and shareholders' equity .................... $6,320,985 $3,215,928
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
79
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------
1998 1997 1996
(In thousands, except per share amounts) ------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Rental ............................................ $ 191,874 $ 137,868 $ 109,119
Interest .......................................... 152,486 151,122 144,905
Rent from Meditrust Operating Company ............. 125,706 -- --
Interest from Meditrust Operating Company ......... 712 129 --
Royalty from Meditrust Operating Company .......... 6,326 -- --
Hotel operating revenue ........................... 5,781 -- --
Other ............................................. 35,987 -- --
---------- --------- ---------
518,872 289,119 254,024
---------- --------- ---------
Expenses:
Interest .......................................... 178,374 87,412 64,216
Depreciation and amortization ..................... 84,327 26,838 21,651
Amortization of goodwill .......................... 12,505 2,214 1,556
General and administrative ........................ 19,371 10,111 8,625
Hotel operations .................................. 1,063 -- --
Rental property operations ........................ 15,638 210 --
Loss on sale of securities ........................ 4,159 -- --
Gain on sale of assets ............................ (52,642) -- --
Income from unconsolidated joint venture .......... (906) 10 --
Other ............................................. 96,052 -- --
---------- --------- ---------
357,941 126,795 96,048
---------- --------- ---------
Income from continuing operations .................. 160,931 162,324 157,976
Discontinued operations:
Income from operations, net ....................... 14,635 688 --
Loss on disposal of Santa Anita, net .............. (82,953) -- --
Provision for loss on disposition of
Cobblestone Golf Group, net ...................... (227,557) -- --
---------- --------- ---------
Net income (loss) .................................. (134,944) 163,012 157,976
Preferred stock dividends .......................... (8,444) -- --
---------- --------- ---------
Net income (loss) available to Common
shareholders ...................................... $ (143,388) $ 163,012 $ 157,976
========== ========= =========
Basic earnings per Common Share: ...................
Income (loss) from continuing operations .......... $ 1.25 $ 2.13 $ 2.21
Discontinued operations ........................... (2.43) .01 --
---------- --------- ---------
Net income (loss) ................................. $ (1.18) $ 2.14 $ 2.21
========== ========= =========
Diluted earnings per Common Share: .................
Income (loss) from continuing operations .......... $ 1.20 $ 2.11 $ 2.20
Discontinued operations ........................... (2.33) .01 --
---------- --------- ---------
Net income (loss) ................................. $ (1.13) $ 2.12 $ 2.20
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
80
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Shares of
Beneficial
Interest or
Common Stock
------------------------
Additional
Preferred Paid-in Treasury
Shares Amount Stock Capital Stock
(In thousands) -------- --------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 61,494 $ 1,192,612
Proceeds from issuance of
shares of beneficial
interest, net of offering
costs of $16,316 ............... 11,055 296,484
Issuance of shares of
beneficial interest for:
Conversion of debentures,
net of unamortized issue
costs of $259 ................. 644 15,707
Employee compensation
and stock options ............. 524 13,123
Distributions paid ..............
Net income for the year
ended December 31, 1996
Change in market value of
equity investment in
excess of cost .................
------ ---------- ---------- --------- ----------
Balance, December 31, 1996 73,717 1,517,926
Distribution of MAC shares to
Meditrust shareholders .........
Effect of merger with Santa
Anita Realty ................... 13,671 (1,509,187) $1,927,790
Issuance of shares of
Common Stock for:
Conversion of debentures,
net of unamortized issue
costs of $165 ................. 1,589 159 47,023
Employee compensation
and stock options ............. 456 45 10,416
<CAPTION>
Accumulated
Other Distributions
Unearned Compre- in Excess Note Comprehensive
Compen- hensive of Receivable Income
sation Income Earnings Operating Total (loss)
(In thousands) ---------- ------------ -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ (130,857) $1,061,755
Proceeds from issuance of
shares of beneficial
interest, net of offering
costs of $16,316 ............... 296,484
Issuance of shares of
beneficial interest for:
Conversion of debentures,
net of unamortized issue
costs of $259 ................. 15,707
Employee compensation
and stock options ............. 13,123
Distributions paid .............. (162,632) (162,632)
Net income for the year
ended December 31, 1996 157,976 157,976 $157,976
Change in market value of
equity investment in
excess of cost ................. $2,528 2,528 2,528
---------- ------ --------- ---------- ---------- --------
Balance, December 31, 1996 2,528 (135,513) 1,384,941 $160,504
========
Distribution of MAC shares to
Meditrust shareholders ......... (43,662) (43,662)
Effect of merger with Santa
Anita Realty ................... $(13,128) 405,475
Issuance of shares of
Common Stock for:
Conversion of debentures,
net of unamortized issue
costs of $165 ................. 47,182
Employee compensation
and stock options ............. 10,461
</TABLE>
81
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Shares of
Beneficial
Interest or
Common Stock
-----------------
Additional
Preferred Paid-in Treasury
Shares Amount Stock Capital Stock
(In thousands) -------- -------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Distributions paid .............
Net income for the year
ended December 31, 1997
Change in market value of
equity investment in
excess of cost ................
------ ------ ---------- ---------- ---------
Balance, December 31, 1997 89,433 8,943 1,985,229
Proceeds from issuance of
Common Stock, net of
offering costs of $5,769 ...... 8,500 850 265,425
Proceeds from issuance of
Preferred Stock, net of
offering costs of $6,334 ...... $70 168,596
Purchase of treasury stock ..... $(160,223)
Effect of merger with
Cobblestone ................... 8,177 818 235,928
Effect of merger with La
Quinta ........................ 43,280 4,328 1,146,028
Issuance of restricted stock
grants ........................ 315 32 6,921
Issuance of shares of
Common Stock for:
Conversion of debentures,
net of unamortized issue
costs of $1 .................. 284 28 7,002
Employee compensation
and stock options ............ 642 64 5,307
Dividends paid .................
Property distribution ..........
<CAPTION>
Accumulated
Other Distributions
Unearned Compre- in Excess Note Comprehensive
Compen- hensive of Receivable Income
sation Income Earnings Operating Total (loss)
(In thousands) ------------ ------------ -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Distributions paid ............. (176,210) (176,210)
Net income for the year
ended December 31, 1997 163,012 163,012 $163,012
Change in market value of
equity investment in
excess of cost ................ 1,041 1,041 1,041
---------- ----- -------- ------- -------- --------
Balance, December 31, 1997 3,569 (192,373) (13,128) 1,792,240 $164,053
========
Proceeds from issuance of
Common Stock, net of
offering costs of $5,769 ...... 266,275
Proceeds from issuance of
Preferred Stock, net of
offering costs of $6,334 ...... 168,666
Purchase of treasury stock ..... (160,223)
Effect of merger with
Cobblestone ................... 236,746
Effect of merger with La
Quinta ........................ 1,150,356
Issuance of restricted stock
grants ........................ $(6,718) 235
Issuance of shares of
Common Stock for:
Conversion of debentures,
net of unamortized issue
costs of $1 .................. 7,030
Employee compensation
and stock options ............ 5,371
Dividends paid ................. (438,639) (438,639)
Property distribution .......... (33,162) (33,162)
</TABLE>
82
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Shares of
Beneficial
Interest or
Common Stock
--------------------
Additional
Preferred Paid-in
Shares Amount Stock Capital
(In thousands) --------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net loss for the year ended
December 31, 1998 .......................................
Change in market value of
equity investment in
excess of cost ..........................................
Balance, December 31, 1998 150,631 $15,063 $70 $3,820,436
======= ======= === ==========
<CAPTION>
Accumulated
Other Distributions
Unearned Compre- in Excess Note
Treasury Compen- hensive of Receivable
Stock sation Income Earnings Operating
(In thousands) -------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Net loss for the year ended
December 31, 1998 ....................................... (134,944)
Change in market value of
equity investment in
excess of cost .......................................... 13,402
------
Balance, December 31, 1998 $ (160,223) $ (6,718) $16,971 $ (799,118) $ (13,128)
========== ======== ======= ========== =========
<CAPTION>
Comprehensive
Income
Total (loss)
(In thousands) ------------- --------------
<S> <C> <C>
Net loss for the year ended
December 31, 1998 ....................................... (134,944) $ (134,944)
Change in market value of
equity investment in
excess of cost .......................................... 13,402 13,402
-------- ----------
Balance, December 31, 1998 $2,873,353 $ (121,542)
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
83
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------
1998 1997 1996
(In thousands) -------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ...................................................... $ (134,944) $ 163,012 $ 157,976
Adjustments to reconcile net income (loss) to net cash
provided by continuing operations
Depreciation of real estate ........................................... 86,395 26,750 21,269
Goodwill amortization ................................................. 15,066 2,214 1,557
Loss on sale of assets ................................................ 34,470 -- --
Shares issued for compensation ........................................ 430 1,994 2,039
Equity in income of joint venture, net of dividends received .......... 544 -- --
Other depreciation, amortization and other items, net ................. 15,749 1,367 1,211
Other non cash expenses ............................................... 309,612 -- --
------------ ---------- ----------
Cash Flows from Operating Activities Available for Distribution ......... 327,322 195,337 184,052
Net change in other assets and liabilities .............................. (139,716) (10,142) 4,499
------------ ---------- ----------
Net cash provided by operating activities ........................... 187,606 185,195 188,551
------------ ---------- ----------
Cash Flows from Financing Activities: ...................................
Proceeds from issuance of common and preferred stock ................... 447,044 -- 312,800
Purchase of treasury stock ............................................. (160,223) -- --
Proceeds from borrowings on bank notes payable ......................... 2,445,000 1,078,000 476,000
Repayment of bank notes payable ........................................ (767,000) (512,015) (370,000)
Repayment of notes payable ............................................. (220,000) -- --
Equity offering and debt issuance costs ................................ (47,288) (5,896) (19,235)
Intercompany lending, net .............................................. 26,385 (11,175) --
Repayment of convertible debentures .................................... (43,152) -- --
Principal payments on bonds and mortgages payable ...................... (37,625) (5,098) (940)
Distributions to shareholders .......................................... (438,639) (176,210) (162,632)
Proceeds from exercise of stock options ................................ 4,939 9,092 11,084
------------ ---------- ----------
Net cash provided by financing activities ........................... 1,209,441 376,698 247,077
------------ ---------- ----------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding ..................... (636,707) (292,607) (325,789)
Investment in real estate mortgages and development funding ............ (222,524) (299,861) (265,084)
Prepayment proceeds and principal payments received on real
estate mortgages ...................................................... 407,241 54,618 162,247
Proceeds from sale of real estate ...................................... 459,833 6,173 4,701
Proceeds from sale of securities ....................................... 3,606 -- --
Payment of Santa Anita merger related costs ............................ -- (16,979) --
Cash acquired from Santa Anita merger .................................. -- 25,944 --
Acquisition of Cobblestone ............................................. (178,523) -- --
Acquisition of La Quinta ............................................... (956,054) -- --
Cash acquired from Cobblestone merger .................................. 723 -- --
Cash acquired from La Quinta merger .................................... 18,004 -- --
Working capital and notes receivable advances, net of
repayments and collections ............................................ 6,211 (134) 284
Investment in MAC ...................................................... -- (43,662) --
Investment in equity securities ........................................ (30,222) (14,052) (13,509)
------------ ---------- ----------
Net cash used in investing activities ............................... (1,128,412) (580,560) (437,150)
------------ ---------- ----------
Net increase (decrease) in cash and cash equivalents ................ 268,635 (18,667) (1,522)
Cash and cash equivalents at:
Beginning of year ...................................................... 24,059 42,726 44,248
------------ ---------- ----------
End of year ............................................................ $ 292,694 $ 24,059 $ 42,726
============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
84
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
(In thousands, except per share amounts) ------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents ...................................... $ 12,762 $ 19,673
Fees, interest and other receivables ........................... 12,673 2,580
Due from Meditrust Corporation ................................. 46,874 --
Other current assets, net ...................................... 10,423 3,078
--------- --------
Total current assets ........................................ 82,732 25,331
Investment in common stock of Meditrust Corporation ............ 37,581 37,581
Goodwill, net .................................................. 34,379 32,485
Property, plant and equipment, less accumulated depreciation
of $760 and 171, respectively ................................. 30,895 10,529
Artwork ........................................................ -- 14,500
Other non-current assets ....................................... 12,603 --
--------- --------
Total assets ................................................ $ 198,190 $120,426
========= ========
Liabilities and Shareholders' Equity
Accounts payable ............................................... $ 18,349 $ 9,981
Accrued payroll and employee benefits .......................... 33,457 9,312
Accrued expenses and other current liabilities ................. 30,980 9,713
Due to Meditrust Corporation ................................... -- 19,354
--------- --------
Total current liabilities ................................... 82,786 48,360
Note payable to Meditrust Corporation .......................... 13,128 13,128
Deferred revenue ............................................... -- 1,349
Other non-current liabilities .................................. 7,629 501
Net liabilities of discontinued operations ..................... 16,140 --
--------- --------
Total liabilities ........................................... 119,683 63,338
--------- --------
Commitments and contingencies -- --
Shareholders' equity:
Common Stock, $.10 par value; 270,000 shares authorized; 149,326
and 88,128 shares issued and outstanding in 1998 and 1997,
respectively .................................................. 14,933 8,813
Additional paid-in-capital ..................................... 109,001 49,739
Treasury stock at cost, 1,635 shares in 1998 ................... (3,103) --
Retained earnings (deficit) .................................... (18,803) (600)
--------- --------
102,028 57,952
Due from Meditrust Corporation ................................. (23,521) (864)
--------- --------
Total shareholders' equity ................................... 78,507 57,088
--------- --------
Total liabilities and shareholders' equity .................. $ 198,190 $120,426
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
85
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the initial
year ended period ended
December 31, December 31,
1998 1997
(In thousands, except per share amounts) -------------- ----------------
<S> <C> <C>
Revenue:
Hotel ................................................................... $ 252,642 $ --
Interest ................................................................ 607 48
--------- ------
253,249 48
--------- ------
Expenses:
Hotel operations ........................................................ 124,183 --
Depreciation and amortization ........................................... 2,901 --
Amortization of goodwill ................................................ 760 135
Interest and other ...................................................... 84 --
Interest to Meditrust Corporation ....................................... 712 129
General and administrative .............................................. 2,065 146
Royalty to Meditrust Corporation ........................................ 6,326 --
Rent to Meditrust Corporation ........................................... 125,706 --
Other ................................................................... 15,163 --
--------- ------
277,900 410
--------- ------
Loss from continuing operations before benefit for income taxes .......... (24,651) (362)
Income tax benefit ....................................................... (4,800) --
--------- ------
Loss from continuing operations .......................................... (19,851) (362)
Discontinued operations:
Loss from operations, net ............................................... (3,914) (238)
Gain on disposal of Santa Anita, net .................................... 15,040 --
Provision for loss on disposition of Cobblestone Golf Group, net ........ (9,478) --
--------- ------
Net loss ................................................................. $ (18,203) $ (600)
========= ======
Basic earnings per Common Share:
Loss from continuing operations ......................................... $ (.16) $ (.01)
Discontinued operations ................................................. .01 --
--------- ------
Net loss ................................................................ $ (.15) $ (.01)
========= ======
Diluted earnings per Common Share:
Loss from continuing operations ......................................... $ (.16) $ (.01)
Discontinued operations ................................................. .01 --
--------- ------
Net loss ................................................................ $ (.15) $ (.01)
========= ======
</TABLE>
The accompanying notes are an integral part of these financial statements
86
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year Ended December 31,1998 and the Initial Period Ended December 31,
1997
<TABLE>
<CAPTION>
Shares of
Beneficial Interest
or Common Stock
---------------------- Due from
Additional Treasury Meditrust Retained
Shares Amount Paid-in Capital Stock Corporation Earnings Total
(In thousands) ---------- ----------- ---------------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Proceeds from issuance of shares of
beneficial interest ......................... 74,161 $ 43,662 $ 43,662
Effect of merger with Santa Anita Operating
Company ..................................... 12,366 (35,009) $ 49,035 14,026
Issuance of shares of beneficial interest for:
Employee compensation and stock
options .................................... 175 17 36 $ (53) --
Conversion of debentures, net of
unamortized issue costs of $3 .............. 1,426 143 668 (811) --
Net loss for the initial period ended
December 31, 1997 ........................... -- $ (600) (600)
------- -------- -------- ------- -------- -------- --------
Balance, December 31, 1997 ................... 88,128 8,813 49,739 (864) (600) 57,088
Proceeds from issuance of Common Stock,
net of offering costs of $105 ............... 8,500 850 4,313 5,163
Purchase of treasury stock ................... $(3,103) (3,103)
Effect of merger with Cobblestone ............ 8,177 818 3,582 4,400
Effect of merger with La Quinta .............. 43,280 4,328 17,952 (22,280) --
Issuance of restricted stock grants .......... 315 32 104 (136) --
Issuance of shares of common stock for:
Conversion of debentures .................... 284 28 108 (136) --
Employee compensation and stock
options .................................... 642 64 41 (105) --
Property contribution ........................ 33,162 33,162
Net loss for the year ended December 31,
1998 ........................................ (18,203) (18,203)
------- -------- -------- ------- -------- -------- --------
Balance, December 31, 1998 ................... 149,326 $ 14,933 $109,001 $(3,103) $(23,521) $(18,803) $ 78,507
======= ======== ======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
87
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the initial
year ended period ended
December 31, December 31,
1998 1997
(In thousands, except per share amounts) -------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ............................................................. $(18,203) $ (600)
Goodwill amortization ................................................ 760 135
Gain on sale of assets ............................................... (15,040) --
Shares issued for compensation ....................................... 8 --
Other depreciation and amortization .................................. 8,079 171
Other items .......................................................... 16,452 --
Net change in other assets and liabilities of discontinued operations (6,852) --
Net change in other assets and liabilities ........................... 3,361 (489)
-------- -------
Net cash used in operating activities ............................. (11,435) (783)
-------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of stock ...................................... 9,669 43,662
Purchase of treasury stock ........................................... (3,103) --
Equity offering costs ................................................ (105) --
Intercompany lending, net ............................................ (26,385) 11,175
Proceeds from stock option exercises ................................. 96 46
-------- -------
Net cash provided by (used in) financing activities ............... (19,828) 54,883
-------- -------
Cash Flows from Investing Activities:
Capital improvements to real estate .................................. (282) --
Proceeds from sale of assets ......................................... 24,634 --
Cash acquired from Santa Anita merger ................................ -- 4,305
Collection of receivables and repayment of working capital advances -- (76)
Investment in equity securities ...................................... -- (38,656)
-------- -------
Net cash provided by (used in) investing activities ............... 24,352 (34,427)
-------- -------
Net increase (decrease) in cash and cash equivalents .............. (6,911) 19,673
Cash and cash equivalents at:
Beginning of year or at inception .................................... 19,673 --
-------- -------
End of year .......................................................... $ 12,762 $19,673
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
88
<PAGE>
1. Summary of Significant Accounting Policies
Business
Meditrust Corporation ("Realty") and Meditrust Operating Company and
subsidiaries ("Operating Company") (collectively the "Companies" or "The
Meditrust Companies") are two separate companies, the stocks of which trade as
a single unit under a stock pairing arrangement on the New York Stock Exchange.
Realty is a self administered real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended, and invests primarily in
healthcare facilities and lodging facilities.
The healthcare facilities include nursing homes, assisted living
facilities, medical office buildings, rehabilitation hospitals and other
healthcare related facilities. These facilities are located throughout the
United States and are operated by regional and national healthcare providers.
Realty also invests in an entity which invests in similar facilities abroad.
The lodging facilities include hotels located in the western and southern
regions of the United States.
Realty leases each of its hotels to Operating Company, who is responsible
for operating the hotels, or to other third party lessees (the "Lessees"). At
December 31, 1998, Realty leased 286 of its hotel investments to Operating
Company for a 5 year term, pursuant to separate participating leases providing
for the payment of the greater of base or participating rent, plus certain
additional charges, as applicable (the "Participating Hotel Facility Leases").
Operating Company is currently engaged in hotel operations previously
conducted by La Quinta Inns, Inc. and its wholly owned subsidiaries and its
unincorporated partnership and joint venture ("La Quinta") which lease the
respective facilities and license the La Quinta tradename from Realty and its
subsidiaries. La Quinta is a fully-integrated lodging company that focuses on
the operation and development of hotels. As of December 31, 1998, La Quinta
operated 290 hotels, with over 37,000 rooms located in the western and southern
regions of the United States.
On November 11, 1998, the Boards of Directors of Realty and Operating
Company approved a comprehensive restructuring plan designed to strengthen the
Companies' financial position and clarify their investment and operating
strategy by focusing on the heathcare and lodging businesses. Significant
components of the restructuring plan include selling more than $1,000,000,000
of non-strategic assets, including their portfolio of golf-related real estate
and operating properties ("Cobblestone Golf Group"), the Santa Anita Racetrack
and adjacent property, and approximately $550,000,000 of non-strategic
healthcare properties.
Basis of Presentation and Consolidation
Separate financial statements have been presented for Realty and for
Operating Company. Combined Realty and Operating Company financial statements
have been presented as The Meditrust Companies. All significant intercompany
and inter-entity balances and transactions have been eliminated in combination.
The Meditrust Companies and Realty use an unclassified balance sheet
presentation.
The consolidated financial statements of Realty and Operating Company
include the accounts of the respective entity and its majority-owned
partnerships after the elimination of all significant intercompany accounts and
transactions.
On July 17, 1998, the Companies acquired La Quinta and its related
operations. This transaction was accounted for under the purchase method of
accounting. Accordingly, the financial statements include, among other things,
the results of operations and cash flows of La Quinta from July 17, 1998
through the date of the financial statements.
As a result of the restructuring plan, the Companies have reflected the
Cobblestone Golf Group and Santa Anita Racetrack as discontinued operations and
certain healthcare properties as assets held for sale, in the accompanying
financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
89
<PAGE>
The Companies' more significant accounting policies follow:
Real Estate Investments
Land, buildings and improvements are stated at cost. Depreciation is
provided for on a straight-line basis over 20 to 40 years, the expected useful
lives of the buildings and major improvements. Hotel equipment, furniture and
fixtures are recorded at cost. Depreciation is provided using the straight-line
method over 3 to 15 years, the estimated useful lives of the related assets.
Leasehold improvements are recorded at cost and depreciated over the shorter of
the lease term or the estimated useful life.
Expenditures which materially increase the property's life are
capitalized. The cost of maintenance and repairs is charged to expense as
incurred. When depreciable property is retired or disposed of, the related cost
and accumulated depreciation is removed from the accounts and any gain or loss
is reflected in current operations.
Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For each asset not held for sale, the sum of expected future
cash flows, undiscounted and without interest charges, of the asset is compared
to the net book value of the asset. If the sum of expected future cash flows,
undiscounted and without interest charges, is less than the net book value of
the asset, the excess of the net book value over the estimated fair value is
charged to current earnings. When an asset is identified by management as held
for sale, the Companies discontinue depreciating the asset and the carrying
value is reduced, if necessary to the estimated fair value less costs to sell.
Fair value is determined based upon discounted cash flows of the assets at
rates deemed reasonable for the type of property and prevailing market
conditions, appraisals and, if appropriate, current estimated net sales
proceeds from pending offers. A gain or loss is recorded to the extent the
amounts ultimately received for the sale of assets differ from the adjusted
book values of the assets. Gains and losses on sales of assets are recognized
at the time the assets are sold provided there is reasonable assurance of the
collectibility of the sales price and any future activities to be performed by
the Companies relating to the assets sold are expected to be insignificant.
Hotel construction in progress is carried at cost. All costs associated
with, or allocable to, hotel construction are capitalized. All pre-opening and
start-up costs are expensed as incurred.
Loans are classified and accounted for as impaired loans when based on
current information and events, it is probable that the Companies will be
unable to collect all principal and interest due on the loan in accordance with
the original contractual terms. Upon determination that an impairment has
occurred, the amount of the impairment is recognized as a valuation allowance
based upon an analysis of the net realizable value of the underlying property
collateralizing the loan. Payments of interest on impaired loans received by
the Companies are recorded as interest income provided the amount does not
exceed that which would have been earned at the historical effective interest
rate.
Capitalized Acquisition and Interest Costs
Realty capitalizes pre-acquisition costs, development costs and other
indirect costs. Additionally, Realty capitalizes the interest cost associated
with developing new facilities. The amount capitalized is based upon a rate of
interest which approximates the Companies' cost of financing.
Cash and Cash Equivalents
Cash and cash equivalents consist of certificates of deposit and other
investments with less than 90-day original maturities and are stated at cost
which approximates fair market value.
Goodwill
Goodwill represents the excess of cost over the fair value of assets
acquired and is being amortized using the straight-line method over periods
ranging from 10 to 40 years. The Companies assess the recoverability of
goodwill whenever adverse events or changes in circumstances or business
climate indicate that the expected future cash flows (undiscounted and without
interest charges) for individual business segments may not be sufficient to
support recorded goodwill. If undiscounted cash flows are not sufficient to
support the recorded asset, an impairment would be recognized to reduce the
carrying value of the goodwill based on the expected discounted cash flows of
the business segment. Expected cash flows would be discounted at a rate
commensurate with the risk involved.
90
<PAGE>
Goodwill associated with the Santa Anita merger primarily relates to the
value of the paired-share structure and, due to the permanent nature of the
structure, is being amortized over a 40 year period. Accordingly, the goodwill
recorded as part of the Santa Anita merger is expected to remain even though
the Santa Anita Racetrack has been sold, as long as the Companies continue to
utilize the paired share structure. Goodwill also includes amounts associated
with the acquisition of La Quinta and Realty's previous investment advisor
which are being amortized on a straight-line basis over 20 and 10 year periods,
respectively.
Investments in Equity Securities
Investments in equity securities have been classified as
available-for-sale and recorded at current market value. The difference between
market value and cost (unrealized holding gains and losses) is recorded in
shareholders' equity. Gains and losses on sales of investments are calculated
based on the specific identification method and are recognized at the time the
investments are sold.
Intangible Assets
Intangible assets, consisting of La Quinta's tradename, reservation system
and assembled workforce, are included in other assets and are amortized on a
straight-line basis using lives ranging from 3 to 20 years based on
management's assessment of the fair value of the intangible assets. The
Companies evaluate the carrying values of intangible assets in the same manner
that they evaluate the carrying values of real estate assets.
Debt Issuance Costs
Debt issuance costs have been deferred and are amortized on a
straight-line basis (which approximates the effective interest method) over the
term of the related borrowings.
Deferred Revenue
Realty's deferred revenue, which is a component of other liabilities,
consists primarily of fees which are being amortized over the term of the
related investment.
Self-Insurance Programs
The hotel operation uses a paid loss retrospective insurance plan for
general and auto liability and workers' compensation whereby the operation is
effectively self-insured. Predetermined loss limits have been arranged with
insurance companies to limit the per occurrence cash outlay.
Hotel employees and their dependents are covered by a self-insurance
program for major medical and hospitalization coverage which is partially
funded by payroll deductions. Payments for major medical and hospitalization to
individual participants below specified amounts are self-insured by the
Companies.
Shareholders' Equity
The outstanding shares of Realty's common stock and Operating Company's
common stock are only transferable and tradable in combination as a paired unit
consisting of one share of Realty's common stock and one share of Operating
Company's common stock.
Realty's Revenue Recognition
Realty's rental income from operating leases is recognized on a
straight-line basis over the life of the respective lease agreements. Interest
income on real estate mortgages is recognized on the accrual basis, which
approximates the effective interest method.
Operating Company's Revenue and Seasonalilty
Hotel revenues are derived from room rentals and other sources such as
charges to guests for long-distance telephone service, fax machine use, movie
and vending commissions, meeting and banquet room revenue and laundry services.
Hotel revenues are recognized as earned.
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in revenue,
profit margins and net earnings. In addition, the opening of new construction
hotels and or the timing of hotel acquisitions may cause variation of revenue
from quarter to quarter.
91
<PAGE>
Earnings Per Share
The Companies have adopted Financial Accounting Standards Board Statement
No. 128 "Earnings Per Share" ("SFAS 128") for the year ended December 31, 1997.
SFAS 128 specifies the computation, presentation and disclosure requirements
for basic earnings per share and diluted earnings per share. Earnings per share
disclosures for all periods presented have been calculated in accordance with
requirements of SFAS 128. Basic earnings per share is computed based upon the
weighted average number of shares of common stock outstanding during the period
presented. Diluted earnings per share is computed based upon the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding during the period presented. The diluted earnings per share
computations also include options to purchase common stock which were
outstanding during the period. The number of shares outstanding related to the
options has been calculated by application of the "treasury stock" method. See
Note 17 for more detailed disclosure regarding the applicable numerators and
denominators used in the earnings per share calculations.
Stock Based Compensation
During 1996, the Companies adopted Financial Accounting Standards Board
Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which
provides companies an alternative to accounting for stock-based compensation as
prescribed under Accounting Principles Board Opinion No. 25 ("APB 25"). SFAS
123 encourages, but does not require companies to recognize expense for
stock-based awards based on their fair value at date of grant. SFAS 123 allows
companies to follow existing accounting rules (intrinsic value method under APB
25) provided that pro-forma disclosures are made of what net income and
earnings per share would have been had the new fair value method been used. The
Companies have elected to adopt the disclosure requirements of SFAS 123, but
will continue to account for stock-based compensation under APB 25.
Fair Value of Financial Instruments
Management has estimated the fair value of its financial instruments using
available market information and various valuation methodologies. Considerable
judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, the estimated values for Realty and Operating Company as of
December 31, 1998 and 1997 are not necessarily indicative of the amounts that
could be realized in current market exchanges.
Income Taxes
Realty has elected to be taxed as a REIT under the Internal Revenue Code
of 1986, as amended, and believes it has met all the requirements for
qualification as such. Accordingly, Realty will not be subject to federal
income taxes on amounts distributed to shareholders, provided it distributes
annually at least 95% of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Therefore, no provision for federal
income taxes is believed necessary in the financial statements of Realty.
Operating Company's income tax expense (benefit) is based on reported
earnings before income taxes. Deferred income taxes reflect the temporary
differences between assets and liabilities recognized for financial reporting
and such amounts recognized for tax purposes which requires recognition of
deferred tax liabilities and assets. Deferred tax liabilities and assets are
determined based on the differences between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. A valuation allowance is
recognized if it is anticipated that some or all of a deferred tax asset may
not be realized.
Concentrations
As of December 31, 1998, lodging facilities, all of which are operated by
Operating Company, comprised approximately 49% of the Companies real estate
investments. A private healthcare company and Sun Healthcare Group Inc.,
operate approximately 20% of the total real estate investments. The remainder
of the Companies real estate investments is comprised of healthcare facilities.
The lodging industry is highly competitive. Each hotel competes for guests
primarily with other similar hotels in its vicinity. The Companies believe that
brand recognition, location, quality of the hotel
92
<PAGE>
and services provided, and price are the principal competitive factors
affecting their lodging investments.
Derivatives
The Companies enter into interest rate swap agreements to manage interest
rate exposure. The differential to be paid or received is accrued consistent
with the terms of the agreements and market interest rates, and is recognized
in interest expense over the term of the related debt using a method which
approximates the effective interest method. The related amounts payable to or
receivable from financial institutions are included in other liabilities or
assets. The fair value of the swap agreements and changes in the fair value as
a result of changes in market interest rates are not recognized in the
financial statements.
Newly Issued Accounting Standards
In 1998, the Companies adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for the reporting and display of comprehensive income and
its components.
In 1998, the Companies adopted Financial Accounting Standards Board
Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Companies' reportable segments.
SFAS 131 also requires disclosure about products and services, geographic
areas, and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information (see Note 20).
Financial Accounting Standards Board Statement No. 133: "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, although
early application is encouraged. SFAS 133 requires that all derivative
investments be recorded in the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction, and the type of hedge transaction. The Companies
anticipate that due to their limited use of derivative instruments, the
adoption of SFAS 133 will not have a material effect on the financial
statements.
Reclassification
Certain reclassifications have been made to the 1997 presentation to
conform to the 1998 presentation.
93
<PAGE>
2. Supplemental Cash Flow Information
Details of the net change in other assets and liabilities for the
Companies (excluding noncash items, deferred income recognized in excess of
cash received, and changes in restricted cash and related liabilities) follow:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1998 1997 1996
(In thousands) ------------- ------------- ------------
<S> <C> <C> <C>
Change in fees, interest and other receivables ........... $ 24,946 $ (10,581) $ (6,956)
Change in other assets ................................... (6,544) (1,657) (2,834)
Change in accrued expenses and other liabilities ......... (143,278) 1,607 14,289
---------- --------- --------
$ (124,876) $ (10,631) $ 4,499
========== ========= ========
</TABLE>
Details of interest and income taxes paid and non-cash investing and
financing transactions follow:
The Meditrust Companies:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------
1998 1997 1996
(In thousands) ------------- ------------ ------------
<S> <C> <C> <C>
Interest paid during the period .............................. $ 166,452 $ 75,936 $ 56,666
Interest capitalized during the period ....................... 13,480 4,627 3,711
Non-cash investing and financing transactions:
Value of real estate acquired:
Land, land improvements and buildings ....................... 11,493 36,486
Retirements and write-offs of project costs ................. (20,651)
Accumulated depreciation of buildings sold .................. 33,161 389
Increase (reduction) in real estate mortgages net of
participation reduction .................................... (31,483) 256 (29,642)
Change in market value of equity securities in
excess of cost ............................................. 13,402 1,041 2,528
Value of shares issued for conversion of debentures ......... 7,167 48,161 15,966
In connection with the Cobblestone merger:
Fair value of assets acquired ............................... 302,713
Excess purchase consideration over estimated fair
market value of assets acquired ............................ 152,031
Liabilities assumed ......................................... (35,769)
Cash, net ................................................... (177,800)
Value of the issuance of Paired Common Shares ............... 241,175
In connection with the La Quinta merger:
Fair value of assets acquired ............................... 2,660,188
Excess purchase consideration over estimated fair
market value of assets acquired ............................ 301,977
Liabilities assumed ......................................... (851,479)
Cash, net ................................................... (938,050)
Value of the issuance of Paired Common Shares ............... 1,172,636
In connection with the Santa Anita merger:
Fair value of assets acquired ............................... 234,375
Excess purchase consideration over estimated fair
market value of assets acquired ............................ 176,922
Liabilities assumed ......................................... (46,490)
Value of the issuance of Paired Common Shares ............... 395,056
</TABLE>
94
<PAGE>
Meditrust Corporation:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------
1998 1997 1996
(In thousands) ------------- ------------ ------------
<S> <C> <C> <C>
Interest paid during the period .............................. $ 166,181 $ 75,936 $ 56,666
Interest capitalized during the period ....................... 13,480 4,627 3,711
Non-cash investing and financing transactions:
Value of real estate acquired: ..............................
Land, land improvements and buildings ....................... 11,493 36,486
Retirements and write-offs of project costs ................. (20,651)
Accumulated depreciation of buildings sold .................. 33,161 389
Increase (reduction) in real estate mortgages net of
participation reduction .................................... (31,483) 256 (29,642)
Change in market value of equity securities in
excess of cost ............................................. 13,402 1,041 2,528
Value of shares issued for conversion of debentures ......... 7,031 47,347 15,966
Property distribution ....................................... (33,162)
Stock dividend of MAC shares ................................ 43,662
In connection with the Cobblestone merger:
Fair value of assets acquired ............................... 272,463
Excess purchase consideration over estimated fair
market value of assets acquired ............................ 152,031
Liabilities assumed ......................................... (9,919)
Cash, net ................................................... (177,800)
Value of the issuance of common shares ...................... 236,775
In connection with the La Quinta merger:
Fair value of assets acquired ............................... 2,426,339
Excess purchase consideration over estimated fair
market value of assets acquired ............................ 301,977
Liabilities assumed ......................................... (639,910)
Cash, net ................................................... (938,050)
Value of the issuance of common shares ...................... 1,150,356
In connection with the Santa Anita merger:
Fair value of assets acquired ............................... 252,626
Excess purchase consideration over estimated fair
market value of assets acquired ............................ 148,735
Liabilities assumed ......................................... (21,830)
Value of the issuance of common shares ...................... 405,475
</TABLE>
95
<PAGE>
Meditrust Operating Company:
<TABLE>
<CAPTION>
For the For the initial
year ended period ended
December 31, December 31,
-------------- ----------------
1998 1997
(In thousands) -------------- ----------------
<S> <C> <C>
Interest paid during the period .................................. $ 324 $ --
Non-cash investing and financing transactions:
Value of shares issued for conversion of debentures ............. 136 814
Property contribution ........................................... 33,162
In connection with the Cobblestone merger:
Fair value of assets acquired ................................... 30,250
Liabilities assumed ............................................. (25,850)
Value of the issuance of common shares .......................... 4,400
In connection with the La Quinta merger:
Fair value of assets acquired ................................... 233,849
Liabilities assumed ............................................. (211,569)
Value of the issuance of common shares .......................... 22,280
In connection with the Santa Anita merger:
Fair value of assets acquired ................................... 19,322
Excess purchase consideration over estimated fair market value of
assets acquired ................................................ 28,187
Liabilities assumed ............................................. (24,660)
Value of the issuance of common shares .......................... 27,154
</TABLE>
3. La Quinta Merger
On July 17, 1998, Realty completed its merger with La Quinta (the "La
Quinta Merger") whereby La Quinta merged with and into Realty, with Realty as
the surviving corporation.
Upon the closing of the La Quinta Merger, each share of common stock of La
Quinta was converted into the right to receive 0.736 paired common shares,
reduced by the amount to be received in an earnings and profits distribution.
Approximately 43,280,000 paired common shares, with an aggregate market value
of approximately $1,172,636,000, and approximately $956,054,000 in cash were
exchanged in order to consummate the La Quinta Merger. In addition,
approximately $851,479,000 of La Quinta's debt and associated costs were
assumed. In accordance with the La Quinta Merger Agreement, on September 10,
1998, the Companies made a special distribution of profits inherited in the
merger of approximately $128,618,000.
As a result of plans contemplated at the time of the La Quinta Merger,
management is committed to relocate certain functions of the La Quinta
corporate headquarters, including marketing, legal, development, human
resources, finance and executive, to Dallas, Texas from San Antonio, Texas. The
accounting, information systems and reservation functions of La Quinta will
remain in San Antonio. It is anticipated that the relocation will be completed
by the end of the third quarter of 1999 and will affect approximately 100
employees. A provision for the estimated cost of relocation of approximately
$10,100,000, including certain lease termination costs, severance and related
employment costs, and office and employee relocation costs, has been included
in the acquisition costs as liabilities assumed. Management has finalized the
employee relocation plan and located appropriate office space in the Dallas
area. Subsequent adjustments to management's estimate of the costs associated
with the planned relocation will be made as an adjustment to goodwill.
The operations of La Quinta are included in the combined and consolidated
financial statements since consummation of the La Quinta Merger. The total
consideration paid in connection with the La Quinta Merger was approximately
$2,980,169,000. The excess of the purchase price, including costs of the La
Quinta Merger, over the fair value of the net assets acquired approximated
$301,977,000, and is being amortized over 20 years.
96
<PAGE>
The following unaudited pro forma condensed combined consolidated results
of operations of Realty and Operating Company have been prepared as if the La
Quinta Merger had occurred on January 1, 1997:
<TABLE>
<CAPTION>
For the year ended December
31,
---------------------------
1998 1997
(Unaudited in thousands, except per share amounts) ------------- -------------
<S> <C> <C>
Revenue ................................................... $923,813 $791,607
Net income from continuing operations ..................... 151,837 172,661
Basic earnings per paired common share .................... 1.20 1.27
Weighted average paired common shares outstanding ......... 144,111 119,350
</TABLE>
The pro forma condensed combined consolidated results for the year ended
December 31, 1998 include approximately $111,215,000 of other expenses related
to nonrecurring write-offs, provisions and restructuring charges further
described in Note 12, a $4,159,000 realized loss on the sale of securities and
a $52,642,000 realized gain on the sale of assets.
The pro forma condensed combined consolidated results do not purport to be
indicative of results that would have occurred had the La Quinta Merger been in
effect for the periods presented, nor do they purport to be indicative of the
results that will be obtained in the future.
4. Other Mergers
On May 29, 1998, Realty completed its merger with Cobblestone Holdings,
Inc. ("Cobblestone") pursuant to an Agreement and Plan of Merger dated as of
January 11, 1998, as amended by a First Amendment thereto dated as of March 16,
1998 (as amended, the "Cobblestone Merger Agreement"). Cobblestone was engaged
in the ownership, leasing, operation and management of 27 golf courses and
related facilities. Under the terms of the Cobblestone Merger Agreement,
Cobblestone merged with and into Realty, with Realty as the surviving
corporation (the "Cobblestone Merger"). Upon the closing of the Cobblestone
Merger, each share of common stock of Cobblestone was converted into the right
to receive 3.867 paired common shares and each share of preferred stock of
Cobblestone was converted into the right to receive .2953 paired common shares.
The total number of paired common shares issued in connection with the
Cobblestone Merger was approximately 8,177,000, with an aggregate market value
of approximately $230,000,000, plus the issuance of approximately 452,000
options valued at $10,863,000. In addition, Realty advanced monies in order for
Cobblestone to satisfy approximately $170,000,000 of its long-term debt and
associated costs. Accordingly, the operations of Cobblestone are included in
the combined and consolidated financial statements since consummation of the
Cobblestone Merger. The total consideration paid in connection with the
Cobblestone Merger was approximately $455,467,000. The excess of the purchase
price, including costs associated with the merger, over the fair value of the
net assets acquired approximated $152,000,000.
On November 5, 1997, Meditrust merged into Santa Anita Realty Enterprises,
Inc. and Meditrust Acquisition Company ("MAC") merged into Santa Anita
Operating Company (collectively, "The Santa Anita Merger"). Santa Anita Realty
Enterprises, Inc. changed its corporate name to "Meditrust Corporation," and
Santa Anita Operating Company changed its corporate name to "Meditrust
Operating Company". The Santa Anita Merger was accounted for as a reverse
acquisition whereby Meditrust and MAC were treated as the acquirers for
accounting purposes. The operations of Santa Anita Realty Enterprises, Inc. and
Santa Anita Operating Company are included in the combined and consolidated
financial statements since the Santa Anita Merger date. The aggregate purchase
price of approximately $412,000,000, which includes costs of the Santa Anita
Merger, has been allocated among the assets of the Santa Anita Companies, based
on their respective fair market values. The excess of the purchase price,
including costs of the Santa Anita Merger, over the fair value of the net
assets acquired approximated $196,000,000 and is being amortized over forty
years.
5. Discontinued Operations
On November 11, 1998, the Boards of Directors of Realty and Operating
Company approved a comprehensive restructuring plan. Significant components of
the restructuring plan include the sale of Cobblestone Golf Group, which
consists of 43 golf properties and related operations, and the Santa Anita
Racetrack and adjacent property. Accordingly, operating results for Cobblestone
Golf Group and the Santa Anita Racetrack have been reclassified and reported as
discontinued operations.
97
<PAGE>
On December 10, 1998, the Companies sold certain assets, leases, and
licenses used in connection with the horseracing business conducted at Santa
Anita Racetrack and recorded a loss on sale of $67,913,000.
The Companies recorded a provision for loss on the disposition of
Cobblestone Golf Group of approximately $237,035,000, which included estimated
income taxes of $56,848,000, as of December 31, 1998 based upon the estimated
proceeds to be realized upon sale. At December 31, 1998, the net assets subject
to sale totaled $305,416,000 and have been classified as net assets of
discontinued operations on the combined consolidated balance sheet. On February
11, 1999, the Companies signed a definitive agreement to sell the Cobblestone
Golf Group (see Note 20).
Operating results, for the nine months ended September 30, 1998,
(exclusive of any corporate charges or interest expense) of discontinued golf
and racetrack operations are as follows:
<TABLE>
<CAPTION>
Cobblestone
Golf Group Santa Anita Total
(In thousands) ------------ ------------- ----------
<S> <C> <C> <C>
Revenue ............ $43,278 $55,421 $98,699
Net income ......... 1,963 8,758 10,721
</TABLE>
Revenue and net income from the measurement date of September 30, 1998
through December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Cobblestone
Golf Group Santa Anita Total
(In thousands) ------------ ------------- ----------
<S> <C> <C> <C>
Revenue ............ $28,849 $7,741 $36,590
Net income ......... 1,763 132 1,895
</TABLE>
6. Real Estate Investments
The following is a summary of real estate investments:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
(In thousands) ------------- -------------
<S> <C> <C>
Land .......................................................... $ 475,376 $ 249,852
Buildings and improvements, net of accumulated depreciation and
other provisions of $186,594 and $124,582 .................... 3,381,392 1,223,255
Real estate mortgages and loans receivable, net of a valuation
allowance of $18,991 and $0 at December 31, 1998 and 1997,
respectively ................................................. 1,197,634 1,432,825
Investment in unconsolidated joint venture, net of accumulated
depreciation of $250 ......................................... -- 29,840
Assets held for sale, net of accumulated depreciation and other
provisions of $41,562 ........................................ 32,334 --
---------- ----------
$5,086,736 $2,935,772
========== ==========
</TABLE>
During 1998, Realty acquired 15 assisted living facilities and 23 medical
office buildings for $276,075,000. Realty also acquired 16 golf facilities for
$121,976,000. In addition, during the year ended December 31, 1998, Realty
provided net funding of $54,467,000 for the construction of 17 assisted living
facilities and two golf facilities, and also provided $1,820,000 for an
addition to a long-term care facility already in the portfolio. Realty and
Operating Company also provided net funding of $182,369,000 and $282,000,
respectively, for ongoing construction of facilities it currently owns which
were in the portfolio prior to 1998 or for construction and capital
improvements to hotels and golf courses acquired in the mergers with
Cobblestone and La Quinta.
Also during the year ended December 31, 1998, Realty provided permanent
mortgage financing of $76,260,000 for two long-term care facilities, one
medical office building and for a 135 acre development stage property. Realty
also provided $2,945,000 in additions to permanent mortgages already in the
portfolio.
98
<PAGE>
Realty commenced new development funding of $33,061,000 relating to two
long-term care facilities and one medical office building. Realty also provided
$110,258,000 for ongoing construction of mortgaged facilities already in the
portfolio.
As a result of the merger with Cobblestone, Realty acquired 21 golf
facilities and leasehold interests in four golf facilities and recorded them at
appraised values of $224,434,000 and $23,641,000, respectively. Since these
courses, as well as the 18 courses noted above, are components of Cobblestone
Golf Group, they are included as net assets of discontinued operations as of
December 31, 1998.
Realty also acquired 280 operating hotels, 23 hotels under construction
and land held for development and recorded them at appraised values of
$2,503,264,000 as a result of the La Quinta Merger.
During the year ended, December 31, 1998, Realty distributed $19,423,000
in real estate assets to Operating Company as part of a property distribution.
During the year ended December 31, 1998, Realty received net proceeds of
$320,135,000 from the sale of one long-term care facility, 32 assisted living
facilities and nine rehabilitation facilities. Realty realized a net gain on
these sales of $52,096,000. Realty also received net proceeds of $39,843,000
from the sale of a 50% ownership in a joint venture holding a fashion mall, as
well as the land on which the fashion mall is located. A net gain of $546,000
was realized on the sale. In connection with the disposition of the racetrack
operations, Realty received net proceeds of $99,855,000 from the sale of the
Santa Anita Racetrack and adjacent land held for development. A net loss on the
sale of $77,838,000 was realized and is included in the loss on disposal of
discontinued operations. In connection with these sales, $1,909,000 in lease
breakage fees were received and have been included as other income in the
consolidated statements of income.
During the year ended December 31, 1998, Realty received principal
payments of $407,241,000 on real estate mortgages. Included in this amount were
$212,032,000 prepayments of mortgage investments for which prepayment fees and
make-whole gains of $34,078,000 were recognized and have been classified as
other income in the consolidated statements of income.
At December 31, 1998, Realty was committed to provide additional financing
of approximately $161,000,000 relating to one medical office building, five
long-term care facilities, 11 assisted living facilities and 13 hotel
facilities currently under construction as well as additions to existing
facilities in the portfolio.
Realty had entered into transactions with entities in which the Companies'
Former Chairman and Chief Executive Officer owned or was expected to own a
controlling equity interest or a minority interest. As of December 31, 1998,
Realty had funded $287,335,000 related to these transactions. During 1998 and
1997, Realty recognized interest income of $19,199,000 and $16,490,000 and
rental income of $1,492,000 and $5,174,000 from investments with these
entities, respectively. All of the terms and conditions of such transactions
were subject to approval by the independent Directors of Realty. On August 3,
1998, the Companies' former Chairman resigned as Chairman and as a Director of
Realty, and as Chief Executive Officer and Treasurer of Operating Company (see
Note 14).
Minority interests in partnerships relating to Realty's investments in two
rehabilitation facilities (seven facilities at December 31, 1997) were $669,000
and $2,071,000 as of December 31, 1998 and 1997, respectively, and are included
in accrued expenses and other liabilities in the consolidated financial
statements. Realty has a 94% equity interest in these partnerships. Also
included in accrued expenses and other liabilities at December 31, 1998 is
$3,019,000 which represents amounts payable to the minority interests in five
rehabilitation facilities sold in 1998.
Realty has investments in certain hotel facilities, which are held by an
unincorporated partnership and a joint venture. Realty has a 60% and 50%
interest in each of these investments, respectively. These investments total
$7,337,000 at December 31, 1998, and partner's equity in the partnership and
joint venture of approximately $6,125,000 are also included in accrued expenses
and other liabilities in the consolidated financial statements.
7. Other Assets
Other assets include primarily La Quinta intangible assets, investments in
equity securities classified as available-for-sale, furniture, fixtures and
equipment, and other receivables.
99
<PAGE>
The investment in equity securities includes approximately 26,606,000
shares of Nursing Home Properties Plc, a property investment group which
specializes in the financing, through sale leaseback transactions, of nursing
homes located in the United Kingdom. These shares were acquired at various
dates between July, 1996 and August, 1998 for an aggregate cost of $57,204,000.
At December 31, 1998, the market value of this investment was $66,591,000. The
difference between market value and cost, $9,387,000, is included in
shareholders' equity in the accompanying balance sheet. The investment in
equity securities also includes 331,000 shares of stock and warrants to
purchase 1,006,000 shares of stock in Balanced Care Corporation, a healthcare
operator. This investment has a market value of $8,688,000 at December 31,
1998. The difference between market value and cost, $7,584,000, is included in
shareholders' equity in the accompanying balance sheet.
La Quinta's intangible assets consist of its tradename, reservation
system, and assembled workforce with net book values at December 31, 1998, of
$95,866,000, $4,293,000 and $7,943,000, respectively, which were acquired as a
result of the La Quinta Merger.
Realty provides for a valuation allowance against its assets on a periodic
basis. As of December 31, 1998 and 1997 the valuation allowance provided
against other assets aggregated approximately $500,000 and $8,992,000,
respectively.
8. Shares of Beneficial Interest/Common Shares
Cash flows from operating activities available for distribution differ
from net income primarily due to depreciation and amortization, as well as
other noncash expenses. Distributions in excess of earnings, as reflected on
Realty's and the Companies' consolidated balance sheets, are primarily a result
of an accumulation of this difference. All shares participate equally in
distributions and in net assets available for distribution to shareholders on
liquidation or termination of Realty. The Directors of Realty have the
authority to effect certain share redemptions or prohibit the transfer of
shares under certain circumstances.
Total distributions to shareholders during the years ended December 31,
1998, 1997, and 1996 included a return of capital per share of 4.1%, 31.7%, and
5.25%, respectively. The 1998 and 1996 distributions also include long-term
capital gain distributions of 30.2% and .23% per share, respectively. The 1998
distribution also includes unrecaptured Internal Revenue Code Section 1250
depreciation from real property of 6.3% per share.
During 1998, Realty issued 7,000,000 depository shares of Meditrust
Corporation. Each depository share represents one-tenth of a share of 9% Series
A Cumulative Redeemable Preferred Stock (the "Preferred Stock") with a par
value of $.10 per share. Net proceeds from this issuance were approximately
$168,666,000 and were primarily used to repay existing indebtedness. Total
distributions to preferred shareholders during the year ended December 31, 1998
included long term capital gain distributions of 31.4% per share and
unrecaptured Internal Revenue Code Section 1250 depreciation from real property
of 6.6% per share. On and after June 17, 2003, the Preferred Stock may be
redeemed for cash at the option of Realty, in whole or from time to time in
part, at a redemption price of $250 per share, plus accrued and unpaid
dividends, if any, to the redemption date.
The following classes of Preferred Stock, Excess Stock and Series Common
Stock are authorized as of December 31, 1998; no shares were issued or
outstanding at December 31, 1998 and 1997:
Meditrust Operating Company Preferred Stock $.10 par value; 6,000,000
shares authorized;
Meditrust Corporation Excess Stock $.10 par value; 25,000,000 shares
authorized;
Meditrust Operating Company Excess Stock $.10 par value; 25,000,000 shares
authorized;
Meditrust Corporation Series Common Stock $.10 par value; 30,000,000
shares authorized;
Meditrust Operating Company Series Common Stock $.10 par value; 30,000,000
shares authorized.
9. Fair Value of Financial Instruments
Fair value estimates are subjective in nature and are dependent on a
number of significant assumptions associated with each financial instrument or
group of financial instruments. Because of a
100
<PAGE>
variety of permitted calculations and assumptions regarding estimates of future
cash flows, risks, discount rates and relevant comparable market information,
reasonable comparisons of the Companies' fair value information with other
companies cannot necessarily be made.
The following methods and assumptions were used for real estate mortgages
and long term indebtedness to estimate the fair value of financial instruments
for which it is practicable to estimate value:
The fair value of real estate mortgages has been estimated by discounting
future cash flows using current interest rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of real estate mortgages amounted to approximately
$1,177,368,000 and $1,429,077,000 as of December 31, 1998 and 1997,
respectively. The carrying value of these mortgages is $1,197,634,000 and
$1,432,825,000 as of December 31, 1998 and 1997, respectively.
The quoted market price for the Companies' publicly traded convertible
debentures and rates currently available to the Companies for debt with similar
terms and remaining maturities were used to estimate fair value of existing
debt. The fair value of the Companies' indebtedness amounted to approximately
$3,293,946,000 and $1,434,412,000 as of December 31, 1998 and 1997,
respectively. The carrying value of these convertible debentures and other debt
is $3,307,947,000 and $1,377,438,000 as of December 31, 1998 and 1997,
respectively.
The fair value of the interest rate swap is based on quoted market prices
and approximated $11,323,000 at December 31, 1998.
10. Indebtedness
Indebtedness at December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands, except per share amounts) ----------- -----------
<S> <C> <C>
Notes payable, net:
Principal payments aggregating $118,500 due from August 1999 to
August 2015, bearing interest at rates between 7.25% and
8.625% ........................................................ $117,950 $117,804
Principal payments aggregating $125,000 due in July 2000, bearing
interest at 7.375% ............................................ 124,508 124,370
Principal payments aggregating $80,000 due in July 2001, bearing
interest at 7.6% .............................................. 79,685 79,464
Principal payments aggregating $50,000 due in October 2001,
bearing interest at 7.11% ..................................... 50,000 --
Principal payments aggregating $100,000 due in August 2002,
bearing interest at LIBOR plus .45% ........................... -- 99,322
Principal payments aggregating $100,000 due in March 2004,
bearing interest at 7.25% ..................................... 100,880 --
Principal payments aggregating $100,000 due in September 2005,
bearing interest at 7.40% ..................................... 99,936 --
Principal payments aggregating $50,000 due in February 2007,
bearing interest at 7.27% ..................................... 50,000 --
Principal payments aggregating $160,000 due in August 2007,
bearing interest at 7% ........................................ 157,316 157,003
Principal payments aggregating $50,000 due in April 2008, bearing
interest at 7.33% ............................................. 50,000 --
Principal payments aggregating $150,000 due in August 2011,
bearing interest at 7.114% .................................... 148,947 148,759
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
1998 1997
(In thousands, except per share amounts) ------------ -------------
<S> <C> <C>
Principal payments aggregating $175,000 due in September 2026,
(redeemable September 2003 at the option of the note holder),
bearing interest at 7.82% ............................................. 174,115 173,872
Other ................................................................... 2,500 --
------- -------
1,155,837 900,594
--------- -------
Convertible debentures, net:
7% interest, convertible at $25.487 per share, due March 1998............ -- 5,037
6-7/8% interest, convertible at $30.896 per share, due November
1998 .................................................................. -- 43,553
8.54% interest, convertible at $27.15 per share, due July 2000........... 41,999 41,749
7-1/2% interest, convertible at $30.11 per share, due March 2001 ........ 89,406 88,951
9% interest, convertible at $22.47 per share, due January 2002 .......... 2,351 3,741
8.56% interest, convertible at $27.15 per share, due July 2002........... 51,257 50,969
--------- -------
185,013 234,000
--------- -------
Bank notes payable, net:
Revolving credit agreement expiring September 23, 1999 .................. -- 179,527
Revolving credit agreement expiring July 17, 2001 ....................... 594,625 --
Term loans, due July 17, 1999 ........................................... 743,398 --
Term loan, due July 17, 2001 ............................................ 493,313 --
--------- -------
1,831,336 179,527
--------- -------
Bonds and mortgages payable, net:
Mortgage notes, interest ranging from 7.9% to 12.2%, monthly
principal and interest payments ranging from $7 to $78 and
maturing from February 1998 through March 2033, collateralized
by thirteen facilities ................................................ -- 59,962
Mortgage notes, interest ranging from 7.72% to 12.75%, monthly
principal and interest payments ranging from $4 to $78 and
maturing from February 1999 through March 2033, collateralized
by ten facilities ..................................................... 44,186 --
Manatee County, Florida Industrial Revenue Bonds, Series 1983,
annual principal payments ranging from $80 to $90 due in 1999
through 2000, $345 due in December 2003, and $2,770 due in
December 2013, interest ranging from 13.0% to 13.5%,
collateralized by one facility ........................................ 3,285 3,355
Mortgage loans maturing July 2000 through November 2001, 8.67%
weighted average effective interest rate .............................. 48,292 --
Industrial development revenue bonds, maturing July 1999 through
February 2012, 3.53% weighted average effective interest rate ......... 33,773 --
--------- -------
129,536 63,317
--------- -------
$3,301,722 $1,377,438
========== ==========
</TABLE>
The notes payable, convertible debentures, bank notes payable, bonds and
mortgages payable are presented net of unamortized debt issuance costs of
$33,535,000 and $10,610,000 at December 31, 1998 and 1997, respectively.
Amortization expense associated with the debt issuance costs amounted to
$12,264,000, $2,692,000 and $2,636,000 for the years ended December 31, 1998,
1997 and 1996, respectively, and is reflected in interest expense.
Notes Payable
On August 7, 1997, Realty completed the sale of $160,000,000 of 7% notes
due August 15, 2007. Realty also completed the sale of $100,000,000 Remarketed
Reset Notes due August 15, 2002 bearing
102
<PAGE>
interest at LIBOR plus .45%. 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
Realty and the underwriter. On August 17, 1998 Realty redeemed the $100,000,000
Remarketed Reset Notes at par value.
During 1997, Realty 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 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 Realty 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.
In conjunction with the La Quinta Merger on July 17, 1998, Realty assumed
La Quinta's notes payable, which approximated $473,000,000. In September 1998,
Realty redeemed $120,000,000, 9.25% senior unsecured subordinated notes
originally due 2003.
Convertible Debentures
The 7% debentures issued in February 1993 matured in March 1998. During
1998, prior to maturity, $5,027,000 of debentures were converted into 197,251
paired common shares. The remaining principal was repaid at maturity. During
the year ended December 31, 1997, $3,095,000 of debentures were converted into
111,306 paired common shares.
The 67/8% debentures issued in November 1993 matured in November 1998.
During 1998, prior to maturity, $665,000 of debentures were converted into
21,521 paired common shares. The remaining principal was repaid at maturity.
During the year ended December 31, 1997, $42,433,000 of debentures were
converted into 1,373,394 paired common shares.
The 8.54% debentures issued in July 1995 are subject to redemption by the
Companies at 100% of the principal amount plus accrued interest. During the
year ended December 31, 1997, $1,000,000 of debentures were converted into
36,830 paired common shares.
The 71/2% debentures issued in March 1994 are subject to redemption by the
Companies at 100% of the principal amount plus accrued interest. During the
years ended December 31, 1998 and 1997, $65,000 and $443,000 of debentures were
converted into 2,158 and 14,706 paired common shares, respectively.
The 9% convertible debentures issued in April 1992 are subject to
redemption by the Companies at 100% of the principal amount plus accrued
interest. During the years ended December 31, 1998 and 1997, $1,410,000 and
$1,190,000 of debentures were converted into 62,746 and 52,949 paired common
shares, respectively.
The 8.56% debentures issued in July 1995 are subject to redemption by the
Companies at 100% of the principal amount plus accrued interest to the extent
necessary to preserve Realty's status as a REIT.
Bank Notes Payable
On July 17, 1998, Realty entered into a new credit agreement (the "New
Credit Agreement") which provides Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's existing $365,000,000 revolving credit
facilities. The New Credit Agreement provides for borrowings in four separate
tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan,
amounts of which if repaid may be reborrowed, which matures July 17, 2001;
Tranche B, a term loan in the amount of $500,000,000, amounts of which if
repaid may not be reborrowed, which matures July 17, 1999 with a $250,000,000
mandatory principal payment on April 17, 1999; Tranche C, a term loan in the
amount of $250,000,000, amounts of which if repaid may not be reborrowed, which
matures July 17, 1999 with a six month extension option;
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and Tranche D, a term loan in the amount of $500,000,000, amounts of which if
repaid may not be reborrowed, which matures July 17, 2001. Borrowings under the
New Credit Agreement include LIBOR, base rate and money market borrowings.
Pricing on the loan commitments, lines and letters of credit under the New
Credit Agreement varies according to the pricing level commensurate with the
credit quality of Realty. Events of default under the New Credit Agreement
include, among other things, failure to pay any principal or reimbursement
obligation when due, failure to meet any of the covenants of the New Credit
Agreement, failure of the representations and warranties to be true in any
material respect, and default under other debt instruments of the Companies or
their subsidiaries. The New Credit Agreement includes covenants with respect to
maintaining certain financial benchmarks, limitations on the types and
percentage of investments in certain business lines, limitations on dividends
of Realty and Operating Company, and other restrictions. In addition, Operating
Company is a guarantor of all of the obligations of Realty under the New Credit
Agreement.
On November 23, 1998, Realty amended its New Credit Agreement to provide
for Realty's settlement of a portion of its forward equity issuance
transaction, the amendment of certain financial covenants to accommodate asset
sales, to exclude the impact of non-recurring charges in certain covenant
calculations, and to provide for future operating flexibility. The amendment
also provided for an increase to the LIBOR pricing of the credit facility by
approximately 125 basis points, and the pledge of stock of the Companies'
subsidiaries. This pledge of subsidiary stock will also extend on a pro rata
basis to entitled bondholders. Realty also agreed to a 25 basis point increase
to the LIBOR pricing in the event that an equity offering of at least
$100,000,000 had not been issued by February 1, 1999. On February 1, 1999 this
increase went into effect.
Of the $1,000,000,000 revolving loan, $353,000,000 was available at
December 31, 1998, bearing interest at the base rate (8.25%) or LIBOR plus
2.625% (7.98% at December 31, 1998).
During July 1998, Realty entered into an interest rate swap agreement to
reduce the impact of fluctuating interest rates on $1,250,000,000 of its New
Credit Agreement. Realty agreed with the counterparty to exchange, on a monthly
basis, the difference between Realty's fixed pay rate and the counterparty's
variable pay rate of one month LIBOR. During the period from July to December,
1998, Realty paid a fixed rate of approximately 5.7% and received an average
variable rate of approximately 5.5%. Differentials in the swapped amounts are
recorded as adjustments to interest expense of Realty. Total interest expense
related to the swap agreement was approximately $995,000 for the period from
July to December 1998.
At December 31, 1997, Realty had unsecured revolving lines of credit
expiring September 23, 1999 in the amount of $365,000,000, of which
$181,000,000 was available, bearing interest at approximately 6.8%. In July
1998, these revolving lines were refinanced with the New Credit Agreement.
Bonds and Mortgages Payable
Realty is obligated by agreements relating to sixteen issues of Industrial
Revenue Bonds ("IRBs"), in an aggregate amount of $32,370,000, to purchase the
bonds at face value prior to maturity under certain circumstances. The bonds
have floating interest rates which are indexed periodically. Bondholders may,
when the rate is changed, put the bonds to the designated remarketing agent. If
the remarketing agent is unable to resell the bonds, it may draw upon an
irrevocable letter of credit which secures the IRBs. In such event, Realty
would be required to repay the funds drawn on the letters of credit within 24
months. As of December 31, 1998, no draws had been made upon any such letters
of credit. The schedule of annual maturities shown below includes these IRBs as
if they will not be subject to repayment prior to maturity. Assuming all bonds
under such IRB arrangements are presented for payment prior to December 31,
1999 and the remarketing agents are unable to resell such bonds, the maturities
of long-term debt shown below would increase by $8,835,000 for the year ending
December 31, 2001.
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The aggregate maturities of notes payable, convertible debentures, bank
notes payable and bonds and mortgages payable, for the five years subsequent to
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999 ................ $ 778,784
2000 ................ 219,422
2001 ................ 1,356,639
2002 ................ 92,659
2003 ................ 207,301
Thereafter .......... 646,917
----------
$3,301,722
==========
</TABLE>
11. Forward Equity Issuance Transaction
On February 26, 1998, the Companies entered into transactions (the
"Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch
International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc.
(collectively with its agent and successor in interest, "MLI"). Pursuant to the
terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A
Non-Voting Convertible Common Stock par value $.10 per share from each of the
Companies at a purchase price of $32.625 per share (collectively with the
paired common shares the shares of Series A non-voting convertible common stock
are convertible into, the "Notional Shares"). The Series A Non-Voting
Convertible Common Stock converted on a one to one basis to paired common stock
of the Companies on June 18, 1998. Total proceeds from the issuance were
approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from
the issuance were approximately $272,000,000, and were used by the Companies to
repay existing indebtedness. The Companies and MLI also entered into a Purchase
Price Adjustment Agreement under which the Companies would, within one year
from the date of MLI's purchase, on a periodic basis, adjust the purchase price
based on the market price of the paired common stock at the time of any interim
or final adjustments, so as to provide MLI with a guaranteed return of LIBOR
plus 75 basis points (the "Return"). The paired common shares issued receive
the same dividend as the Companies' paired common stock; however, the
difference between LIBOR plus 75 basis points and the dividend payments
received by MLI will be included as an additional adjustments under the
Purchase Price Adjustment Agreement. Such adjustments were to be effected by
deliveries of additional paired common shares to, or, receipts of paired common
shares from, MLI. In the event that the market price for the paired shares is
not high enough to provide MLI with the Return, the Companies would have to
deliver additional paired shares to MLI, which would have a dilutive effect on
the capital stock of the Companies. This dilutive effect increases
significantly as the market price of the paired shares declines further below
the original purchase price. Moreover, settlement of the FEIT transaction,
whether at maturity or at an earlier date, may force the Companies to issue
paired shares at a depressed price, which may heighten this dilutive effect on
the capital stock of the Companies. Prior to the settlement, MLI shall hold any
paired common shares delivered by the Companies under the Purchase Price
Adjustment Agreement in a collateral account (the "Collateral Shares"). Under
the adjustment mechanism, the Companies delivered approximately 9,700,000
Collateral Shares in 1998, all of which were returned to the Companies when the
Companies settled in cash a portion of the adjustment transaction in December
1998.
The FEIT has been accounted for as an equity transaction with the Notional
Shares treated as outstanding from their date of issuance until the respective
date of repurchase, if any, for both basic and diluted earnings per share
purposes. For diluted earnings per share purposes, at the end of each quarterly
period, the then outstanding Reference Amount (as defined herein) is divided by
the quoted market price of a paired common share, and the excess, if
applicable, of that number of paired common shares over the Notional Shares
(the "Contingent Shares") is added to the denominator. Contingent shares are
included in the calculation of year to date diluted earnings per share weighted
for the interim periods in which they were included in the computation of
diluted earnings per share.
The "Reference Amount" equals the Initial Reference Amount plus the Return
and net of any cash distributions on the Notional Shares or any other cash paid
or otherwise delivered to MLI under the FEIT.
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Payments that reduce the Reference Amount in effect satisfy all necessary
conditions for physically settling that portion of the Reference Amount and are
accounted for in a manner similar to a treasury stock transaction. Therefore,
payments that reduce the Reference Amount are divided by the quoted market
price of a paired common share on the date of payment. The calculated number is
then multiplied by the fractional number of days in the period prior to the
payment date and the resulting number of paired common shares is included in
the calculation of diluted earnings per share for the period.
On November 11, 1998, the Companies entered into an agreement with MLI to
amend the FEIT. Under the agreement, Realty agreed to grant a mortgage of the
Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the
FEIT with cash generated in part from the sale of certain assets, including the
Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the
settlement agreement, not to sell any shares of the existing FEIT until
February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152
million ($127 million of which was from the sale of certain assets including
the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and
the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional
Shares outstanding were reduced to approximately 6,865,000 paired common shares
and there were no Contingent Shares issuable.
12. Other Expenses:
During the three months ended March 31, 1998, the Companies pursued a
strategy of diversifying into new business lines including lodging and golf.
Consistent with this strategy, Realty commenced a reevaluation of its
intentions with respect to certain existing healthcare real estate facilities
and other assets. This process included review of the valuation of facilities
in the portfolio, including those with deteriorating performance, and other
assets and receivables that were unrelated to its historical primary business.
As a result of this on-going analysis Realty identified assets which would be
held for sale and recorded provisions to adjust the carrying value of certain
facilities, other assets and receivables and a valuation reserve for certain
mortgage loans receivable. Following the quarter ended March 31, 1998 one
facility was sold and certain other assets and receivables were written off.
On July 22, 1998, the President signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits
the Companies' ability to continue to grow through use of the paired share
structure. While the Companies' use of the paired share structure in connection
with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under
the Reform Act, the ability to continue to use the paired share structure to
acquire additional real estate and operating businesses conducted with the real
estate assets (including the golf and lodging industries) was substantially
limited. In addition, during the summer of 1998, the debt and equity capital
markets available to REITs deteriorated, thus limiting the Companies' access to
cost-efficient capital.
As a result of these events, the Companies commenced a strategic
evaluation of their business which included an extensive review of their
healthcare properties and mortgage loan portfolio, an analysis of the impact of
the Reform Act, the Companies' limited ability to access the capital markets,
and the operating strategy of the Companies' existing businesses. The analysis
culminated in the development of a comprehensive restructuring plan, which was
announced on November 12, 1998, which included the sale of approximately $550
million of non-strategic healthcare assets.
Based upon the analysis described above, other expenses were recorded for
the year ended December 31, 1998, as follows:
<TABLE>
<S> <C>
Asset related: (In thousands)
Provision for assets held for sale ...................................... $33,218
Provision for real estate assets ........................................ 14,700
Provision for loss on real estate mortgage and loans receivable ......... 16,036
Provision for loss on working capital and other receivables ............. 16,400
-------
Subtotal ................................................................ 80,354
Comprehensive restructuring plan:
Employee severance ...................................................... 7,149
Write-off of capitalized pre-development costs .......................... 8,720
</TABLE>
106
<PAGE>
<TABLE>
<S> <C>
(In thousands)
External consulting fees ...................... 11,882
--------
Subtotal ...................................... 27,751
Other
Costs of transactions not consummated ......... 3,110
--------
Total ......................................... $111,215
========
</TABLE>
As a result of continued deteriorating performance at five healthcare
facilities, management committed to a plan to sell these facilities as soon as
practicable. As of December 31, 1998, Realty had recorded a provision, net of
one facility that was sold prior to the end of the year, of $33,218,000 to
reduce the carrying value of these facilities to estimated fair value less
expected costs of sale. Management expects that the remaining assets will be
disposed of during 1999.
As part of the review of the healthcare portfolio, management identified
four properties where recent events or changes in circumstances, including
physical plant and licensure issues, indicated that the carrying value of the
assets may not be recoverable. Management determined that the estimated
undiscounted future cash flows for these assets was below the carrying value
and, accordingly, Realty reduced the carrying value of these assets by
$14,700,000 to estimated fair value.
Management also identified one mortgage loan collateralized by a
rehabilitation facility where continued eroding margins and an expiring
guarantee indicated that the Companies will likely not be able to collect all
amounts due according to the contractual terms of the loan agreement.
Accordingly, the Companies provided a loan loss for this asset of approximately
$8,000,000. In addition, Realty has also provided for the establishment of an
additional $8,036,000 mortgage loan valuation allowance primarily in response
to the implementation of new government reimbursement regulations impacting
many of its operators during the second half of 1998.
Realty also held working capital and other receivables that were unrelated
to its historical primary business of healthcare financing. Management
determined that certain of these accounts were uncollectible and protracted
collection efforts for these assets would be an inefficient use of its
resources and therefore recorded provisions of approximately $16,400,000 and
then wrote off these assets.
Pursuant to its comprehensive restructuring plan, the Companies announced
plans to refocus their capital investment program by reducing healthcare
investments and ceasing development of any new hotels other than the completion
of those Inns and Suites currently under construction. Accordingly, the
Companies recorded non recurring costs of $8,720,000 for the write-off of
certain previously capitalized costs associated with lodging development, and
$7,149,000 for severance related costs attributable to workforce reductions of
87 employees at the Companies' lodging and healthcare divisions.
The Companies have also recorded $11,882,000 in costs incurred for various
consultants engaged to assist in the development and implementation of the
comprehensive restructuring plan.
The Companies also incurred approximately $3,110,000 in costs related to
the evaluation of certain acquisition targets, which the Companies are no
longer pursuing.
The total amount of the comprehensive restructuring plan charges that were
unpaid at December 31, 1998 was $16,518,000.
13. Lease Commitments
Healthcare
Realty's healthcare related land and facilities are generally leased
pursuant to non-cancelable, fixed-term operating leases expiring from 1999 to
2012. The leases ordinarily provide multiple, five-year renewal options and the
right of first refusal or the option to purchase the facilities at the greater
of the fair market value or Realty's investment at the end of the initial term
of the lease or at various times during the lease.
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<PAGE>
The healthcare related lessees are required to pay aggregate base rent
during the lease term and applicable debt service payments as well as
percentage, supplemental and additional rent (as defined in the lease
agreements). The majority of the healthcare related leases are triple net which
generally requires the lessees to pay all taxes, insurance, maintenance and
other operating costs of the land and facilities.
Future minimum rents, expected to be received by Realty during the initial
term of the healthcare related leases for the years subsequent to December 31,
1998, are as follows:
<TABLE>
<CAPTION>
Year (In thousands)
<S> <C>
1999 ......................... $146,993
2000 ......................... 143,400
2001 ......................... 137,809
2002 ......................... 133,559
2003 ......................... 131,919
2004 and thereafter .......... 433,138
</TABLE>
Lodging
The Participating Hotel Facility Leases between Realty and Operating
Company are generally long-term and provide for quarterly base or minimum rents
plus contingent or percentage rents based on quarterly gross revenue thresholds
for each hotel facility. Operating Company is generally responsible for paying
all operating expenses of the hotel facilities while Realty is responsible for
costs attributable to real estate taxes and insurance. The leases are accounted
for as operating leases. Total rental expense paid by Operating Company to
Realty under such leases was approximately $125,706,000 for the year ended
December 31, 1998 of which approximately $29,494,000 was contingent rent.
Realty's future minimum rents at December 31, 1998 receivable from
Operating Company under non-cancelable Participating Hotel Facility Leases for
the years ending December 31, are as follows:
<TABLE>
<CAPTION>
Year (In thousands)
<S> <C>
1999 .......... $224,589
2000 .......... 227,036
2001 .......... 227,036
2002 .......... 227,036
2003 .......... 113,518
</TABLE>
Realty also leases restaurants it owns to third parties. These leases are
accounted for as operating leases and expire over a period from 1999 to 2018
and provide for minimum rentals and contingent rentals based on a percentage of
annual sales in excess of stipulated amounts. Total restaurant rental income
for 1998 was $3,382,000, which consisted of $2,812,000 minimum rent and
$570,000 of contingent rent.
Realty's future minimum rents at December 31, 1998 to be received under
non-cancelable operating restaurant leases for the years ending December 31 are
as follows:
<TABLE>
<CAPTION>
Year (In thousands)
<S> <C>
1999 ......................... $ 6,050
2000 ......................... 5,646
2001 ......................... 5,015
2002 ......................... 4,305
2003 ......................... 3,404
2004 and thereafter .......... 13,238
</TABLE>
Realty is also committed to third parties for certain ground lease
arrangements which contain contingent rent provisions based upon revenues and
also certain renewal options at fair market value at the conclusion of the
initial lease terms. The leases extend for varying periods through 2014. Future
minimum rental payments required under operating ground leases that have
initial or remaining non-
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cancelable lease terms in excess of one year at December 31, 1998 follow:
<TABLE>
<CAPTION>
Year (In thousands)
<S> <C>
1999 ......................... $ 364
2000 ......................... 356
2001 ......................... 356
2002 ......................... 294
2003 ......................... 272
2004 and thereafter .......... 1,337
</TABLE>
Total rent for ground leases was $297,000 for 1998.
Operating Company leases certain non-hotel, real estate and equipment for
the hotels' operations under various lease agreements. The leases extend for
varying periods through 2003 and generally are for a fixed amount each month.
Total rent expense for operating leases was approximately $1,561,000 for the
period from July 17, 1998 to December 31, 1998.
Operating Company's future minimum rents at December 31, 1998 payable
under non-hotel non-cancelable operating leases for the years ending December
31 are as follows (in thousands):
<TABLE>
<CAPTION>
Year (In thousands)
<S> <C>
1999 ......................... $3,033
2000 ......................... 2,800
2001 ......................... 2,220
2002 ......................... 1,977
2003 ......................... 1,787
2004 and thereafter .......... 298
</TABLE>
14. Contingencies
Litigation
On January 8, 1998 the Companies received notice that they were named as
defendants in an 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 (the "Texas Court"), and on January 20, 1998 the Companies
received notice that they were named as defendants in an action entitled Adele
Brody v. William J. Razzouk, et al., Civil Action No. 98CI-00456 filed January
12, 1998 in the Texas Court. The complaints, which were consolidated into one
action (the "Action"), (i) alleged, in part, that La Quinta and its directors
violated their fiduciary duties of care and 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) sought injunctive relief
enjoining the merger with La Quinta and compensatory damages. The parties
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 set forth the principal bases for the settlement,
which included 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 in the joint proxy
statement/prospectus prepared for the shareholder meetings which described the
FEIT with MLI.
The parties have negotiated and entered into a Stipulation and Agreement
of Compromise, Settlement and Release (the "Stipulation" or "Settlement"),
dated on or about October 8, 1998, which contains the terms of settlement of
the Action. On October 8, 1998, the Texas Court entered an Order Re:
Preliminary Approval ("Order") which, among other things, (i) preliminarily
approved the Settlement; (ii) conditionally approved the Settlement Class;
(iii) approved the Notice of Pendency and Settlement of Class Action for
mailing to the Settlement Class; and (iv) scheduled a Settlement Hearing. On
November 9, 1998, the Texas Court entered an amended Order which set the date
for the Settlement Hearing to January 19, 1999. The Texas Court has the right
to change the date of the Settlement Hearing without further notice to the
Settlement Class. The Settlement is contingent upon Final Court Approval
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<PAGE>
of the Settlement (as defined in the Stipulation). At the Settlement Hearing,
the parties will ask the Texas Court to enter a Final Judgment which will,
among other things, (i) finally approve the Settlement; (ii) declare that the
Action and the Settled Claims (as defined in the Stipulation) are finally and
fully compromised and settled; (iii) deem that the Representative Plaintiffs,
the Settlement Class and the Settlement Class Members have fully, finally and
forever settled and released any and all Settled Claims against the Released
Parties (as defined in the Stipulation); and (iv) dismiss the Action on the
merits and with prejudice. Pursuant to the settlement, La Quinta on February
22, 1999, paid the class plaintiffs attorney's fees totaling $700,000 which
were awarded by the Texas court.
The Companies are a party to a number of other claims and lawsuits arising
out of the normal course of business; the Companies believe that none of these
claims or pending lawsuits, either individually or in the aggregate, will have
a material adverse affect on the Companies' business or on their consolidated
financial position or results of operations.
Paired Share REIT Legislation
On July 22, 1998, the President of the United States of America signed
into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the
"Reform Act"). Included in the Reform Act is a freeze on the grandfathered
status of paired share REITs such as the Companies. Under this legislation, the
anti-pairing rules provided in the Internal Revenue Code of 1986, as amended
(the "Code"), apply to real property interests acquired after March 26, 1998 by
the Companies, or by a subsidiary or partnership in which a ten percent or
greater interest is owned by the Companies, unless (1) the real property
interests are acquired pursuant to a written agreement that 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.
Under the Reform Act, the properties acquired in connection with the July
17, 1998 La Quinta Merger and in connection with the merger on May 29, 1998
with Cobblestone generally are not 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 or described in a public
announcement or in a filing with the SEC on or before March 26, 1998, is
subject to the anti-pairing rules. Moreover, under the Reform Act any otherwise
grandfathered property will become subject to the anti-pairing rules if the
rent on a lease or renewal with respect to such property is determined to
exceed an arm's length rate. In addition, the Reform Act also provides that a
property held by the Companies that is not subject to the anti-pairing rules
will become subject to such rules in the event of 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 acquired from La
Quinta and Cobblestone), the fair market value of the property on the date it
was acquired by the Companies.
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 restriction on property improvements applies to the
properties acquired from La Quinta and Cobblestone, as well as all other
properties owned by the Companies, and limits the ability of the Companies to
improve or change the use of those properties after December 31, 1999. The
Companies are considering various steps which they might take in order to
minimize the effect of the Reform Act. As part of their restructuring plan
announced in November 1998, the Companies intend to operate their healthcare
and lodging business using the paired share structure until the healthcare
spin-off takes place. Restructuring the operations of Realty and Operating
Company, however, to comply with the legislation may cause the Companies to
incur substantial tax liabilities, to recognize an impairment loss on their
goodwill asset or otherwise adversely affect the Companies.
Other Events
On August 3, 1998, Abraham D. Gosman resigned his position as Director and
Chairman of the Boards of Directors of the Companies and Chief Executive
Officer and Treasurer of Operating Company. In connection with his resignation,
Mr. Gosman is seeking severance payments and the Companies are evaluating
whether certain severance or other payments should be made to Mr. Gosman. As
part of this
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evaluation, the Companies are considering the applicability of Mr. Gosman's
employment contract and whether such severance or other payments are
appropriate. The results of the Companies' evaluation are currently uncertain
and depending upon the results of this evaluation and the results of ongoing
discussions with Mr. Gosman, Mr. Gosman may initiate litigation against the
Companies.
The ultimate outcome of this matter is not predictable and management is
not able to make a meaningful estimate of the amount or range of loss that
could result from an unfavorable outcome of this matter. It is possible that an
unfavorable outcome of this matter could have a material adverse effect on the
Companies' results of operations in a particular quarter or annual period.
However, the Companies believe any such claim, even if materially adverse to
the Companies' results of operations, should not have a material adverse effect
on the Companies' financial position.
15. Stock Option and Benefit Plans
The Meditrust Corporation Amended and Restated 1995 Share Award Plan (the
"Meditrust Corporation Plan") provides that the maximum number of common shares
(the "Meditrust Corporation Shares") that may be issued under the plan shall
not exceed the sum of 3,616,741 plus an amount equal to 5% of the Meditrust
Corporation Shares outstanding from time to time. The Meditrust Operating
Company Amended and Restated 1995 Share Award Plan (the "Meditrust Operating
Plan" and together with the Meditrust Corporation Plan, the "Plans") provides
that the maximum number of common shares (the "Meditrust Operating Shares")
that may be issued under the plan shall not exceed an amount equal to 5% of the
Meditrust Operating Shares outstanding from time to time.
Under each of the Plans, the maximum number of options and stock
appreciation rights that may be granted to an eligible person during any one
year period shall not exceed 450,000 subject to certain adjustments. Also under
each of the Plans, awards are to be issued either as Options, Dividend
Equivalents, Stock Appreciation Rights, Restricted Stock Awards, Performance
Share Awards or Stock Bonuses (each, an "Award"). At December 31, 1998, under
the Meditrust Corporation Plan and the Meditrust Operating Plan, 9,387,000 and
5,334,000 shares, respectively, were available for future grant.
Each Award expires on such date as determined by management and the
Compensation Committee of the Board of Directors (the "Committee"), but in the
case of options or other rights to acquire paired common shares, not later than
10 years after the date of the Award. Options granted under each of the Plans
vest according to a schedule determined by the Committee. The Committee may
authorize the deferral of any payment of cash or issuance of paired common
shares under each of the Plans at the election and request of a participant. Up
to 4,000,000 shares are available under each of the Plans to be issued as
incentive stock options. Directors, officers, employees and individual
consultants, advisors or agents who render or who have rendered bona fide
services to the corporation are eligible to participate in the plan for such
corporation.
The Committee is provided discretion to accelerate or extend the
exercisability or vesting of any or all such outstanding Awards within the
maximum 10 year period, including in the event of retirement, death or
termination of employment. Options outstanding at December 31, 1998 expire in
2001 through 2008.
Under each of the Meditrust Corporation Plan and the Meditrust Operating
Plan, a like number of shares of the Meditrust Corporation Shares or Meditrust
Operating Shares, as the case may be, shall be purchased from the other
corporation or arrangements shall be made with such other corporation for the
simultaneous issuance by the other corporation of the same number of common
shares as the number of common shares issued in connection with an Award. Under
each of the Plans, the option price shall not be less than the par value of the
Meditrust Corporation Shares and the Meditrust Operating Shares subject to the
Award. In the event of a "change in control," as defined in each of the Plans,
all options outstanding will become fully vested.
During 1998, 315,000 restricted shares of the Companies' stock were issued
to key employees under the Plans. Restrictions generally limit the sale or
transfer of shares during a restricted period, not exceeding eight years.
Participants vest in the amounts granted on the earliest of eight years after
the date of issuance, upon achieving the performance goals as defined, or as
the Boards of Directors may determine.
111
<PAGE>
Unearned compensation was charged for the market value of the restricted
shares on the date of grant and is being amortized over the restricted period.
The unamortized unearned compensation value is shown as a reduction of
shareholders' equity in the accompanying consolidated and combined balance
sheets.
The Companies apply APB 25 and related Interpretations in accounting for
these Plans. Accordingly, no compensation cost has been recognized for the
fixed stock option plans.
Options to purchase 864,000 Meditrust Corporation Shares and 168,000
Meditrust Operating Shares were exercisable as of December 31, 1998.
Had compensation cost for the Companies' stock option-based compensation
plans been determined based on the fair value at the grant dates for Awards
under those plans consistent with the method pursuant to SFAS 123, the
Companies' net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------
1998 1997 1996
(In thousands, except per share amounts) -------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) available to paired common
shareholders:
As reported ............................... $ (161,591) $ 162,412 $ 157,976
Pro forma* ................................ (162,120) 160,586 157,209
Earnings (loss) per paired common share:
Basic as reported ......................... $ (1.34) $ 2.14 $ 2.21
Diluted as reported ....................... (1.29) 2.12 2.20
Basic pro forma* .......................... (1.35) 2.11 2.20
Diluted pro forma* ........................ (1.29) 2.09 2.19
</TABLE>
* The pro forma effect of compensation costs determined using the fair value
based method are not indicative of future amounts when the new method will
apply to all outstanding vested and non-vested Awards.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively. Dividend yield of 14.1, 7.9 and 8.2 percent, and expected
volatility of 33, 16 and 16 percent for each year, respectively. Risk-free
interest rates of 4.4 percent in 1998, and ranging from 5.9 to 6.7 percent in
1997, and 5.9 to 6.6 percent for 1996; and an expected life of four years for
each grant.
112
<PAGE>
A summary of the Companies' stock option activity and related information
follows:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
------------------------ ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
Fixed options ----------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year .......... 3,811 $ 30 1,171 $ 25 1,593 $ 24
Granted ..................... 2,934 13 2,639 33
Options from merger ......... 452 4 288 17 127 27
Exercised ................... (611) 8 (272) 24 (477) 25
Forfeited ................... (1,564) 31 (15) 25 (72) 27
------ ------ ----- ------ ----- ------
Outstanding at
end of year ................ 5,022 $ 20 3,811 $ 30 1,171 $ 25
------ ------ ----- ------ ----- ------
Options exercisable
at year end ................ 1,032 1,225 509
------ ----- -----
Weighted average fair
value of options granted
during the year ............ $ 1.44 $ 2.71 $ 2.52
------ ------ ------
</TABLE>
The weighted-average exercise price equals the weighted-average grant date
fair value as all options were granted at fair market value on the date of
grant.
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
at 12/31/98 Contractual Life Price at 12/31/98 Price
Range of exercise prices ------------- ------------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
$21.85.................... 18,872 2.81 $ 21.85 18,872 $ 21.85
$27.46.................... 8,813 5.70 27.46 8,813 27.46
$25.07-$25.17............. 401,743 6.22 25.08 401,743 25.08
$24.97-$29.44............. 84,327 7.53 27.53 84,327 27.53
$30.58-$36.46............. 1,407,678 8.61 32.80 350,266 32.80
$12.625-$29............... 150,600 4.82 17.90 150,600 17.90
$3.95-$4.42............... 17,364 8.47 4.20 17,364 4.20
$13.44.................... 2,933,500 9.95 13.44
--------- ---- -------- --------- - -----
5,022,897 9.04 $ 20.19 1,031,985 $ 26.49
========= ==== ======== ========= ========
</TABLE>
Retirement and Other Benefits
Realty entered into a non-qualified Trustee Retirement Plan (the "Plan")
during 1996. The Plan provides eligible Trustees defined retirement benefits
based on Trustee fees and years of service. At December 31, 1998 and 1997, the
present value of the accumulated benefit obligation was $1,802,000 and
$1,616,000, respectively. Retirement expense, including prior amortization cost
and a current provision for the Plan, totaled $1,214,000, $346,000 and $350,000
in the accompanying income statements for 1998, 1997 and 1996, respectively.
On December 10, 1998, the Board of Directors of Meditrust Corporation
voted to accept the recommendations of the Compensation Committee to make a
payment, pursuant to the Meditrust Corporation Plan, of unrestricted stock of
The Meditrust Companies to certain Directors that previously qualified under
the Meditrust Trustee Retirement Plan, in an amount equal to the present value
of each individual's accumulated benefit.
113
<PAGE>
During 1995, Realty entered into a Split-Dollar Life Insurance Agreement
with a trust established by the then Chairman and Chief Executive Officer,
pursuant to which Realty has agreed to advance policy premiums on life
insurance policies paying a death benefit to the trust. Realty is entitled to
reimbursement of the amounts advanced, without interest, which right is
collateralized by an assignment of the life insurance policies and a personal
guarantee of the former Chairman in the amount of the excess, if any, of the
premiums paid by Realty over the cash surrender value of the insurance
policies.
The Companies have savings plans which qualify under Section 401(K) of the
Internal Revenue Code under which eligible employees are entitled to
participate up to a specified annual maximum contribution level. The Companies
match a portion of such contributions which amounted to $320,000, $106,000 and
$90,000, for the years ended December 31, 1998, 1997 and 1996, respectively.
The La Quinta Retirement Plan is a defined benefit pension plan covering
all La Quinta employees. Benefits accruing under this plan are determined
according to a career average benefit formula which is integrated with Social
Security benefits. For each year of service as a participant in this plan, an
employee accrues a benefit equal to one percent of his or her annual
compensation plus .65 percent of compensation in excess of the Social Security
covered compensation amount. The Companies' funding policy for this plan is to
annually contribute the minimum amount required by federal law.
The following table sets forth the funded status and amounts recognized in
the Companies' combined financial statements for the La Quinta Retirement Plan
at December 31, 1998:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $12,836 .... $ (14,952)
=========
Projected benefit obligation for services rendered to date .............. $ (18,802)
Plan assets at fair value, primarily marketable securities .............. 19,020
---------
Projected plan assets in excess of benefit obligation ................... 218
Unrecognized net gain from past experiences different from those assumed (1,281)
Prior service costs ..................................................... (1,122)
---------
Accrued pension costs ................................................... $ (2,185)
=========
</TABLE>
The assumptions used in the calculations shown above were:
<TABLE>
<CAPTION>
1998
----------------
<S> <C>
Discount rate ........................................ 6.75%
Expected long-term rate of return on assets .......... 8.00%
Rate of increase in compensation levels .............. 5.00%--6.00%
</TABLE>
The net periodic pension cost for the La Quinta Retirement Plan was
approximately $1,100,000 for the period July 18, 1998 to December 31, 1998. The
net periodic pension cost for the La Quinta Retirement Plan included the
following components for the year ended December 31, 1998:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Service cost (benefits earned during the period) .......... $ 1,960
Interest cost on projected benefit obligation ............. 1,218
Actual return on plan assets .............................. (3,087)
Net amortization and deferral ............................. 186
Net deferred asset gain ................................... 1,879
--------
Net periodic pension cost ................................. $ 2,156
========
</TABLE>
Effective January 1, 1999, the Companies converted their existing
retirement plan to a cash balance pension plan. Existing accrued benefits under
the existing retirement plan were converted into a beginning account balance as
of January 1, 1999. Under the new cash balance pension plan, the Companies will
make quarterly contributions to the account balances calculated as a percentage
of quarterly employee compensation based on years of service. Interest credits
to the account balances will be based on one year U.S. Treasury Securities. The
account balances will be made available to employees after they reach age 55.
114
<PAGE>
La Quinta maintained a trust account intended for use in settling benefits
due under the Supplemental Retirement Plan and Trust ("SERP") which covered a
select group of management employees. As a result of the La Quinta Merger, a
"Potential Change in Control", as defined in the SERP document, occurred. This
event required the Companies to make a contribution to the trust sufficient to
meet funding obligations as described in the SERP document within 90 days of
signing the La Quinta Merger documents. On April 3,1998, La Quinta deposited
$2,520,000 into the trust account to meet the initial funding requirement
defined under the provisions of the SERP document. On December 31,1998, the
trustee paid all benefits due under this plan to the management employees
covered.
16. Income Taxes
As a REIT, Realty is taxed only on undistributed REIT income. During the
year ended December 31, 1998, Realty distributed at least 95% of its REIT
taxable earnings to its shareholders.
Section 382 of the Internal Revenue Code of 1986, as amended, restricts a
corporation's ability to use its net operating loss ("NOL") carryforwards
following certain "ownership changes." Operating Company determined that such
an ownership change occurred as a result of the Santa Anita, Cobblestone and La
Quinta Mergers, respectively, and accordingly the amount of NOL carryforwards
available for use in any particular taxable year will be limited. To the extent
that Operating Company does not utilize the full amount of the annual NOL
limit, the unused amount may be used to offset taxable income in future years.
NOL carryforwards expire 15 years after the tax year in which they arise, and
the last of Operating Company's NOL carryforwards will expire in 2013. A
valuation allowance is provided for the full amount of the NOL's as the
realization of tax benefits from such NOL's is not assured.
Operating Company recorded a deferred tax asset of $11,156,000 and a
deferred tax liability of $5,485,000 as a result of the La Quinta Merger. A
valuation allowance is provided for $11,156,000 of the deferred tax asset, as
realization of such asset is not assured.
Operating Company has provided a valuation allowance with respect to
certain post-La Quinta Merger increases in deferred tax assets as realization
of these amounts are not assured.
Components of deferred income taxes for Operating Company as of December
31, 1998 and 1997 are as follows:
Deferred tax assets for continuing operations:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
(In thousands) -------------- -------------
<S> <C> <C>
Federal net operating loss carryovers ............................. $ 11,099 $ 7,270
State net operating loss carryovers ............................... 1,488 1,160
Self-insurance deductible when paid ............................... 8,821
Vacation pay deductible when paid ................................. 1,391
Pension plan ...................................................... 592
Restructuring accruals deductible when paid ....................... 782
Other ............................................................. 442
Valuation allowance ............................................... (20,460) (8,430)
--------- --------
Total deferred tax assets ........................................ $ 4,155 $ --
--------- --------
Deferred tax liabilities for continuing operations:
Amortization of workforce-in-place and reservation system ......... $ 4,650
---------
Total deferred tax liabilities ................................... $ 4,650
---------
</TABLE>
A reconciliation of Operating Company's total income tax provision
(benefit) for calendar year 1998 and the initial period ended December 31, 1997
to the statutory federal corporation income tax rate of 35% and applicable
state tax rates as follows:
115
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
(In thousands) ------------- --------------
<S> <C> <C>
Computed "expected" tax provision .................. $ (8,628) $ --
State tax provision, net of federal effect ......... (887)
Nondeductible compensation ......................... 878
Nondeductible meals and entertainment .............. 79
Nondeductible amortization ......................... 304
Valuation allowance ................................ 873
Gain from discontinued operations .................. 2,581 --
-------- ------
Total income tax benefit ........................... $ (4,800) $ --
-------- ------
</TABLE>
17. Earnings Per Share
Combined consolidated earnings per share is computed as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
(In thousands, except per share amounts) -------------------------------------------
1998 1997 1996
----------- ------------- -------------
<S> <C> <C> <C>
Income from continuing operations ......................... $141,080 $ 161,962 $ 157,976
Preferred stock dividends ................................. (8,444) -- --
-------- --------- ---------
Income from continuing operations available to
common shareholders ...................................... $132,636 $ 161,962 $ 157,976
======== ========= =========
Average outstanding shares of paired common stock ......... 120,515 76,070 71,445
Dilutive effect of:
Contingently issuable shares ............................. 4,757
Stock options ............................................ 236 454 306
-------- --------- ---------
Dilutive potential paired common stock .................... 125,508 76,524 71,751
======== ========= =========
Earnings per share:
Basic .................................................... $ 1.10 $ 2.13 $ 2.21
======== ========= =========
Diluted .................................................. $ 1.06 $ 2.12 $ 2.20
======== ========= =========
</TABLE>
Options to purchase 3,471,000, 27,000 and 17,000 paired common shares at
prices ranging from $27.98 to $43.81 were outstanding during the years ended
December 31, 1998, 1997 and 1996 respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options, which expire on
dates ranging from October 2006 to October 2007, were still outstanding at
December 31, 1998.
Convertible debentures outstanding for the years ended December 31, 1998,
1997 and 1996 of 6,579,000, 9,600,000 and 10,289,000, respectively, are not
included in the computation of diluted EPS because the inclusion would result
in an antidilutive effect.
Meditrust Corporation earnings per share is computed as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
(In thousands, except per share amounts) ---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income from continuing operations .................. $160,931 $162,324 $157,976
Preferred stock dividends .......................... (8,444) -- --
-------- -------- --------
Income from continuing operations available to
common shareholders ............................... $152,487 $162,324 $157,976
======== ======== ========
Average outstanding shares of common stock ......... 121,820 76,274 71,445
Dilutive effect of:
Contingently issuable shares ...................... 4,757
Stock options ..................................... 236 733 306
-------- -------- --------
Dilutive potential common stock .................... 126,813 77,007 71,751
======== ======== ========
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
(In thousands, except per share amounts) ------------------------------------
Earnings per share:
<S> <C> <C> <C>
Basic ................................... $ 1.25 $ 2.13 $ 2.21
====== ====== ======
Diluted ................................. $ 1.20 $ 2.11 $ 2.20
====== ====== ======
</TABLE>
Options to purchase 3,471,000, 27,000 and 17,000 paired common shares at
prices ranging from $27.98 to $43.81 were outstanding during the years ended
December 31, 1998, 1997 and 1996, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options, which expire on
dates ranging from October 2006 to October 2007, were still outstanding at
December 31, 1998.
Convertible debentures outstanding for the years ended December 31, 1998,
1997 and 1996 of 6,579,000, 9,600,000 and 10,289,000, respectively, are not
included in the computation of diluted EPS because the inclusion would result
in an antidilutive effect.
Meditrust Operating Company earnings per share is computed as follows:
<TABLE>
<CAPTION>
For the year ended December
31,
(In thousands, except per share amounts) --------------------------
1998 1997
------------- ----------
<S> <C> <C>
Loss from continuing operations .................... $ (19,851) $ (362)
Preferred stock dividends .......................... -- --
--------- -------
Loss from continuing operations available to
common shareholders ............................... $ (19,851) $ (362)
========= =======
Average outstanding shares of common stock ......... 120,515 82,490
Dilutive effect of:
Contingently issuable shares ...................... --
Stock options ..................................... -- --
--------- -------
Dilutive potential common stock .................... 120,515 82,490
========= =======
Earnings per share:
Basic ............................................. $ (0.16) $ (0.01)
========= =======
Diluted ........................................... $ (0.16) $ (0.01)
========= =======
</TABLE>
Options to purchase 18,000 paired common shares at $29.00 were outstanding
during the year ended December 31, 1998, but were not included in the
computation of diluted EPS because the options' exercise price was greater then
the average market price of the common shares. The options, which expire in
December 1999, were still outstanding at December 31, 1998.
Convertible debentures outstanding for the years ended December 31, 1998,
1997 and 1996 of 6,579,000, 9,600,000 and 10,289,000, respectively, are not
included in the computation of diluted EPS because the inclusion would result
in an antidilutive effect.
Operating Company holds common shares of Realty which are unpaired
pursuant to a stock option plan approved by the shareholders. The common shares
held totaled 1,305,000 as of December 31, 1998. These shares affect the
calculations of Realty's net income per common share but are eliminated in the
calculation of net income per paired common share for The Meditrust Companies.
18. Transactions between Realty and Operating Company
Operating Company leases hotel facilities from Realty and its
subsidiaries. The Participating Hotel Facilities Lease arrangements between
Operating Company and Realty include base and additional rent provisions and
require Realty to assume costs attributable to property taxes and insurance.
Operating Company has entered into a royalty arrangement with Realty for
the use of the La Quinta tradename at a rate of approximately 2.5% of gross
revenues, as defined in the agreement.
Subsequent to the La Quinta Merger, Realty distributed certain assets,
including two newly constructed lodging facilities, to Operating Company with
an established value of $33,162,000. Realty and Operating Company accounted for
this transaction as a property distribution and contribution, respectively.
117
<PAGE>
During the year, Realty and Operating Company issued shares under the
Plans. Amounts due from Realty and Operating Company in connection with Awards
of shares under the Plans are shown as a reduction of shareholders' equity in
the accompanying consolidated balance sheets of Realty and Operating Company,
respectively.
In connection with certain acquisitions, Operating Company issued shares
to Realty and recorded a receivable. Due to the affiliation of Realty and
Operating Company, the receivable from Realty has been classified in Operating
Company's shareholders' equity.
Operating Company delivered a note to Realty for $13,128,000 on November
5, 1997. The purpose of the note was to adjust the relative values of Meditrust
and Meditrust Acquisition Company in order to ensure that the Santa Anita
Merger qualified as a tax free reorganization. This transaction is eliminated
in the combined consolidated financial statements. However, due to the
affiliation of Realty and Operating Company, the note has been classified in
shareholders' equity in Realty and a note payable has been recorded in
Operating Company. The note is due on November 1, 2009 and bears interest at
6.42%. Interest is payable quarterly in arrears.
As of December 31, 1998, net liabilities of discontinued operations of
Operating Company include an intercompany payable to Realty of $41,226,000.
This intercompany balance bears interest at 6.42%. In addition, there are
intercompany balances related to working capital items that are not interest
bearing.
Operating Company owns 1,305,377 shares of Realty as a result of
acquisition activity.
Realty provides certain services to Operating Company primarily related to
general tax preparation and consulting, legal, accounting, and certain aspects
of human resources. In the opinion of management, the costs associated with
these services were not material and have been excluded from the financial
statements.
19. Quarterly Financial Information (Unaudited)
The following quarterly financial data summarizes the unaudited quarterly
results for the Companies for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Quarter Ended 1998
(In thousands, except per share amounts) ------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue ....................................... $ 108,576 $ 87,629 $ 216,202 $226,970
Income (loss) from continuing operations ...... 44,266 45,893 (18,453) 69,374
Discontinued operations ....................... 7,355 2,510 (176,338) (127,754)
Net income (loss) ............................. 51,621 48,403 (194,791) (58,380)
Basic earnings per Paired Common Share:
Income (loss) from continuing operations ..... 0.48 0.45 ( .16) 0.44
Discontinued operations ...................... 0.08 0.03 (1.26) (.86)
Net income (loss) ............................ 0.56 0.48 (1.42) (.42)
Diluted earnings per Paired Common Share:
Income (loss) from continuing operations ..... 0.48 0.44 ( .16) 0.42
Discontinued operations ...................... 0.08 0.03 (1.26) (.81)
Net income (loss) ............................ 0.56 0.47 (1.42) (.39)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended 1997
(In thousands, except per share amounts) -----------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue .................................... $ 67,965 $ 71,014 $ 74,744 $ 75,315
Income from continuing operations .......... 41,053 41,947 42,052 36,910
Discontinued operations .................... -- -- -- 450
Net income ................................. 41,053 41,947 42,052 37,360
Basic earnings per Paired Common Share:
Income from continuing operations ......... 0.56 0.57 0.57 0.44
Discontinued operations ................... -- -- -- 0.01
Net income ................................ 0.56 0.57 0.57 0.45
Diluted earnings per Paired Common Share:
Income from continuing operations ......... 0.55 0.56 0.56 0.44
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended 1997
(In thousands, except per share amounts) ---------------------------------------------
<S> <C> <C> <C> <C>
Discontinued operations ................. -- -- -- 0.01
Net income .............................. 0.55 0.56 0.56 0.45
</TABLE>
20. Segment reporting
The following is provided pursuant to SFAS. 131:
Description of the types of products and services from which each reportable
segment derives its revenues
The Companies have two reportable segments: Healthcare and Lodging. The
Healthcare segment generally invests in healthcare facilities throughout the
United States by providing financing to healthcare operators. This financing
takes the form of mortgages, development loans, and sale/leaseback
transactions. The Lodging segment essentially includes the ownership,
development and operation of hotels in the mid-priced segment of the lodging
industry under the brand name La Quinta, which is concentrated in the western
and southern United States. La Quinta Inns appeal to guests who desire
high-quality rooms, convenient locations and attractive prices, but who do not
require banquet and convention facilities, in-house restaurants, cocktail
lounges or room service. There is no single competitor or group of competitors
of La Quinta that is dominant in the lodging industry. Competitive factors in
the industry include reasonableness of room rates, quality of accommodations,
service level and convenience of locations.
Measurement of segment profit or loss and segment assets
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Companies evaluate
performance based on contribution from each reportable segment. Contribution is
defined by the Companies as income from operations before interest expense,
depreciation, amortization, gains and losses on sales of assets, provisions for
losses on disposal or impairment of assets, income or loss from unconsolidated
entities, income taxes and nonrecurring income and expenses. The measurement of
each of these segments is made on a combined basis with revenue from external
customers, and excludes lease income between Realty and Operating Company. The
Companies account for Realty and Operating Company transactions as if the
transactions were to third parties, that is, at current market prices.
Factors management used to identify the enterprise's reportable segments
The Companies reportable segments are strategic business segments
operating in different industries and offering different products and services.
They are managed separately because each business requires different skill
levels and marketing strategies. The Lodging segment was acquired as a unit,
and the management at the time of the acquisition was retained. As described in
Note 5, the Golf and Horseracing segments have been reported as discontinued
operations in the accompanying financial statements.
The following table presents information used by management by reported
segment. The Companies do not allocate interest expense, income taxes or
unusual items to segments.
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands, except per share amounts) ---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Healthcare:
Rental income (a) ........................... $191,874 $137,868 $109,119
Interest income ............................. 153,093 151,170 144,905
Rental property operating costs ............. (7,199) (210) --
General and administrative expenses ......... (21,436) (10,257) (8,625)
--------- --------- --------
Healthcare Contribution ..................... $316,332 $278,571 $245,399
--------- --------- --------
Lodging:
Room revenue ................................ $241,868 -- --
Guest services and other .................... 16,555 -- --
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands, except per share amounts) ----------------------------------------
Operating expenses ................................... (125,246) -- --
<S> <C> <C> <C>
Rental property operating costs ...................... (8,439) -- --
------ -- --
Lodging Contribution ................................. $ 124,738 -- --
---------- -- --
Combined Contribution ................................ 441,070 278,571 245,399
---------- ------- -------
Reconcilation to Combined Consolidated
Financial Statements:
Interest expense ..................................... 178,458 87,412 64,216
Depreciation and amortization ........................ 87,228 26,838 21,651
Amortization of goodwill ............................. 13,265 2,349 1,556
Loss on sale of securities ........................... 4,159 -- --
Gain on sale of assets ............................... (52,642) -- --
Income from unconsolidated joint venture ............. (906) 10 --
Other income ......................................... (35,987) -- --
Other expenses ....................................... 111,215 -- --
---------- ------- -------
304,790 116,609 87,423
---------- ------- -------
Income from continuing operations before benefit for
income taxes ........................................ 136,280 161,962 157,976
Income tax benefit ................................... (4,800)
---------- ------- -------
Income from continuing operations .................... 141,080 161,962 157,976
Discontinued operations (Note 5):
Income from discontinued operations ................. 10,721 450
Loss on disposal of discontinued operations ......... (67,913)
Provision for loss on disposition of discontinued
operations ......................................... (237,035)
---------- ------- -------
Net income (loss) .................................... (153,147) 162,412 157,976
Preferred stock dividends ............................ (8,444)
---------- ------- -------
Net income (loss) available to Paired Common
shareholders ........................................ $ (161,591) $162,412 $157,976
========== ======== ========
</TABLE>
- - ------------
(a) Revenue from segments below the quantitative thresholds are attributable to
two operating segments of the Companies. Those segments include a property
management business, which manages medical office buildings not owned by
the Healthcare segment, and rents received from restaurant properties
leased to third parties included in the Lodging segment. None of those
segments have ever met any of the quantitative thresholds for determining
reportable segments.
The following table presents assets by reported segment and in the aggregate.
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
(In thousands, except per share amounts) ------------- -------------
<S> <C> <C>
Healthcare gross real estate investments .............................. $2,738,927 $3,060,604
Lodging gross real estate investments ................................. 2,594,956
Accumulated depreciation, valuation allowances and provisions ......... (247,147) (124,832)
---------- ----------
Net real estate by reportable segment ................................. 5,086,736 2,935,772
Other assets:
Cash and cash equivalents ............................................. 305,456 43,732
Fees, interest and other receivables .................................. 54,712 23,650
Goodwill, net ......................................................... 486,051 194,893
Net assets of discontinued operations ................................. 305,416
</TABLE>
120
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------
221,180 82,236
Other assets, net ......... ------------- -------------
<S> <C> <C>
Total assets .............. $6,459,551 $3,280,283
========== ==========
</TABLE>
The following table reconciles revenue to the accompanying financial
statements.
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------
1998 1997 1996
(In thousands, except per share amounts) ----------- ----------- -----------
<S> <C> <C> <C>
Healthcare:
Rental income ............................ $191,874 $137,868 $109,119
Interest income .......................... 153,093 151,170 144,905
-------- -------- --------
Total healthcare revenue ................. 344,967 289,038 254,024
Total lodging revenue .................... 258,423 -- --
Other income ............................. 35,987 -- --
-------- -------- --------
Total revenue ............................ $639,377 $289,038 $254,024
======== ======== ========
</TABLE>
21. Subsequent Events
On January 14, 1999, the Board of Directors of Realty declared a dividend
of $0.46 per share of common stock payable on February 16, 1999 to shareholders
of record on January 29, 1999. This dividend relates to the quarter ended
December 31, 1998.
On February 11, 1999, the Companies signed a definitive agreement to sell
the Cobblestone Golf Group for aggregate consideration, including assumed debt,
of approximately $393,000,000. The transaction is expected to close by the end
of the first quarter of 1999.
On March 10, 1999, Realty reached a second agreement with its bank group
to amend its New Credit Agreement. The second amendment, which is subject to
the successful completion of the sale of Cobblestone Golf Group, provides for a
portion of the sale proceeds to be applied to settle a portion of the FEIT. The
second amendment also provides for, among other things, deletion of limitations
on certain healthcare investments and lowering the Tranche A loan commitments
to $850,000,000.
In addition, on March 10, 1999, the Companies entered into an agreement
with MLI and certain of its affiliates which stated that the proceeds from the
sale of Cobblestone Golf Group in excess of $300,000,000 will be used to
purchase all or a portion of the Notional Shares outstanding. Merrill Lynch has
agreed not to sell any Notional Shares until March 31, 1999 while the Companies
complete the sale of Cobblestone Golf Group.
121
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Boards of Directors of
Meditrust Corporation and Meditrust Operating Company:
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of The Meditrust Companies, Meditrust
Corporation, and Meditrust Operating Company at December 31, 1998 and 1997, and
the results of The Meditrust Companies and Meditrust Corporation's operations
and their cash flows for each of the three years in the period ended December
31, 1998, and the results of Meditrust Operating Company's operations and its
cash flows for the year ended December 31, 1998 and the initial period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Companies' management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
February 8, 1999, except for Note 21, as to which the date is March 10, 1999.
122
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Directors of The Meditrust Companies:
Our report on the financial statements of The Meditrust Companies, Meditrust
Corporation and Meditrust Operating Company, is included in this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index to this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
February 8, 1999
123
<PAGE>
MEDITRUST CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Charged as Additions &
Revenue Adjustments
Balance at Reductions or Charged Balance at
Beginning of Costs and To/From Other End of
Description Period Expenses Accounts Deductions Period
- - -------------------- -------------- --------------- ---------------------- --------------------- -------------
<S> <C> <C> <C> <C> <C>
Valuation allowance
included in Other
Assets for the year
ended December 31:
1996 ............... $4,232,523 (3,075,328)(B) $1,157,195
1997 ............... $1,157,195 $ 7,779,772 $ 8,054,572(A) (8,000,000)(B) $8,991,539
1998 ............... $8,991,539 $16,400,000 $ (2,955,000)(C) $ 21,936,412(B) $ 500,127
</TABLE>
(A) Reclassified from valuation allowance included in Accrued Expenses and
Other Liabilities.
(B) Relates to receivables and working capital loans charged off.
(C) Reclassified to Loan Valuation allowance.
<TABLE>
<CAPTION>
Additions
Balance at Charged to Additions Balance at
Beginning of Costs and Charged To End of
Description Period Expenses Other Accounts Deductions Period
- - ------------------------- -------------- ------------ ---------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
Valuation allowance
included in Accrued
Expenses and Other
Liabilities for the year
ended December 31:
1996 .................... $ 9,714,572 $(1,690,000)(B) $ 8,054,572
1997 .................... $ 8,054,572 $(8,054,572)(A) --
1998 .................... $ -- $ --
</TABLE>
(A) Includes $8,054,572 reclassified as a reduction to Other Assets.
(B) Relates to receivables charged off.
124
<PAGE>
<TABLE>
<CAPTION>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ --------- ---------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alcohol and Substance
Abuse Treatment Centers
and Psychiatric Facilities
Hollywood, CA ............ $ 4,035,000 $ 4,035,000(6) $1,715,000 $ 5,750,000 $1,104,723 1957 5/88
College Station, TX ...... 3,708,894 3,708,894(6) 980,185 4,689,079 1,865,900 1987 5/93
Acute Care Hospital
Phoenix, AZ .............. 63,960,000 63,960,000 1,690,000 65,650,000 6,262,750 1954 2/95
Assisted Living
Blytheville, AR .......... 3,756,249 3,756,249 130,000 3,886,249 86,086 1996 4/96
Maumelle, AR ............. 3,848,620 3,848,620 320,000 4,168,620 88,121 1996 11/96
Mountain Home, AR ........ 3,787,872 3,787,872 170,000 3,957,872 76,111 1996 11/96
Pocahontas, AR ........... 3,701,500 3,701,500 50,000 3,751,500 87,188 1996 11/96
Sherwood, AR ............. 3,929,170 3,929,170 450,000 4,379,170 102,845 1996 11/96
Flagstaff, AZ ............ 3,222,513 3,222,513 3,222,513 9,814
Phoenix, AZ .............. 6,051,282 6,051,282 6,051,282 163,953 1997 12/97
Scottsdale, AZ ........... 3,922,447 3,922,447 3,922,447 113,283 1998 3/98
Folsom, CA ............... 9,280,000 9,280,000 620,000 9,900,000 268,254 1997 1/98
Palm Desert, CA .......... 5,415,920 5,415,920 784,080 6,200,000 295,560 1996 2/87
Trumbull, CT ............. 12,717,665 12,717,665 12,717,665 190,708 1998 1/98
Brandon, FL .............. 5,404,280 5,404,280 290,000 5,694,280 382,806 1991 3/96
Deland, FL ............... 2,615,000 2,615,000 275,000 2,890,000 87,168 1996 9/97
Fort Myers, FL ........... 3,252,481 3,252,481 513,000 3,765,481 169,400 1996 3/96
Fort. Myers, FL .......... 3,012,558 3,012,558 620,000 3,632,558 213,384 1982 12/96
Jacksonville, FL ......... 3,348,171 3,348,171 380,000 3,728,171 111,082 1996 11/97
Lakeland, FL ............. 6,076,053 6,076,053 600,000 6,676,053 430,372 1991 3/96
Leesburg, FL ............. 2,420,000 2,420,000 180,000 2,600,000 110,924 1996 3/97
Ocala, FL ................ 2,555,000 2,555,000 175,000 2,730,000 119,215 1996 6/97
Ormond Beach, FL ......... 2,580,000 2,580,000 310,000 2,890,000 89,031 1996 10/97
Port Orange, FL .......... 2,435,000 2,435,000 295,000 2,730,000 114,465 1996 6/97
</TABLE>
125
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ ---------- ---------- ------------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Port Richey, FL .......... $ 4,602,955 $ 4,602,955 $1,322,045 $ 5,925,000 $253,344 1996 2/97
Sarasota, FL ............. 7,841,931 7,841,931 7,841,931 202,870 1982 3/96
Stuart, FL ............... 2,380,000 2,380,000 270,000 2,650,000 118,992 1996 6/96
Tampa, FL ................ 3,366,481 3,366,481 399,000 3,765,481 175,350 1997 12/96
Tequesta, FL ............. 2,420,000 2,420,000 380,000 2,800,000 115,966 1998 12/97
Tequesta, FL ............. 2,636,499 2,636,499 2,636,499 95,597 1998 12/97
West Melbourne, FL ....... 2,460,000 2,460,000 240,000 2,700,000 123,000 1998 10/97
West Melbourne, FL ....... 2,751,181 2,751,181 2,751,181 50,144 1998 10/97
Pocatello, ID ............ 3,200,000 3,200,000 160,000 3,360,000 180,009 1996 10/96
Abilene, KS .............. 1,720,000 1,720,000 120,000 1,840,000 50,162 1996 6/97
4 facilities in KS,
1 facility in OK ........ 6,762,000 6,762,000 748,000 7,510,000 535,433 1993 3/96
Tewksbury, MA ............ 4,943,256 4,943,256 480,000 5,423,256 350,166 1987 3/96
Hagerstown, MD ........... 2,813,866 2,813,866 2,813,866 17,837 1998 4/98
Ann Arbor, MI ............ 2,797,488 2,797,488 280,800 3,078,288 443,406 1995 12/96
Davison, MI .............. 1,336,648 1,336,648 89,000 1,425,648 16,710 1998 7/98
Delta, MI ................ 3,520,133 3,520,133 494,000 4,014,133 44,003 1998 7/98
Delta, MI ................ 1,337,736 1,337,736 260,000 1,597,736 16,722 1998 7/98
Farmington Hills, MI ..... 3,205,250 3,205,250 215,600 3,420,850 166,950 1995 12/96
Farmington Hills, MI ..... 3,504,592 13,504,592 246,400 3,750,992 182,525 1995 12/96
2 facilities in Holly, MI 13,154,821 3,154,821 13,154,821 109,624 1998 7/98
Haslett (Lansing),MI ..... 6,518,771 6,518,771 436,000 6,954,771 215,190 1997 11/97
Sterling Heights,MI ...... 8,920,000 18,920,000 460,000 9,380,000 479,847 1987 12/95
2 facilities in Troy, MI . 13,355,257 3,355,257 13,355,257 111,294 1998 7/98
Utica, MI ................ 3,077,414 3,077,414 277,200 3,354,614 160,275 1995 12/96
Faribault, MN ............ 1,125,390 1,125,390 60,000 1,185,390 37,102 1997 11/97
Mankato, MN .............. 1,198,173 1,198,173 86,000 1,284,173 39,571 1997 11/97
Owatonna, MN ............. 1,230,173 1,230,173 54,000 1,284,173 40,509 1997 11/97
Sauk Rapids, MN .......... 905,825 905,825 82,000 987,825 29,977 1997 11/97
Willmar, MN .............. 1,123,390 1,123,390 62,000 1,185,390 37,031 1997 11/97
Winona, MN ............... 1,200,173 1,200,173 84,000 1,284,173 39,627 1997 11/97
</TABLE>
126
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ ----------- ----------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Charlotte, NC ........ $4,546,973 $4,546,973 $ 624,000 $ 5,170,973 $151,254 1997 11/97
Charlotte, NC ........ 6,515,381 6,515,381 504,000 7,019,381 215,328 1997 11/97
Greensboro, NC ....... 3,553,509 3,553,509 304,000 3,857,509 117,541 1997 11/97
Greensboro, NC ....... 6,321,281 6,321,281 576,000 6,897,281 209,217 1997 11/97
Lakewood Village,NY .. 1,370,399 1,370,399 1,370,399 7,220 1987 12/95
Manlius, NY .......... $963,000 8,610,000 8,610,000 510,000 9,120,000 395,583 1994 5/97
Chubbock, ID ......... 4,472,363 4,472,363 90,000 4,562,363 286,741 1996 8/96
Coeur d'Alene, ID .... 6,712,071 6,712,071 340,000 7,052,071 223,744 1997 6/96
Barberton, OH ........ 2,160,000 2,160,000 240,000 2,400,000 45,000 1997 3/98
Bowling Green, OH .... 1,845,000 1,845,000 200,000 2,045,000 57,660 1997 10/97
Colerain Township,OH . 6,872,605 6,872,605 604,395 7,477,000 371,920 1987 12/95
Englewood, OH ........ 2,100,000 2,100,000 240,000 2,340,000 48,125 1998 2/98
Lima, OH ............. 3,830,666 3,830,666 3,830,666 75,491 1997 10/97
Mansfield, OH ........ 2,350,000 2,350,000 210,000 2,560,000 48,958 1997 10/97
Mansfield, OH ........ 4,290,601 4,290,601 4,290,601 97,824 1997 10/97
Marion, OH ........... 2,515,000 2,515,000 270,000 2,785,000 41,917 1998 5/98
Xenia, OH ............ 5,368,305 5,368,305 5,368,305 83,892 1997 10/97
Bartlesville, OK ..... 1,800,000 1,800,000 110,000 1,910,000 52,500 1997 11/97
Ontario, OR .......... 2,940,000 2,940,000 110,000 3,050,000 136,353 1985 5/97
Beaver Falls, PA ..... 2,964,368 2,964,368 2,964,368 53,172 1998 2/98
Berwick, PA .......... 2,577,105 2,577,105 2,577,105 57,027 1998 2/98
Dillsburg, PA ........ 3,682,609 3,682,609 3,682,609 98,914 1998 2/98
Duncanville, PA ...... 3,349,018 3,349,018 288,000 3,637,018 76,747 1997 11/96
Lewisburg, PA ........ 2,536,515 2,536,515 2,536,515 75,464 1998 2/98
Lewistown, PA ........ 2,491,416 2,491,416 2,491,416 51,653 1998 2/98
North Wales, PA ...... 4,487,033 4,487,033 480,000 4,967,033 233,700 1997 7/97
North Wales, PA ...... 5,831,013 5,831,013 5,831,013 145,710 1997 7/97
Reading, PA .......... 3,845,940 3,845,940 372,000 4,217,940 94,083 1997 2/97
Richboro, PA ......... 9,624,115 9,624,115 1,212,000 10,836,115 501,250 1990 2/96
Scranton, PA ......... 3,156,603 3,156,603 3,156,603 52,227 1997 12/97
</TABLE>
127
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ --------- ----------- ------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State College, PA .. $ 3,277,006 $ 3,277,006 $360,000 $ 3,637,006 $109,232 1996 8/96
Peckville, PA ...... 2,073,206 2,073,206 2,073,206 33,890 1998 2/98
Yardley, PA ........ 4,494,920 4,494,920 504,000 4,998,920 234,100 1996 12/96
(Irmo) Columbia, SC 3,562,784 3,562,784 231,800 3,794,584 117,594 1997 11/97
Anderson, SC ....... 10,499,705 10,499,705 170,000 10,669,705 637,240 1987 10/97
Charleston, SC ..... 3,676,366 3,676,366 399,000 4,075,366 121,910 1997 11/97
Hendersonville, TN . 1,453,758 1,453,758 1,453,758 11,006 1998 7/98
Kingsport, TN ...... 1,539,264 1,539,264 1,539,264 12,401 1998 7/98
Knoxville, TN ...... 1,750,755 1,750,755 1,750,755 9,944 1998 7/98
Abilene, TX ........ 2,134,231 2,134,231 150,000 2,284,231 84,474 1996 6/96
Big Springs, TX .... 2,037,899 2,037,899 10,000 2,047,899 80,674 1996 6/97
2 facilities in TX . 4,257,036 4,257,036 222,000 4,479,036 172,274 1996 6/97
Kerrville, TX ...... 1,766,000 1,766,000 195,000 1,961,000 73,580 1996 5/97
Lancaster, TX ...... 1,500,000 1,500,000 175,000 1,675,000 46,875 1996 10/97
Lubbock, TX ........ 5,362,195 5,362,195 220,000 5,582,195 212,254 1996 4/96
3 facilities in TX . 5,456,834 5,456,834 240,000 5,696,834 215,992 1996 6/97
3 facilities in TX . 4,968,892 4,968,892 230,000 5,198,892 289,856 1996 9/96
New Braunfels, TX .. 1,960,000 1,960,000 155,000 2,115,000 77,626 1996 6/97
San Antonio, TX .... 2,450,000 2,450,000 250,000 2,700,000 96,976 1997 6/97
6 facilities in TX . 11,155,104 11,155,104 625,000 11,780,104 743,680 1996 5/96
Temple, TX ......... 1,900,000 1,900,000 250,000 2,150,000 119,198 1996 3/97
Chesterfield, VA ... 2,053,993 2,053,993 2,053,993 10,830 1998 7/98
Stafford, VA ....... 3,135,835 3,135,835 470,000 3,605,835 45,731 1970 6/98
Staunton, VA ....... 2,451,654 2,451,654 2,451,654 9,718 1998 7/98
Bellingham, WA ..... 3,327,423 3,327,423 350,000 3,677,423 202,609 1996 10/96
Federal Way, WA .... 5,185,000 5,185,000 590,000 5,775,000 400,455 1996 4/96
Moses Lake, WA ..... 5,770,000 5,770,000 240,000 6,010,000 267,322 1996 5/97
Brown Deer, WI ..... 635,266 635,266 72,000 707,266 33,100 1995 12/96
Eau Claire, WI ..... 1,208,173 1,208,173 76,000 1,284,173 39,865 1996 11/97
Plover, WI ......... 2,093,924 2,093,924 140,000 2,233,924 71,483 1996 11/97
</TABLE>
128
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ ----------- ----------- ------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kenosha, WI ........... $ 1,299,524 $ 1,299,524 $ 100,000 $ 1,399,524 $ 16,244 1998 7/98
Manitowoc, WI ......... 1,016,608 1,016,608 70,000 1,086,608 33,567 1996 11/97
Medford, WI ........... 860,802 860,802 70,000 930,802 29,441 1996 11/97
Menomonie, WI ......... 912,000 912,000 57,000 969,000 36,100 1996 11/97
Middleton, WI ......... 1,405,738 1,405,738 76,000 1,481,738 46,345 1996 11/97
Neenah, WI ............ 1,312,955 1,312,955 70,000 1,382,955 43,273 1996 11/97
New Richmond, WI ...... 696,000 696,000 54,000 750,000 27,550 1996 11/97
Onalaska, WI .......... 1,205,931 1,205,931 84,000 1,289,931 62,800 1995 12/96
Oshkosh, WI ........... 1,016,608 1,016,608 70,000 1,086,608 33,567 1996 11/97
Plymouth, WI .......... 706,000 706,000 54,000 760,000 27,949 1996 11/97
Sun Prairie, WI ....... 1,113,390 1,113,390 72,000 1,185,390 36,751 1996 11/97
Sussex, WI ............ 874,824 874,824 86,000 960,824 45,575 1995 12/96
Wausau, WI ............ 1,535,443 1,535,443 140,000 1,675,443 52,597 1996 11/97
Wisconsin Rapids, WI .. 956,000 956,000 64,000 1,020,000 37,848 1996 11/97
Wisconsin Rapids, WI .. 1,233,123 1,233,123 70,000 1,303,123 42,042 1997 6/97
Martinsburg, WV ....... 4,089,923 4,089,923 4,089,923 73,142 1987 12/95
Golf Courses
Phoenix, AZ ........... 5,471,479 5,471,479 2,510,904 7,982,383 82,394 1993 5/98
Phoenix, AZ ........... 4,446,011 4,446,011 2,969,990 7,416,001 68,428 1973 5/98
Phoenix, AZ ........... 7,322,042 7,322,042 2,554,778 9,876,820 93,924 1977 5/98
Mesa, AZ .............. $ 242,595 4,989,975 4,989,975 3,371,036 8,361,011 76,771 5/98
Escondido, CA ......... 6,596,324 6,596,324 3,857,897 10,454,221 101,676 5/98
Oceanside, CA ......... 7,703,840 $529,049 8,232,889 2,911,762 11,144,651 114,016 5/98
San Diego, CA ......... 20,013,170 719,206 20,732,376 7,447,839 28,180,215 284,779 5/98
San Diego, CA ......... 991,165 991,165 145,468 1,136,633 18,849 1986 5/98
Escondido, CA ......... 5,515,457 8,573,825 8,573,825 1,922,187 10,496,012 155,429 5/98
Ventura, CA ........... 2,626,084 2,626,084 69,017 2,695,101 68,877 1931 5/98
Jacksonville, FL ...... 3,480,927 3,480,927 1,961,147 5,442,074 59,505 6/98
Orlando, FL ........... 4,204,273 287,814 4,492,087 1,505,228 5,997,315 61,815 1993 5/98
Oldsmar, FL ........... 10,574,785 52,577 10,627,362 5,473,299 16,100,661 166,909 1974 5/98
</TABLE>
129
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ ---------- ----------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tampa, FL .......... $ 4,287,344 $ 112,871 $ 4,400,215 $1,484,656 $ 5,884,871 $ 53,705 1993 5/98
Atlanta, GA ........ 4,147,675 269,457 4,417,132 1,465,326 5,882,458 62,128 5/98
Snellville, GA ..... 4,658,179 222,611 4,880,790 2,817,105 7,697,895 73,669 1996 5/98
Atlanta, GA ........ 6,421,620 6,421,620 3,536,965 9,958,585 46,716 8/98
Atlanta, GA ........ 6,192,743 6,192,743 3,515,270 9,708,013 202,210 3/98
Nags Head, NC ...... 7,657,934 7,657,934 4,175,255 11,833,189 85,188 8/98
Holly Springs, NC .. 5,486,374 5,486,374 2,962,875 8,449,249 61,223 8/98
Gary, NC ........... 4,594,088 4,594,088 2,498,465 7,092,553 52,366 8/98
Clayton, NC ........ 2,641,510 2,641,510 1,433,367 4,074,877 29,848 8/98
Advance, NC ........ 1,135,037 1,135,037 608,293 1,743,330 12,882 8/98
Corolla, NC ........ 3,826,611 3,826,611 2,080,832 5,907,443 43,714 8/98
Austin, TX ......... 12,630,609 158,773 12,789,382 6,938,328 19,727,710 190,732 1980 5/98
Austin, TX ......... 2,844,629 2,844,629 1,346,813 4,191,442 44,676 1965 5/98
Richmond, TX ....... 7,533,834 143,480 7,677,314 3,259,218 10,936,532 105,478 1994 5/98
McKinney, TX ....... 6,674,770 3,408,567 10,083,337 5,742,408 15,825,745 146,559 1988 5/98
McKinney, TX ....... 6,587,050 40,384 6,627,434 3,510,826 10,138,260 95,944 1988 5/98
Trophy Club, TX .... 14,292,555 63,545 14,356,100 7,334,397 21,690,497 219,448 1979 5/98
Grand Prairie, TX .. 2,357,821 2,357,821 1,059,194 3,417,015 36,140 5/98
Yaupon,TX .......... 4,423,988 4,423,988 2,485,313 6,909,301 65,224 5/98
Frisco, TX ......... 680,735 680,735 71,964 752,699 5/98
Houston, TX ........ 9,313,085 9,313,085 9,313,085 238,975 1957 5/98
Benbrook, TX ....... 479,595 479,595 157,895 637,490 8/98
Aledo, TX .......... 4,513,589 4,513,589 2,456,089 6,969,678 123,474 3/98
DeSoto, TX ......... 3,274,219 3,274,219 1,770,914 5,045,133 89,617 3/98
Plano, TX .......... 7,586,553 7,586,553 4,150,499 11,737,052 208,167 3/98
Plano, TX .......... 5,830,724 5,830,724 3,154,700 8,985,424 160,069 3/98
San Antonio, TX .... 4,349,568 4,349,568 2,338,105 6,687,673 115,629 3/98
Gainesville, VA .... 4,667,000 4,667,000 2,360,999 7,027,999 88,854 5/98
Midlothian, VA ..... 6,374,273 53,228 6,427,501 4,094,469 10,521,970 100,568 1977 5/98
Williamsburg, VA ... 4,394,351 4,394,351 2,532,201 6,926,552 54,061 5/98
</TABLE>
130
<PAGE>
<TABLE>
<CAPTION>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Cost
Capitalized/
Building & Adjusted
Improvements Subsequent to
Encumbrances at Acquisition Acquisitions
-------------- ---------------- ---------------
<S> <C> <C> <C>
Long Term Care
Alabaster, AL .............. $ 7,609,000
Benton, AR ................. 8,257,410
Kentfield, CA .............. 9,650,000
Fresno, CA ................. $7,469,068 14,469,580
Cheshire, CT ............... 6,770,000
Ansonia, CT ................ 7,750,000
Danbury, CT ................ 5,295,000
Darien, CT ................. 4,202,477
Milford, CT ................ 10,000,000
Milford, CT ................ 3,224,151
Newington, CT .............. 8,970,000
Southbury, CT .............. 5,538,590
Westport, CT ............... 4,970,000
Wethersfield, CT ........... 19,083,219
Bradenton, FL .............. 3,285,000 9,900,000
Naples, FL ................. 6,528,616
Palm Beach, FL ............. 12,300,000
Sarasota, FL ............... 4,447,012
Venice, FL ................. 8,592,203
Indianapolis, IN ........... 2,455,612
New Haven, IN .............. 4,628,541
Bowling Green, KY .......... 10,000,000
Beverly, MA ................ 6,300,000
Concord, MA ................ 8,762,000
New Bedford, MA ............ 7,492,000
East Longmeadow,MA ......... 15,995,928
Holyoke, MA ................ 12,664,918
Lexington, MA .............. 11,210,000
Lowell, MA ................. 10,492,351
<CAPTION>
Total
Building & Accumulated Const. Date
Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
-------------- ------------- ------------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Long Term Care
Alabaster, AL .............. $ 7,609,000 $ 150,000 $ 7,759,000 $1,970,323 1971 8/87
Benton, AR ................. 8,257,410 135,000 8,392,410 1,180,467
Kentfield, CA .............. 9,650,000 350,000 10,000,000 2,593,418 1963 3/88
Fresno, CA ................. 14,469,580 2,088,920 16,558,500 2,914,496 1991 3/91
Cheshire, CT ............... 6,770,000 455,000 7,225,000 2,235,492 1975 10/85
Ansonia, CT ................ 7,750,000 750,000 8,500,000 1,001,050 1993 11/96
Danbury, CT ................ 5,295,000 305,000 5,600,000 1,748,421 1976 10/85
Darien, CT ................. 4,202,477 45,000 4,247,477 490,280 1975 6/94
Milford, CT ................ 10,000,000 10,000,000 1,145,815 1971 6/94
Milford, CT ................ 3,224,151 1,020,000 4,244,151 369,435 1992 6/94
Newington, CT .............. 8,970,000 430,000 9,400,000 2,961,953 1978 10/85
Southbury, CT .............. 5,538,590 5,538,590 611,567 1975 6/94
Westport, CT ............... 4,970,000 400,000 5,370,000 1,641,114 1965 10/85
Wethersfield, CT ........... 19,083,219 19,083,219 4,503,563 1965 8/86
Bradenton, FL .............. 9,900,000 4,100,000 14,000,000 2,744,255 1985 12/87
Naples, FL ................. 6,528,616 26,775 6,555,391 733,194 1969 1/96
Palm Beach, FL ............. 12,300,000 2,700,000 15,000,000 2,076,795 1996 4/96
Sarasota, FL ............... 4,447,012 1,060,800 5,507,812 333,540 1982 1/96
Venice, FL ................. 8,592,203 128,500 8,720,703 644,400 1985 1/96
Indianapolis, IN ........... 2,455,612 114,700 2,570,312 184,176 1973 1/96
New Haven, IN .............. 4,628,541 128,100 4,756,641 343,560 1982 1/96
Bowling Green, KY .......... 10,000,000 10,000,000 1,145,817 1992 6/94
Beverly, MA ................ 6,300,000 645,000 6,945,000 2,080,315 1972 10/85
Concord, MA ................ 8,762,000 3,538,000 12,300,000 711,907 1995 11/95
New Bedford, MA ............ 7,492,000 1,008,000 8,500,000 608,712 1995 11/95
East Longmeadow,MA ......... 15,995,928 400,000 16,395,928 3,847,068 1986 9/87
Holyoke, MA ................ 12,664,918 121,600 12,786,518 1,986,193 1973 9/92
Lexington, MA .............. 11,210,000 590,000 11,800,000 3,459,605 1965 8/86
Lowell, MA ................. 10,492,351 500,000 10,992,351 1,644,880 1975 9/92
</TABLE>
131
<PAGE>
<TABLE>
<CAPTION>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building &
Encumbrances at Acquisition Acquisitions Improvements
-------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Lynn, MA .................... $14,163,515 $14,163,515
Millbury, MA ................ 10,233,000 10,233,000
New Bedford, MA ............. 10,859,303 10,859,303
Newton, MA .................. 12,430,000 12,430,000
Northampton, MA ............. 2,709,612 2,709,612
Peabody, MA ................. 7,245,315 7,245,315
Randolph, MA ................ 9,014,760 9,014,760
Weymouth, MA ................ 10,719,932 10,719,932
Wilmington, MA .............. 6,689,925 6,689,925
Montgomery Village,MD ....... 16,888,000 16,888,000
Grand Blanc, MI ............. 7,363,800 7,363,800
Battle Creek, MI ............ 7,674,443 7,674,443
Kansas City, MO ............. 8,559,900 8,559,900
Bedford, NH ................. $7,290,672 12,691,500 12,691,500
Effingham Falls, NH ......... 11,984,845 11,984,845
Milford, NH ................. 3,195,288 3,195,288
Milford, NH ................. 4,222,545 4,222,545
Peterborough, NH ............ 4,779,992 4,779,992
Keene, NH ................... 3,688,917 3,688,917
Winchester, NH .............. 3,363,325 3,363,325
Bound Brook, NJ ............. 1,624,000 1,624,000
Bridgewater, NJ ............. 12,678,944 12,678,944
Camden, NJ .................. 8,334,780 8,334,780
New Milford, NJ ............. 11,110,000 11,110,000
Oradell, NJ ................. 14,986,000 14,986,000
Marlton, NJ ................. 14,060,000 14,060,000
Cortland, NY ................ 27,812,817 27,812,817
Niskayuna, NY ............... 10,542,539 10,542,539
Rensselaer, NY .............. 1,400,000 1,400,000
Troy, NY .................... 10,459,237 10,459,237
<CAPTION>
Accumulated Const. Date
Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------- -------------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Lynn, MA .................... $1,206,734 $15,370,249 $2,039,091 1960 4/93
Millbury, MA ................ 467,000 10,700,000 377,340 1996 6/97
New Bedford, MA ............. 10,859,303 1,219,213 1995 11/95
Newton, MA .................. 630,000 13,060,000 4,104,511 1977 10/85
Northampton, MA ............. 187,500 2,897,112 310,475 1974 6/94
Peabody, MA ................. 805,035 8,050,350 2,298,681 1987 10/90
Randolph, MA ................ 1,001,640 10,016,400 1,859,319 1987 10/90
Weymouth, MA ................ 850,000 11,569,932 1,228,315 1994 6/94
Wilmington, MA .............. 743,325 7,433,250 2,153,214 1987 10/90
Montgomery Village,MD ....... 1,300,000 18,188,000 1,372,139 1994 11/95
Grand Blanc, MI ............. 120,000 7,483,800 1,899,236 1970 5/88
Battle Creek, MI ............ 146,970 7,821,413 1,098,958 1933 4/93
Kansas City, MO ............. 238,000 8,797,900 2,300,458 1965 3/88
Bedford, NH ................. 808,500 13,500,000 962,698 1920 6/94
Effingham Falls, NH ......... 1,478,800 13,463,645 1,675,916 1985 4/93
Milford, NH ................. 52,000 3,247,288 239,652 1900 1/96
Milford, NH ................. 82,000 4,304,545 316,692 1972 1/96
Peterborough, NH ............ 128,700 4,908,692 600,786 1976 1/96
Keene, NH ................... 87,000 3,775,917 276,660 1965 1/96
Winchester, NH .............. 35,000 3,398,325 252,252 1987 1/96
Bound Brook, NJ ............. 1,176,000 2,800,000 487,155 1963 12/86
Bridgewater, NJ ............. 1,193,400 13,872,344 928,387 1971 1/96
Camden, NJ .................. 450,250 8,785,030 2,500,411 1984 12/86
New Milford, NJ ............. 1,090,000 12,200,000 3,055,271 1971 12/87
Oradell, NJ ................. 1,714,000 16,700,000 1,217,619 1995 11/95
Marlton, NJ ................. 240,000 14,300,000 1,142,388 1995 11/95
Cortland, NY ................ 263,000 28,075,817 3,740,224 1971 8/93
Niskayuna, NY ............... 292,000 10,834,539 1,527,969 1976 3/93
Rensselaer, NY .............. 1,400,000 145,850 1975 11/94
Troy, NY .................... 56,100 10,515,337 1,412,255 1972 8/93
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Cost
Capitalized/
Building & Adjusted
Improvements Subsequent to
Encumbrances at Acquisition Acquisitions
-------------- ---------------- ---------------
<S> <C> <C> <C>
Bellbrook, OH ............... $ 2,787,134
Huber Heights, OH ........... 3,593,360
Medina, OH .................. 12,367,785
New London, OH .............. 2,110,837
Swanton, OH ................. 5,500,000
Troy, OH .................... 6,206,197
West Carrolton, OH .......... 3,483,669
Erie, PA .................... 5,128,000
Greensburg, PA .............. 5,544,012
DeSoto, TX .................. 5,709,730
MountlakeTerrace,WA ......... 4,831,020
Waterford, WI ............... 13,608,228
4 facilities in WV .......... 16,299,400
Medical Office Buildings
Tempe, AZ ................... 8,239,068
Lakewood, CA ................ 8,317,585
Los Gatos, CA ............... 13,453,194
Arcadia, CA ................. $7,675,842 10,764,952
Boca Raton, FL .............. 17,968,149
Boca Raton, FL .............. 8,847,282
Boynton Beach, FL ........... 3,108,793
Boynton Beach, FL ........... 4,414,510
Hollywood, FL ............... 8,200,012
Jupiter, FL ................. 4,410,569
Loxahatchee, FL ............. 2,590,922 3,483,338
Loxahatchee, FL ............. 2,387,386 3,009,294
Loxahatchee, FL ............. 2,584,023 3,281,910
Palm Bay, FL ................ 3,115,229
Palm Beach,FL ............... 43,408,996
Plantation, FL .............. 8,230,445
<CAPTION>
Total
Building & Accumulated Const. Date
Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------------ ------------- ------------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bellbrook, OH ............... $ 2,787,134 $ 212,000 $ 2,999,134 $ 573,341 1981 12/90
Huber Heights, OH ........... 3,593,360 174,000 3,767,360 738,134 1984 12/90
Medina, OH .................. 12,367,785 232,000 12,599,785 2,848,165 1954 4/88
New London, OH .............. 2,110,837 22,600 2,133,437 434,379 1985 12/90
Swanton, OH ................. 5,500,000 350,000 5,850,000 554,245 1950 4/95
Troy, OH .................... 6,206,197 210,600 6,416,797 443,906 1970 1/96
West Carrolton, OH .......... 3,483,669 216,400 3,700,069 716,415 1983 12/90
Erie, PA .................... 5,128,000 335,000 5,463,000 1,397,040 1977 12/87
Greensburg, PA .............. 5,544,012 525,000 6,069,012 1,003,023 1991 6/90
DeSoto, TX .................. 5,709,730(7) 849,270 6,559,000 1,519,578 1988 1/88
MountlakeTerrace,WA ......... 4,831,020 1,029,980 5,861,000 557,238 1987 5/93
Waterford, WI ............... 13,608,228(6) 280,000 13,888,228 1,926,696 1968 4/93
4 facilities in WV .......... 16,299,400 900,600 17,200,000 1,258,285 1987 12/95
Medical Office Buildings
Tempe, AZ ................... 8,239,068 555,000 8,794,068 284,804 1997 1/98
Lakewood, CA ................ 8,317,585 8,317,585 328,855 1997 1/98
Los Gatos, CA ............... 13,453,194 13,453,194 512,952 1997 1/98
Arcadia, CA ................. 10,764,952 3,500,000 14,264,952 307,779 11/97
Boca Raton, FL .............. 17,968,149 17,968,149 661,149 1997 1/98
Boca Raton, FL .............. 8,847,282 3,900,000 12,747,282 53,508 1985 10/98
Boynton Beach, FL ........... 3,108,793 390,000 3,498,793 123,030 1997 1/98
Boynton Beach, FL ........... 4,414,510 455,000 4,869,510 181,082 1997 1/98
Hollywood, FL ............... 8,200,012 8,200,012 317,935 1997 1/98
Jupiter, FL ................. 4,410,569 695,000 5,105,569 172,292 1997 1/98
Loxahatchee, FL ............. 3,483,338 880,000 4,363,338 131,463 1997 1/98
Loxahatchee, FL ............. 3,009,294 560,000 3,569,294 109,074 1997 1/98
Loxahatchee, FL ............. 3,281,910 3,281,910 122,364 1997 1/98
Palm Bay, FL ................ 3,115,229 390,000 3,505,229 114,306 1997 1/98
Palm Beach,FL ............... 43,408,996 43,408,996 1997 1/98
Plantation, FL .............. 8,230,445 1,090,000 9,320,445 327,800 1997 5/98
</TABLE>
133
<PAGE>
<TABLE>
<CAPTION>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building &
Encumbrances at Acquisition Acquisitions Improvements
-------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Plantation, FL ................... $ 7,906,570 $ 11,762,977 $ 11,762,977
Delray Beach, FL ................. 19,615,626 19,615,626
Palm Spring, FL .................. 4,900,274 4,900,274
West Palm Beach, FL .............. 7,318,439 7,318,439
Concord, MA ......................
Voorhees, NJ ..................... 20,436,273 20,436,273
Dallas, TX ....................... 16,189,492 16,189,492
Edinburg, TX ..................... 10,788,524 10,788,524
El Paso, TX ...................... 16,804,249 16,804,249
Victoria, TX ..................... 10,282,627 10,282,627
Rehabilitation
Topeka, KS ....................... 4,847,654 10,353,830 10,353,830
Land
Temecula, CA ..................... 480,000
----------- --------------- --------- ---------------
Subtotal ........................ 53,238,189 1,670,308,873 6,061,562 1,676,370,435
----------- --------------- --------- ---------------
Hotels
Unallocated Dev & Const Costs 23,490,528 $ (23,490,528) --
Birmingham, AL ................... 4,139,503 48,417 4,187,920
Birmingham, AL ................... 8,568,797 3,158 8,571,955
Birmingham, AL ................... 7,891,894 5,787 7,897,681
Huntsville, AL ................... 7,117,420 4,165 7,121,586
Huntsville, AL ................... 6,906,010 15,168 6,921,178
Mobile, AL ....................... 5,075,001 23,011 5,098,012
Montgomery, AL ................... 8,236,093 49,225 8,285,318
Tuscaloosa, AL ................... 3,472,470 47,580 3,520,050
Little Rock, AR .................. 4,850,805 3,567 4,854,373
Little Rock, AR .................. 3,116,595 82,417 3,199,013
<CAPTION>
Accumulated Const. Date
Land (2) Total (5) Deprec.(4)(5) Date Acquired
--------------- ------------------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Plantation, FL ................... $ 1,100,000 $ 12,862,977 $ 195,544 1997 1/98
Delray Beach, FL ................. 19,615,626 781,067 1997 1/98
Palm Spring, FL .................. 4,900,274 151,219 1997 1/98
West Palm Beach, FL .............. 820,000 8,138,439 285,927 1997 1/98
Concord, MA ...................... 1,850,000 1,850,000 1997 1/98
Voorhees, NJ ..................... 4,750,000 25,186,273 732,004 1997 1/98
Dallas, TX ....................... 220,000 16,409,492 639,049 1997 1/98
Edinburg, TX ..................... 95,000 10,883,524 371,694 1997 1/98
El Paso, TX ...................... 16,804,249 557,703 1997 1/98
Victoria, TX ..................... 10,282,627 349,279 1997 1/98
Rehabilitation
Topeka, KS ....................... 1,295,499 11,649,329 2,551,321 1989 2/89
Land
Temecula, CA ..................... 330,000 330,000(6)
------------- ---------------- -------------
Subtotal ........................ 216,889,096 1,893,259,531 145,464,498
------------- ---------------- -------------
Hotels
Unallocated Dev & Const Costs -- -- -- -- --
Birmingham, AL ................... 728,062 4,915,982 83,639 1985 7/98
Birmingham, AL ................... 1,512,123 10,084,078 135,550 1996 7/98
Birmingham, AL ................... 1,367,572 9,265,253 125,227 1997 7/98
Huntsville, AL ................... 1,253,577 8,375,163 126,285 1983 7/98
Huntsville, AL ................... 1,216,269 8,137,447 121,974 1985 7/98
Mobile, AL ....................... 893,150 5,991,162 93,264 1979 7/98
Montgomery, AL ................... 1,450,990 9,736,308 151,225 1982 7/98
Tuscaloosa, AL ................... 610,351 4,130,401 67,972 1982 7/98
Little Rock, AR .................. 853,586 5,707,959 88,852 1983 7/98
Little Rock, AR .................. 547,549 3,746,562 61,508 1975 7/98
</TABLE>
134
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ ---------- ----------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Little Rock, AR ........ $ 7,403,968 $ 20,758 $ 7,424,727 $1,303,986 $ 8,728,713 $130,539 1980 7/98
Little Rock, AR ........ 3,824,783 32,054 3,856,837 672,523 4,529,360 78,821 1993 7/98
North Little Rock, AR .. 6,605,396 4,708 6,610,105 1,163,220 7,773,325 118,973 1983 7/98
Chandler, AZ ........... 6,078,484 457,913 6,536,397 951,803 7,488,199 88,046 1998 7/98
Flagstaff, AZ .......... 6,570,932 1,776 6,572,708 1,159,576 7,732,284 102,006 1996 7/98
Mesa, AZ ............... 7,370,306 164,120 7,534,426 1,327,392 8,861,818 120,347 1997 7/98
Peoria, AZ ............. 6,013,092 166,476 6,179,568 963,994 7,143,562 95,403 1998 7/98
Phoenix, AZ ............ 8,894,259 19,403 8,913,662 1,567,137 10,480,799 158,133 1973 7/98
Phoenix, AZ ............ 7,884,309 306,341 8,190,651 1,388,910 9,579,561 147,751 1993 7/98
Phoenix, AZ ............ 7,036,272 104,562 7,140,835 821,636 7,962,470 110,441 1997 7/98
Scottsdale, AZ ......... 12,352,538 14,000 12,366,538 2,179,860 14,546,398 199,609 1996 7/98
Tempe, AZ .............. 12,584,021 27,755 12,611,777 2,218,271 14,830,048 175,807 1982 7/98
Tucson, AZ ............. 8,901,960 56,587 8,958,548 1,568,496 10,527,044 159,829 1991 7/98
Tucson, AZ ............. 7,789,754 30,310 7,820,065 1,372,224 9,192,289 140,556 1973 7/98
Tucson, AZ ............. 6,811,360 1,778 6,813,138 1,202,005 8,015,143 106,629 1996 7/98
Bakersfield, CA ........ 5,756,768 26,682 5,783,451 1,013,462 6,796,913 102,470 1986 7/98
Chula Vista, CA ........ 14,703,759 27,355 14,731,114 2,592,343 17,323,457 202,999 1986 7/98
Costa Mesa, CA ......... 7,592,769 29,737 7,622,506 1,337,462 8,959,968 137,357 1980 7/98
Fremont, CA ............ 4,495,925 4,547,941 9,043,866 2,486,143 11,530,009 -- 1999 7/98
Fresno, CA ............. 3,965,010 9,781 3,974,791 697,269 4,672,060 75,038 1986 7/98
Irvine, CA ............. 10,816,163 25,196 10,841,359 1,906,297 12,747,656 200,064 1987 7/98
La Palma, CA ........... 11,057,877 130,241 11,188,118 1,948,952 13,137,070 196,904 1994 7/98
Mission Valley, CA ..... -- -- -- 3,611,225 3,611,225 -- N/A 7/98
Ontario, CA ............ 6,250,091 4,454,527 10,704,617 1,464,145 12,168,762 30,777 1998 7/98
Redding, CA ............ 6,704,273 106,594 6,810,867 1,180,669 7,991,536 129,324 1993 7/98
Sacramento, CA ......... 10,521,578 20,745 10,542,323 -- 10,542,323 304,094 1985 7/98
Sacramento, CA ......... 9,148,634 36,262 9,184,896 1,612,009 10,796,905 171,450 1993 7/98
San Bernardino, CA ..... 10,729,322 32,931 10,762,254 1,890,972 12,653,226 187,539 1983 7/98
San Buenaventura, CA ... 5,873,995 29,527 5,903,522 1,034,149 6,937,671 107,948 1988 7/98
San Diego, CA .......... 5,173,136 33,200 5,206,336 910,468 6,116,804 95,628 1987 7/98
</TABLE>
135
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- -------------- ------------ ---------- ----------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
South San Francisco, CA $19,630,626 $ 37,691 $19,668,317 $3,461,790 $23,130,107 $270,076 1987 7/98
Stockton, CA ........... 11,762,912 27,681 11,790,593 2,073,370 13,863,963 206,373 1984 7/98
Valencia, CA ........... -- -- -- 2,487,486 2,487,486 -- N/A 7/98
Vista, CA .............. 6,608,756 30,363 6,639,119 1,163,813 7,802,932 118,688 1987 7/98
Aurora, CO ............. 10,090,478 2,810 10,093,288 1,778,234 11,871,522 176,699 1982 7/98
Colorado Springs, CO ... 6,143,464 6,950 6,150,415 1,081,702 7,232,117 110,382 1985 7/98
Colorado Springs, CO ... 7,591,836 (260,138) 7,331,698 1,238,742 8,570,440 128,180 1998 7/98
Denver, CO ............. 11,755,008 35,579 11,790,587 2,071,975 13,862,562 205,457 1974 7/98
Denver, CO ............. 6,500,817 184,649 6,685,466 1,144,765 7,830,231 117,871 1974 7/98
Denver, CO ............. 7,894,924 66,315 7,961,239 1,390,784 9,352,023 140,596 1980 7/98
Denver, CO ............. 13,981,316 69,837 14,051,153 2,467,291 16,518,444 228,027 1996 7/98
Denver, CO ............. 10,627,274 13,056 10,640,330 1,512,646 12,152,977 66,043 1998 7/98
Grand Junction, CO ..... 6,687,464 60,001 6,747,465 466,163 7,213,628 120,162 1997 7/98
Lakewood, CO ........... 7,571,644 851,707 8,423,352 1,106,781 9,530,132 130,628 1998 7/98
Lewisville, CO ......... 7,845,924 87,345 7,933,269 1,475,795 9,409,064 122,463 1997 7/98
Pueblo, CO ............. 7,280,369 (470,750) 6,809,619 742,076 7,551,695 119,996 1998 7/98
Westminister, CO ....... 8,880,218 36,371 8,916,589 1,564,659 10,481,248 157,977 1986 7/98
Westminister, CO ....... 9,863,738 58,759 9,922,498 1,738,221 11,660,719 175,933 1986 7/98
Wheat Ridge, CO ........ 10,793,362 54,044 10,847,406 1,902,273 12,749,679 188,832 1985 7/98
Altamonte Springs, FL .. 7,431,923 22,474 7,454,398 1,309,077 8,763,475 131,533 1987 7/98
Brandon, FL ............ 8,192,791 18,258 8,211,049 1,208,344 9,419,393 131,509 1997 7/98
Clearwater, FL ......... 6,852,662 48,657 6,901,319 1,206,855 8,108,174 123,509 1988 7/98
Coral Springs, FL ...... 7,888,175 67,541 7,955,716 1,389,593 9,345,309 144,046 1994 7/98
Daytona Beach, FL ...... 7,201,071 36,684 7,237,755 1,268,339 8,506,094 131,960 1991 7/98
Deerfield Beach, FL .... 6,432,943 62,649 6,495,593 1,132,787 7,628,380 116,429 1986 7/98
Fort Lauderdale, FL .... 12,286,111 26,068 12,312,180 2,165,699 14,477,879 200,847 1995 7/98
Fort Lauderdale, FL .... 9,039,567 538,445 9,578,012 1,416,013 10,994,025 164,703 1998 7/98
Fort Lauderdale, FL .... -- -- -- 648,808 648,808 -- N/A 7/98
Fort Myers, FL ......... 7,471,064 23,080 7,494,144 1,315,985 8,810,129 132,353 1984 7/98
Gainesville, FL ........ 8,137,122 30,698 8,167,821 1,433,525 9,601,346 143,838 1989 7/98
</TABLE>
136
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquire
------------ -------------- ------------- ------------- ---------- ----------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jacksonville, FL ..... $ 6,408,732 $ 22,532 $ 6,431,264 $1,128,515 $ 7,559,779 $114,797 1980 7/98
Jacksonville, FL ..... 6,923,144 14,994 6,938,138 1,219,293 8,157,431 122,310 1986 7/98
Jacksonville, FL ..... 7,413,329 16,939 7,430,268 1,305,796 8,736,064 130,254 1982 7/98
Jacksonville, FL ..... 7,987,537 91,145 8,078,682 1,343,005 9,421,687 130,752 1997 7/98
Lake Mary, FL ........ 7,511,096 408,865 7,919,961 1,020,912 8,940,872 137,678 1998 7/98
Lakeland, FL ......... 7,973,877 125,672 8,099,549 1,189,768 9,289,317 129,322 1997 7/98
Miami, FL ............ 13,206,890 85,864 13,292,755 2,328,189 15,620,944 228,491 1986 7/98
Miami, FL ............ 8,948,658 1,141,346 10,090,004 1,537,039 11,627,043 126,534 1998 7/98
Ocala, FL ............ 6,882,908 229,922 7,112,829 891,376 8,004,205 123,006 1998 7/98
Orlando, FL .......... 6,656,415 1,395,162 8,051,577 1,011,827 9,063,404 73,280 1998 7/98
Orlando, FL .......... 2,230,894 4,797,302 7,028,196 1,339,955 8,368,151 -- 1999 7/98
Orlando, FL .......... 1,570,657 5,460,020 7,030,677 2,590,302 9,620,979 -- 1999 7/98
Orlando, FL .......... 10,251,049 20,532 10,271,582 1,806,570 12,078,152 180,877 1987 7/98
Orlando, FL .......... 15,422,958 37,380 15,460,338 2,719,260 18,179,598 263,787 1994 7/98
Panama City, FL ...... 6,802,665 98,484 6,901,149 1,097,320 7,998,469 115,778 1997 7/98
Pensacola, FL ........ 8,957,428 29,297 8,986,725 1,578,284 10,565,009 155,841 1985 7/98
Pinellas Park, FL .... 6,623,817 37,495 6,661,312 1,166,470 7,827,782 116,278 1985 7/98
Plantation, FL ....... 6,824,583 2,502,305 9,326,889 1,378,533 10,705,421 -- 1998 7/98
St. Petersburg, FL ... 5,792,905 22,185 5,815,091 1,019,839 6,834,930 108,049 1987 7/98
Tallahassee, FL ...... 13,048,829 18,928 13,067,757 2,300,296 15,368,053 226,907 1979 7/98
Tallahassee, FL ...... 8,149,524 44,412 8,193,937 1,435,713 9,629,650 143,665 1986 7/98
Tampa, FL ............ 3,659,646 60,646 3,720,293 643,382 4,363,675 69,082 1984 7/98
Tampa, FL ............ 11,881,605 43,125 11,924,730 2,094,316 14,019,046 164,139 1983 7/98
Tampa, FL ............ 6,869,201 46,061 6,915,263 1,160,882 8,076,145 111,043 1997 7/98
Alpharetta, GA ....... 7,423,945 (8,091) 7,415,854 1,632,105 9,047,959 121,271 1997 7/98
Atlanta, GA .......... 6,461,075 1,788,405 8,249,480 2,196,386 10,445,867 25,936 1998 7/98
Atlanta, GA .......... 5,784,092 2,402,354 8,186,446 1,366,704 9,553,150 -- 1998 7/98
Augusta, GA .......... 4,852,929 44,749 4,897,678 853,961 5,751,639 88,286 1985 7/98
Austell, GA .......... 4,373,863 22,370 4,396,233 769,420 5,165,653 80,926 1986 7/98
College Park, GA ..... 2,929,266 126,292 3,055,559 514,491 3,570,050 62,287 1979 7/98
</TABLE>
137
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------- -------------- ------------- ------------ ----------- ----------- ------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
College Park, GA ..... $ 3,110,554 $ 9,170 $ 3,119,725 $ 546,483 $ 3,666,208 $ 51,569 1995 7/98
Columbus, GA ......... 6,123,710 33,180 6,156,890 1,078,216 7,235,106 115,560 1980 7/98
Conyers, GA .......... 6,853,690 893,917 7,747,607 1,263,029 9,010,636 116,068 1998 7/98
Lithonia, GA ......... 3,625,380 24,137 3,649,517 637,335 4,286,852 70,269 1985 7/98
Macon, GA ............ 6,601,559 4,511 6,606,070 1,164,981 7,771,051 100,110 1996 7/98
Marietta, GA ......... 6,051,123 57,742 6,108,865 1,065,407 7,174,272 107,482 1984 7/98
Norcross, GA ......... 4,392,960 13,913 4,406,874 772,790 5,179,664 79,572 1986 7/98
Norcross, GA ......... 4,462,376 58,443 4,520,820 785,040 5,305,860 85,521 1983 7/98
Savannah, GA ......... 9,292,087 9,665 9,301,752 1,637,342 10,939,094 161,426 1982 7/98
Savannah, GA ......... 4,462,501 14,049 4,476,551 785,062 5,261,613 72,818 1995 7/98
Tucker, GA ........... 4,545,700 12,393 4,558,094 799,744 5,357,838 82,076 1987 7/98
Arlington Heights, IL 8,371,126 72,221 8,443,348 1,474,819 9,918,167 153,826 1989 7/98
Champaign, IL ........ 2,645,580 135,679 2,781,258 447,686 3,228,944 70,810 1982 7/98
Elk Grove Village, IL 8,987,067 76,370 9,063,438 1,583,515 10,646,953 165,212 1985 7/98
Hoffman Estates, IL .. 9,254,248 30,316 9,284,564 1,630,664 10,915,228 167,012 1989 7/98
Moline, IL ........... 2,257,510 38,326 2,295,836 395,911 2,691,747 83,399 1986 7/98
Oakbrook Terrace, IL . 8,738,589 93,467 8,832,056 1,539,666 10,371,722 159,120 1984 7/98
Schaumburg, IL ....... 8,309,673 10,362 8,320,035 1,463,975 9,784,010 149,998 1982 7/98
Indianapolis, IN ..... 9,561,210 69,123 9,630,333 1,684,834 11,315,167 163,526 1980 7/98
Indianapolis, IN ..... 3,530,754 16,056 3,546,810 602,589 4,149,399 109,256 1981 7/98
Merrillville, IN ..... 3,323,615 189,142 3,512,757 574,980 4,087,737 75,071 1979 7/98
Lenexa, KS ........... 5,758,096 75,485 5,833,581 1,013,679 6,847,260 129,742 1978 7/98
Wichita, KS .......... 3,479,512 463,411 3,942,923 -- 3,942,923 399,852 1978 7/98
Lexington, KY ........ 5,300,151 18,229 5,318,380 932,883 6,251,263 88,077 1982 7/98
Alexandria, LA ....... 6,814,270 (40,054) 6,774,216 995,042 7,769,257 116,289 1997 7/98
Baton Rouge, LA ...... 9,845,427 26,402 9,871,829 1,734,990 11,606,819 174,286 1984 7/98
Bossier City, LA ..... 10,601,965 5,506 10,607,471 1,868,497 12,475,968 186,574 1982 7/98
Gretna, LA ........... 8,561,779 23,158 8,584,937 1,508,464 10,093,401 150,666 1985 7/98
Kenner, LA ........... 14,984,662 42,956 15,027,619 2,641,914 17,669,533 257,869 1993 7/98
Lafayette, La, LA .... 7,540,154 10,278 7,550,432 1,328,177 8,878,609 136,499 1969 7/98
</TABLE>
138
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- -------------- ------------ ----------- ----------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Metairie, LA ..... $10,786,292 $ 73,550 $10,859,842 $ -- $10,859,842 $683,251 1967 7/98
Metairie, LA ..... 15,458,306 15,847 15,474,153 -- 15,474,153 694,626 1985 7/98
Monroe, LA ....... 5,384,339 5,381 5,389,720 947,739 6,337,459 98,986 1984 7/98
New Orleans, LA .. 4,354,349 48,964 4,403,314 765,976 5,169,290 80,790 1985 7/98
New Orleans, LA .. 7,135,565 34,317 7,169,882 1,256,779 8,426,661 125,732 1985 7/98
New Orleans, LA .. 5,307,196 6,213,888 11,521,084 1,223,302 12,744,386 -- 1999 7/98
Shreveport, LA ... 6,505,540 (55,955) 6,449,585 664,699 7,114,284 107,803 1997 7/98
Slidell, LA ...... 6,451,551 68,363 6,519,914 1,136,071 7,655,985 118,134 1993 7/98
Sulphur, LA ...... 9,120,039 4,618 9,124,657 1,606,980 10,731,637 159,636 1985 7/98
Hazelwood, MO .... 2,240,543 26,589 2,267,133 392,775 2,659,908 81,010 1977 7/98
St Louis, MO ..... 9,461,134 (94,739) 9,366,396 867,193 10,233,589 150,453 1997 7/98
Jackson, MS ...... 2,896,382 49,830 2,946,212 508,688 3,454,900 62,034 1974 7/98
Jackson, MS ...... 4,212,283 42,066 4,254,349 709,949 4,964,298 69,785 1993 7/98
Cary, NC ......... 13,293,656 (55,763) 13,237,893 2,345,939 15,583,832 196,437 1996 7/98
Cary, NC ......... 8,728,546 (367,174) 8,361,372 1,653,827 10,015,199 221,880 1998 7/98
Charlotte, NC .... 5,439,007 2,392,286 7,831,293 1,227,118 9,058,411 -- 1998 7/98
Charlotte, NC .... 6,860,195 32,041 6,892,237 1,208,184 8,100,421 122,750 1985 7/98
Charlotte, NC .... 4,462,651 15,453 4,478,104 783,722 5,261,826 82,767 1986 7/98
Durham, NC ....... 690,651 4,118,626 4,809,277 1,147,248 5,956,525 -- 1999 7/98
Greensboro, NC ... 91,528 4,090,360 4,181,888 1,241,004 5,422,892 -- 1999 7/98
Greensboro, NC ... -- -- -- 289,698 289,698 -- N/A 7/98
Raleigh, NC ...... 1,381,047 6,114,382 7,495,429 1,244,653 8,740,082 -- 1999 7/98
Raleigh, NC ...... 9,240,392 121,089 9,361,482 1,484,478 10,845,960 148,371 1997 7/98
Winston-Salem, NC 1,516,141 4,002,848 5,518,988 1,707,220 7,226,208 -- 1999 7/98
Omaha, NE ........ 4,063,807 74,738 4,138,545 706,438 4,844,983 89,518 1981 7/98
Albuquerque, NM .. 6,979,226 22,423 7,001,649 1,229,190 8,230,839 125,185 1970 7/98
Albuquerque, NM .. 9,657,110 9,379 9,666,490 1,701,758 11,368,248 169,154 1985 7/98
Albuquerque, NM .. 7,419,168 34,142 7,453,310 1,306,827 8,760,137 131,066 1982 7/98
Albuquerque, NM .. 7,061,635 707,073 7,768,708 815,418 8,584,126 111,657 1997 7/98
Farmington, NM ... 5,354,541 27,357 5,381,899 1,037,151 6,419,050 98,082 1983 7/98
</TABLE>
139
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ --------------- ------------- ------------ ----------- ----------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Las Cruces, NM ...... $ 3,887,580 $ 12,977 $ 3,900,557 $ 683,605 $ 4,584,162 $ 73,904 1990 7/98
Santa Fe, NM ........ 10,482,425 38,475 10,520,900 1,847,401 12,368,301 181,345 1986 7/98
Las Vegas, NV ....... 4,095,884 3,895,557 7,991,441 1,418,487 9,409,928 -- 1999 7/98
Las Vegas, NV ....... -- -- -- -- -- -- Leased 7/98
Las Vegas, NV ....... 10,831,428 1,983,925 12,815,353 1,899,819 14,715,172 214,320 1994 7/98
Reno, NV ............ 6,292,389 24,382 6,316,772 1,107,983 7,424,755 114,115 1981 7/98
Columbus, OH ........ 4,261,818 37,333 4,299,151 749,647 5,048,798 121,846 1980 7/98
Del City, OK ........ 5,994,389 12,223 6,006,612 1,055,395 7,062,007 107,797 1985 7/98
Norman, OK .......... 6,512,329 (26,934) 6,485,395 974,479 7,459,874 105,907 1997 7/98
Oklahoma City, OK ... 2,431,771 4,322,216 6,753,986 1,325,810 8,079,796 -- 1999 7/98
Oklahoma City, OK ... 7,521,155 83,859 7,605,015 1,324,824 8,929,839 134,718 1979 7/98
Oklahoma City, OK ... 12,707,607 59,460 12,767,067 2,240,080 15,007,147 213,575 1996 7/98
Tulsa, OK ........... 3,764,727 41,662 3,806,389 661,925 4,468,314 71,130 1974 7/98
Tulsa, OK ........... 4,816,485 24,065 4,840,551 847,530 5,688,081 88,254 1985 7/98
Tulsa, OK ........... 4,210,223 17,848 4,228,071 740,542 4,968,613 77,851 1990 7/98
Moon Township, PA ... 5,617,668 46,154 5,663,821 988,897 6,652,718 108,695 1985 7/98
Anderson, SC ........ 3,482,009 21,922 3,503,931 612,034 4,115,965 56,141 1995 7/98
Columbia, SC ........ 3,225,225 55,986 3,281,211 566,719 3,847,930 63,495 1980 7/98
Greensboro, SC ...... 5,980,091 22,028 6,002,119 1,052,872 7,054,991 109,817 1981 7/98
Greenville, SC ...... 991,210 4,516,697 5,507,907 852,127 6,360,034 -- 1999 7/98
Myrtle Beach, SC .... 7,317,710 275,349 7,593,059 1,841,290 9,434,349 117,881 1996 7/98
North Charleston, SC 5,307,416 25,370 5,332,786 934,165 6,266,951 96,527 1981 7/98
Chattanooga, TN ..... 5,721,768 13,860 5,735,628 1,007,285 6,742,913 92,497 1995 7/98
Kingsport, TN ....... 5,113,764 (50,615) 5,063,149 889,325 5,952,474 96,533 1995 7/98
Knoxville, TN ....... 5,550,237 25,654 5,575,891 977,015 6,552,906 101,349 1986 7/98
Knoxville, TN ....... 3,878,194 13,380 3,891,574 681,949 4,573,523 80,208 1995 7/98
Memphis, TN ......... 3,336,592 3,947,805 7,284,398 1,514,027 8,798,424 -- 1998 7/98
Memphis, TN ......... 5,745,873 13,826 5,759,700 1,011,539 6,771,239 108,386 1979 7/98
Memphis, TN ......... 3,519,797 57,170 3,576,967 618,702 4,195,669 67,594 1983 7/98
Memphis, TN ......... 6,051,153 24,867 6,076,020 1,065,412 7,141,432 110,110 1986 7/98
</TABLE>
140
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ ---------- ----------- ------------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nashville-South, TN .. $ 8,235,038 $ 24,347 $ 8,259,386 $1,450,804 $ 9,710,190 $148,121 1982 7/98
Nashville-South, TN .. 4,992,812 38,776 5,031,588 878,646 5,910,234 98,104 1979 7/98
Nashville-South, TN .. 8,741,098 17,693 8,758,791 1,540,108 10,298,899 154,335 1993 7/98
Abilene, TX .......... 4,621,327 8,450 4,629,777 813,090 5,442,867 84,747 1979 7/98
Addison, TX .......... 12,293,005 16,588 12,309,593 2,169,354 14,478,947 196,782 1996 7/98
Amarillo, TX ......... 6,732,642 29,486 6,762,128 1,185,675 7,947,803 122,300 1983 7/98
Amarillo, TX ......... 5,386,670 2,377 5,389,047 948,151 6,337,198 95,991 1986 7/98
Arlington, TX ........ 13,933,240 141,841 14,075,081 2,456,369 16,531,450 259,369 1989 7/98
Arlington, TX ........ 8,267,633 13,618 8,281,251 1,471,857 9,753,108 130,832 1997 7/98
Austin, TX ........... 3,412,522 4,200,001 7,612,523 2,946,105 10,558,628 -- 1998 7/98
Austin, TX ........... 1,041,028 5,195,294 6,236,321 1,212,401 7,448,722 -- 1999 7/98
Austin, TX ........... 9,775,256 2,836 9,778,092 1,722,589 11,500,681 170,692 1983 7/98
Austin, TX ........... 8,439,970 12,607 8,452,577 1,486,968 9,939,545 149,252 1972 7/98
Austin, TX ........... 10,532,391 51,775 10,584,166 1,856,219 12,440,385 150,227 1975 7/98
Austin, TX ........... 9,870,999 32,117 9,903,116 1,739,503 11,642,619 172,766 1977 7/98
Austin, TX ........... 11,881,356 65,534 11,946,891 2,094,272 14,041,163 210,366 1993 7/98
Austin, TX ........... 15,276,708 43,101 15,319,809 2,695,890 18,015,699 225,808 1996 7/98
Balcones Heights, TX . 133,941 2,028 135,969 -- 135,969 2,808 1968 7/98
Baytown, TX .......... 5,344,949 35,116 5,380,065 940,788 6,320,853 96,932 1984 7/98
Beaumont, TX ......... 7,210,109 24,503 7,234,612 1,269,934 8,504,546 128,572 1979 7/98
Bedford, TX .......... 4,794,865 16,092 4,810,958 843,697 5,654,655 93,549 1991 7/98
Clute, TX ............ 4,402,811 26,462 4,429,273 774,528 5,203,801 84,207 1977 7/98
College Station, TX .. 11,461,417 23,378 11,484,796 2,020,165 13,504,961 202,645 1980 7/98
Corpus Christi, TX ... 8,802,172 72,723 8,874,896 1,550,886 10,425,782 155,715 1983 7/98
Corpus Christi, TX ... 5,521,350 24,124 5,545,474 971,918 6,517,392 101,463 1973 7/98
Dallas, TX ........... 5,551,202 13,086 5,564,288 977,185 6,541,473 111,294 1971 7/98
Dallas, TX ........... 7,544,290 10,413 7,554,704 1,603,738 9,158,442 131,978 1975 7/98
Dallas, TX ........... 8,225,565 10,760 8,236,325 1,449,132 9,685,457 144,264 1974 7/98
Dallas, TX ........... 4,737,976 2,477 4,740,453 833,675 5,574,128 83,819 1974 7/98
Dallas, TX ........... 7,045,322 3,955 7,049,278 1,240,854 8,290,132 122,091 1978 7/98
</TABLE>
141
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- -------------- ------------ ----------- ----------- ------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Del Rio, TX ........ $ 2,774,995 $ 15,724 $ 2,790,720 $ 487,267 $ 3,277,987 $ 54,967 1993 7/98
Denton, TX ......... 4,732,766 56,899 4,789,666 832,756 5,622,422 87,639 1992 7/98
Eagle Pass, TX ..... 6,068,832 10,109 6,078,942 1,068,532 7,147,474 109,889 1982 7/98
El Paso, TX ........ 1,993,099 1,533,248 3,526,348 349,285 3,875,633 42,337 1989 7/98
El Paso, TX ........ 6,435,249 32,428 6,467,677 1,133,194 7,600,871 114,839 1980 7/98
El Paso, TX ........ 6,701,217 25,309 6,726,527 1,180,130 7,906,657 120,900 1969 7/98
El Paso, TX ........ 6,166,588 10,507 6,177,095 1,085,783 7,262,878 111,279 1984 7/98
Euless, TX ......... 6,665,600 6,421 6,672,021 1,173,844 7,845,865 120,335 1981 7/98
Farmers Branch, TX . 7,087,609 10,975 7,098,584 1,248,316 8,346,900 123,333 1990 7/98
Fort Stockton, TX .. 3,736,240 6,086 3,742,326 656,898 4,399,224 67,166 1994 7/98
Fort Worth, TX ..... 9,224,663 12,253 9,236,916 1,627,882 10,864,798 147,814 1996 7/98
Fort Worth, TX ..... 7,974,545 159,330 8,133,875 1,196,924 9,330,799 138,014 1997 7/98
Galveston, TX ...... 6,842,408 65,872 6,908,280 1,205,045 8,113,325 131,978 1988 7/98
Garland, TX ........ 7,129,797 6,042 7,135,839 1,255,761 8,391,600 125,526 1979 7/98
Georgetown, TX ..... 4,808,723 29,132 4,837,855 846,160 5,684,015 84,021 1994 7/98
Grand Prairie, TX .. 5,233,559 32,708 5,266,267 921,131 6,187,398 94,468 1980 7/98
Harlingen, TX ...... 7,120,695 49,035 7,169,730 1,254,155 8,423,885 129,477 1982 7/98
Houston, TX ........ 1,617,173 4,622,710 6,239,883 1,501,567 7,741,449 -- 1999 7/98
Houston, TX ........ 8,821,421 74,646 8,896,068 1,554,283 10,450,351 160,902 1969 7/98
Houston, TX ........ 4,420,603 8,406 4,429,009 636,698 5,065,707 87,605 1973 7/98
Houston, TX ........ 5,890,076 16,021 5,906,097 1,036,987 6,943,084 108,023 1977 7/98
Houston, TX ........ 6,273,192 71,646 6,344,838 1,104,595 7,449,433 113,998 1978 7/98
Houston, TX ........ 6,642,552 37,318 6,679,870 1,169,777 7,849,647 121,034 1985 7/98
Houston, TX ........ 10,399,067 31,742 10,430,809 1,832,691 12,263,500 182,455 1986 7/98
Houston, TX ........ 6,018,910 21,551 6,040,461 1,059,722 7,100,183 108,890 1989 7/98
Houston, TX ........ 2,274,304 8,038 2,282,342 398,909 2,681,251 54,367 1989 7/98
Houston, TX ........ 3,695,447 2,751 3,698,198 649,699 4,347,897 73,246 1976 7/98
Houston, TX ........ 6,076,965 24,937 6,101,903 1,069,967 7,171,870 110,169 1977 7/98
Houston, TX ........ 4,067,389 17,350 4,084,739 715,336 4,800,075 75,994 1980 7/98
Houston, TX ........ 7,007,505 19,742 7,027,247 1,234,180 8,261,427 125,260 1981 7/98
</TABLE>
142
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- ------------- ------------ --------- ----------- ------------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Houston, TX ............. $ 7,426,052 $ (45,019) $ 7,381,033 $ 873,698 $ 8,254,731 $ 118,669 1997 7/98
Houston, TX ............. 12,152,069 386,205 12,538,274 2,755,165 15,293,438 208,069 1998 7/98
Huntsville, TX .......... 6,758,618 26,842 6,785,460 1,190,259 7,975,719 112,665 1996 7/98
Irving, TX .............. 8,641,754 5,127 8,646,882 1,522,577 10,169,459 156,923 1974 7/98
Irving, TX .............. 11,014,227 13,919 11,028,146 1,943,687 12,971,833 177,453 1996 7/98
Killeen, TX ............. 5,932,179 4,208 5,936,386 1,044,191 6,980,577 108,749 1976 7/98
La Marque, TX ........... 2,205,750 (39,445) 2,166,305 389,250 2,555,555 -- 1990 7/98
La Porte, TX ............ 7,485,670 6,796 7,492,466 1,318,562 8,811,028 132,262 1985 7/98
Laredo, TX .............. 10,698,219 45,637 10,743,856 1,885,483 12,629,339 194,601 1969 7/98
Lewisville, TX .......... 6,832,961 15,209 6,848,170 1,203,378 8,051,548 121,621 1984 7/98
Live Oak, TX ............ 6,889,107 10,531 6,899,638 1,213,286 8,112,924 125,221 1986 7/98
Longview, TX ............ 5,944,128 15,093 5,959,222 1,046,525 7,005,747 106,274 1983 7/98
Lubbock, TX ............. 7,098,710 11,440 7,110,151 1,250,275 8,360,426 128,845 1976 7/98
Lubbock, TX ............. 5,815,970 127,162 5,943,133 1,023,909 6,967,042 112,195 1994 7/98
Lufkin, TX .............. 5,887,501 43,602 5,931,104 1,036,533 6,967,637 106,236 1984 7/98
Mesquite, TX ............ -- -- -- 341,446 341,446 -- N/A 7/98
Midland, TX ............. 4,982,957 24,901 5,007,859 876,907 5,884,766 94,158 1983 7/98
Nacogdoches, TX ......... 3,352,383 32,951 3,385,334 589,159 3,974,493 63,307 1984 7/98
North Richland Hills, TX 5,707,616 7,993 5,715,609 1,004,788 6,720,397 99,960 1993 7/98
Odessa, TX .............. 6,327,946 33,590 6,361,537 1,114,258 7,475,795 113,565 1981 7/98
Plano, TX ............... 4,370,769 67,958 4,438,727 768,874 5,207,601 80,306 1980 7/98
Plano, TX ............... 9,439,404 (459,088) 8,980,316 1,269,573 10,249,889 155,317 1997 7/98
Round Rock, TX .......... 10,234,147 49,912 10,284,060 1,803,588 12,087,648 183,930 1991 7/98
San Angelo, TX .......... 5,962,114 21,409 5,983,523 1,049,699 7,033,222 114,787 1986 7/98
San Antonio, TX ......... 20,288,264 73,140 20,361,404 3,577,844 23,939,248 314,471 1968 7/98
San Antonio, TX ......... 9,913,036 7,550 9,920,586 1,746,921 11,667,507 1,259,770 1968 7/98
San Antonio, TX ......... 6,526,296 24,876 6,551,172 1,149,261 7,700,433 118,533 1970 7/98
San Antonio, TX ......... 9,172,066 67,996 9,240,062 1,616,162 10,856,224 167,771 1975 7/98
San Antonio, TX ......... 5,697,351 3,596 5,700,947 1,002,977 6,703,924 722,890 1975 7/98
San Antonio, TX ......... 5,627,889 34,285 5,662,175 990,719 6,652,894 103,906 1981 7/98
</TABLE>
143
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building & Accumulated Const. Date
Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired
------------ -------------- -------------- ------------ ---------- ----------- ------------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
San Antonio, TX ...... $10,806,800 $ 34,395 $10,841,195 $1,904,644 $12,745,839 $154,217 1982 7/98
San Antonio, TX ...... 12,794,370 4,917 12,799,287 2,255,392 15,054,679 224,861 1984 7/98
San Antonio, TX ...... 3,284,488 26,366 3,310,854 577,177 3,888,031 63,674 1974 7/98
San Antonio, TX ...... 5,311,012 22,211 5,333,224 934,799 6,268,023 99,057 1976 7/98
San Antonio, TX ...... -- -- -- 1,432,542 1,432,542 -- N/A 7/98
San Marcos, TX ....... 7,024,196 30,615 7,054,811 1,237,126 8,291,937 120,636 1995 7/98
Shenandoah, TX ....... 9,129,561 40,777 9,170,338 1,608,643 10,778,981 158,531 1986 7/98
Shermann, TX ......... 7,584,039 (68,288) 7,515,751 954,414 8,470,164 124,825 1997 7/98
Stafford, TX ......... 9,515,881 14,469 9,530,351 1,676,835 11,207,186 169,928 1990 7/98
Temple, TX ........... 4,846,042 1,400 4,847,443 852,745 5,700,188 85,758 1984 7/98
Texarkana, TX ........ 4,948,588 50,127 4,998,715 870,842 5,869,557 92,109 1982 7/98
Texas City, TX ....... 4,027,610 3,766 4,031,376 708,316 4,739,692 71,245 1978 7/98
Tyler, TX ............ 9,253,152 4,279 9,257,431 1,630,453 10,887,884 161,047 1983 7/98
Victoria, TX ......... 7,226,090 18,363 7,244,453 1,272,754 8,517,207 128,596 1984 7/98
Waco, TX ............. 6,689,172 4,977 6,694,150 1,292,751 7,986,901 124,851 1971 7/98
White Settlement, TX . 6,233,038 2,793 6,235,832 1,097,492 7,333,324 110,828 1980 7/98
Wichita Falls, TX .... 5,020,159 5,209 5,025,368 883,472 5,908,840 92,949 1973 7/98
Layton, UT ........... 3,669,799 10,653 3,680,452 645,173 4,325,625 74,157 1988 7/98
Midvale, UT .......... 5,820,947 104,811 5,925,759 1,024,752 6,950,511 121,664 1978 7/98
Ogden, UT ............ 8,909,631 (270,496) 8,639,136 791,871 9,431,007 132,904 1997 7/98
Salt Lake City, UT ... -- -- -- 6,577,985 6,577,985 -- N/A 7/98
Salt Lake City, UT ... 8,538,608 14,981 8,553,589 1,530,439 10,084,028 132,464 1997 7/98
Bristol, VA .......... 3,808,727 4,367 3,813,094 669,690 4,482,784 67,945 1995 7/98
Hampton, VA .......... 4,507,663 28,888 4,536,551 793,032 5,329,583 85,261 1985 7/98
Richmond, VA ......... 3,173,648 30,033 3,203,682 557,617 3,761,299 63,947 1987 7/98
Virginia Beach, VA ... 3,702,148 17,685 3,719,833 650,882 4,370,715 74,786 1984 7/98
Kirkland, WA ......... 11,147,010 149,368 11,296,378 1,951,151 13,247,529 220,549 1986 7/98
</TABLE>
144
<PAGE>
<TABLE>
<CAPTION>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
Cost
Capitalized/
Building & Adjusted Total
Improvements Subsequent to Building &
Encumbrances at Acquisition Acquisitions Improvements
-------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sea-Tac, WA ............................ $ 7,647,560 $ 170,337 $ 7,817,897
Tacoma, WA ............................. 8,956,029 99,004 9,055,032
Cheyenne, WY ........................... 2,793,345 67,132 2,860,477
-------------- ----------- --------------
Subtotal .............................. -- 2,124,497,074 78,822,780 2,203,319,854
-- -------------- ----------- --------------
Grand Total ........................... $53,238,189 $3,794,805,947 $84,884,342 $3,879,690,289
=========== ============== =========== ==============
<CAPTION>
Accumulated Const. Date
Land (2) Total (5) Deprec.(4)(5) Date Acquired
--------------- ---------------- --------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sea-Tac, WA ............................ $ 1,332,999 $ 9,150,896 $ 165,440 1987 7/98
Tacoma, WA ............................. 1,562,329 10,617,361 186,377 1988 7/98
Cheyenne, WY ........................... 485,089 3,345,566 72,301 1981 7/98
------------ -------------- ------------
Subtotal .............................. 391,636,281 2,594,956,135 38,946,635
------------ -------------- ------------
Grand Total ........................... $608,525,377 $4,488,215,666 $184,411,133
============ ============== ============
</TABLE>
145
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(1) Facility classifications are Long-Term Care (LTC), Retirement Living (RL),
Psychiatric Hospital (Psych), Rehabilitation Hospital (Rehab), Assisted
Living (AL), and Medical Office Buildings (MOB), Golf Courses (GC) and
land under development (LND).
(2) Gross amount at which land is carried at close of period also represents
initial cost to Realty.
(3) Cost for federal income tax purposes.
(4) Depreciation is calculated using a 40-year life for healthcare and lodging
facilities and a 30-year life for all golf course buildings and a 20-year
life for golf course improvements.
(5) Real estate and accumulated depreciation reconciliations for the three
years ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Accumulated
Real Estate Depreciation
------------- -------------
(In thousands)
<S> <C> <C>
Balance at close of year--December 31, 1995 ................... $ 746,379 $ 77,203
Additions during the period:
Acquisitions ................................................ 325,789
Value of real estate acquired ............................... 36,875
Additions to existing properties ............................
Provision for depreciation .................................. 21,269
Deductions:
Sale of real estate ......................................... (4,701) (390)
---------- ---------
Balance at close of year--December 31, 1996 ................... 1,104,342 98,082
Additions during the period:
Acquisitions ................................................ 292,607
Value of real estate acquired in merger ..................... 237,003
Provision for depreciation .................................. 26,750
Deductions:
Sale of real estate ......................................... (6,173)
----------
Balance at close of year--December 31, 1997 ................... 1,627,779 124,832
Additions during the period:
Acquisitions ................................................ 636,989
Value of real estate acquired in mergers .................... 2,751,339
Provision for depreciation .................................. 86,395
Other ....................................................... 6,344
Deductions:
Sale of real estate ......................................... (518,190) (33,161)
Income from joint venture net of dividends received ......... (544)
Other ....................................................... (9,158)
----------
Balance at close of year--December 31, 1998 ................... 4,488,215 184,410
Provision for impairment ...................................... 47,918
Included in net assets of discontinued operations ............. (370,957) (4,172)
---------- ---------
Balance per financial statements .............................. $4,117,258 $ 228,156
========== =========
</TABLE>
(6) Real estate investments reserved against due to impairment.
(7) Real estate assets held for sale that were written down to fair value less
costs to sell.
146
<PAGE>
<TABLE>
<CAPTION>
MEDITRUST CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
Interest Final Maturity
Description (A) Rate Date
- - ------------------------------------------------------------------------ ---------- -------------------
<S> <C> <C>
Individual mortgages in excess of 3% of the total carrying
amount:
7 long-term care facilities located in Missouri ........................ 10.70% August 1, 2006
10 long-term care facilities located in Texas, Missouri, and 10.95% November 17, 2001
Nebraska ..............................................................
18 long-term care facilities located in Colorado, Florida, Indiana, 10.85% August 23, 2005
Kansas, Missouri, Nebraska, North Carolina, Tennessee and
Washington ............................................................
17 long-term care facilities located in Arizona, Colorado, Florida, 10.75% May 21, 2003
Georgia, Indiana, Kansas, Tennessee and Utah ..........................
<CAPTION>
Periodic Face
Payment Amount of
Description (A) Terms Mortgages
- - ------------------------------------------------------------------------ ---------------------------- --------------
<S> <C> <C>
Individual mortgages in excess of 3% of the total carrying
amount:
7 long-term care facilities located in Missouri ........................ Monthly payments of $ 41,385,000
principal and interest of
$384,767, balloon
payment of
$38,544,000 due at
maturity
10 long-term care facilities located in Texas, Missouri, and Monthly payments of 40,803,800
Nebraska .............................................................. principal and interest of
$381,767, balloon
payment of
$39,087,000 due at
maturity
18 long-term care facilities located in Colorado, Florida, Indiana, Monthly payments of 87,940,000
Kansas, Missouri, Nebraska, North Carolina, Tennessee and principal and interest of
Washington ............................................................ $825,488, balloon
payment of
$80,961,000 due at
maturity
17 long-term care facilities located in Arizona, Colorado, Florida, Monthly payments of 103,073,000
Georgia, Indiana, Kansas, Tennessee and Utah .......................... principal and interest of
$968,000, balloon
payment of
$95,501,000 due at
maturity
<CAPTION>
Carrying
Amount of
Description (A) Mortgages (D)
- - ------------------------------------------------------------------------ --------------
<S> <C>
Individual mortgages in excess of 3% of the total carrying
amount:
7 long-term care facilities located in Missouri ........................ $ 41,132,940
10 long-term care facilities located in Texas, Missouri, and 40,060,019
Nebraska ..............................................................
18 long-term care facilities located in Colorado, Florida, Indiana, 86,474,955
Kansas, Missouri, Nebraska, North Carolina, Tennessee and
Washington ............................................................
17 long-term care facilities located in Arizona, Colorado, Florida, 100,494,835
Georgia, Indiana, Kansas, Tennessee and Utah ..........................
</TABLE>
147
<PAGE>
<TABLE>
<CAPTION>
MEDITRUST CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
Interest Final Maturity
Description (A) Rate Date
- - -------------------------------------------------------------------- -------------- ------------------------
<S> <C> <C>
Mortgages individually less than 3% of total carrying amount:
Long-term care facilities, 62 mortgages, face amounts ranging From 8.20% From August 1999
from $525,000 to $29,158,000, located in Arizona, California, to 12.50% to March 2012
Colorado, Connecticut, Florida, Idaho, Indiana,
Massachusetts, Michigan, Missouri, New Jersey, New Mexico,
Nevada, New York, North Carolina, Ohio, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Utah, Washington,
West Virginia and Wyoming .........................................
Retirement living facilities, 3 mortgages, face amounts ranging From 8.83% From January 2000
from $5,500,000 to $12,100,000, located in North Carolina, to 10.90% to January 2007
Ohio and Utah .....................................................
Alcohol and substance abuse treatment facility, face amount of 11.00% September 29, 2005
$33,300,000, located in New York ..................................
Medical office buildings, 6 mortgages, face amounts ranging From 7.6% From March 2000
from $2,697,298 to $30,122,543, located in Arizona, Florida, to 9.75% to October 2008
Nevada and Tennessee ..............................................
Assisted living facilities, 9 mortgages, face amounts ranging From 8.84% From September 2005
from $3,387,878 to $26,450,000, located in Florida, Michigan, to 9.85% to June 2012
Washington, Colorado, Idaho .......................................
Land under development, 1 loan, located in Florida ................. 9.25% March 4, 2004
Other notes secured by real estate in California ................... From 8.50%
to 10.52%
Construction Loans:
Long-term care facilities, 4 loans, amounts ranging from 9.25% (C)
$6,112,079 to $12,232,034, located in Florida and Ohio ............
Medical office building, 1 loan, located in New Jersey ............. 9.75% (C)
Assisted living facility, 1 loan, located in Michigan .............. 9.25% (C)
<CAPTION>
Periodic Face Carrying
Payment Amount of Amount of
Description (A) Terms Mortgages Mortgages (D)
- - -------------------------------------------------------------------- ---------- ----------- -----------------------
<S> <C> <C> <C>
Mortgages individually less than 3% of total carrying amount:
Long-term care facilities, 62 mortgages, face amounts ranging (E) $ 632,021,956(F)
from $525,000 to $29,158,000, located in Arizona, California,
Colorado, Connecticut, Florida, Idaho, Indiana,
Massachusetts, Michigan, Missouri, New Jersey, New Mexico,
Nevada, New York, North Carolina, Ohio, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Utah, Washington,
West Virginia and Wyoming .........................................
Retirement living facilities, 3 mortgages, face amounts ranging (E) 20,925,150
from $5,500,000 to $12,100,000, located in North Carolina,
Ohio and Utah .....................................................
Alcohol and substance abuse treatment facility, face amount of (E) 32,344,743
$33,300,000, located in New York ..................................
Medical office buildings, 6 mortgages, face amounts ranging (E) 71,945,990
from $2,697,298 to $30,122,543, located in Arizona, Florida,
Nevada and Tennessee ..............................................
Assisted living facilities, 9 mortgages, face amounts ranging (E) 115,555,997
from $3,387,878 to $26,450,000, located in Florida, Michigan,
Washington, Colorado, Idaho .......................................
Land under development, 1 loan, located in Florida ................. (E) 13,508,402
Other notes secured by real estate in California ................... (E) 5,272,903
Construction Loans:
Long-term care facilities, 4 loans, amounts ranging from 32,030,410
$6,112,079 to $12,232,034, located in Florida and Ohio ............
Medical office building, 1 loan, located in New Jersey ............. 20,298,282
Assisted living facility, 1 loan, located in Michigan .............. 4,558,418
----------------
$ 1,216,625,000(B)
================
</TABLE>
- - --------
(A) Virtually all mortgage loans on real estate are first mortgage loans.
(B) The aggregate cost for federal income tax purposes.
(C) Final maturity date will be determined upon completion of construction.
(D) No mortgage loan is subject to delinquent principal or interest.
(E) Monthly payments of principal and interest normally payable at a level
amount, with a balloon payment at maturity.
(F) Includes a mortgage loan collateralized by a rehabilitation facility where
eroding margins and an expiring guarantee indicate that the Companies will
not likely collect all amounts due. Accordingly, the Companies provided a
loan loss for this asset of approximately $8,000,000.
148
<PAGE>
MEDITRUST CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
Reconciliation of carrying amount of mortgage loans for the three years
ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(In thousands)
- - ----------------------------------------------
<S> <C>
Balance at December 31, 1995 ................. $1,108,623
Additions during period:
New mortgage loans ......................... 137,686
Construction loan advances ................. 117,495
Other ...................................... 9,903
Deductions during period:
Collection of principal .................... (33,962)
Non-cash deductions ........................ (29,642)
Prepayment of mortgage loans ............... (128,285)
----------
Balance at December 31, 1996 ................. 1,181,818
Additions during period:
New mortgage loans ......................... 139,304
Construction loan advances ................. 160,557
Other ...................................... 5,764
Deductions during period:
Collection of principal .................... (7,629)
Prepayment of mortgage loans ............... (46,989)
----------
Balance at December 31, 1997 ................. 1,432,825
Additions during period:
New mortgage loans ......................... 76,260
Construction loan advances ................. 146,264
Deductions during period:
Collection of principal .................... (9,125)
Non-cash deduction ......................... (31,483)
Prepayment of mortgage loans ............... (398,116)
----------
Balance at December 31, 1998 ................. $1,216,625
==========
Reserve for loan loss ....................... (16,036)
Reallocation of valuation allowance ......... (2,955)
----------
Balance per financial statements ............ 1,197,634
</TABLE>
149
<PAGE>
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NOT APPLICABLE.
PART III
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to Item 4a above and the table and the
information appearing in the first subsection of the section entitled "Election
of Directors of The Meditrust Companies"and the section entitled "The Companies
- - --Executive Officers and Directors" contained in the Companies' Joint Proxy
Statement for their Annual Meetings of Shareholders ("Annual Meetings Proxy
Statement"), to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended ("Regulation 14A"). There are no family
relationships among any of the Directors or executive officers of the
Companies.
Incorporated by reference to the section entitled "Certain Transactions"
contained in the Companies' Annual Meetings Proxy Statement, to be filed
pursuant to Regulation 14A.
Item 11.
EXECUTIVE COMPENSATION
Incorporated by reference to the section entitled "Executive Compensation"
contained in the Companies' Annual Meeting Proxy Statement, to be filed
pursuant to Regulation 14A.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the table appearing in the first subsection
of the section entitled "Election of Directors of The Meditrust Companies" and
the section entitled "Principal and Management Shareholders of The Meditrust
Companies" contained in the Companies' Annual Meeting Proxy Statement, to be
filed pursuant to Regulation 14A.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section entitled "Certain Transactions"
contained in the Companies' Annual Meeting Proxy Statement, to be filed
pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
2. Financial Statement Schedules
<TABLE>
<CAPTION>
Page(s)
----------
<S> <C>
Report of Independent Accountants on Financial Statement Schedules 126
II. Valuation and Qualifying Accounts ............................ 127-148
III. Real Estate and Accumulated Depreciation ..................... 149-151
IV. Mortgage Loans on Real Estate .................................
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable
150
<PAGE>
or have been disclosed in the notes to consolidated financial statements, and
therefore, have been omitted.
3. Exhibits
Exhibits required as part of this report are listed in the index appearing
on Pages 154 through 159.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
<TABLE>
<S> <C> <C>
Meditrust Corporation -- Incorporated by reference to Exhibit 4.1 to Joint
Amended and Restated 1995 Registration Statement on Form S-8 of Meditrust
Share Award Plan Corporation and Meditrust Operating Company (File
Nos. 333-39771 and 333-39771-01)
Meditrust Operating Company -- Incorporated by reference to Exhibit 4.2 to Joint
Amended and Restated 1995 Registration Statement on Form S-8 of Meditrust
Share Award Plan Corporation and Meditrust Operating Company (File
Nos. 333-39771 and 333-39771-01)
Employment Agreement with -- Incorporated by reference to Exhibit 10.1 to the Joint
Abraham D. Gosman Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1998
</TABLE>
(b) Reports on Form 8-K. The Meditrust Companies filed one joint current
report on Form 8-K, event date November 12, 1998, during the quarter
ended December 31, 1998.
151
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEDITRUST CORPORATION
By: /s/ Laurie T. Gerber
------------------------------------------
Chief Financial Officer
(and Principal Financial and Accounting
Officer)
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- - --------------------------- ------------------------------------ ---------------
<S> <C> <C>
/s/ Thomas M. Taylor Chairman of the Board of Directors March 31, 1999
- - -------------------------
Thomas M. Taylor
/s/ David F. Benson Director, President and Treasurer March 31, 1999
- - ------------------------- (Principal Executive Officer)
David F. Benson
/s/ Donald J. Amaral Director March 31, 1999
- - -------------------------
Donald J. Amaral
/s/ Edward W. Brooke Director March 31, 1999
- - -------------------------
Edward W. Brooke
/s/ James P. Conn Director March 31, 1999
- - -------------------------
James P. Conn
/s/ John C. Cushman Director March 31, 1999
- - -------------------------
John C. Cushman
/s/ C. Gerald Goldsmith Director March 31, 1999
- - -------------------------
C. Gerald Goldsmith
/s/ Thomas J. Magovern Director March 31, 1999
- - -------------------------
Thomas J. Magovern
/s/ Gerald Tsai, Jr. Director March 31, 1999
- - -------------------------
Gerald Tsai, Jr.
/s/ Stephen E. Merrill Director March 31, 1999
- - -------------------------
Stephen E. Merrill
/s/ Nancy Goodman Brinker Director March 31, 1999
- - -------------------------
Nancy Goodman Brinker
</TABLE>
152
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEDITRUST OPERATING COMPANY
By: /s/ William C. Baker
------------------------------------
President
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- - --------------------------- ------------------------------------ ---------------
<S> <C> <C>
/s/ Thomas M. Taylor Chairman of the Board of Directors March 31, 1999
- - -------------------------
Thomas M. Taylor
/s/ William C. Baker President, Director, (Principal March 31, 1999
- - ------------------------- Executive, Financial and Accounting
William C. Baker Officer)
/s/ Donald J. Amaral Director March 31, 1999
- - -------------------------
Donald J. Amaral
/s/ David F. Benson Director March 31, 1999
- - -------------------------
David F. Benson
/s/ Edward W. Brooke Director March 31, 1999
- - -------------------------
Edward W. Brooke
/s/ C. Gerald Goldsmith Director March 31, 1999
- - -------------------------
C. Gerald Goldsmith
/s/ William G. Byrnes Director March 31, 1999
- - -------------------------
William G. Byrnes
/s/ Nancy Goodman Brinker Director March 31, 1999
- - -------------------------
Nancy Goodman Brinker
/s/ Thomas J. Magovern Director March 31, 1999
- - -------------------------
Thomas J. Magovern
/s/ Gerald Tsai, Jr. Director March 31, 1999
- - -------------------------
Gerald Tsai, Jr.
</TABLE>
153
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
No Title Method of Filing
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated as of Incorporated by reference to Exhibit 10.1 to
January 3, 1998 by and among La Quinta the Joint Current Report on Form 8-K of
Inns, Inc., Meditrust Corporation and Meditrust Corporation and Meditrust
Meditrust Operating Company Operating Company, event date January 8,
1998
2.2 Agreement and Plan of Merger dated as of Incorporated by reference to Exhibit 2 to the
January 11, 1998 among Meditrust Joint Current Report on Form 8-K of
Corporation, Meditrust Operating Company Meditrust Corporation and Meditrust
and Cobblestone Holdings, Inc. Operating Company, event date January 11,
1998
2.3 First Amendment to Agreement and Plan of Incorporated by reference to Exhibit 2 to the
Merger among Meditrust Corporation, Joint Current Report on Form 8-K of
Meditrust Operating Company and Meditrust Corporation and Meditrust
Cobblestone Holdings, Inc., dated as of Operating Company, event date March 16,
March 16, 1998 1998
3.1 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.2 to
Meditrust Corporation filed with the the Joint Registration Statement on Form
Secretary of State of Delaware on March 2, S-4 of Meditrust Corporation and Meditrust
1998 Operating Company (File Nos. 333-47737
and 333-47737-01)
3.2 Certificate of Amendment of Restated Incorporated by reference to Exhibit 3.8 to
Certificate of Incorporation of Meditrust the Joint Quarterly Report on form 10-Q for
Corporation filed with the Secretary of State the Quarter ended June 30, 1998
of Delaware on July 17, 1998
3.3 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.4 to
Meditrust Operating Company filed with the the Joint Registration Statement on Form
Secretary of State of Delaware on March 2, S-4 of Meditrust Corporation and Meditrust
1998 Operating Company (File Nos. 333-47737
and 333-47737-01)
3.4 Certificate of Amendment of Restated Incorporated by reference to Exhibit 3.9 to
Certificate of Incorporation of Meditrust the Joint Quarterly Report on form 10-Q for
Operating Company filed with the Secretary the Quarter ended June 30, 1998
of State of Delaware on July 17, 1998
3.5 Certificate of Designation for the 9% Series Incorporated by reference to Exhibit 4.1 to
A Cumulative Redeemable Preferred Stock Joint Current Report on Form 8-K of
of Meditrust Corporation filed with the Meditrust Corporation and Meditrust
Secretary of State of Delaware on June 12, Operating Company, event date June 10,
1998 1998
3.6 Amended and Restated By-laws of Incorporated by reference to Exhibit 3.5 to
Meditrust Corporation the Joint Registration Statement on Form
S-4 of Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-47737
and 333-47737-01)
</TABLE>
154
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Title Method of Filing
<S> <C> <C>
3.7 Amended and Restated By-Laws of Incorporated by reference to Exhibit 3.6 to
Meditrust Operating Company the Joint Registration Statement on Form
S-4 of Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-47737
and 333-47737-01)
4.1 Pairing Agreement by and between Incorporated by reference to Exhibit 5 to
Meditrust Corporation (formerly known as Joint Registration Statement on Form 8-A of
Santa Anita Realty Enterprises, Inc.) and Santa Anita Operating Company filed
Meditrust Operating Company (formerly February 5, 1980
known as Santa Anita Operating Company)
dated as of December 20, 1979
4.2 First Amendment to Pairing Agreement, by Incorporated by reference to Exhibit 4.4 to
and between Meditrust Corporation and Joint Registration Statement on Form S-8 of
Meditrust Operating Company, dated Meditrust Corporation and Meditrust
November 6, 1997 Operating Company (File Nos. 333-39771
and 333-39771-01)
4.3 Second Amendment to Pairing Agreement, Incorporated by reference to Exhibit 4.3 to
by and between Meditrust Corporation and the Joint Registration Statement on Form
Meditrust Operating Company, dated S-4 of Meditrust Corporation and Meditrust
February 6, 1998 Operating Company (File Nos. 333-47737
and 333-47737-01)
4.4 Third Amendment to Pairing Agreement, by Filed herewith
and between Meditrust Corporation and
Meditrust Operating Company, dated July
17, 1998
4.5 Rights Agreement, dated June 15, 1989, Incorporated by reference to Exhibit 2.1 to
among Meditrust Corporation (formerly Joint Registration Statement on Form 8-A of
known as Santa Anita Realty Enterprises, Santa Anita Realty Enterprises, Inc., filed
Inc.), Meditrust Operating Company June 19, 1989
(formerly known as Santa Anita Operating
Company), and Boston EquiServe, as
Rights Agent
4.6 Appointment of Boston EquiServe as Rights Incorporated by reference to Exhibit 4.6 to
Agent, dated October 24, 1997 Joint Registration Statement on Form S-8 of
Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-39771
and 333-39771-01)
4.7 Meditrust Corporation Amended and Incorporated by reference to Exhibit 4.1 to
Restated 1995 Share Award Plan Joint Registration Statement on Form S-8 of
Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-39771
and 333-39771-01)
4.8 Meditrust Operating Company Amended Incorporated by reference to Exhibit 4.2 to
and Restated 1995 Share Award Plan Joint Registration Statement on Form S-8 of
Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-39771
and 333-39771-01)
</TABLE>
155
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Title Method of Filing
<S> <C> <C>
4.9 Form of Fiscal Agency Agreement dated Incorporated by reference to Exhibit 4.7 to
November 15, 1993 between Meditrust and Form 10-K of Meditrust for the fiscal year
Fleet National Bank as fiscal agent ended December 31, 1993
4.10 Form of Indenture dated April 23, 1992 Incorporated by reference to Exhibit 4 to the
between Meditrust and Fleet National Bank, Registration Statement on Form S-3 of
as trustee Meditrust (File No. 33-45979)
4.11 Form of 9% Convertible Debenture due Incorporated by reference to Exhibit 4.1 to
2002 the Registration Statement on Form S-3 of
Meditrust (File No. 33-45979)
4.12 Form of Indenture dated March 9, 1994 Incorporated by reference to Exhibit 4 to the
between Meditrust and Shawmut Bank as Registration Statement on Form S-3 of
Trustee Meditrust (File No. 33-50835)
4.13 Form of 7 1/2% Convertible Debenture due Incorporated by reference to Exhibit 4 to the
2001 Registration Statement on Form S-3 of
Meditrust (File No. 33-50835)
4.14 Form of First Supplemental Indenture dated Incorporated by reference to Exhibit 4.1 to
as of July 26, 1995, to Indenture dated as of the Current Report on Form 8-K of Meditrust
July 26, 1995 between Meditrust and Fleet dated July 13, 1995
National Bank
4.15 Form of 8.54% Convertible Senior Note due Incorporated by reference to Exhibit 4.1 to
July 1, 2000 the Current Report on Form 8-K of Meditrust
dated July 27, 1995
4.16 Form of 8.56% Convertible Senior Note due Incorporated by reference to Exhibit 4.1 to
July 1, 2002 the Current Report on Form 8-K of Meditrust
dated July 27, 1995
4.17 Form of Second Supplemental Indenture Incorporated by reference to Exhibit 4.1 to
dated as of July 28, 1995, to Indenture the Current Report on Form 8-K of Meditrust
dated as of July 26, 1995 between dated July 27, 1995
Meditrust and Fleet National Bank, as
trustee
4.18 Form of Fixed Rate Senior Medium-term Incorporated by reference to Exhibit 4.3 to
Note the Current Report on Form 8-K of Meditrust
dated August 8, 1995
4.19 Form of Floating Rate Medium-term Note Incorporated by reference to Exhibit 4.4 to
the Current Report on Form 8-K of Meditrust
dated August 8, 1995
4.20 Form of Third Supplemental Indenture dated Incorporated by reference to Exhibit 4.2 to
as of August 10, 1995, to Indenture dated the Current Report on Form 8-K of Meditrust
as of July 26, 1995 between Meditrust and dated August 8, 1995
Fleet National Bank
4.21 Form of 7.375% Note due July 15, 2000 Incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K of Meditrust
dated July 13, 1995
</TABLE>
156
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Title Method of Filing
<S> <C> <C>
4.22 Form of 7.60% Note due July 15, 2001 Incorporated by reference to Exhibit 4.1 to
the Current Report on Form 8-K of Meditrust
dated July 13, 1995
4.23 Form of Fourth Supplemental Indenture Incorporated by reference to Exhibit 4.1 to
dated as of September 5, 1996, to the Current Report on Form 8-K of Meditrust
Indenture dated as of July 26, 1995 dated September 6, 1996
between Meditrust and Fleet National Bank
4.24 Form of 7.82% Note due September 10, Incorporated by reference to Exhibit 4.1 to
2026 the Current Report on Form 8-K of Meditrust
dated September 6, 1996
4.25 Form of Fifth Supplemental Indenture dated Filed herewith
as of August 12, 1997, to Indenture dated
as of July 26, 1995 between Meditrust and
Fleet National Bank (State Street Bank and
Trust Company, as Successor Trustee)
4.26 Form of Remarketed Reset Note due August Filed herewith
15, 2002
4.27 Form of Sixth Supplemental Indenture dated Filed herewith
as of August 12, 1997, to Indenture dated
as of July 26, 1995 between Meditrust and
State Street Bank and Trust Company
4.28 Form of 7% Notes due August 15, 2007 Filed herewith
4.29 Form of Seventh Supplemental Indenture Filed herewith
dated August 12, 1997, to Indenture dated
as of July 26, 1995 between Meditrust and
State Street Bank and Trust Company
4.30 Form of 7.114% Note due August 15, 2011 Filed herewith
4.31 Form of Deposit Agreement, among Incorporated by reference to Exhibit 4.3 to
Meditrust Corporation and State Street Bank Joint Current Report on Form 8-K of
and Trust Company and all holders from Meditrust Corporation and Meditrust
time to time of Receipts for Depositary Operating Company, event date June 16,
Shares, including form of Depositary 1998
Receipts
10.1 Credit Agreement dated as of July 17, 1998 Incorporated by reference to Joint Quarterly
among Meditrust Corporation, Morgan Report on Form 10-Q for the Quarter ended
Guaranty Trust Company of New York and June 30, 1998
the other Banks set forth therein
10.2 Amended and Restated Lease Agreement Incorporated by reference to Exhibit 2.2 to
between Mediplex of Queens, Inc. and the Form 8-K of Meditrust dated January 13,
QPH, Inc. dated December 30, 1986 1987
</TABLE>
157
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Title Method of Filing
<S> <C> <C>
10.3 Employment Agreement dated as of July 17, Incorporated by reference to Exhibit 10.1 to
1998 by and between Meditrust Operating the Joint Quarterly Report on Form 10-Q for
Company and Abraham D. Gosman the Quarter ended September 30, 1998
10.4 Registration Rights Agreement, dated as of Incorporated by reference to Exhibit 10.3 to
January 3, 1998 by and among Meditrust Joint Current Report on Form 8-K of
Corporation, Meditrust Operating Company Meditrust Corporation and Meditrust
and certain other parties signatory thereto Operating Company, event date January 8,
1998
10.5 Shareholders Agreement, dated as of Incorporated by reference to Exhibit 10.2 to
January 3, 1998, by and among Meditrust Joint Current Report of Form 8-K of
Corporation, Meditrust Operating Company, Meditrust Corporation and Meditrust
certain shareholders of La Quinta Inns, Inc., Operating Company, event date January 8,
and solely for purposes of Section 3.6 of 1998
such Agreement, La Quinta Inns, Inc.
10.6 Shareholders Agreement, dated as of Incorporated by reference to Exhibit 10 to
January 11, 1998 among Meditrust the Joint Current Report on Form 8-K of
Corporation, Meditrust Operating Company Meditrust Corporation and Meditrust
and Certain Shareholders of Cobblestone Operating Company, event date January 11,
Holdings, Inc. 1998
10.7 First Amendment to Shareholders Incorporated by reference to Annex D-1 to
Agreement dated April 30, 1998, by and the Joint Proxy Statement/Prospectus on
among Meditrust Corporation, Meditrust Form S-4/A of Meditrust Corporation and
Operating Company and certain Meditrust Operating Company (File Nos.
shareholders of La Quinta Inns, Inc., and 333-47737 and 333-47737-01)
solely for the pursposes of Section 3.6 of
such Agreement, La Quinta Inns, Inc.
10.8 First Amendment to Shareholders Incorporated by reference to Exhibit 10 to
Agreement among Meditrust Corporation, the Joint Current Report on Form 8-K of
Meditrust Operating Company and Certain Meditrust Corporation and Meditrust
Shareholders of Cobblestone Holdings, Inc., Operating Company, event date March 16,
dated as of March 16, 1998 1998
10.9 Purchase Agreement dated as of February Incorporated by reference to Exhibit 4.28 to
26, 1998 among Meditrust Corporation, the Joint Registration Statement on Form
Meditrust Operating Company, Merrill Lynch S-4/A of Meditrust Corporation and
International and Merrill Lynch, Pierce, Meditrust Operating Company (File Nos.
Fenner & Smith Incorporated 333-47737 and 333-47737-01)
10.10 Amendment Agreement to Purchase Incorporated by reference to Exhibit 99.3 to
Agreement dated as of July 16, 1998 the Joint Quarterly Report on Form 10-Q for
among Meditrust Corporation, Meditrust the Quarter ended June 30, 1998
Operating Company, Merrill Lynch
International and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
</TABLE>
158
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No Title Method of Filing
<S> <C> <C>
10.11 Amendment Agreement to Purchase Incorporated by reference to Exhibit 99.4 to
Agreement dated as of July 31, 1998 the Joint Quarterly Report on Form 10-Q for
among Meditrust Corporation, Meditrust the Quarter endedJune 30, 1998
Operating Company, Merrill Lynch
International and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
10.12 Amendment Agreement to Purchase Incorporated by reference to Exhibit 99.5 to
Agreement dated as of September 11, 1998 the Joint Registration Statement on Form
among Meditrust Corporation, Meditrust S-3/A of Meditrust Corporation and
Operating Company, Merrill Lynch Meditrust Operating Company (File Nos.
International and Merrill Lynch, Pierce, 333-40055 and 333-40055-01)
Fenner & Smith Incorporated
10.13 Amendment Agreement to Purchase Filed herewith
Agreement dated as of November 11, 1998
among Meditrust Corporation, Meditrust
Operating Company, Merrill Lynch
International and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
10.14 Unsecured Purchase Price Adjustment Filed herewith
Mechanism Agreement among Meditrust
Corporation, Meditrust Operating Company,
Merrill Lynch International and Merrill Lynch,
Pierce, Fenner & Smith Incorporated as a
partial amendment and restatement of that
certain Purchase Price Adjustment
Mechanism Agreement dated as of
February 26, 1998
10.15 Amended and Restated Settlement Filed herewith
Agreement dated as of November 11, 1998
among Meditrust Corporation, Meditrust
Operating Company, Merrill Lynch
International and Merrill Lynch, Pierce,
Fenner & Smith Incorporated
10.16 Amendment to Credit Agreement dated as Filed herewith
November 23, 1998 among Meditrust
Corporation, Morgan Guaranty Trust
Company of New York and the other Banks
set forth therein
11 Statement Regarding Computation of Per Filed herewith
Share Earnings
21 Subsidiaries of the Registrant Filed herewith
23 Consent of PricewaterhouseCoopers L.L.P. Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
159
<PAGE>
Exhibit 11
THE MEDITRUST COMPANIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of shares outstanding ......... 120,515 76,070 71,445
Net income from continuing operations ................. $141,080 $161,962 $157,976
Preferred stock dividends ............................. (8,444) -- --
Income from continuing operations available to
common shareholders .................................. $132,636 $161,962 $157,976
Per share amounts:
Net income per share .................................. (A) $ 1.10 $ 2.13 $ 2.21
Diluted:
Weighted average number of shares used in Basic
calculation .......................................... 120,515 76,070 71,445
Dilutive effect of:
Contingently issuable shares .......................... 4,757 -- --
Stock options ......................................... 236 454 306
Diluted weighted average shares and equivalent
shares outstanding ................................... (B) 125,508 76,524 71,751
Net income from continuing operations ................. $141,080 $161,962 $157,976
Preferred stock dividends ............................. (8,444) -- --
Income from continuing operations available to
common shareholders .................................. $132,636 $161,962 $157,976
Per share amounts:
Net income per share .................................. (A) $ 1.06 $ 2.12 $ 2.20
</TABLE>
- - ------------
(A) This calculation is submitted in accordance with Regulation S-K item 601(b)
(11)
(B) Convertible debentures are not included due to their antidilutive effect.
160
THIRD AMENDMENT TO PAIRING AGREEMENT
THIRD AMENDMENT TO PAIRING AGREEMENT ("Third Amendment") dated as of July
17, 1998 by and between Meditrust Corporation, a Delaware corporation ("REIT"),
and Meditrust Operating Company, a Delaware corporation ("OPCO").
WHEREAS, REIT and OPCO are parties to a Pairing Agreement dated as of
December 20, 1979, as amended by the First Amendment to Pairing Agreement, dated
November 6, 1997, as further amended by the Second Amendment to Pairing
Agreement, dated February 6, 1998 (as so amended, the "Pairing Agreement");
WHEREAS, the Boards of Directors of each of REIT and OPCO adopted, and the
shareholders of REIT and OPCO approved, amendments to each of the respective
certificates of incorporation of REIT and OPCO to authorize the issuance
25,000,000 shares of REIT capital stock and OPCO capital stock known as Excess
Stock ("REIT Excess Stock" and "OPCO Excess Stock," respectively);
WHEREAS, REIT and OPCO desire to amend the Pairing Agreement to provide
that shares of REIT Excess Stock and shares of OPCO Excess Stock issuable upon
conversion of Realty Common Stock (as defined in the Pairing Agreement),
Operating Company Common Shares (as defined in the Pairing Agreement) or
Convertible Equity Stock (as defined below) will, upon issuance, be paired in
the same manner as, and be subject to the same conditions, limitations,
restrictions and requirements as Realty Common Stock and Operating Company
Common Shares; and
WHEREAS, REIT and OPCO desire to clarify the terms of the Second Amendment
to Pairing Agreement such that all series of series common stock that are
convertible into Realty Common Stock, Operating Company Shares, REIT Excess
Stock or OPCO Excess Stock will be subject to the pairing provisions of the
Pairing Agreement.
NOW, THEREFORE, in consideration of the mutual agreements contained in the
Pairing Agreement and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Section 9 of the Pairing Agreement is hereby deleted in its entirety and
shall be replaced with the following:
"9. Preferred Stock, Series Common Stock and Excess Stock. The terms
"Realty Common Stock" and "Operating Company Common Shares," as used in this
Pairing Agreement, shall include, respectively, any preferred stock or series
common stock of Realty or Operating Company which is convertible into Realty
Common Stock or Operating Company Common Shares (the "Convertible Equity Stock")
and shall also include any REIT Excess Stock or OPCO Excess Stock issued as a
result of the conversion of Realty Common Stock, Operating Common Shares or
Convertible Equity Stock, to the end that such Convertible Equity Stock, REIT
Excess Stock or OPCO Excess Stock, as the case may be, shall be paired in the
same manner as, and be subject to the same conditions, limitations, restrictions
and
<PAGE>
requirements as the Realty Common Stock and Operating Company Common Shares
under this Pairing Agreement."
2. As amended by this Third Amendment, the Pairing Agreement is ratified,
confirmed and approved in all respects.
IN WITNESS WHEREOF, the parties have executed this Third Amendment as of
the day and year first above written.
MEDITRUST CORPORATION
By: /s/ Michael Benjamin
-------------------------------
Name: Michael S. Benjamin, Esq.
Title: Senior Vice President
MEDITRUST OPERATING COMPANY
By: /s/ Edward J. Robinson
-------------------------------
Name: Edward J. Robinson
Title: Chief Operating Officer
2
FIFTH SUPPLEMENTAL INDENTURE
Dated as of August 15, 1997
to
INDENTURE
Dated as of July 26, 1995
between
MEDITRUST
and
FLEET NATIONAL BANK, as Trustee
(STATE STREET BANK AND TRUST COMPANY, Successor Trustee)
7% Notes due August 15, 2007
<PAGE>
FIFTH SUPPLEMENTAL INDENTURE
FIFTH SUPPLEMENTAL INDENTURE, dated as of August 15, 1997 between
Meditrust, a Massachusetts business trust (the "Company"), and State Street Bank
and Trust Company, a Massachusetts trust company (the "Trustee"), to the
Indenture dated as of July 26, 1995, between the Company and Fleet National
Bank, predecessor Trustee (the "Indenture").
WHEREAS, the parties hereto have entered into the Indenture which provides
for the issuance by the Company of one or more series of securities thereunder;
and
WHEREAS, Section 9.01 of the Indenture provides, among other things, that
the Company, when authorized by a Board Resolution, and the Trustee, at any time
and from time to time, without the consent of any Holders, may enter into an
indenture supplemental to the Indenture (a) to add to the covenants of the
Company for the benefit of the Holders of all or any series of Securities (and
if such covenants are to be for the benefit of less than all series of
Securities, stating that such covenants are expressly being included solely for
the benefit of such series) or to surrender any right or power herein conferred
upon the Company or (b) to establish the form or terms of Securities of any
series as permitted by Sections 2.01 and 2.02; and
WHEREAS, the Company wishes to issue an additional series of securities
under the Indenture, designated its 7% Notes due August 15, 2007 (the "Notes");
and
WHEREAS, the Company desires and has requested the Trustee to join with it
in the execution and delivery of this Fifth Supplemental Indenture for the
purpose of amending the Indenture in certain respects with respect to the Notes;
and
WHEREAS, the amendments contained in this Fifth Supplemental Indenture
shall apply only to the Notes, and the covenants of the Company contained in
this Fifth Supplemental Indenture are solely for the benefit of the Holders of
the Notes; and
WHEREAS, all acts necessary to constitute this Fifth Supplemental Indenture
as a valid, binding and legal obligation of the Company have been done and
performed;
NOW, THEREFORE, witnesseth that, in consideration of the premises and of
the covenants herein, it is hereby agreed as follows:
<PAGE>
ARTICLE ONE
The Terms and Form of the Notes
-------------------------------
(a) Terms of the Notes.
(i) The Notes shall be limited to the aggregate principal amount of
$160,000,000, which shall be designated "7% Notes due August 15, 2007."
(ii) The Notes shall be issued only in denominations of $1,000 principal
amount and integral multiples thereof; shall be dated the date of their
authentication; shall mature on August 15, 2007; shall bear interest at the rate
of 7% per annum from August 15, 1997, computed on the basis of a 360-day year of
twelve 30-day months, payable commencing on February 15, 1998 and on each
succeeding February 15 and August 15 thereafter until maturity to the persons in
whose name the Notes shall be registered as of each February 1 and August 1 next
preceding such interest payment date; shall be entitled to the benefit of the
covenants of the Company set forth in Article Two (a) and (b) hereof in addition
to those set forth in the Indenture.
(b) Form of the Notes.
(i) The text of the Notes due shall be substantially in the following form:
-2-
<PAGE>
MEDITRUST
7% Note Due August 15, 2007
7% 7%
DUE August 15, 2007 DUE August 15, 2007
MEDITRUST, a Massachusetts business trust, promises to pay to
SPECIMEN
or registered assigns, the principal sum of _____________________ Dollars, on
August 15, 2007
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
[Additional provisions of this Security are set forth on the reverse side
of this Security.]
_____________, ____ MEDITRUST
(SEAL)
By: ____________________________
Secretary
By: ____________________________
President
CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY, as Trustee, certifies that this is one of
the Securities referred to in the within-mentioned Indenture.
By: ____________________________
Authorized Officer
3
<PAGE>
MEDITRUST
7% Notes Due August 15, 2007
1. Interest. Meditrust, a Massachusetts business trust (the "Company"),
promises to pay interest on the principal amount of this Note at the rate per
annum shown above. The Company will pay interest semiannually on February 15 and
August 15 of each year beginning February 15, 1998. Interest on the Notes will
accrue from August 15, 1997. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
2. Method of Payment. The Paying Agent will pay interest (except defaulted
interest) on the Notes from monies provided by the Company to the persons who
are the registered Holders of the Notes at the close of business on the February
1 or August 1 next preceding the interest payment date. Holders must surrender
Notes to a Paying Agent to collect principal payments. The Paying Agent will pay
principal and interest in money of the United States that at the time of payment
is legal tender for payment of public and private debts. The Paying Agent will
make all payments of principal and interest in immediately available funds, so
long as The Depository Trust Company or a successor depository continues to make
its Same-Day Funds Settlement System available to the Company.
3. Registrar and Agents. Initially, State Street Bank and Trust Company
will act as Registrar, Paying Agent and agent for service of notices and
demands. The Company may change any Registrar, co-registrar, Paying Agent and
agent for service of notices and demands without notice. The Company or any of
its Subsidiaries may act as Paying Agent. The address of State Street Bank and
Trust Company is Two International Place, Boston, MA 02110, Attn: Corporate
Trust Dept.
4. Indenture, Limitations. The Company issued the Notes as a series of its
securities under an Indenture dated as of July 26, 1995 as supplemented by a
Fifth Supplemental Indenture dated as of August 15, 1997 (the Indenture")
between the Company and State Street Bank and Trust Company, as successor
trustee (the "Trustee"). Capitalized terms herein are used as defined in the
Indenture unless otherwise defined herein. The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on
the date of the Indenture (the "TIA"). The Notes are subject to all such terms,
and the Holders of the Notes are referred to the Indenture and the TIA for a
statement of such terms.
The Notes are general unsecured obligations of the Company limited to
$160,000,000 principal amount. The Indenture imposes certain limitations on the
ability of the Company to, among other things, incur certain liens and certain
additional indebtedness, make payments in respect of its shares of beneficial
interest, merge or consolidate with any other Person and sell, lease, transfer
or dispose of its properties or assets.
4
<PAGE>
5. Denominations, Transfer, Exchange. This Note is one of a duly authorized
issue of Securities of the Company designated as its 7% Notes due August 15,
2007. The Notes are in registered form without coupons in denominations of
$1,000 principal amount and integral multiples thereof. A Holder may register
the transfer of or exchange Notes in accordance with the Indenture. The
Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture.
6. Persons Deemed Owners. The registered Holder of a Note may be treated as
the owner of it for all purposes.
7. Unclaimed Money. If money for the payment of principal or interest on
any Note remains unclaimed for three years, the Trustee and the Paying Agent
will pay the money back to the Company at its written request, unless otherwise
required by law. Thereafter, Holders may look only to the Company for payment.
8. Discharge Prior to Maturity. The Indenture will be discharged and
cancelled except for certain sections thereof upon payment of all the Notes, or
upon the irrevocable deposit with the Trustee of funds or U.S. Government
Obligations maturing on or before such payment date sufficient, together with
scheduled payments of interest thereon without reinvestment, to pay principal,
premium, if any, and interest on such payment date.
9. Supplemental Indenture. Subject to certain exceptions, the Indenture may
be amended or supplemented with respect to the Notes with the consent of the
Holders of at least a majority in principal amount of the Notes then outstanding
and any existing default or compliance with any provision may be waived with the
consent of the Holders of the majority in principal amount of the Notes then
outstanding. Without the consent of or notice to any Holder, the Company may
supplement the Indenture, to, among other things, provide for uncertificated
Notes, cure any ambiguity, defect or inconsistency, or make any other change
that does not adversely affect the interests or rights of any Holder.
10. Successors. Upon satisfaction of the conditions provided in the
Indenture, if a successor to the Company assumes all the obligations of its
predecessor under the Notes and the Indenture, the predecessor will be released
from those obligations.
11. Defaults and Remedies. If an Event of Default with respect to the
Notes, as defined in the Indenture, occurs and is continuing, the Trustee or the
Holders of a majority in principal amount of Notes may declare all the Notes to
be due and payable immediately in the manner and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may require indemnity satisfactory to it,
subject to the provisions of the TIA, before it enforces the Indenture or the
Notes. Subject to certain limitations, Holders of a majority in principal amount
of the Notes then outstanding may direct the Trustee in its exercise of any
trust or
5
<PAGE>
power with respect to the Notes. The Trustee may withhold from Holders of
Securities notice of any continuing default (except a default in payment of
principal or interest) if it determines that withholding notice is in their
interests. The Company is required to file periodic reports with the Trustee as
to the absence of any Default or Event of Default.
12. Trustee Dealings with the Company. State Street Bank and Trust Company,
the Trustee under the Indenture, in its individual or any other capacity, may
make loans to, accept deposits from, and perform services for the Company or its
Affiliates, and may otherwise deal with the Company or its Affiliates as if it
were not the Trustee.
13. No Recourse Against Others. No shareholder, trustee or officer, as
such, past, present or future, of the Company or any successor corporation or
trust shall have any liability for any obligation of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder of a Note by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.
THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS
AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE
OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS
TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT
INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS
DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE
COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
14. Authentication. This Note shall not be valid until the Trustee signs
the certificate of authentication on the reverse side of this Note.
15. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants
by the entirety), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and any supplemental indentures thereto. It also
will furnish the text of this Note in larger type. Requests may be made to:
MEDITRUST, 197 Third Avenue, Needham Heights, Massachusetts 02194, Attention:
John G. Demeritt, Controller.
6
<PAGE>
ASSIGNMENT FORM
If you, the Holder, want to assign this Note, fill in the form below and have
your signature guaranteed:
For value received, I or we assign and transfer this Note to
(INSERT ASSIGNEE'S SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER)
|----------------------------|
| |
|----------------------------|
................................................................................
................................................................................
................................................................................
................................................................................
(Print or type assignee's name, address and zip code)
and irrevocably appoint.........................................................
................................................... agent to transfer this Note
on the books of the Company. The agent may substitute another to act for it.
___________________________________________________________
Date:...........................................................................
Your signature:.................................................................
(Sign exactly as your name appears on the reverse side of this Note)
Signature Guaranteed By:........................................................
Note: Signature must be guaranteed by a participant in
a Signature Guaranty Medallion Program.
7
<PAGE>
ARTICLE TWO
Additional Provisions
---------------------
The following provisions in addition to those contained in the Indenture
will apply to the Notes:
(a) Limitation on Liens.
--------------------
The Company will not pledge or otherwise subject to any lien, any of its or
its Subsidiaries' property or assets unless the Notes are secured by such pledge
or lien equally and ratably with all other obligations secured thereby so long
as such other obligations shall be so secured; provided that such covenant will
not apply to liens securing obligations which do not in the aggregate at any one
time outstanding exceed 10% of Consolidated Net Tangible Assets of the Company
and its consolidated Subsidiaries and also will not apply to:
(1) Any lien or charge on any property, tangible or intangible, real or
personal, existing at the time of acquisition or construction of such property
(including acquisition through merger or consolidation) or given to secure the
payment of all or any part of the purchase or construction price thereof or to
secure any indebtedness incurred prior to, at the time of, or within one year
after, the acquisition or completion of construction thereof for the purpose of
financing all or any part of the purchase or construction price thereof;
(2) Any liens securing the performance of any contract or undertaking of
the Company not directly or indirectly in connection with the borrowing of
money, obtaining of advances or credit or the securing of debts, if made and
continuing in the ordinary course of business;
(3) Any lien in favor of the United States or any state thereof or the
District of Columbia, or any agency, department or other instrumentality
thereof, to secure progress, advance or other payments pursuant to any contract
or provision of any statute;
(4) Mechanics', materialmen's, carriers', or other like liens arising in
the ordinary course of business (including construction of facilities) in
respect of obligations which are not due or which are being contested in good
faith;
(5) Any lien arising by reason of deposits with, or the giving of any form
of security to, any governmental agency or any body created or approved by law
or governmental regulations, which is required by law or governmental regulation
as a condition to the transaction of any business, or the exercise of any
privilege, franchise or license;
8
<PAGE>
(6) Any liens for taxes, assessments or governmental charges or levies not
yet delinquent, or liens for taxes, assessments or governmental charges or
levies already delinquent but the validity of which is being contested in good
faith;
(7) Liens (including judgment liens) arising in connection with legal
proceedings so long as such proceedings are being contested in good faith and in
the case of judgment liens, execution thereof is stayed;
(8) Liens relating to secured indebtedness of the Company outstanding as of
June 30, 1996; and
(9) Any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, of any lien referred to in the
foregoing clauses (1) to (8) inclusive, of this subsection (a), provided,
however, that the amount of any and all obligations and indebtedness secured
thereby shall not exceed the amount thereof so secured immediately prior to the
time of such extension, renewal or replacement and that such extension, renewal
or replacement shall be limited to all or a part of the property which secured
the charge or lien so extended, renewed or replaced (plus improvements on such
property).
As used herein:
"Consolidated Net Tangible Assets" means the aggregate amount of assets
(less applicable reserves and other properly deductible items) less (i) all
current liabilities and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expenses and other like intangibles of the Company
and its consolidated Subsidiaries, all as set forth on the most recent balance
sheet of the Company and its consolidated Subsidiaries and prepared in
accordance with generally accepted accounting principles; and
"Subsidiary" means an affiliate controlled by the Company directly, or
indirectly through one or more intermediaries.
(b) Limitation on Incurrence of Obligations for Borrowed Money.
The Company will not create, assume, incur or otherwise become liable in
respect of, any
(1) Senior Debt unless the aggregate outstanding principal amount of Senior
Debt of the Company will not, at the time of such creation, assumption or
incurrence and after giving affect thereto and to any concurrent transactions,
exceed the greater of (i) 150% of Capital Base, or (ii) 225% of Tangible Net
Worth; and
(2) Non-Recourse Debt unless the aggregate principal amount of Senior Debt
and Non-Recourse Debt outstanding of the Company will not, at the time of such
creation,
9
<PAGE>
assumption or incurrence and after giving affect thereto and to any concurrent
transactions, exceed 225% of Capital Base.
For any period during which the Company shall have a Subsidiary or
Subsidiaries, the limitations contained in this subsection (b) shall be applied
to the consolidated financial statements of the Company and its Subsidiaries.
As used herein:
"Capital Base" means, at any date, the sum of Tangible Net Worth and
Subordinated Debt;
"Capital Lease" means at any time any lease of Property which, in
accordance with generally accepted accounting principles, would at such time be
required to be capitalized on a balance sheet of the lessee;
"Capital Lease Obligation" means at any time the amount of the liability in
respect of a Capital Lease which, in accordance with generally accepted
accounting principles, would at such time be required to be capitalized on a
balance sheet of the lessee;
"Debt" when used with respect to any Person means (i) its indebtedness,
secured or unsecured, for borrowed money; (ii) liabilities secured by any
existing Lien on Property owned by such Person; (iii) Capital Lease Obligations,
and the present value of all payments due under any arrangement for retention of
title (discounted at a rate per annum equal to the average interest borne by all
outstanding Debt Securities determined on a weighted average basis and
compounded semi-annually) if such arrangement is in substance an installment
purchase or an arrangement for the retention of title for security purposes; and
(iv) guarantees of obligations of the character specified in the foregoing
clauses (i), (ii) and (iii) to the full extent of the liability of the guarantor
(discounted to present value, as provided in the foregoing clause (iii), in the
case of guarantees of title retention arrangements);
"Liabilities" means, at any date, the items shown as liabilities on the
balance sheet of the Company, except any items of deferred income, including
capital gains;
"Lien" means any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such interest
is based on the common law, statute or contract, and including but not limited
to the security interest lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictions,
leases and all other title exceptions and encumbrances affecting Property. For
all purposes of this Indenture, the Company shall be deemed to be the owner of
any Property which it has acquired or holds
10
<PAGE>
subject to a conditional sale agreement, Capital Lease or other arrangement
pursuant to which title to the Property has been retained by or vested in some
other Person for security purposes;
"Non-Recourse Debt" when used with respect to any Person, means any Debt
secured by, and only by, property on or with respect to which such Debt is
incurred where the rights and remedies of the holder of such Debt in the event
of default do not extend to assets other than the property constituting security
therefore;
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization or government or any agency or political subdivision
thereof;
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible;
"Senior Debt" means all Debt other than Non-Recourse Debt and Subordinated
Debt;
"Subordinated Debt" means unsecured Debt of the Company which is issued or
assumed pursuant to, or evidenced by, an indenture or other instrument which
contains provisions for the subordination of such Debt (to which appropriate
reference shall be made in the instruments evidencing such Debt if not contained
therein) to the Debt Securities (and, at the option of the Company, if so
provided, to other Debt of the Company, either generally or as specifically
designated);
"Subsidiary" means an affiliate controlled by the Company directly, or
indirectly through one or more intermediaries;
"Tangible Assets" means all assets of the Company (including assets held
subject to Capital Leases and other arrangements described in the last sentence
of the definition of "Lien") except: (i) deferred assets, other than prepaid
insurance, prepaid taxes and deposits; (ii) patents, copyrights, trademarks,
trade names, franchises, goodwill, experimental expense and other similar
intangibles; and (iii) unamortized debt discount and expense; and
"Tangible Net Worth" means, with respect to the Company at any date, the
net book value (after deducting related depreciation, obsolescence,
amortization, valuation and other proper reserves) of the Tangible Assets of the
Company at such date minus the amount of its Liabilities at such date.
11
<PAGE>
ARTICLE THREE
Miscellaneous
-------------
The Indenture, except as amended herein, is in all respects ratified and
confirmed and this Fifth Supplemental Indenture and all its provisions herein
contained shall be deemed a part thereof in the manner and to the extent herein
and therein provided.
The terms used in this Fifth Supplemental Indenture, but not defined
herein, shall have the meanings assigned thereto in the Indenture.
THIS FIFTH SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
This Fifth Supplemental Indenture may be simultaneously executed in any
number of counterparts, and all such counterparts executed and delivered, each
as an original, shall constitute one and the same instrument.
THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS
AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE
OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS
TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT
INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS
DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE
COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental
Indenture to be duly executed, as of the day and year first above written.
MEDITRUST
By: _______________________________
Name:
Title: Chief Financial Officer
12
<PAGE>
STATE STREET BANK AND TRUST
COMPANY, as trustee
By: _______________________________
Name:
Title:
COMMONWEALTH OF MASSACHUSETTS )
) ss.:
County of Norfolk )
On the day of August, 1997, before me personally came , to
me known, who, being by me duly sworn, did depose and say that she is Chief
Financial Officer of Meditrust, one of the business entities described in and
which executed the foregoing instrument; that s/he knows the seal of Meditrust;
that the seal affixed to said instrument is Meditrust's seal; that it was so
affixed by authority of the Board of Trustees of Meditrust; and that s/he signed
her name thereto by like authority.
[SEAL]
________________________________
Notary Public
My commission expires:
COMMONWEALTH OF MASSACHUSETTS )
) ss.:
County of Suffolk___________________ )
On the ________ day of August __, 1997, before me personally came
_________________________, to me known, who, being by me duly sworn, did depose
and say that s/he is _______________________________ of State Street Bank and
Trust Company, one of the business entities described in and which executed the
foregoing instrument; that s/he knows the seal of said bank; that the seal
affixed to said instrument is such bank's seal; that it was so affixed by
authority of the Board of Directors of said bank; and that s/he signed his/her
name thereto by like authority.
[SEAL]
___________________________
Notary Public
My commission expires:
13
FORM OF
GLOBAL NOTE
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO, HAS AN INTEREST
HEREIN.
No. $100,000,000
MEDITRUST
Remarketed Reset Note due August 15, 2002
CUSIP 5850ITAK4
Meditrust, a Massachusetts business trust (the "Company"), for value
received, hereby promises to pay to CEDE & CO. or registered assigns, in the
Borough of Manhattan, The City of New York, the principal sum of ONE HUNDRED
MILLION DOLLARS ($100,000,000), on August 15, 2002, in such coin or currency of
the United States of America as at the time of payment shall be legal tender for
the payment of public and private debts, and to pay interest in arrears on each
November 15, February 15, May 15 and August 15, as the case may be, or any other
date (including August 15, 1998) as shall be established by the Company as an
interest payment date (each, an "Interest Payment Date"), commencing on November
15, 1997, and at maturity, on the principal amount of this Global Note, in like
coin or currency, at the times and at the rate per annum from time to time in
effect as set forth below, from the most recent date to which interest has been
paid or, if no interest has been paid, from August 12, 1997. The interest so
payable on each Interest Payment Date will, subject to certain exceptions
provided in the
<PAGE>
Indenture referred to below, be paid to the person in whose name this Global
Note is registered on the 15th calendar day, whether or not a Business Day, next
preceding the applicable Interest Payment Date.
This Global Note is issued in respect of a duly authorized issue of
Securities of the Company, designated as the Remarketed Reset Notes due August
15, 2002 of the Company (the "Notes"), limited (except as otherwise provided in
the Indenture referred to below) in aggregate principal amount to $100,000,000.
The Notes represent one of a duly authorized series of Securities of the
Company, issued and to be issued in one or more series under an Indenture dated
as of July 26, 1996 and a Supplemental Indenture, dated as of August 12, 1997
(collectively, the "Indenture"), between the Company and State Street Bank and
Trust Company, as trustee (herein called the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
the Trust Indenture Act of 1939, as amended (the "Act"). The Notes are subject
to all such terms, and beneficial owners of interests in this Global Note are
referred to the Indenture and the Act for a statement of such terms. All terms
used in this Global Note which are defined in the Indenture shall have the
meanings assigned to them in the Indenture. The Notes of this series are general
and unsecured obligations of the Company.
Except as provided below, owners of beneficial interests in the Notes
evidenced by this Global Note will not be entitled to receive definitive Notes
evidencing such ownership. Beneficial interests in the Notes will be held
through a depositary selected by the Company, which initially is The Depository
Trust Company ("DTC"). This Global Note will be deposited with and held by DTC
and is registered in the name of DTC=s nominee. So long as DTC=s nominee is the
registered owner of this Global Note, such nominee for all purposes will be
considered the sole owner of the Notes under the Indenture. If DTC is at any
time unwilling, unable or ineligible to continue as depositary and a successor
depositary is not appointed by the Company within 90 calendar days of its
receipt of notice from DTC to such effect, the Company will issue individual
Notes in definitive form in exchange for this Global Note. In addition, the
Company may at any time and in its sole discretion determine not to have the
Notes represented by a Global Note. In either instance, an owner of a beneficial
interest in this Global Note will be entitled to have Notes equal in principal
amount to such beneficial interest registered in its name and will be entitled
to physical delivery of such Notes in definitive form. Notes so issued in
definitive form will be issued in denominations of $1,000 and any integral
multiple thereof and will be issued in registered form only, without coupons.
During the period from and including August 12, 1997 to but excluding
August 15, 1998 (the "Initial Spread Period"), the interest rate on the Notes
will be reset quarterly, and will equal LIBOR (as defined herein) plus the
applicable Spread. The Spread during the Initial Spread Period is 0.45%. Unless
notice of redemption as a whole has been given, after the Initial Spread Period
the duration, redemption dates, redemption type, redemption prices (if
applicable), Commencement Date (as defined herein), Interest Payment Dates (as
defined herein) and interest rate mode will be agreed to by the Company and the
Remarketing Underwriter (as defined herein) by 3:00 p.m., New York City time, on
each applicable Duration/Mode Determination Date (as defined herein) and the
Spread will be agreed to by the Company and the Remarketing
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Underwriter by 3:00 p.m., New York City time, on the corresponding Spread
Determination Date (as defined herein). Interest on the Notes during each
Subsequent Spread Period (a "Subsequent Spread Period") shall be payable, as
applicable, either (i) at a floating interest rate (such Notes being in the
"Floating Rate Mode," and such interest rate being a "Floating Rate") or (ii) at
a fixed interest rate (such Notes being in the "Fixed Rate Mode" and such
interest rate being a "Fixed Rate"), in each case as determined by the
Remarketing Underwriter and the Company in accordance with a Remarketing
Agreement between the Remarketing Underwriter and the Company (the "Remarketing
Agreement").
During the Initial Spread Period, interest on the Notes will be
payable quarterly in arrears, on November 15, 1997, February 15, 1998, May 15,
1998 and August 15, 1998 (or, if not a Business Day (as defined herein), on the
next succeeding Business Day (except as described below)), to the persons in
whose names the Notes are registered at the close of business on the applicable
record date (i.e., the 15th calendar day, whether or not a Business Day, next
preceding the applicable Interest Payment Date) next preceding such Interest
Payment Date. During the Initial Spread Period and any Subsequent Spread Period
for which the Notes are in the Floating Rate Mode, the interest rate on the
Notes will be reset quarterly and the Notes will bear interest at a per annum
rate (computed on the basis of the actual number of days elapsed over a 360-day
year) equal to LIBOR for the applicable Quarterly Period (as defined herein),
plus the applicable Spread. Interest on the Notes will accrue from and include
each Interest Payment Date (or, in the case of the Initial Quarterly Period (as
defined herein), July 9, 1997) but exclude the next succeeding Interest Payment
Date or maturity date, as the case may be. The Initial Quarterly Period will be
the period from and including August 12, 1997 to but excluding the first
Interest Payment Date (November 15, 1997) (the "Initial Quarterly Period").
Thereafter, each Quarterly Period during the Initial Spread Period or any
Subsequent Spread Period for which the Notes are in the Floating Rate Mode
(each, a "Quarterly Period") will be from and including the most recent Interest
Payment Date to which interest has been paid to but excluding the next Interest
Payment Date; the first day of a Quarterly Period is referred to herein as an
"Interest Reset Date."
After the Initial Spread Period, the Spread applicable to each
Subsequent Spread Period will be determined on each subsequent Spread
Determination Date which precedes the beginning of the corresponding Subsequent
Spread Period, pursuant to agreement between the Company and the Remarketing
Underwriter (except as otherwise provided below). If the Company and the
Remarketing Underwriter are unable to agree on the Spread for any Subsequent
Spread Period, (1) the Subsequent Spread Period will be one year, (2) the Notes
will be reset to the Floating Rate Mode, (3) the Spread for such Subsequent
Spread Period will be the Alternate Spread (as defined herein) and (4) the Notes
will be redeemable at the option of the Company, in whole or in part, upon at
least five Business Days= notice given by no later than the fifth Business Day
after the relevant Spread Determination Date, at a redemption price equal to
100% of the principal amount thereof, together with accrued interest to the
redemption date, except that the Notes may not be redeemed prior to the Tender
Date (as defined herein) or later than the last day of such one-year Subsequent
Spread Period. The Alternate Spread will be the percentage equal to LIBOR (as
described herein) for the Quarterly Period beginning on the first date of such
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Subsequent Spread Period (the "Commencement Date").
If any Interest Payment Date (other than at maturity), redemption date,
Interest Reset Date, Duration/Mode Determination Date, Spread Determination
Date, Commencement Date or Tender Date in the Floating Rate Mode would otherwise
be a day that is not a Business Day, such Interest Payment Date, redemption
date, Interest Reset Date, Duration/Mode Determination Date, Spread
Determination Date, Commencement Date or Tender Date will be postponed to the
next succeeding day that is a Business Day, except that if such Business Day is
in the next succeeding calendar month, such Interest Payment Date, redemption
date, Interest Reset Date, Commencement Date or Tender Date shall be the next
preceding Business Day. If the maturity date for the Notes falls on a day that
is not a Business Day, the related payment of principal and interest will be
made on the next succeeding Business Day as if it were made on the date such
payment was due, and no interest will accrue on the amounts so payable for the
period from and after such date.
LIBOR applicable for a Quarterly Period will be determined by the Rate
Agent (as defined herein) as of the second London Business Day (as defined
herein) preceding each Interest Reset Date (the "LIBOR Determination Date") in
accordance with the following provisions:
(i) LIBOR will be determined on the basis of the offered rates for
three-month deposits in U.S. Dollars of not less than U.S.$1,000,000, commencing
on the second London Business Day immediately following such LIBOR Determination
Date, which appears on Telerate Page 3750 (as defined herein) as of
approximately 11:00 a.m., London time, on such LIBOR Determination Date.
"Telerate Page 3750" means the display designated on page "3750" on the Telerate
Service (or such other page as may replace the 3750 page on that service or such
other service or services as may be nominated by the British Bankers=
Association for the purpose of displaying London interbank offered rates for
U.S. Dollar deposits). If no rate appears on Telerate Page 3750, LIBOR for such
LIBOR Determination Date will be determined in accordance with the provisions of
paragraph (ii) below.
(ii) With respect to a LIBOR Determination Date on which no rate
appears on Telerate Page 3750 as of approximately 11:00 a.m., London time, on
such LIBOR Determination Date, the Rate Agent shall request the principal London
offices of each of four major reference banks in the London interbank market
selected by the Rate Agent to provide the Rate Agent with a quotation of the
rate at which three-month deposits in U.S. Dollars, commencing on the second
London Business Day immediately following such LIBOR Determination Date, are
offered by it to prime banks in the London interbank market as of approximately
11:00 a.m., London time, on such LIBOR Determination Date and in a principal
amount equal to an amount of not less than U.S.$1,000,000 that is representative
for a single transaction in such market at such time. If at least two such
quotations are provided, LIBOR for such LIBOR Determination Date will be the
arithmetic mean of such quotations as calculated by the Rate Agent. If fewer
than two quotations are provided, LIBOR for such LIBOR Determination Date will
be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., New
York City time, on such LIBOR Determination Date by three major banks in The
City of New York selected by the Rate Agent (after consultation with the
Company) for loans in U.S. Dollars to leading European banks,
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<PAGE>
having a three-month maturity commencing on the second London Business Day
immediately following such LIBOR Determination Date and in a principal amount
equal to an amount of not less than U.S.$1,000,000 that is representative for a
single transaction in such market at such time; provided, however, that if the
banks selected as aforesaid by the Rate Agent are not quoting as mentioned in
this sentence, LIBOR for such LIBOR Determination Date will be LIBOR determined
with respect to the immediately preceding LIBOR Determination Date, or in the
case of the first LIBOR Determination Date, LIBOR for the Initial Quarterly
Period.
If the Notes are to be reset to the Fixed Rate Mode, as agreed to by
the Company and the Remarketing Underwriter on a Duration/Mode Determination
Date, then the applicable Fixed Rate for the corresponding Subsequent Spread
Period will be determined as of the sixth calendar day following the Spread
Determination Date (provided that such date is a Business Day; otherwise, as of
the next Business Day thereafter) (the "Fixed Rate Determination Date")
(provided, however, that in the case where the Notice Date (as defined herein)
also falls on the Fixed Rate Determination Date, the Fixed Rate Determination
Date will be the following Business Day thereafter), in accordance with the
following provisions: the Fixed Rate will be a per annum rate and will be
determined as of 12:00 noon on such Fixed Rate Determination Date by adding the
applicable Spread (as agreed to by the Company and the Remarketing Underwriter
on the preceding Spread Determination Date) to the yield to maturity (expressed
as a bond equivalent, on the basis of a year of 365 or 366 days, as applicable,
and applied on a daily basis) of the applicable United States Treasury security,
selected by the Rate Agent after consultation with the Remarketing Underwriter,
as having a maturity comparable to the duration selected for the following
Subsequent Spread Period, which would be used in accordance with customary
financial practice in pricing new issues of corporate debt securities of
comparable maturity to the duration selected for the following Subsequent Spread
Period.
Interest in the Fixed Rate Mode will be computed on the basis of a
360-day year of twelve 30-day months. Such interest will be payable semiannually
in arrears on the Interest Payment Dates (February 15 and August 15, unless
otherwise specified by the Company and the Remarketing Underwriter on the
applicable Duration/Mode Determination Date) at the applicable Fixed Rate, as
determined by the Company and the Remarketing Underwriter on the Fixed Rate
Determination Date, beginning on the Commencement Date and for the duration of
the relevant Subsequent Spread Period. Interest on the Notes will accrue from
and including each Interest Payment Date to but excluding the next succeeding
Interest Payment Date or maturity date, as the case may be.
If any Interest Payment Date or any redemption date in the Fixed Rate
Mode falls on a day that is not a Business Day (in either case, other than any
Interest Payment Date or redemption date that falls on a Commencement Date, in
which case such date will be postponed to the next day that is a Business Day),
the related payment of principal and interest will be made on the next
succeeding Business Day as if it were made on the date such payment was due, and
no interest will accrue on the amounts so payable for the period from and after
such dates.
The Spread that will be applicable during each Subsequent Spread Period
will be the percentage (a) recommended by the Remarketing Underwriter so as to
result in a rate that, in the
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<PAGE>
opinion of the Remarketing Underwriter, will enable tendered Notes to be
remarketed by the Remarketing Underwriter at 100% of the principal amount
thereof, as described below, and (b) agreed to by the Company.
Unless notice of redemption of the Notes as a whole has been given, the
duration, redemption dates, redemption types (i.e., par, premium or make-whole),
redemption prices (if applicable), Commencement Date, Interest Payment Dates and
interest rate mode (i.e., Fixed Rate Mode or Floating Rate Mode) (and any other
relevant terms) for each Subsequent Spread Period will be established by 3:00
p.m., New York City time, on the 15th calendar day prior to the Commencement
Date of each Subsequent Spread Period (the "Duration/Mode Determination Date").
In addition, the Spread for each Subsequent Spread Period will be established by
3:00 p.m., New York City time, on the 10th calendar day prior to the
Commencement Date of such Subsequent Spread Period (the "Spread Determination
Date"). The Company will request, not later than seven nor more than 15 calendar
days prior to any Spread Determination Date, that DTC notify its Participants of
such Spread Determination Date and of the procedures that must be followed if
any beneficial owner of a Note wishes to tender such Note as described below.
The term "Business Day" means any day other than a Saturday or Sunday or a day
on which banking institutions in The City of New York are required or authorized
to close and, in the case of Notes in the Floating Rate Mode, that is also a
London Business Day. The term "London Business Day" means any day on which
dealings in deposits in U.S. Dollars are transacted in the London interbank
market.
Unless notice of redemption of the Notes as a whole has been given, the
Company will cause a notice to be given to Noteholders on the New York Business
Day (as defined herein) next following the Spread Determination Date for each
Subsequent Spread Period, specifying (1) the duration of such Subsequent Spread
Period, (2) the mode (i.e., Fixed Rate Mode or Floating Rate Mode), (3) the
Commencement Date, (4) any redemption dates, (5) any redemption type (i.e., par,
premium or make-whole), (6) any redemption prices, (7) the Spread for such
Subsequent Spread Period, (8) the identity of the Remarketing Underwriter, if
applicable, and (9) any other relevant provisions. The term "New York Business
Day" means any day other than a Saturday or Sunday or a day on which banking
institutions in The City of New York are required or authorized to close.
All percentages resulting from any calculation of any interest rate for
the Notes will be rounded, if necessary, to the nearest one hundred thousandth
of a percentage point, with five one millionths of a percentage point rounded
upward and all dollar amounts will be rounded to the nearest cent, with one half
cent being rounded upward.
In the event the Company and the Remarketing Underwriter agree on the
Spread on the Spread Determination Date with respect to any Subsequent Spread
Period, the Company and the Remarketing Underwriter will enter into a
Remarketing Underwriting Agreement (the "Remarketing Underwriting Agreement") on
such Spread Determination Date, under which the Remarketing Underwriter will
agree, subject to the terms and conditions set forth therein, to purchase from
tendering Noteholders on the date immediately following the end of a Subsequent
Spread Period (the "Tender Date") all Notes with respect to which the
Remarketing Underwriter
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<PAGE>
receives a Tender Notice as described below at 100% of the principal amount
thereof (the "Purchase Price"). In such event (except as otherwise provided
below), each beneficial owner of a Note may, at such owner=s option, upon giving
notice as provided below (the "Tender Notice"), tender such Note for purchase by
the Remarketing Underwriter on the Tender Date at the Purchase Price. The
Purchase Price will be paid by the Remarketing Underwriter in accordance with
the standard procedures of DTC. Interest accrued on the Notes with respect to
the preceding Quarterly Period will be paid by the Company in the manner
described above.
The Tender Notice must be received by the Remarketing Underwriter
during the period commencing on the calendar day following the Spread
Determination Date (or, if not a Business Day, on the next succeeding Business
Day) and ending at 5:00 p.m., New York City time, on the fifth calendar day
following the Spread Determination Date (or, if not a Business Day, on the next
succeeding Business Day) (the "Notice Date"). Except as otherwise provided
below, a Tender Notice shall be irrevocable. If a Tender Notice is not received
for any reason by the Remarketing Underwriter with respect to any Note by 5:00
p.m., New York City time, on the Notice Date, the beneficial owner of such Note
shall be deemed to have elected not to tender such Note for purchase by the
Remarketing Underwriter.
The obligation of the Remarketing Underwriter to purchase Notes from
tendering Noteholders will be subject to several conditions precedent set forth
in the Remarketing Underwriting Agreement. In addition, the Remarketing
Underwriting Agreement will provide for the termination thereof by the
Remarketing Underwriter upon the occurrence of certain events. In the event
that, with respect to any Subsequent Spread Period, the Remarketing Underwriter
does not purchase on the relevant Tender Date all of the Notes for which a
Tender Notice shall have been given, then (1) all such Tender Notices will be
null and void, (2) none of the Notes for which such Tender Notices shall have
been given will be purchased by the Remarketing Underwriter on such Tender Date,
(3) the Subsequent Spread Period will be one year, which Subsequent Spread
Period shall be deemed to have commenced upon the applicable Commencement Date,
(4) the Notes will be reset to the Floating Rate Mode, (5) the Spread for such
Subsequent Spread Period shall be the Alternate Spread and (6) the Notes will be
redeemable at the option of the Company, in whole or in part, upon at least 10
Business Days= notice given by no later than the fifth Business Day following
the relevant Tender Date, on the date set forth in such notice, which shall be
no later than the last day of such one-year Subsequent Spread Period, in the
manner described below, at a redemption price equal to 100% of the principal
amount thereof, together with accrued interest to the redemption date.
No beneficial owner of any Note shall have any rights or claims under
the Remarketing Underwriting Agreement or against the Company or the Remarketing
Underwriter as a result of the Remarketing Underwriter not purchasing such
Notes, except as provided in clause (5) of the last sentence of the preceding
paragraph. The Company will have no obligation under any circumstance to
repurchase any Notes, except in the case of Notes called for redemption as
described herein.
If the Remarketing Underwriter does not purchase all Notes tendered for
purchase on any Tender Date, it will promptly notify the Company and the
Trustee. As soon as practicable after
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receipt of such notice, the Company will cause a notice to be given to
Noteholders specifying (1) the one-year duration of the Subsequent Spread
Period, (2) that the Notes will reset to the Floating Rate Mode, (3) the Spread
for such Subsequent Spread Period (which shall be the Alternate Spread) and (4)
LIBOR for the Initial Quarterly Period of such Subsequent Spread Period.
The term "Remarketing Underwriter" means the nationally recognized
broker-dealer selected by the Company to act as Remarketing Underwriter. The
term "Rate Agent" means the entity selected by the Company as its agent to
determine (i) LIBOR and the interest rate on the Notes for any Quarterly Period
and/or (ii) the yield to maturity on the applicable United States Treasury
security that is used in connection with the determination of the applicable
Fixed Rate, and the ensuing applicable Fixed Rate. Pursuant to a Remarketing
Agreement, Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed to act
as Remarketing Underwriter and Rate Agent. The Company, in its sole discretion,
may change the Remarketing Underwriter and the Rate Agent for any Subsequent
Spread Period at any time at or prior to 3:00 p.m., New York City time, on the
Duration/Mode Determination Date relating thereto.
The Notes may not be redeemed by the Company prior to August 15, 1998.
On that date and on those Interest Payment Dates specified as redemption dates
by the Company on the Duration/Mode Determination Date in connection with any
Subsequent Spread Period, the Notes may be redeemed, at the option of the
Company, in whole or in part, upon notice thereof given at any time during the
45 calendar day period ending on the tenth calendar day prior to the redemption
date (provided that notice of any partial redemption must be given at least 15
calendar days prior to the redemption date), in accordance with the redemption
type selected on the Duration/Mode Determination Date. In the event of any
redemption of less than all of the outstanding Notes, the particular Notes to be
redeemed will be selected by such method as the Company shall deem fair and
appropriate. So long as the Global Note is held by DTC, the Company will give
notice to DTC, and DTC will determine the principal amount to be redeemed from
the account of each Participant.
The redemption type to be chosen by the Company and the Remarketing
Underwriter on the Duration/Mode Determination Date may be one of the following
as defined herein: (i) Par Redemption; (ii) Premium Redemption; or (iii)
Make-Whole Redemption. "Par Redemption" means redemption at a redemption price
equal to 100% of the principal amount thereof, plus accrued interest thereon, if
any, to the redemption date. "Premium Redemption" means redemption at a
redemption price or prices greater than 100% of the principal amount thereof,
plus accrued interest thereon, if any, to the redemption date, as determined on
the Duration/Mode Determination Date. "Make-Whole Redemption" means redemption
at a redemption price equal to the sum of (i) the principal amount of the Notes
being redeemed plus accrued interest thereon, if any, to the redemption date and
(ii) the Make-Whole Amount (as defined herein), if any, with respect to such
Notes.
"Make-Whole Amount" means, in connection with any optional redemption
or accelerated payment of any Note, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar or principal being redeemed or
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<PAGE>
paid and the amount of interest (exclusive of interest accrued to the date of
redemption or accelerated payment) that would have been payable in respect of
such dollar if such redemption or accelerated payment had not been made,
determined by discounting, on a semiannual basis, such principal and interest at
the Reinvestment Rate (as defined herein) (determined on the third Business Day
preceding the date such notice of redemption is given or declaration of
acceleration is made) from the respective dates on which such principal and
interest would have been payable if such redemption or accelerated payment had
not been made, over (ii) the aggregate principal amount of the Notes being
redeemed or paid.
"Reinvestment Rate" means 0.25% (twenty-five one hundredths of one
percent) plus the yield on treasury securities at constant maturity under the
heading "Week Ending" published in the Statistical Release (as defined herein)
under the caption "Treasury Constant Maturities" for the maturity (rounded to
the nearest month) corresponding to the remaining life to maturity, as of the
payment date of the principal being redeemed or paid. If no maturity exactly
corresponds to such maturity, yields for the two published maturities most
closely corresponding to such maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be interpolated
or extrapolated from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For purposes of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to the
date of determination of the Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.
15(519)" or any successor publication which is published weekly by the Federal
Reserve System and which establishes yields on actively traded United States
government securities adjusted to constant maturities or, if such statistical
release is not published at the time of any determination under the Supplemental
Indenture, then such other reasonably comparable index which shall be designated
by the Rate Agent, after consultation with the Company.
In case an Event of Default (as defined in the Indenture) with respect
to the Notes shall have occurred and be continuing, the principal hereof may be
declared, and upon such declaration shall become, due and payable, in the
manner, with the effect and subject to the provisions provided in the Indenture.
The Indenture contains provisions permitting the holders of not less
than a majority of the aggregate principal amount of the outstanding Notes, on
behalf of the holders of all such Notes at a meeting duly called and held as
provided in the Indenture, to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided in
the Indenture to be made, given or taken by the holders of the Notes, including
without limitation, waiving (a) compliance by the Company with certain
provisions of the Indenture, and (b) certain past defaults under the Indenture
and their consequences. Any resolution passed or decision taken at any meeting
of the holders of the Notes in accordance with the provisions of the Indenture
shall be conclusive and binding upon such holders and upon all future holders of
this Note and other Notes issued upon the registration of transfer hereof or in
exchange heretofore or in lieu hereof.
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No shareholder, trustee or officer, as such, past, present or future,
of the Company or any successor corporation or trust shall have any liability
for any obligation of the Company under the Notes or the Indenture or for any
claim based on, in respect of or by reason of, such obligations or their
creation. Each Holder of a Note by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Securities.
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THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985,
AS AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF
STATE OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST"
REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT
INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS
DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE
COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
The Company, the Trustee, and any agent of the Company or the Trustee
may treat the registered holder hereof as the absolute owner of this Global Note
for all purposes.
When a successor corporation assumes all of the obligations of its
predecessor under the Notes and the Indenture, the predecessor corporation will
be released from those obligations.
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This Global Note shall not be valid or become obligatory for any
purpose until the Certificate of Authentication hereon shall have been signed by
the Trustee.
IN WITNESS WHEREOF, Meditrust has caused this Global Note to be
executed.
Dated: August 12, 1997
MEDITRUST
By:_____________________________________
Name:___________________________________
Title:__________________________________
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated herein referred
to in the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
as Trustee
By_________________________________
Authorized Signatory
Dated: August 12, 1997
12
SIXTH SUPPLEMENTAL INDENTURE
Dated as of August 12, 1997
to
INDENTURE
Dated as of July 26, 1995
between
MEDITRUST
and
STATE STREET BANK AND TRUST COMPANY
as Successor Trustee
Exercisable Put Option Notes due August 15, 2011
<PAGE>
SIXTH SUPPLEMENTAL INDENTURE
SIXTH SUPPLEMENTAL INDENTURE, dated as of August 12, 1997 between
Meditrust, a Massachusetts business trust (the "Company"), and State Street Bank
and Trust Company, a Massachusetts trust company (the "Trustee"), to the
Indenture dated as of July 26, 1995, between the Company and Fleet National
Bank, predecessor Trustee (the "Indenture").
WHEREAS, the parties hereto have entered into the Indenture which provides
for the issuance by the Company of one or more series of securities thereunder;
and
WHEREAS, Section 9.01 of the Indenture provides, among other things, that
the Company, when authorized by Board Resolution, and the Trustee, at any time
and from time to time, without notice to or consent of any Holders, may amend
the Indenture or enter into an indenture supplemental to the Indenture (a) to
add to the covenants of the Company for the benefit of the Holders of all or any
series of Securities (and if such covenants are to be for the benefit of less
than all series of Securities, stating that such covenants are expressly being
included solely for the benefit of such series) or to surrender any right or
power herein conferred upon the Company or (b) to establish the form or terms of
securities of any series as permitted by Sections 2.01 and 2.02 of the
Indenture; and
WHEREAS, the Company wishes to issue an additional series of securities
under the Indenture, designated its Exercisable Put Option Notes due August 15,
2011 (the "Notes"); and
WHEREAS, the Company desires and has requested the Trustee to join with it
in the execution and delivery of this Sixth Supplemental Indenture for the
purpose of amending the Indenture in certain respects with respect to the Notes;
and
WHEREAS, the amendments contained in this Sixth Supplemental Indenture
shall apply only to the Notes, and the covenants of the Company contained in
this Sixth Supplemental Indenture are solely for the benefit of the Holders of
the Notes; and
WHEREAS, all acts necessary to constitute this Sixth Supplemental Indenture
as a valid, binding and legal obligation of the Company have been done and
performed;
NOW, THEREFORE, witnesseth that, in consideration of the premises and of
the covenants herein, it is hereby agreed as follows:
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ARTICLE ONE
The Terms and Form of the Notes
-------------------------------
(a) Terms of the Notes.
(i) The Notes shall constitute one series of securities having the title
Exercisable Put Option Notes due August 15, 2011.
(ii) The Notes shall be limited in the aggregate principal amount of
$150,000,000.
(iii) The Notes shall be issued at 100% of the principal amount thereof.
(iv) The Notes will mature on August 15, 2011, subject to the Call Option
(as defined below) and the Put Option (as defined below).
(v) The rate at which the Notes shall bear interest shall be (A) at 7.114%
per annum from August 12, 1997, to but not including August 15, 2004, and (B) at
the Interest Rate to Maturity (as defined below) from August 15, 2004 until
August 15, 2011. The Interest Payment Dates on which interest will be payable
shall be February 15 and August 15 in each year, beginning February 15, 1998;
the Record Dates for the interest payable on the Notes on any Interest Payment
Date shall be the Business Day immediately preceding each Interest Payment Date
(if the Notes are evidenced by a global note in book-entry form and otherwise
shall be the last Business Day of the calendar month immediately preceding the
month in which the related Interest Payment Date occurs) and the basis upon
which interest shall be calculated shall be that of a 360-day year consisting of
twelve 30-day months.
(vi) The Notes will be issuable in denominations of $100,000 and multiples
of $1,000 in excess thereof.
(vii) The place where the principal of, premium, if any, and interest on
the Notes shall be payable and the Notes may be surrendered for registration of
transfer or exchange and where notices or demands to or upon the Company in
respect of the Notes and the Indenture may be served shall be State Street Bank
and Trust Company, 111 Westminster Street, RIM0199, Providence, Rhode Island
02903-2305.
(viii) The entire outstanding principal amount of the Notes (and premium,
if any) shall be payable upon declaration of acceleration of the maturity
thereof pursuant to Section 6.02 of the Indenture.
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(ix) Payment of the principal of (and premium, if any) and interest on the
Notes shall be payable in Dollars, and the Notes shall be denominated in
Dollars.
(x) In exchange for certain consideration to be paid by Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Callholder") to the initial holder of
the Notes (the "Noteholder"), the Noteholder will enter into a Call Option with
the Callholder, pursuant to which the Callholder will have the right to purchase
the Notes from the Noteholder (the "Call Option") on August 15, 2004 (the "Call
Settlement Date") at 100% of the principal amount thereof (the "Call Price"). On
the Call Settlement Date, the Company may repurchase the Notes, in whole but not
in part, from the Callholder at a price equal to the greater of (A) 100% of the
principle amount of the Notes and (B) the sum of the present values of the
Remaining Scheduled Payments (as defined below) thereon, as determined by the
Callholder, discounted to the Call Settlement Date on a semiannual basis
(assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate, plus in either case accrued and unpaid interest from August 15, 2004 on
the principal amount being purchased to the date of purchase. If the Company
elects to repurchase the Notes, it shall pay the purchase price therefor in
same-day funds by wire transfer to an account designated by the Callholder on
the Call Settlement Date.
The Callholder will notify the Company and the trustee of the Trust (the
"Trust Trustee"), not later than five Business Days prior to the Call Settlement
Date, of its intention to purchase the Notes subject to the exceptions described
herein. The Company thereafter will notify the Trust Trustee and the Callholder,
not later than the Business Day immediately preceding the Determination Date (as
defined below), that the Company has irrevocably determined to exercise its
right to repurchase the Notes from the Callholder.
From and after August 15, 2004, the Notes will bear interest at the
Interest Rate to Maturity. The obligation of the Callholder to purchase the
Notes on the Call Settlement Date is subject to the condition that no Event of
Default, or any event which, with the giving of notice or passage of time, or
both, would constitute an Event of Default, with respect to the Notes shall have
occurred and be continuing.
The Interest Rate to Maturity shall be determined by Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Calculation Agent") by 4:00 p.m., New York
City time, on the third Business Day immediately preceding August 15, 2004 (the
"Determination Date") to the nearest one hundred-thousandth (0.00001) of one
percent per annum and will be the Base Rate (7.114%) plus the Spread, which will
be based on the Dollar Price (as defined below) of the Notes calculated as
described in the next sentence. The "Dollar Price" of the Notes shall be equal
to the present value of the remaining principal and interest payments of the
Base Rate from August 15, 2004, discounted at the Treasury Rate. The Spread, as
determined in the manner specified in the next succeeding sentence, shall be the
lowest bid, expressed as a spread in the terms of the Base Rate given the Dollar
Price as calculated in the prior sentence. The Spread will be obtained by the
Calculation Agent on the Determination Date from each of five leading dealers of
publicly
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traded debt securities of the Company in The City of New York (which may include
the Calculation Agent or one of its affiliates) selected by the Calculation
Agent, for the full aggregate principal amount of the Notes, but assuming an
issue date on August 15, 2004, a stated annual interest rate equal to the Base
Rate plus the spread bid by such dealer, for settlement, without accrued
interest, on August 15, 2004. If fewer than five such dealers bid as described
above, then the Spread shall be the arithmetic mean of the bids obtained,
determined as described above. Notwithstanding the calculation of the Spread
described above, if the Calculation Agent and the Company agree, the Callholder
and the Company may mutually determine the Interest Rate to Maturity for the
Notes. The Interest Rate to Maturity announced by the Calculation Agent, absent
manifest error, shall be binding and conclusive upon the beneficial owners and
holders of the Notes, the Company and the Trustee.
"Treasury Rate" means, with respect to the Call Settlement Date, the rate
per annum equal to the semiannual equivalent yield to maturity or interpolated
(on a day count basis) yield to maturity of the Comparable Treasury Issues (as
defined below), assuming a price for the Comparable Treasury Issues (expressed
as a percentage of its principal amount), equal to Comparable Treasury Price (as
defined below) for such Call Settlement Date.
"Comparable Treasury Issues" means the United States Treasury security or
securities selected by the Calculation Agent as having an actual or interpolated
maturity or maturities comparable to the remaining term of the Notes being
purchased.
"Comparable Treasury Price" means, with respect to the Call Settlement
Date, (a) the offer prices for the Comparable Treasury Issues (expressed in each
case as a percentage of its principal amount) on the third Business Day
preceding such Call Settlement Date, as set forth on "Telerate Page 500" (or
such other page as may replace Page 500) or (b) if such page (or any successor
page) is not displayed or does not contain such an offer prices on such Business
Day, (i) the average of the Reference Treasury Dealer Quotations for such Call
Settlement Date, after excluding the highest and lowest such Reference Treasury
Quotations, or (ii) if the Calculation Agent obtains fewer than four such
Reference Treasury Dealer Quotations, the average of all such Reference Treasury
Dealer Quotations. "Telerate Page 500" means the display designated as "Page
500" on the Dow Jones Telerate Service (or such other page as may replace Page
500 on such service) or such other service displaying such Treasury Rate as may
replace the Dow Jones Telerate Service. "Reference Treasury Dealer Quotations"
means, with respect to each Reference Treasury Dealer and any Call Settlement
Date, the average, as determined by the Calculation Agent, of the offer prices
for the Comparable Treasury Issues (expressed in each case as a percentage of
its principal amount) quoted in writing to the Calculation Agent by such
Reference Treasury Dealer by 3:30 p.m., on the third Business Day preceding such
call Settlement Date.
"Reference Treasury Dealer" means each of CS First Boston Corporation,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and Salomon Brothers Inc. and their respective
successors; provided, however, that
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<PAGE>
it any of the foregoing or their affiliates shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"), the
Calculation Agent shall substitute therefor another Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to the Notes, the
remaining scheduled payments of the principal thereof to be purchased and
interest thereon, to the extent of the Base Rate (7.114%) only, that would be
due after the related Call Settlement Date but for such purchase; provided,
however, that, if such Call Settlement Date is not an Interest Payment Date with
respect to such Notes, the amount on the next scheduled interest payment
thereon, to the extent of the Base Rate only, will be reduced by the amount of
interest accrued thereon, to the extent of the Base Rate only, to such Call
Settlement Date.
If the Callholder has exercised its right to call the Notes and the Company
has not previously notified the Callholder and the Trustee of its intention to
exercise its right to purchase the Notes from the Callholder, the Callholder
will notify the Company and the Trustee by telephone, confirmed in writing, by
4:00 p.m., New York City time, on the Determination Date, of the Interest Rate
to Maturity.
All of the Notes will be automatically delivered to the account of the
Callholder (by book-entry through The Depository Trust Company ("DTC")) or the
Company, as and the case may be, pending payment of the purchase price therefor,
on the Call Settlement Date.
(xi) The Noteholder shall have the right, upon at least one Business Day
but not more than four Business Days prior written notice, to require the
Company to repurchase on August 15, 2004 (the "Put Settlement Date") all of the
Notes (the "Put Option") at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest to the Put Settlement Date. The
Trustee shall also give notice of its intent to exercise the Put Option on the
Put Settlement Date if the Callholder has exercised the Call Option but fails to
make payment in full thereon on the date required in the Call Option.
(xii) Except for such rights as are set forth in the Call Option and the
Put Option, the holders of the Notes shall have no special rights in addition to
those provided in the Indenture upon the occurrence of any particular events.
(xiii) Other than as set forth herein, there shall be no deletions from,
modifications of or additions to the Events of Default or additional covenants
of the Company with respect to the Notes from those set forth in the Indenture.
(xiv) The Notes will initially be issued in definitive form as a single
note. Upon the exercise of the Call Option, the definitive Note may be exchanged
for a single global note (the "Global Note") registered in the name of DTC or
its nominee. If represented by a Global Note, (i) DTC or its nominee will
credit, on its book-entry registration and transfer system, the
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<PAGE>
respective amounts of Notes represented by the Global Note; (ii) ownership of
beneficial interest in the Global Note will be limited to institutions that have
accounts with DTC or its nominee ("Participants") and to persons that may hold
interests through Participants; (iii) beneficial owners of interest in the
Global Note may exchange such interests for Notes of like tenor of any
authorized form and denomination only in the manner provided in Section 2.06 of
the Indenture; and (iv) DTC shall be depositary of the Global Note.
(xv) The Notes shall not be issuable as Bearer Securities.
(xvi) Interest on any Note shall be payable only to the Person in whose
name that Note (or one or more Predecessors Securities thereof) is registered at
the close of business on the Regular Record Date for such interest.
(xvii) the Notes are not Guaranteed Securities.
(b) Form of the Notes.
(i) The text of the Notes due shall be substantially in the following form:
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MEDITRUST
7.114% Notes due August 15, 2011
PRINCIPAL AMOUNT $150,000,000 CUSIP NO: 584979AA6
DUE August 15, 2011
MEDITRUST, a Massachusetts business trust, promises to pay to
Meditrust Exercisable Put Option Secturities(sm)Trust
or registered assigns, the principal sum of One Hundred Fifty Million Dollars,
on August 15, 2011.
Additional provisions of this Security are set forth on the reverse
side of this Security.
_______________, ____ MEDITRUST
(SEAL)
By:______________________
Secretary
By:______________________
President
CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY, as Trustee, certifies that this is one of
the Securities referred to in the within-mentioned Indenture.
By:______________________
Authorized Officer
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<PAGE>
MEDITRUST
Exercisable Put Option Notes due August 15, 2011
CUSIP NO: 584979AA6
THE NOTES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM.
1. Interest. Meditrust, a Massachusetts business trust, and any successor
under the Indenture (the "Company"), for value received, hereby promises to pay
to Meditrust Exercisable Put Option SecuritiesSM Trust (the "Trust"), formed
pursuant to an Amended and Restated Declaration of Trust and Trust Agreement
(the "Trust Agreement"), dated as of August 7, 1997, or to any subsequent
registered assignee or transferee Holder hereof upon presentation, the principal
sum of ONE HUNDRED AND FIFTY MILLION DOLLARS ($150,000,000) on August 15, 2011
(the "Maturity Date"), and to pay interest on the outstanding principal amount
of this Note (i) at 7.114% per annum (the "Initial Interest Rate") from August
12, 1997 (the "Original Issuance Date") to but not including August 15, 2004,
and (ii) at the Interest Rate to Maturity (determined as hereinafter provided)
from August 15, 2004 until the Maturity Date. The Company shall pay interest on
the Notes semi-annually in arrears on February 15, and August 15 of each year,
commencing February 15, 1998, or if any such day is not a Business Day, on the
next succeeding Business Day (and without any interest or other payment in
respect of such delay) (each an "Interest Payment Date"). Interest will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
2. Method of Payment. The Paying Agent will pay interest (except defaulted
interest) on the Notes from monies provided by the Company to the persons who
are the registered Holders of the Notes at the close of business on the Business
Day immediately preceding each Interest Payment Date (if the Notes are evidenced
by a global note in book-entry form and otherwise shall be the last Business Day
of the calendar month immediately preceding the month in which the related
interest payment date occurs). Holders must surrender Notes to a Paying Agent to
collect principal payments. The Paying Agent will pay principal and interest in
money of the United States that at the time of payment is legal tender for
payment of public and private debts.
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<PAGE>
The Paying Agent will make all payments of principal and interest in immediately
available funds, so long as The Depository Trust Company or a successor
depository continues to make its Same-Day Funds Settlement System available to
the Company.
3. Registrar and Agents. Initially, State Street Bank and Trust Company
will act as Registrar, Paying Agent and agent for service of notices and
demands. The Company may change any Registrar, co-registrar, Paying Agent and
agent for service of notices and demands without notice. The Company or any of
its Subsidiaries may act as Paying Agent. The address of State Street Bank and
Trust Company is [111 Westminster Street, RIM0199, Providence, Rhode Island
02903-2305.]
4. Indenture, Limitations. The Company issued the Notes as a series of its
securities under an Indenture dated as of July 26, 1995 as supplemented by a
Sixth Supplemental Indenture dated as of August 12, 1997 (the "Indenture")
between the Company and State Street Bank and Trust Company, as successor
trustee (the "Trustee"). Capitalized terms herein are used as defined in the
Indenture unless otherwise defined herein. The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (15 U.S. Code " 77aaa-77bbbb) as in effect on the
date of the Indenture (the "TIA"). The Notes are subject to all such terms, and
the Holders of the Notes are referred to the Indenture and the TIA for a
statement of such terms.
The Notes are general unsecured obligations of the Company limited to
$150,000,000 principal amount. The Indenture imposes certain limitations on the
ability of the Company to, among other things, incur certain liens and certain
additional indebtedness, make payments in respect of its shares of beneficial
interest, merge or consolidate with any other Person and sell, lease, transfer
or dispose of its properties or assets.
5. Call and Repurchase Option. In exchange for certain consideration paid
by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Callholder") to the
Trust, the Trust has entered into a Call Option with the Callholder, pursuant to
which the Callholder has the right to purchase the Notes from the Trust (the
"Call Option") on August 15, 2004 (the "Call Settlement Date") at 100% of the
principal amount thereof (the "Call Price"). On the Call Settlement Date, the
Company may repurchase the Notes, in whole but not in part, from the Callholder
at a price equal to the greater of (i) 100% of the principal amount of the Notes
and (ii) the sum of the present values of the Remaining Scheduled Payments (as
defined herein) thereon, as determined by the Callholder, discounted to the Call
Settlement Date on a semiannual basis (assuming a 360- day year consisting of
twelve 30-day months) at the Treasury Rate, plus in either case accrued and
unpaid interest from August 15, 2004 on the principal amount being purchased to
the date of purchase. If the Company elects to repurchase the Notes, it shall
pay the purchase price therefor in same-day funds by wire transfer to an account
designated by the Callholder on the Call Settlement Date.
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<PAGE>
The Callholder will notify the Company and trustee of the Trust (the "Trust
Trustee"), not later than five Business Days prior to the Call Settlement Date,
of its intention to purchase the Notes subject to the exceptions described
herein. The Company thereafter will notify the Trust Trustee and the Callholder,
not later than the Business Day immediately preceding the Determination Date (as
defined herein), that the Company has irrevocably determined to exercise its
right to repurchase the Notes from the Callholder.
From and after August 15, 2004, the Notes will bear interest at the
Interest Rate to Maturity. The obligation of the Callholder to purchase the
Notes on the Call Settlement Date is subject to the condition that no Event of
Default, or any event which, with the giving of notice or passage of time, or
both, would constitute an Event of Default, with respect to the Notes shall have
occurred and be continuing.
The Interest Rate to Maturity shall be determined by Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Calculation Agent") by 4:00 p.m., New York
City time, on the third Business Day immediately preceding August 15, 2004 (the
"Determination Date") to the nearest one hundred-thousandth (0.00001) of one
percent per annum and will be the Base Rate (6.194%) plus the Spread, which will
be based on the Dollar Price (as defined herein) of the Notes calculated as
described in the next sentence. The "Dollar Price" of the Notes shall be equal
to the present value of the remaining principal and interest payments of the
Base Rate from August 15, 2004, discounted at the Treasury Rate. The Spread, as
determined in the manner specified in the next succeeding sentence, shall be the
lowest bid, expressed as a spread in the terms of the Base Rate given the Dollar
Price as calculated in the prior sentence. The Spread will be obtained by the
Calculation Agent on the Determination Date from each of five leading dealers of
publicly traded debt securities of the Company in The City of New York (which
may include the Calculation Agent or one of its affiliates) selected by the
Calculation Agent, for the full aggregate principal amount of the Notes, but
assuming an issue date on August 15, 2004, a stated annual interest rate equal
to the Base Rate plus the spread bids by such dealer, for settlement without
accrued interest on August 15, 2004. If fewer than five such dealers bid as
described above, then the Spread shall be the arithmetic mean of the bid
obtained determined as described above. Notwithstanding the calculation of the
Spread described above, if the Calculation Agent and the Company agree, the
Callholder and the Company may mutually determine the Interest Rate to Maturity
for the Notes. The Interest Rate to Maturity announced by the Calculation Agent,
absent manifest error, shall be binding and conclusive upon the beneficial
owners and Holders of the Notes, the Company and the Trustee.
"Treasury Rate" means, with respect to the Call Settlement Date, the rate
per annum equal to the semiannual equivalent yield to maturity or interpolated
(on a day count basis) yield to maturity of the Comparable Treasury Issues (as
defined herein), assuming a price for the Comparable Treasury Issues (expressed
as a percentage of its principal amount), equal to the Comparable Treasury Price
(as defined herein) for such Call Settlement Date.
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<PAGE>
"Comparable Treasury Issues" means the United States Treasury security or
securities selected by the Calculation Agent as having an actual or interpolated
maturity or maturities comparable to the remaining term of the Notes being
purchased.
"Comparable Treasury Price" means, with respect to the Call Settlement
Date, (a) the offer prices for the Comparable Treasury Issues (expressed in each
case as a percentage of its principal amount) on the third Business Day
preceding such Call Settlement Date, as set forth on "Telerate Page 500" (or
such other page as may replace Page 500) or (b) if such page (or any successor
page) is not displayed or does not contain such offer prices on such Business
Day, (i) the average of the Reference Treasury Dealer Quotations for such Call
Settlement Date, after excluding the highest and lowest such Reference Treasury
Quotations, or (ii) if the Calculation Agent obtains fewer than four such
Reference Treasury Dealer Quotations, the average of all such Reference Treasury
Dealer Quotations. "Telerate Page 500" means the display designated as "Page
500" on the Dow Jones Telerate Service (or such other page as may replace Page
500 on such service) or such other service displaying such Treasury Rate as may
replace the Dow Jones Telerate Service. "Reference Treasury Dealer Quotations"
means, with respect to each reference Treasury Dealer and any Call Settlement
Date, the average, as determined by the Calculation Agent, of the offer prices
for the Comparable Treasury Issues (expressed in each case as a percentage of
its principal amount) quoted in writing to the Calculation Agent by such
Reference Treasury Dealer by 3:30 p.m., on the third Business Day preceding such
Call Settlement Date.
"Reference Treasury Dealer" means each of CS First Boston Corporation,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated and Salomon Brothers Inc. and their respective
successors; provided, however, that if any of the foregoing or their affiliates
shall cease to be a primary U.S. Government securities dealer in New York City
(a "Primary Treasury Dealer"), the Calculation Agent shall substitute therefor
another Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to the Notes, the
remaining scheduled payments of the principal thereof to be purchased and
interest thereon, to the extent of the Base Rate (6.194%) only, that would be
due after the related Call Settlement Date but for such purchase; provided,
however, that if such Call Settlement Date is not an Interest Payment Date with
respect to such Notes, the amount of the next succeeding scheduled interest
payment thereon, to the extent of the Base Rate only, will be reduced by the
amount of interest accrued thereon, to the extent of the Base Rate only, to such
Call Settlement Date.
If the Callholder has exercised its right to call the Notes and the Issuer
has not previously notified the Callholder and the Trust Trustee of its
intention to exercise its right to purchase the Notes from the Callholder, the
Callholder will notify the Issuer and the Trust Trustee by telephone, confirmed
in writing, by 4:00 p.m., New York City time, on the Determination Date, of the
Interest Rate to Maturity.
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<PAGE>
All of the Notes will be automatically delivered to the account of the
Callholder (by book-entry through the Depository Trust Company) or the Issuer,
as the case may be, pending payment of the purchase price therefor, on the Call
Settlement Date.
6. Put Option. The Trust has the right, upon at least one Business Day but
not more than four Business Days prior written notice, to require the Company to
repurchase on August 15, 2004 (the "Put Settlement Date") all of the Notes (the
"Put Option") at a price equal to 100% of the principal amount thereof plus
accrued and unpaid interest to the Put Settlement Date. The Trust Trustee shall
also give notice of its intent to exercise the Put Option on the Put Settlement
Date if the Callholder has exercised the Call Option but fails to make payment
in full thereon on the date required in the Call Option.
7. Denominations, Transfer, Exchange. This Note is one of a duly authorized
issue of Securities of the Company designated as its Exercisable Put Option
Notes due August 15, 2011 limited in aggregate principal amount to $150,000,000.
The Notes are in registered form without coupons in denominations of $100,000,
and multiples of $1,000 principal amount and integral multiples thereof. A
Holder may register the transfer of or exchange Notes in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes and fees
required by law or permitted by the Indenture.
8. Persons Deemed Owners. The registered Holder of a Note may be treated as
the owner of it for all purposes.
9. Unclaimed Money. If money for the payment of principal or interest on
any Note remains unclaimed for three years, the Trustee and the Paying Agent
will pay the money back to the Company at its written request, unless otherwise
required by law. Thereafter. Holders may look only to the Company for payment.
10. Discharge Prior to Maturity. The Indenture will be discharged and
cancelled except for certain sections thereof upon payment of all the Notes, or
upon the irrevocable deposit with the Trustee of funds or U.S. Government
Obligations maturing on or before such payment date sufficient, together with
scheduled payments of interest thereon without reinvestment, to pay principal,
premium, if any, and interest on such payment date.
11. Supplemental Indenture. Subject to certain exceptions, the Indenture
may be amended or supplemented with respect to the Notes with the consent of the
Holders of at least a majority in principal amount of the Notes then outstanding
and any existing default or compliance with any provision may be waived with the
consent of the Holders of the majority in principal amount of the Notes then
outstanding. Without the consent of or notice to any Holder, the Company may
supplement the Indenture, to, among other things, provide for uncertificated
Notes, cure any ambiguity, defect or inconsistency, or make any other change
that does not
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adversely affect the interests or rights of any Holder.
12. Successors. Upon satisfaction of the conditions provided in the
Indenture, if a successor to the Company assumes all the obligations of its
predecessor under the Notes and the Indenture, the predecessor will be released
from those obligations.
13. Defaults and Remedies. If an Event of Default with respect to the
Notes, as defined in the Indenture, occurs and is continuing, the Trustee or the
Holders of a majority in principal amount of Notes may declare all the Notes to
be due and payable immediately in the manner and with the effect provided in the
Indenture. Holders of Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may require indemnity satisfactory to it,
subject to the provisions of the TIA, before it enforces the Indenture or the
Notes. Subject to certain limitations, Holders of a majority in principal amount
of the Notes then outstanding may direct the Trustee in its exercise of any
trust or power with respect to the Notes. The Trustee may withhold from Holders
of Securities notice of any continuing default (except a default in payment of
principal or interest) if it determines that withholding notice is in their
interests. The Company is required to file periodic reports with the Trustee as
to the absence of any Default or Event of Default.
14. Trustee Dealings with the Company. Fleet National Bank, the Trustee
under the Indenture, in its individual or any other capacity, may make loans to,
accept deposits from, and perform services for the Company or its Affiliates,
and may otherwise deal with the Company or its Affiliates as if it were not the
Trustee.
15. No Recourse Against Others. No shareholder, trustee or officer, as
such, past, present or future, of the Company or any successor corporation or
trust shall have any liability for any obligation of the Company under the Notes
or the Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder of a Note by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.
THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS
AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE
OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS
TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT
INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS
DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE
COMPANY FOR THE PAYMENT OF ANY SUM OR THE
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PERFORMANCE OF ANY OBLIGATION.
16. Authentication. This Note shall not be valid until the Trustee signs
the certificate of authentication on the reverse side of this Note.
17. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants
by the entirety), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture and any supplemental indentures thereto. It also
will furnish the text of this Note in larger type. Requests may be made to:
MEDITRUST, 197 Third Avenue, Needham Heights, Massachusetts 02194, Attention:
John G. Demeritt, Controller.
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ASSIGNMENT FORM
If you, the Holder, want to assign this Note, fill in the form below and have
your signature guaranteed:
For value received, I or we assign and transfer this Note to
(INSERT ASSIGNEE'S SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER)
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.................................................................
.................................................................
(Print or type assignee's name, address and zip code)
and irrevocably appoint .........................................
................................................... agent to transfer this Note
on the books of the Company. The agent may substitute another to act for it.
Date:............................................................
Your signature:..................................................
(Sign exactly as your name appears on the reverse side of this Note)
Signature Guaranteed By:.........................................
Note: Signature must be guaranteed by a participant in a
Signature Guaranty Medallion Program.]
16
<PAGE>
ARTICLE THREE
Miscellaneous
-------------
The Indenture, except as amended herein, is in all respects ratified and
confirmed and this Sixth Supplemental Indenture and all its provisions herein
contained shall be deemed a part thereof in the manner and to the extent herein
and therein provided.
The terms used in this Sixth Supplemental Indenture, but not defined
herein, shall have the meanings assigned thereto in the Indenture.
THIS SIXTH SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
This Sixth Supplemental Indenture may be simultaneously executed in any
number of counterparts, and all such counterparts executed and delivered, each
as an original, shall constitute one and the same instrument.
THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS
AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE
OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS
TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT
INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS
DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE
COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth Supplemental
Indenture to be duly executed, as of the day and year first above written.
MEDITRUST
By:________________________________
Name:
Title: [Chief Financial Officer][Treasurer]
17
<PAGE>
STATE STREET BANK AND TRUST
COMPANY, as trustee
By:_______________________________
Name:
Title:
COMMONWEALTH OF MASSACHUSETTS )
) ss.:
County of Norfolk )
On the __ day of August, 1997, before me personally came
________________, to me known, who, being by me duly sworn, did depose and say
that s/he is [Chief Financial Officer][Treasurer] of Meditrust, one of the
business entities described in and which executed the foregoing instrument; that
s/he knows the seal of Meditrust; that the seal affixed to said instrument is
Meditrust's seal; that it was so affixed by authority of the Board of Trustees
of Meditrust; and that s/he signed her name thereto by like authority.
[SEAL]
--------------------------
Notary Public
My commission expires:
STATE OF RHODE ISLAND )
) ss.:
County of ___________ )
On the day of August __, 1997, before me personally came
_________________, to me known, who, being by me duly sworn, did depose and say
that s/he is _____________________ of State Street Bank and Trust Company, one
of the business entities described in and which executed the foregoing
instrument; that s/he knows the seal of said bank; that the seal affixed to said
instrument is such bank's seal; that it was so affixed by authority of the Board
of Directors of said bank; and that s/he signed his/her name thereto by like
authority.
[SEAL]
----------------------------
Notary Public
My commission expires:
18
SEVENTH
SUPPLEMENTAL INDENTURE
by and between
MEDITRUST
and
STATE STREET BANK AND TRUST COMPANY
August 12, 1997
MEDITRUST
$100,000,000 Remarketed Reset Notes due August 15, 2002
<PAGE>
This SEVENTH SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") made
and entered into as of August 12, 1997 between Meditrust, a Massachusetts
business trust (the "Company"), and State Street Bank and Trust Company, a
national banking association (the "Trustee").
WITNESSETH THAT:
WHEREAS, the Company and State Street Bank and Trust Company have executed
and delivered an Indenture, dated as of July 26, 1995 (the "Indenture"),
relating to the Company's issuance, from time to time, of various series of debt
securities; and
WHEREAS, the Company has determined to issue debt securities known as its
$100,000,000 Remarketed Reset Notes due August 15, 2002 (the "Notes"); and
WHEREAS, the Indenture provides that certain terms and conditions for each
series of debt securities issued by the Company thereunder may be set forth in
an indenture supplemental to the Indenture;
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
ARTICLE ONE
DEFINED TERMS
Section 101. The following definitions supplement, and, to the extent
inconsistent with, replace the definitions in Section 101 of the Indenture:
"Alternate Spread" means the percentage equal to LIBOR for the Quarterly
Period beginning on the Commencement Date of the relevant Subsequent Spread
Period.
"Annual Service Charge" as of any date means the maximum amount which is
expensed in any 12-month period for interest on Debt of the Company and its
Subsidiaries.
"Business Day" means any day other than a Saturday or Sunday or a day on
which banking institutions in The City of New York are required or authorized to
close and, in the case of Notes in the Floating Rate Mode, that is also a London
Business Day.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participation or other ownership
interests (however designated) of such Person and any rights (other than debt
securities convertible into or exchangeable for capital stock), warrants or
options to purchase any thereof.
"Commencement Date" means the first date of a Subsequent Spread Period.
<PAGE>
"Duration/Mode Determination Date" means the fifteenth calendar date prior
to the Commencement Date of each Subsequent Spread Period on which the character
and duration of the interest rate on the Notes as well as the redemption type
(and any other relevant terms) for the Subsequent Spread Period will be agreed
to by the Company and the Remarketing Underwriter.
"Initial Quarterly Period" is defined in the third paragraph of Section
201(c) hereof.
"Initial Spread" means the Spread applicable during the Initial Spread
Period.
"Initial Spread Period" means the period from and including August 12, 1997
to but excluding August 15, 1998 during which the interest rate on the Notes
will be reset quarterly and will equal LIBOR plus the Initial Spread.
"Interest Payment Date" means any date interest is paid on the Notes.
"Interest Reset Date" means the first day of a Quarterly Period.
"LIBOR Determination Date" means the second London Business Day preceding
each Interest Reset Date, on which the Rate Agent will determine LIBOR
applicable for a Quarterly Period.
"LIBOR" means, with respect to determining the interest rate on Notes in
the Floating Rate Mode, the offered rate for three-month deposits in U.S.
Dollars of not less than U.S. $1,000,000, commencing on the second London
Business Day immediately following such LIBOR Determination Date, which appears
on Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR
Determination Date. With respect to a LIBOR Determination Date on which no rate
appears on Telerate Page 3750 as of approximately 11:00 a.m., London time, on
such LIBOR Determination Date, the Rate Agent shall request the principal London
offices of each of four major reference banks in the London interbank market
selected by the Rate Agent to provide the Rate Agent with a quotation of the
rate at which three-month deposits in U.S. Dollars, commencing on the second
London Business Day immediately following such LIBOR Determination Date, are
offered by it to prime banks in the London interbank market as of approximately
11:00 a.m., London time, on such LIBOR Determination Date and in a principal
amount equal to an amount of not less than U.S. $1,000,000 that is
representative for a single transaction in such market at such time. If at least
two such quotations are provided, LIBOR for such LIBOR Determination Date will
be the arithmetic mean of such quotations as calculated by the Rate Agent. If
fewer than two quotations are provided, LIBOR for such LIBOR Determination Date
will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m.,
New York City time, on such LIBOR Determination Date by three major banks in The
City of New York selected by the Rate Agent (after consultation with the
Company) for loans in U.S. Dollars to leading European banks, having a
three-month maturity commencing on the second London Business Day immediately
following such LIBOR
2
<PAGE>
Determination Date and in a principal amount equal to an amount of not less than
U.S. $1,000,000 that is representative for a single transaction in such market
at such time; provided, however, that if the banks selected as aforesaid by the
Rate Agent are not quoting as mentioned in this sentence, LIBOR for such LIBOR
Determination Date will be LIBOR determined with respect to the immediately
preceding LIBOR Determination Date, or in the case of the first LIBOR
Determination Date, LIBOR for the Initial Quarterly Period.
"London Business Day" means any day on which dealings in deposits in U.S.
Dollars are transacted in the London interbank market.
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Note, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest (exclusive
of interest accrued to the date of redemption or accelerated payment) that would
have been payable in respect of such dollar if such redemption or accelerated
payment had not been made, determined by discounting, on a semiannual basis,
such principal and interest at the Reinvestment Rate (determined on the third
Business Day preceding the date such notice of redemption is given or
declaration of acceleration is made) from the respective dates on which such
principal and interest would have been payable if such redemption or accelerated
payment had not been made, over (ii) the aggregate principal amount of the Notes
being redeemed or paid. For purposes of this Supplemental Indenture and the
Notes, references in the Indenture to the payment of the principal (and premium,
if any) and interest on the Notes shall be deemed to include the payment of the
Make-Whole Amount, if any, due upon redemption with respect to the Notes.
"Make-Whole Redemption" means redemption at a redemption price equal to the
sum of (i) the principal amount of the Notes being redeemed plus accrued
interest thereon, if any, to the redemption date and (ii) the Make-Whole Amount,
if any, with respect to such Notes.
"Par Redemption" means redemption at a redemption price equal to 100% of
the principal amount thereof, plus accrued interest thereon, if any, to the
redemption date.
"Premium Redemption" means redemption at a redemption price or prices
greater than 100% of the principal amount thereof, plus accrued interest
thereon, if any, to the redemption date, as determined on the Duration/Mode
Determination Date.
"Quarterly Period" means the period from and including the most recent
Interest Payment Date to which interest has been paid to but excluding the next
Interest Payment Date.
"Rate Agent" means the nationally recognized broker-dealer selected by the
Company as its agent to determine (i) LIBOR and the interest rate on the Notes
for any Quarterly Period and/or (ii) the yield to maturity on the applicable
United States Treasury security that is used in connection with the
determination of the applicable Fixed Rate, and the ensuing applicable Fixed
Rate.
3
<PAGE>
"Record Date" means the fifteenth calendar day, whether or not a Business
Day, next preceding the applicable Interest Payment Date.
"Reinvestment Rate" means .25% (twenty-five one hundredths of one percent)
plus the yield on treasury securities at constant maturity under the heading
"Week Ending" published in the Statistical Release under the caption "Treasury
Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid. If no maturity exactly corresponds to such
maturity, yields for the two published maturities most closely corresponding to
such maturity shall be calculated pursuant to the immediately preceding sentence
and the Reinvestment Rate shall be interpolated or extrapolated from such yields
on a straight-line basis, rounding in each of such relevant periods to the
nearest month. For purposes of calculating the Reinvestment Rate, the most
recent Statistical Release published prior to the date of determination of the
Make-Whole Amount shall be used.
"Remarketing Underwriter" means the nationally recognized broker-dealer
selected by the Company to act as Remarketing Underwriter.
"Remarketing Underwriting Agreement" means the agreement entered into by
the Company and the Remarketing Underwriter in the event the Company and the
Remarketing Underwriter agree on the Spread on the Spread Determination Date
with respect to any Subsequent Spread Period.
"Spread" refers to the percentage that, added to LIBOR (when in the
Floating Rate Mode) or the comparable Treasury rate (when in the Fixed Rate
Mode), equals the interest rate payable on the Notes.
"Spread Determination Date" is the tenth calendar day prior to the
Commencement Date of such Subsequent Spread Period on which the Spread for each
Subsequent Spread Period will be established by 3:00 p.m., New York City time.
"Statistical Release" means the statistical release designated "H. 15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States government
securities adjusted to constant maturities or, if such statistical release is
not published at the time of any determination under this Supplemental
Indenture, then such other reasonably comparable index which shall be designated
by the Rate Agent, after consultation with the Company.
"Subsequent Spread" means the Spread determined by agreement between the
Remarketing Underwriter and the Company to result in a rate which will enable
100% of tendered Notes to be remarketed.
"Subsequent Spread Period" means one or more periods of at least six months
and not more than nine years (or any integral multiple of six months therein),
designated by the Company,
4
<PAGE>
commencing on a February 15 or August 15 (or as otherwise specified by the
Company and the Remarketing Underwriter on the applicable Duration/Mode
Determination Date in connection with the establishment of each Subsequent
Spread Period) through and including August 15, 2002.
"Subsidiary" means any corporation or other entity of which a majority of
(i) the voting power of the voting equity securities or (ii) the outstanding
equity interests of which are owned, directly or indirectly, by the Company or
one or more other Subsidiaries of the Company. For the purposes of this
definition, "voting equity securities" means equity securities having voting
power for the election of directors, whether at all times or only so long as no
senior class of security has such voting power by reason of any contingency.
"Telerate Page 3750" means the display designated on page "3750" on the
Telerate Service (or such other page as may replace the 3750 page on that
service or such other service or services as may be nominated by the British
Bankers' Association for the purpose of displaying London interbank offered
rates for U.S. Dollar deposits).
"Tender Date" is defined in Section 201(e) hereof.
"Tender Notice" is defined in Section 201(e) hereof.
ARTICLE TWO
TERMS OF THE NOTES
Section 201. Pursuant to Section 301 of the Indenture, the Notes shall have
the following terms and conditions:
(a) Title; Limitation on Aggregate Principal Amount. The Notes shall be
known as the Company's $100,000,000 Remarketed Reset Notes due August 15, 2002.
The Notes will be limited to an aggregate principal amount of $100,000,000.
(b) Principal Repayment; Currency. The stated maturity of the Notes is
August 15, 2002, provided, however, the Notes may be earlier redeemed at the
option of the Company as provided in paragraph (d) below. The principal of each
Note payable on the maturity date shall be paid against presentation and
surrender thereof at the corporate trust office of the Trustee, located
initially at Two International Place, Boston, Massachusetts 02110, in such coin
or currency of the United States of America as at the time of payment is legal
tender for the payment of public or private debts. The Company will not pay
Additional Amounts (as defined in the Indenture) on the Notes.
(c) Interest Payments. During the Initial Spread Period, the interest rate
on the Notes will be reset on each Interest Reset Date, and will equal LIBOR
plus the Initial Spread. The Initial Spread is .45%. After the Initial Spread
Period, unless notice of redemption of the Notes as a whole
5
<PAGE>
has been given, the duration, redemption dates, redemption type, redemption
prices (if applicable), Commencement Date, Interest Payment Date and interest
rate mode will be agreed to by the Company and the Remarketing Underwriter by
3:00 p.m., New York City time, on each applicable Duration/Mode Determination
Date and the Spread will be agreed to by the Company and the Remarketing
Underwriter by 3:00 p.m., New York City time, on the corresponding Spread
Determination Date. Interest on the Notes during each Subsequent Spread Period
shall be payable, as applicable, either (i) at a floating interest rate (such
Notes being in the "Floating Rate Mode", and such interest rate being a
"Floating Rate") or (ii) at a fixed interest rate (such Notes being in the
"Fixed Rate Mode" and such interest rate being a "Fixed Rate"), in each case as
determined by the Remarketing Underwriter and the Company in accordance with a
Remarketing Agreement between the Remarketing Underwriter and the Company (the
"Remarketing Agreement").
After the Initial Spread Period, the Spread applicable to each Subsequent
Spread Period will be determined on each subsequent Spread Determination Date
which precedes the beginning of the corresponding Subsequent Spread Period,
pursuant to agreement between the Company and the Remarketing Underwriter
(except as otherwise provided below), and the interest rate mode used for each
Subsequent Spread Period may be a Floating Rate Mode or a Fixed Rate Mode, at
the discretion of the Company and the Remarketing Underwriter. If the Company
and the Remarketing Underwriter are unable to agree on the Spread for any
Subsequent Spread Period, (1) the Subsequent Spread Period will be one year, (2)
the Notes will be reset to the Floating Rate Mode, (3) the Spread for such
Subsequent Spread Period will be the Alternate Spread and (4) the Notes will be
redeemable at the option of the Company, in whole or in part, upon at least five
Business Days' notice given by no later than the fifth Business Day after the
relevant Spread Determination Date, at a redemption price equal to 100% of the
principal amount thereof, together with accrued interest to the redemption date,
except that the Notes may not be redeemed prior to the Tender Date or later than
the last day of such one-year Subsequent Spread Period. During the Initial
Spread Period, interest on the Notes will be payable in Dollars quarterly in
arrears on November 15, 1997, February 15, 1998, May 15, 1998 and August 15,
1998 (or, if not a Business Day, on the next succeeding Business Day except as
described herein). After the Initial Spread Period, (i) if the Notes are in the
Floating Rate Mode, interest on the Notes will be payable, unless otherwise
specified on the applicable Duration/Mode Determination Date, quarterly in
arrears on each November 15, February 15, May 15 and August 15, during the
applicable Subsequent Spread Period, or (ii) if the Notes are in the Fixed Rate
Mode, interest on the Notes will be payable, unless otherwise specified on the
applicable Duration/Mode Determination Date, semiannually in arrears on each
January 9 and July 9 beginning on the Commencement Date and for the duration of
the applicable Subsequent Spread Period. Interest on the Notes is payable to the
persons in whose names the Notes are registered at the close of business on the
applicable Record Date next preceding the applicable Interest Payment Date.
Interest on the Notes will accrue from and including each Interest Payment
Date (or in the case of the Initial Quarterly Period, July 9, 1997) to but
excluding the next succeeding Interest Payment Date or maturity date, as the
case may be. The Initial Quarterly Period will be the period from and including
August 12, 1997 to but excluding the first Interest Payment Date (November 15,
6
<PAGE>
1997) (the "Initial Quarterly Period"). Thereafter, each Quarterly Period during
the Initial Spread Period or any Subsequent Spread Period will be from and
including the most recent Interest Payment Date to which interest has been paid
to but excluding the next Interest Payment Date.
Payment of interest on the Notes shall be made by the Trustee to or at the
direction of The Depository Trust Company or its nominee, Cede & Co., who will
in turn immediately credit the account of the Remarketing Underwriter.
If any Interest Payment Date (other than at maturity), redemption date,
Interest Reset Date, Duration/Mode Determination Date, Spread Determination
Date, Commencement Date or Tender Date would otherwise be a day that is not a
Business Day, such Interest Payment Date, redemption date, Interest Reset Date,
Duration/Mode Determination Date, Spread Determination Date, Commencement Date
or Tender Date will be postponed to the next succeeding day that is a Business
Day, except that if such Business Day is in the next succeeding calendar month,
such Interest Payment Date, redemption date, Interest Reset Date, Commencement
Date or Tender Date shall be the next preceding Business Day. If the maturity
date for the Notes falls on a day that is not a Business Day, the related
payment of principal and interest will be made on the next succeeding Business
Day as if it were made on the date such payment was due, and no interest will
accrue on the amounts so payable for the period for the period from and after
such dates.
If the Notes are in the Floating Rate Mode, such Notes will bear interest
at a rate per annum (computed on the basis of the actual number of days elapsed
over a 360-day year) equal to LIBOR for the applicable Quarterly Period plus the
applicable Spread, as agreed to by the Company and the Remarketing Underwriter,
and such interest rate will be reset quarterly. If the Notes are in the Fixed
Rate Mode, interest will equal the applicable Spread, as agreed to by the
Company and the Remarketing Underwriter, plus the applicable Treasury rate,
computed on the basis of a 360-day year of twelve 30-day months. Interest in the
Fixed Rate Mode will accrue from and including each Interest Payment Date to but
excluding the next succeeding Interest Payment Date or maturity date, as the
case may be. If any Interest Payment Date or any redemption date in the Fixed
Rate Mode falls on a day that is not a Business Day (in either case, other than
any Interest Payment Date or redemption date that falls on a Commencement Date,
in which case such Commencement Date will be postponed to the next day that is a
Business Day), the related payment of principal and interest will be made on the
next succeeding Business Day as if it were made on the date such payment was
due, and no interest will accrue on the amounts so payable for the period from
and after such date.
Unless the Company shall have otherwise provided pursuant to Section 4 of
the Remarketing Agreement, dated as of August 7, 1997 between the Company and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), the Rate Agent will be Merrill Lynch.
All percentages resulting from any calculation in respect of a Note will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of
7
<PAGE>
a percentage point rounded upward, and all dollar amounts used in or resulting
from such calculation in respect of a Note will be rounded to the nearest cent
(with one-half cent rounded upward).
Unless notice of redemption of the Notes as a whole has been given, the
Company will cause a notice to be given to holders of Notes on the New York
Business Day (as defined below) following the Spread Determination Date for each
Subsequent Spread Period in the manner described below, specifying (1) the
duration of such Subsequent Spread Period, (2) the mode (i.e., Fixed Rate Mode
or Floating Rate Mode), (3) the Commencement Date, (4) any redemption dates, (5)
any redemption type (i.e., par, premium or make-whole), (6) any redemption
prices, (7) the Spread for such Subsequent Spread Period, (8) the identity of
the Remarketing Underwriter, if applicable, and (9) any other relevant
provisions. The term "New York Business Day" means any day other than a Saturday
or Sunday or a day on which banking institutions in The City of New York are
required or authorized to close.
(d) Prepayment at the Option of the Company; Redemption. The Notes are not
redeemable prior to August 15, 1998. On that date and thereafter, the Notes may
be redeemable, at the option of the Company, on those Interest Payment Dates
that are specified as redemption dates by the Company on the applicable
Duration/Mode Determination Date, in whole or in part, upon notice thereof given
at any time during the 45 calendar day period ending on the tenth calendar day
prior to the redemption date (provided that notice of any partial redemption
must be given to the Noteholders at least 15 calendar days prior to the
redemption date), in accordance with the redemption type selected on the
Duration/Mode Determination Date. The redemption type to be chosen by the
Company and the Remarketing Underwriter on the Duration/Mode Determination Date
may be one of the following: (i) Par Redemption; (ii) Premium Redemption; or
(iii) Make- Whole Redemption.
(e) Tender at Option of Beneficial Owners. The Company will request, not
later than seven nor more than 15 calendar days prior to any Spread
Determination Date, that The Depository Trust Company ("DTC") notify its
Participants of such Spread Determination Date and of the procedures that must
be followed if any beneficial owner of a Note wishes to tender such Note as
described herein. If the Company and the Remarketing Underwriter agree on the
Spread on the Spread Determination Date with respect to any Subsequent Spread
Period, each Note may be tendered to the Remarketing Underwriter for purchase
from the tendering Noteholder at 100% of its principal amount and for
remarketing by the Remarketing Underwriter on the calendar day (or if such day
is not a Business Day, on the next succeeding Business Day except as otherwise
provided herein) immediately following the end of each Subsequent Spread Period
(the "Tender Date"). In the case of the Initial Spread Period, the Notes may be
tendered on August 15, 1998. Notice of a beneficial owner's election to tender
to the Remarketing Underwriter, which notice is irrevocable (the "Tender
Notice"), must be received by the Remarketing Underwriter during the period
commencing on the calendar day following the Spread Determination Date (or, if
not a Business Day, on the next succeeding Business Day) and ending at 5:00
p.m., New York City time, on the fifth calendar day following the relevant
Spread Determination Date. The obligation of the
8
<PAGE>
Remarketing Underwriter to purchase tendered Notes from the tendering
Noteholders will be subject to certain conditions and termination events as
provided in the Remarketing Underwriting Agreement. If, pursuant to those
certain conditions or termination events set forth in the Remarketing
Underwriting Agreement, the Remarketing Underwriter does not purchase all Notes
on the relevant Tender Date, for which a Tender Notice shall have been given,
(1) all Tender Notices relating thereto will be null and void, (2) none of the
Notes for which such Tender Notices shall have been given will be purchased by
the Remarketing Underwriter on such Tender Date, (3) the Subsequent Spread
Period will be one year, which Subsequent Spread Period shall be deemed to have
commenced on the applicable Commencement Date, (4) the Notes will be reset to
the Floating Rate Mode, (5) the Spread for such Subsequent Spread Period will be
the Alternate Spread and (6) the Notes will be redeemable at the option of the
Company, in whole or in part, upon at least ten Business Days' notice given by
no later than the fifth Business Day following the relevant Tender Date on the
date set forth in such notice, which shall be no later than the last day of such
one-year Subsequent Spread Period, at a redemption price equal to 100% of the
principal amount thereof, together with accrued interest to the redemption date.
No beneficial owner of any Note shall have any rights or claims against the
Company or the Remarketing Underwriter as a result of the Remarketing
Underwriter not purchasing such Notes, except as provided in clause (5) of the
preceding sentence.
If the Remarketing Underwriter does not purchase all Notes tendered for
purchase on any Tender Date, it will promptly notify the Company and the
Trustee. As soon as practicable after receipt of such notice, the Company will
cause a notice to be given to holders of the Notes specifying (1) the one-year
duration of the Subsequent Spread Period, (2) that the Notes will be reset to
the Floating Rate Mode, (3) the Spread for such Subsequent Spread Period (which
shall be the Alternate Spread) and (4) LIBOR for the initial Quarterly Period of
such Subsequent Spread Period.
(f) Form of Notes. The Notes shall be issued by the Company in registered
form as set forth in Exhibit A attached hereto and all of the terms and
provisions thereof are incorporated herein by reference. The Notes will be
issued in the form of single fully registered global security without coupons
(the "Global Note") which will be deposited with, or on behalf of, DTC, and
registered in the name of DTC's nominee, Cede & Co. Except under the
circumstance described below, the Notes will not be issuable in a definitive
form. Unless and until it is exchanged in whole or in part for the individual
notes represented thereby, a Global Note may not be transferred except as a
whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any nominee of DTC to a successor depository or any
nominee of such successor.
So long as DTC or its nominee is the registered owner of such Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by such Global Note for all purposes under this
Supplemental Indenture. Except as described below, owners of beneficial interest
in Notes evidenced by a Global Note will not be entitled to have any of the
individual Notes represented by such Global Note registered in their names, will
not receive or be entitled to receive physical delivery of any such Notes in
definitive form and will not be
9
<PAGE>
considered the owners or holders thereof under the Indenture or this
Supplemental Indenture.
If DTC is at any time unwilling, unable or ineligible to continue as
depository and a successor depository is not appointed by the Company within 90
days, the Company will issue individual Notes in exchange for the Global Note
representing such Notes. In addition, the Company may at any time and in its
sole discretion, subject to certain limitations set forth in the Indenture,
determine not to have any of such Notes represented by one or more Global Notes
and in such event will issue individual Notes in exchange for the Global Note or
Notes representing such debt Securities. Individual Notes so issued will be
issued in denominations of $1,000 and integral multiples thereof and will be
issued in registered form only, without coupons.
(g) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Company shall be directed
to it at 197 First Avenue, Needham Heights, Massachusetts 02194, Attention:
David F. Benson, President; notices to the Trustee shall be directed to it at
Two International Place, Boston, Massachusetts 02110, Attention: Corporate Trust
Division.
ARTICLE THREE
ADDITIONAL EVENTS OF DEFAULT
For purposes of this Supplemental Indenture and the Notes, in addition to
the Events of Default set forth in Section 501 of the Indenture, it shall also
constitute an "Event of Default" if an event of default under any bond,
debenture, note or other evidence of indebtedness of the Company (including an
event of default with respect to any other series of securities), or under any
mortgage, indenture or other instrument of the Company under which there may be
issued or by which there may be secured or evidenced any indebtedness of the
Company (or by any Subsidiary, the repayment of which the Company has guaranteed
or for which the Company is directly responsible or liable as obligor or
guarantor), whether such indebtedness now exists or shall hereafter be created,
shall happen and shall result in an aggregate principal amount exceeding
$20,000,000 becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, without such indebtedness
having been discharged, or such acceleration having been rescinded or annulled,
within a period of ten days after there shall have been given, by registered or
certified mail, to the Company by the Trustee or to the Company and the Trustee
by the holders of at least 25% in principal amount of the outstanding Notes, a
written notice specifying such default and requiring the Company to cause such
indebtedness to be discharged or cause such acceleration to be rescinded or
annulled and stating that such notice is a "Notice of Default" hereunder.
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<PAGE>
ARTICLE FOUR
EFFECTIVENESS
This Supplemental Indenture shall be effective for all purposes as of the
date and time this Supplemental Indenture has been executed and delivered by the
Company and the Trustee in accordance with Article Nine of the Indenture. As
supplemented hereby, the Indenture is hereby confirmed as being in full force
and effect.
ARTICLE FIVE
MISCELLANEOUS
Section 601. In the event any provision of this Supplemental Indenture
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof or any provision of the Indenture.
Section 602. To the extent that any terms of the Notes are inconsistent
with the terms of the Indenture, the terms of the Notes shall govern and
supersede such inconsistent terms.
Section 603. This Supplemental Indenture shall be governed by and construed
in accordance with the laws of The Commonwealth of Massachusetts.
Section 604. This Supplemental Indenture may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
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IN WITNESS WHEREOF, the Company and the Trustee have caused this
Supplemental Indenture to be executed as an instrument under seal in their
respective corporate names and attested by their duly authorized officers, all
as of the date first above written.
(SEAL) MEDITRUST
Attest:
By: ________________________________
Name:
Title:
________________________________
Name:
Title:
(SEAL) STATE STREET BANK AND TRUST COMPANY
Attest:
By: ________________________________
Name:
Title:
________________________________
Name:
Title:
FINAL
AMENDMENT
---------
TO
--
PURCHASE AGREEMENT
------------------
THIS AMENDMENT to that certain Purchase Agreement (the "Purchase
Agreement"), dated as of February 26, 1998, by and among Meditrust Corporation
(the "REIT"), Meditrust Operating Company (the "OPCO") (the REIT and the OPCO,
each a "Company" and together the "Companies"), Merrill Lynch International
("MLI"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent acting
for the account of MLI ("Merrill Lynch" and, collectively with MLI, the "Merrill
Lynch Parties"), as amended by that certain Amendment Agreement dated as of July
16, 1998 by and among the Companies and the Merrill Lynch Parties, as amended
("Amendment Agreement No. 1"), that certain Amendment Agreement dated as of July
31, 1998 by and among the Companies and the Merrill Lynch Parties, as amended
("Amendment Agreement No. 2"), and that certain Amendment Agreement dated as of
September 11, 1998 by and among the Companies and the Merrill Lynch Parties
("Amendment Agreement No. 3," and, collectively with Amendment No. 1 and
Amendment No. 2, the "Amendment Agreements"), is made as of this 11th day of
November, 1998, by and among the Companies, MLI and Merrill Lynch, as agent
acting for the account of MLI and as owner of the Purchase Shares (as defined in
the Purchase Agreement) and assignee of the Purchase Agreement.
W I T N E S S E T H
-------------------
WHEREAS, prior to the date hereof, the Companies and the Merrill Lynch
Parties have entered into the Purchase Agreement, the Amendment Agreements and
that certain Purchase Price Adjustment Mechanism Agreement, dated as of February
26, 1998, as amended and restated as of February 26, 1998 by entering into a
Secured Purchase Price Adjustment Mechanism Agreement (the "Secured Adjustment
Agreement") and an Unsecured Purchase Price Adjustment Mechanism Agreement (the
"Unsecured Adjustment Agreement" and, together with the Secured Adjustment
Agreement, the "Restated Adjustment Agreements") by and among the Companies and
the Merrill Lynch Parties, (the "Adjustment Agreements," collectively with the
Purchase Agreement, each as modified by the Amendment Agreements, the "Forward
Equity Transaction Documents");
WHEREAS, the parties hereto desire to enter into a Settlement Agreement
as of the date hereof (the "Settlement Agreement") and, in connection with the
Settlement Agreement, to amend the Forward Equity Transaction Documents by
entering into this Amendment and the Restated Adjustment Agreements.
NOW, THEREFORE, in consideration of the mutual undertakings set forth
herein, the parties, intending to be legally bound, agree as follows:
<PAGE>
1. Amendment Agreements. Each of the Amendment Agreements is hereby
rescinded in its entirety, and shall be of no further force or effect. However,
the intent of the foregoing is not to affect any actions taken prior to the date
hereof pursuant to any of the Amendment Agreements. Further, the parties hereto
expressly reserve their rights with respect to any actions taken under the
Forward Equity Transaction Documents prior to the date hereof, except that the
parties agree that the Registration Statement declared effective on October 8,
1998 shall constitute a Resale Registration Statement as contemplated by the
Purchase Agreement. The parties hereto acknowledge and agree that this Amendment
shall constitute the only legally binding instrument on the parties that amends
or modifies the Purchase Agreement dated as of February 26, 1998.
2. Assignment of Shares from Merrill Lynch to MLI. The Companies hereby
authorize and consent to the assignment from Merrill Lynch to MLI of those
Shares sold by MLI to Merrill Lynch pursuant to that certain Sale and Assignment
Agreement dated as of October 23, 1998.
3. Resale of the Shares. Section 5.2 of the Purchase Agreement is hereby
deleted in its entirety and shall be replaced with the following:
Resale. The Merrill Lynch Parties acknowledge and agree that in
connection with any transfer of any Shares they will provide to the
transfer agent prompt notice of any Shares sold pursuant to a Prospectus
Supplement (as defined in Section 7) or otherwise transferred in compliance
with applicable federal and state securities laws. The Merrill Lynch
Parties acknowledge that there may occasionally be times when, subject to
the provisions of Section 7.2(a), the Companies (i) must suspend the right
of the Merrill Lynch Parties to effect sales of the Shares through the use
of a Prospectus Supplement until such time as a Prospectus Supplement has
been filed by the Companies with the Commission, or an amendment to the
Registration Statement has been filed by the Companies and declared
effective by the Commission, or until such time as the Companies have filed
an appropriate report with the Commission pursuant to the Exchange Act, or
(ii) shall have failed (whether or not such failure is due to regulatory
review) to take all actions required of the Companies under the Forward
Equity Transaction Documents to enable the Merrill Lynch Parties to
publicly sell the Shares including, without limitation, the failure of the
Company to (X) maintain an effective registration statement covering such
Shares, (Y) provide the Merrill Lynch Parties with a deliverable Prospectus
and Prospectus Supplement, or (Z) provide the appropriate Resale Closing
Documents (each, a "Black-out Period"). The Companies agree that following
the termination of the Merrill Lynch Parties' Standstill pursuant to the
terms of the Settlement Agreement, the number of days in all Black-out
Periods taken together, whether or not consecutive, shall not exceed 20
calendar days (a "Black-out Measurement Period") (counting only the days
following the termination of the
2
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Merrill Lynch Parties' Standstill). In the event that the number of days in
all Black-out Periods taken together, whether or not consecutive, exceeds
the Black-out Measurement Period then the Companies shall immediately
comply with the provisions of Section 7 and the Merrill Lynch Parties may
effect sales of the Shares unless the Companies shall have delivered (i) a
written notice to the Merrill Lynch Parties requesting a 20-day extension
prior to the end of the Black-out Measurement Period and (ii) $25 million
in cash (a "Black-out Period Extension Fee") to the Merrill Lynch Parties
on or prior to the end of the third Business Day immediately following the
expiration of such Black-out Measurement Period in accordance with
instructions provided by the Merrill Lynch Parties to the Companies
promptly following the request for such extension and the Companies
acknowledge that continuation of the Black-out Period beyond the Black-out
Measurement Period shall entitle the Merrill Lynch Parties to a claim for
such Black-out Period Extension Fee; provided, however, that in the event
that a Black-out Period is in effect at the end of a Black-out Measurement
Period, and the continuation of such Black-out Period is only the result of
(i) the Companies waiting for the Commission to (A) provide verbal or
written comments to a filing with the Commission, or (B) declare any filing
effective after the Companies have completed such filing, then the
Companies, in lieu of paying the Black-out Extension Fee may elect to
deliver Paired Shares to the collateral account of MLI pursuant to and in
accordance with Section 5 of each of the Restated Adjustment Agreements at
the greater of (i) the rate of 200% instead of 150% on the Interim
Settlement Amount in Interim Settlement Shares (as provided in Section 5(a)
of such Restated Adjustment Agreement, and each as defined in such
Agreement) or (ii) that number of Interim Settlement Shares such that such
number of Interim Settlement Shares plus any Interim Settlement Shares and
Adjustment Shares then held by the Merrill Lynch Parties valued at the
Closing Price on such date will equal at least 120% of the Reference Amount
(as provided in Section 5(a) of such Restated Adjustment Agreement) until
the Companies shall have taken all actions required of the Companies under
the Forward Equity Transaction Documents to enable the Merrill Lynch
Parties to publicly sell the Shares, and the Spread (as defined in Section
1(ah) of such Restated Adjustment Agreement) for such period shall increase
to 400 basis points until the circumstances described in clauses (A) and
(B) have ended. In the event that the Companies make the election in the
immediately preceding sentence, then the Black-out Measurement Period, for
purposes of this Amendment, shall be deemed to be extended until the
circumstances described in clauses (A) and (B) above have ended. Upon
payment of any Black-out Period Extension Fee and effective as of the day
immediately following the last day of the previous Black-out Measurement
Period, the then applicable Black-out Measurement Period shall be increased
by 20 calendar days (counting only the days following the termination of
the Merrill Lynch Parties' Standstill). Each subsequent extension of the
Black-out
3
<PAGE>
Period Measurement Period shall be subject to the foregoing requirements.
Any Black-out Period Extension Fee paid shall reduce the Reference Amount
under the Unsecured Adjustment Agreement in accordance with the provisions
of Section 3.3 of the Unsecured Adjustment Agreement. Subject to the
foregoing and compliance with Section 7.2(a) hereof, the Merrill Lynch
Parties hereby covenant that during a Black-out Period they will not effect
sales of any Shares pursuant to said Resale Prospectus during the period
commencing at the time at which the Companies give the Merrill Lynch
Parties written notice (which such notice shall have been given by the
Companies as promptly as practicable) of the suspension of the use of said
Resale Prospectus and ending at the time the Companies give the Merrill
Lynch Parties written notice that the Merrill Lynch Parties may thereafter
effect sales pursuant to said Resale Prospectus. The Merrill Lynch Parties
further covenant to notify the Companies promptly of the sale of all of the
Shares.
4. Registration of the Shares. The Companies have filed with the Commission
(a) Post-Effective Amendment No. 2 to the Companies' Joint Registration
Statement on Form S-3 (File Nos. 333-40055 and 333-40055-1) (the "Registration
Statement") and (b) a Prospectus Supplement under Rule 424(b) of the Securities
Act to the Prospectus dated September 29, 1998 contained in the Registration
Statement covering the sale of up to 11,000,000 Shares (the "Initial Prospectus
Supplement"). Based on verbal advice from the Commission to the parties, the
Registration Statement, as amended, was declared effective by the Commission as
of October 8, 1998. The parties hereby acknowledge and agree that the
Registration Statement constitutes a Resale Registration Statement and the
Merrill Lynch Parties agree to not assert in any legal proceeding with the
Companies that the Registration Statement does not constitute a Resale
Registration Statement. In connection with the foregoing, Section 7 of the
Purchase Agreement is hereby amended as follows:
(a) The term "Resale Registration Statement" as used in the Purchase
Agreement (other than Section 7.5) shall mean the Registration Statement and any
amendments and supplements to such registration statement, including all
post-effective amendments thereto, and all exhibits and all material
incorporated by reference into such registration statement. The term "Resale
Prospectus" as used in the Purchase Agreement (other than Section 7.5) shall
mean the Initial Prospectus Supplement or any subsequent Prospectus Supplement
(as defined below).
(b) Section 7.1(a) of the Purchase Agreement is hereby amended by (i)
deleting the phrase "prepare and file with the Commission a Resale Registration
Statement (as defined below) covering the resale by the Merrill Lynch Parties,
from time to time, of a number of shares equal to the number of Purchase Shares
in any of the manners specified in the Restated Adjustment Agreements (the
"Initial Resale registration Statement") and use its best efforts to obtain
effectiveness of the Initial Resale Registration Statement by the fifth Business
Day (as defined in the Restated Adjustment Agreements) following the Conversion
4
<PAGE>
Date)" and inserting the following in place of such phrase:
prepare and file with the Commission such additional Prospectus
Supplement or Prospectus Supplements under Rule 424(b) of the
Securities Act to the Prospectus contained in the Registration
Statement (including the Initial Prospectus Supplement, each, a
"Prospectus Supplement") covering the sale by the Merrill Lynch
Parties, from time to time, of such number of Shares that are not
covered by the Initial Prospectus Supplement, in any of the manners
specified in the Adjustment Agreements.
(c) Section 7.1(e) of the Purchase Agreement is hereby deleted in its
entirety and shall be replaced with the following:
in order to facilitate the public sale or other disposition of all or
any of the Shares by the Merrill Lynch Parties, furnish to the Merrill
Lynch Parties with respect to the Shares registered under any Resale
Registration Statement, in connection with any such public sale or
other disposition, an opinion of counsel to the Companies covering the
matters set forth on Exhibits B-1 and B-2 hereto and such other
documents as the Merrill Lynch Parties may reasonably request
(including a comfort letter from the Companies' independent certified
public accountants and a certificate of bring down of representations
and warranties in connection with sale of Shares under the Resale
Registration Statement) (collectively, the "Resale Closing Documents")
(i) upon the termination of the Merrill Lynch Parties' Standstill (or
if there is a Black-out Period immediately following such termination
then upon the termination of such Black-out Period), (ii) quarterly
beginning with the Companies' filing of a Joint Quarterly Report on
Form 10-Q after the termination of the Merrill Lynch Parties'
Standstill (or as soon as practicable thereafter if such quarterly
filing is made during a Black-out Period), or (iii) in the event the
public sale or other disposition of the Shares is effected through an
underwritten offering or a block trade, as of the date of the closing
of any sale of such Shares or date of pricing with respect to the sale
of such Shares, as applicable upon prior notice from the Merrill Lynch
Parties to the Companies as to which date applies; provided, however,
that the Companies shall not be required to deliver any Resale Closing
Documents in the event that the aggregate offering price of any Shares
offered in an underwritten offering or a block trade is less than
$20,000,000, unless as of the date of any such underwritten offering
or block sale, the Companies have not made any previous delivery of
Resale Closing Documents to the Merrill Lynch Parties in connection
with any other public sale or other disposition of the Shares.
5
<PAGE>
(d) Section 7.2(g) is hereby deleted in its entirety.
5. All references to the "Adjustment Agreement" shall be deemed a reference
to the Restated Adjustment Agreements collectively.
6. General Provisions.
(a) Notices. All notices, consents and other communications required
hereunder shall be delivered in the manner set forth in the Purchase Agreement.
(b) Changes. This Agreement may not be modified or amended except
pursuant to an instrument in writing signed by the parties hereto.
(c) Severability. In case any provision contained in this Amendment
should be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby.
(d) Governing Law; Jurisdiction. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York without regard to
the conflicts of law principles thereof.
(e) Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties.
(f) Conflicts with Other Agreements. In the event any conflict between
the provisions of this Amendment and the Purchase Agreement, the terms and
provisions of this Amendment shall govern.
[Rest of page intentionally left blank]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized representatives as of the date and year first
above written.
MEDITRUST CORPORATION
By: /s/ Michael Benjamin
------------------------------
Name: Michael S. Benjamin, Esq.
Title: Senior Vice President
MEDITRUST OPERATING COMPANY
By: /s/ William Baker
------------------------------
Name: William C. Baker
Title: President
MERRILL LYNCH INTERNATIONAL
By: /s/ John O'Dowd
------------------------------
Name: John O'Dowd
Title: Vice President
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ Onu Odim
------------------------------
Name: Onu Odim
Title: Managing Director
7
UNSECURED PURCHASE PRICE ADJUSTMENT MECHANISM AGREEMENT
-------------------------------------------------------
THIS UNSECURED PURCHASE PRICE ADJUSTMENT MECHANISM AGREEMENT (this
"Agreement") is made as of the 26th day of February, 1998, by and among
Meditrust Corporation (the "REIT"), Meditrust Operating Company ("OPCO," and
together with the REIT, the "Companies"), Merrill Lynch International ("MLI"),
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") as agent for MLI
and as owner of the Purchase Shares and assignee of the Purchase Agreement
(together with MLI, the "Merrill Lynch Parties"). The Companies and the Merrill
Lynch Parties are referred to herein collectively as the "Parties" and each
individually, as a "Party."
The Parties hereto entered into the Purchase Agreement (the "Purchase
Agreement") and Purchase Price Adjustment Mechanism Agreement (the "Original
Adjustment Agreement") each dated as of February 26, 1998 and those certain
Amendment Agreements dated as of July 16, July 31 and September 11, 1998
(collectively, the "Amendments"), which Amendments amended the Purchase
Agreement and the Original Adjustment Agreement to the extent set forth therein.
The Parties are executing and delivering an Amended and Restated Settlement
Agreement dated as of November 11, 1998 (the "Settlement Agreement") which sets
forth certain additional agreements and covenants related to the transactions
contemplated by the Purchase Agreement and the Original Adjustment Agreement, as
amended prior to the date hereof. As required thereby, the Parties are entering
into an Amendment to Purchase Agreement, a Secured Purchase Price Adjustment
Mechanism Agreement dated as of February 26, 1998 (the "Secured Adjustment
Agreement") and this Agreement contemporaneously with the execution and delivery
of the Settlement Agreement, which, collectively, are intended to (i) amend and
restate in its entirety the Original Adjustment Agreement, and (ii) rescind the
Amendments in their entirety such that such Amendments are thereafter of no
further force and effect.
Accordingly, the purpose of this Agreement and the Secured Adjustment
Agreement, collectively, is to amend and restate the Original Adjustment
Agreement, as amended by the Amendments, in its entirety and to set forth the
terms and conditions of the purchase price adjustment transaction (the
"Transaction") entered into between MLI and the Companies.
IN CONSIDERATION of the mutual representations, warranties and covenants
herein contained, and on the terms and subject to the conditions herein set
forth, the Companies and MLI hereby agree as follows:
1. Definitions.
As used in this Agreement, the following terms shall have the meanings set
forth below:
a. Ability to Settle in Paired Shares. As of the date hereof, the Companies
have not, and after the date hereof, the Companies will not, enter into any
obligation that would contractually prohibit the Companies from delivering
Paired Shares pursuant to Sections 3.2, 4.2 or 5 of this Agreement.
<PAGE>
b. Adjustment Shares. 5,855,000 Paired Shares, as may be adjusted from time to
time pursuant to Section 1(c) or Section 4.1(d), reduced by the number of
Settlement Shares that are the subject of Settlement pursuant to Section
3.1 or Section 4.1 or by the number of Paired Shares delivered to the
Companies pursuant to Section 3.3(c).
c. Certain Adjustments to Reference Price or Number of Adjustment Shares. In
the event of:
(i) a subdivision, consolidation or reclassification of the Paired
Shares, or a free distribution or dividend of any Paired Shares
to all existing holders of Paired Shares by way of bonus,
capitalization or similar issue;
(ii) a distribution or dividend to all existing holders of Paired
Shares of (A) additional Paired Shares or (B) other share capital
or securities granting right to payment of dividends and/or the
proceeds of liquidation of the Companies equally or
proportionally with such payments to holders of Paired Shares, an
adjustment shall thereupon be effected to the Reference Price
and/or the Adjustment Shares at the time of such event with the
intent that following such adjustment, the value of this
Transaction is economically equivalent to the value immediately
prior to the occurrence of the event causing the adjustment.
(cA) Blackout Day. Means any day on which the Companies shall have (i)
suspended the right of the Merrill Lynch Parties to effect sales of
the Shares through the use of a Prospectus Supplement until such time
as a Prospectus Supplement has been filed by the Companies with the
Commission, or an amendment to the Registration Statement has been
filed by the Companies and declared effective by the Commission, or
until such time as the Companies have filed an appropriate report with
the Commission pursuant to the Exchange Act, or (ii) failed to take
any actions required of the Companies under the Forward Equity
Transaction Documents (as defined in the Settlement Agreement) to
enable the Merrill Lynch Parties to publicly sell Paired Shares under
this Agreement including, without limitation, the failure of the
Company to (i) maintain an effective registration statement covering
such Paired Shares (whether or not such failure is due to regulatory
review), (ii) provide the Merrill Lynch Parties with a deliverable
Prospectus and/or Prospectus Supplement, or (iii) provide the
appropriate Resale Closing Documents (as defined in the Purchase
Agreement, as amended by the Amendment to Purchase Agreement).
d. Block Sale. Any privately negotiated sales of the Paired Shares involving
at least a block of such security (as defined in Rule 10b18 under the
Exchange Act) that are not effected to or through a broker or dealer.
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<PAGE>
e. Business Day. Any day other than Saturday, Sunday, or any other day on
which banking institutions in the States of Delaware or New York are not
open for business.
f. Calculation Agent. MLI, whose calculations and determinations shall be made
in a reasonable manner.
(fA) Cash Payment Amount. Means, on each Reset Date or Interim Settlement
Date, an amount in U.S. Dollars equal to:
(i) the sum of all per Paired Share cash amounts paid or delivered by
the Companies to MLI under Section 3.3 (other than amounts that
reduce the Adjustment Shares pursuant to Section 3.3(c)) during
the relevant Compounding Period; the per Paired Share amount to
be determined by dividing the amount of cash delivered pursuant
to Section 3.3 by the number of Adjustment Shares on the date so
paid or delivered; plus (ii) an amount representing interest that
could have been earned on such cash amounts at the USD LIBOR rate
having a designated maturity of 1 month, plus 75 basis points,
for the period from the date that such cash amounts are received
by MLI until such Reset Date or Interim Settlement Date.
g. Closing Price. The last sale price of the Paired Shares on the Relevant
Exchange on the relevant date.
(gA) Collateral Account. Means the collateral account in the name of the
Meditrust Corporation Pledged Collateral for MLI at MLPF&S. The
Collateral Account as of the date hereof is Acct. #51L10522 at MLPF&S.
h. Commission. The Securities and Exchange Commission.
i. Compounding Period. Means each period commencing on and including:
(i) in the case of the first Compounding Period, the Initial
Settlement Date and ending on but excluding the first Reset Date,
and
(ii) for each period thereafter, a Reset Date and ending on (but
excluding) the next following Reset Date.
j. [Intentionally Omitted]
k. Distribution Amount. Means, on each Reset Date or Interim Settlement Date,
an amount in U.S. Dollars equal to:
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<PAGE>
(i) the sum of all cash distributions paid on a single Paired Share
during the relevant Compounding Period; plus
(ii) an amount representing interest that could have been earned on
such distributions at the USD LIBOR rate having a designated
maturity of 1 month, plus 75 basis points, for the period from
the date that such distributions would have been received by a
holder of such number of Paired Shares until such Reset Date or
Interim Settlement Date.
l. DRIP Distribution. Sales to any Distribution Reinvestment Plan now or
hereafter established by the Companies, or to any agent acting on behalf of
such Plan, for sale to participants in such Plan.
m. Effective Date. February 26, 1998.
(mA) [Intentionally Omitted]
n. Exchange Act. The Securities Exchange Act of 1934, as amended.
o. Exchange Trading Day. Each day on which the Relevant Exchange is open for
trading.
p. Execution Price. The Closing Price on the Effective Date.
q. Gradual Market Distribution. An offering of the Paired Shares into the
existing trading market for outstanding shares of the same class at other
than a fixed price on or through facilities of a national securities
exchange or to or through a market maker otherwise than on an exchange.
r. Initial Price. Means,
(i) for the Compounding Period ending on May 31, 1998, an amount in
U.S. Dollars equal to $32.625, and
(ii) for each subsequent Reset Date, the Reference Price as calculated
on or adjusted as of the prior Reset Date.
s. Initial Settlement Date. February 26, 1998.
(sA) Interim Settlement Date. Means (i) each Tuesday until the Reference
Amount has been reduced to zero dollars and (ii) any day on which cash
amounts are paid or delivered to MLI under Section 3.3; provided that
if such date is not an Exchange Trading Day, then the Interim
Settlement Date shall be the next succeeding Exchange Trading Day.
4
<PAGE>
t. Interim Settlement Amount. With respect to a given Interim Settlement Date,
means the amount by which the Reference Amount minus $10,000,000 exceeds
the product of (x) the Closing Price and (y) the number of Adjustment
Shares.
u. Interim Settlement Shares. The Interim Settlement Amount divided by the
Closing Price on such Reset Date or Interim Settlement Date.
v. Maturity Date. February 26, 1999.
w. Paired Shares. Units consisting of one share of common stock, $.10 par
value per share, of the REIT and one share of common stock, par value $.10
per share, of OPCO, which shares are paired and traded as a unit.
x. Relevant Exchange. Means, with respect to any Exchange Trading Day, the
principal Stock Exchange on which the Paired Shares are traded on that day.
y. Reference Amount. On each Reset Date and Interim Settlement Date, the
Reference Price multiplied by the Adjustment Shares or Settlement Shares,
as applicable.
z. Reference Price. On each Reset Date and Interim Settlement Date, the
Reference Price shall be determined by:
(i) compounding the Initial Price for each Compounding Period at USD
LIBOR rate plus Spread for a designated maturity of 1 month
(Actual/360 day count fraction) to such Reset Date and Interim
Settlement Date;
(ii) subtracting the Distribution Amount at that date; and
(iii) subtracting the Cash Payment Amount at that date.
aa. Reset Date. Means, through the final Settlement Date, (i) the last day of
each month, beginning May 31,1998 (provided, that if such day is not a
Business day then the Reset Date shall be the next succeeding Business Day)
and (ii) as to any Settlement Shares, the Settlement Date that such
Settlement Shares are settled.
bb. Securities Act. The Securities Act of 1933, as amended.
cc. Settlement. Has the meaning set forth in Section 3.1 or Section 4.1, as
applicable.
dd. Settlement Amount. The net sales proceeds realized by or on behalf of MLI
for all sales of Paired Shares in connection with any Settlement,
calculated as follows:
(i) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1
is an Underwritten Offering, the Settlement Amount will equal
the gross proceeds realized, net of a negotiated underwriting
discount;
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(ii) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1
is a Block Sale, the Settlement Amount will equal the gross
sales proceeds realized, net of a negotiated underwriting
discount;
(iii) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1
is a Gradual Market Distribution, the Settlement Amount will
equal the gross sales proceeds realized from sales to the market
over the period of the distribution, net of a resale spread of
50 basis points;
(iv) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1
is a DRIP Distribution, the Settlement Amount will equal the
gross sales proceeds realized from sales to any Purchase Agent
for a Company Distribution Reinvestment Plan, net of a resale
spread of 50 basis points;
(v) if the manner of Settlement Sale pursuant to Section 3.1 is a
Subscription Distribution, the Settlement Amount will equal the
gross proceeds realized, net of any fees, discounts or other
costs incurred by the Companies in connection with such
Subscription Distribution.
ee. Settlement Date. The date on which, in accordance with standard
market practice, the Paired Shares are delivered and the funds
received, in respect of any Settlement in accordance with Section
3.2 or Section 4.2.
ff. [Intentionally Omitted].
gg. Settlement Shares. The number of Adjustment Shares subject to
Settlement.
hh. Spread. 75 basis points, subject to adjustment pursuant to
Section 6.5 of this Agreement, Section 7 of the Settlement
Agreement and Section 5.2 of the Purchase Agreement, as amended
by the Amendment to Purchase Agreement.
ii. Stock Exchange. Means the New York Stock Exchange, the American
Stock Exchange or NASDAQ.
jj. Underwritten Offering. An underwritten fixed price offering of
the Paired Shares.
kk. USD LIBOR. The London Inter Bank Offered Rate in respect of U.S.
Dollars for the designated maturity as quoted on Page 3750 on the
Telerate Service (or such other page as may replace Page 3750 on
that service) as of 11:00 a.m., London time, on the date on which
it is to be determined.
ll. Subscription Distribution. An offering of the Paired Shares to
existing holders of the Paired Shares.
6
<PAGE>
2. Representations and Warranties.
-------------------------------
The representations and warranties of the Companies in Section 4 of the
Purchase Agreement, dated as of February 26, 1998 (the "Purchase Agreement"),
among the Companies, MLI and MLPF&S are hereby incorporated by reference herein
as of the date hereof, and the Companies hereby so represent and warrant to MLI
as of the date hereof. The provisions of Section 6 of the Purchase Agreement
shall also be applicable to any Paired Shares delivered to MLI under this
Agreement.
3. Settlement by or at the Companies' Direction.
---------------------------------------------
a. Settlement Sale.
Subject to Section 4.2(a)(ii), on any Reset Date or on any other Exchange
Trading Date agreed by both parties, up to and including the Maturity Date, the
Companies may give telephonic notice to MLI to settle, and MLI shall settle, in
a commercially reasonable manner (which may require sales over a period of more
than 1 day), all or a portion of the Adjustment Shares ("Settlement"), as
specified by the Companies, through sale of not less than the number of Paired
Shares, the sale of which would result in a Settlement Amount equal to 100% of
the Reference Amount on the Settlement Date, and not more than the number of
Paired Shares, the sale of which would result in a Settlement Amount equal to
105% of the Reference Amount on the Settlement Date, in any of the manners set
forth below, as selected by the Companies:
(i) an Underwritten Offering (for which the Companies shall provide
at least 21 Business Days prior notice to MLI);
(ii) a Block Sale (for which the Companies shall provide at least 3
Business Days prior notice to MLI);
(iii) a Gradual Market Distribution (for which the Companies shall
provide at least 1 Business Days prior notice to MLI);
(iv) a DRIP Distribution (for which the Companies shall provide at
least 1 Business Days prior notice to MLI); or
(v) a Subscription Distribution (for which the Companies shall
provide at least 5 Business Days prior notice to MLI).
If the Companies do not specify a manner of sale, a Gradual Market
Distribution shall be used. Settlement procedures shall begin as soon as
commercially practicable, as determined by MLI, after MLI receives notice from
the Companies and no later than the first Exchange Trading Day after expiration
of the notice period unless otherwise agreed by the Companies and MLI. At such
time as the Companies deliver notice pursuant to this Section 3.1, the Companies
may direct MLI to sell not less than the number of Paired Shares equal to the
number of Settlement Shares, and MLI shall comply with such direction in a
commercially reasonable manner.
7
<PAGE>
b. Settlement Mechanics.
i. If, on the Settlement Date, the Settlement Amount is greater than
the Reference Amount, MLI will pay the Companies an amount in
cash or Paired Shares (valued at the Closing Price on the
Settlement Date) equal to the difference.
ii. If the number of Paired Shares sold by MLI pursuant to Section
3.1 is greater than the number of Settlement Shares, the
Companies shall deliver to MLI, on the Settlement Date, a number
of Paired Shares equal to the difference. If the number of Paired
Shares sold by MLI pursuant to Section 3.1 is less than the
number of Settlement Shares, MLI shall deliver to the Companies,
on the Settlement Date, a number of Paired Shares equal to the
difference.
iii. In all events, MLI will pay to the Companies an amount equal to
all cash distributions received by MLI that are payable to
holders of the Paired Shares but not paid prior to the Settlement
Date, on a number of Paired Shares equal to the Settlement
Shares, on the Business Day after the relevant distribution
payment date declared by the Board of Directors of the REIT and
OPCO.
iv. If MLI, in connection with any Settlement, receives net sales
proceeds, as calculated pursuant to the definition of Settlement
Amount, from the sale of Paired Shares prior to the applicable
Settlement Date, MLI, on the Settlement Date, shall pay the
Companies an amount in cash representing interest that could have
been earned on such net sales proceeds at the USD LIBOR rate
having a designated maturity of 1 month, plus 75 basis points,
for the period from the date that such net sales proceeds are
received by MLI until such Settlement Date.
c. Cash Payments.
i. Notwithstanding anything provided herein or in the Purchase
Agreement or the Settlement Agreement, the Companies shall have
the right to pay or otherwise deliver cash to MLI to reduce the
Reference Amount (by reducing the Reference Price on a per
Adjustment Share basis) and the date of such payment or delivery
shall constitute an Interim Settlement Date and MLI shall deliver
or cause to be delivered to the Companies any Interim Settlement
Shares as required by Section_5(b) hereof.
ii. Any cash paid or otherwise delivered to MLI pursuant to Sections
4.2(a)(i) and 5(c) of this Agreement, Sections 4.2(ii), 4.3, 5,
6.3(b), 6.4, 7(b), 8.1 and 9 of the Settlement Agreement and
Section 5.2 of the Purchase Agreement, as amended by the
Amendment to Purchase Agreement, shall, in each case, reduce the
Reference Amount (by reducing the Reference
8
<PAGE>
Price on a per Adjustment Share basis) and the date of any such
payment or delivery shall constitute an Interim Settlement Date
and MLI shall deliver or cause to be delivered to the Companies
any Interim Settlement Shares as required by Section 5(b) hereof.
iii. In the event that on the date of any cash payment contemplated by
Section 3.3(a) or 3.3(b) no such Interim Settlement Shares are
held in the Collateral Account or after giving effect to the
application of any cash payment no such Interim Settlement Shares
will be held in the Collateral Account, the Merrill Lynch Parties
shall deliver, or cause to be delivered, within five (5) Business
Days to the Companies, in addition to any Interim Settlement
Shares required to be delivered, that number of Paired Shares
then held by the Merrill Lynch Parties pursuant to the Purchase
Agreement or this Agreement in excess of that number of Paired
Shares determined by dividing the Reference Amount (after
deducting any such cash payment not applied in respect of Interim
Settlement Shares) by the Closing Price on the date of such
payment or transfer. Any such delivery of excess Paired Shares
other than Interim Settlement Shares shall reduce the number of
Adjustment Shares by the number of Paired Shares so delivered.
4. Settlement by the Merrill Lynch Parties.
a. Settlement Sales.
i. After the Standstill (as defined in the Settlement Agreement)
ends, MLI shall have the right to sell in any of the manners set
forth in Section 3.1 or 4.1(b) hereof (the "Settlement") 100% of
the Adjustment Shares and in connection therewith to sell a
number of Paired Shares equal to the number of Paired Shares
purchased by MLI pursuant to the Purchase Agreement (the
"Original Shares") and any and all Interim Settlement Shares. MLI
shall be entitled to continue settlement procedures and the
Companies shall continue to deliver Interim Settlement Shares
pursuant to Section 5 hereof (if required) and otherwise perform
the Companies' obligations under this Agreement until the
Reference Amount has been reduced to zero or until the Companies
make a cash payment to MLI in settlement of the remaining
Reference Amount.
ii. The Companies and MLI agree that sales of Paired Shares will be
made in a commercially reasonable manner, which may include
private or public sales and Block Sales at discounts to current
market prices that, in MLI's judgment, are commercially
reasonable and appropriate at the time of such sales.
Notwithstanding the foregoing, if MLI proposes to make a sale of
750,000 or more Paired Shares to a single purchaser in a single
transaction
9
<PAGE>
or series of transactions, other than through the facilities of
the New York Stock Exchange at prevailing market prices, it shall
first notify the Companies of the material terms of such sale
(including the number of Paired Shares and the proposed price per
Paired Share, which may, subject to the preceding sentence, be
based upon a discount to the closing or other identified price or
other relevant measure) and the Companies shall then have the
right to purchase (or to designate one or more purchasers for)
such Paired Shares on such terms; provided, however, that if the
Companies (or their designee(s)) shall fail to commit to such
purchase (i) if MLI gives the Companies notice prior to 12:00
p.m. New York City time on an Exchange Trading Day, prior to 4:30
p.m. New York City time on the day on which MLI gives the
Companies notice of the proposed sale as provided above (or the
next succeeding Business Day if the day of the delivery of such
notice is not a Business Day), (ii) if MLI gives the Companies
notice on or after 12:00 p.m. and before 6:00 p.m., prior to 9:00
a.m. New York City time on the Exchange Trading Day following the
day on which MLI gives the Companies notice of the proposed sale
as provided above or (iii) if such sale involves 2,000,000 or
more Paired Shares to be sold in a single transaction,
notwithstanding the provisions of clauses (i) and (ii) above,
within 24 hours (excluding hours in non-Business Days) of the
time at which MLI gives the Companies notice of the proposed sale
as provided above, MLI may proceed to effect such sale on the
proposed terms with such purchaser or purchasers as it selects.
iii. At the option of MLI, subject to the ownership limitation
provisions of Section 6.2 hereof, (i) all right, title and
interest to Interim Settlement Shares having a value (based on
the Closing Price on such date) equal to (x) the Reference Amount
on such date less (y) an amount equal to the Adjustment Shares
multiplied by the Closing Price on such date shall be transferred
to MLI and (ii) such Interim Settlement Shares shall be
transferred to an account at MLPF&S in the name of and for the
exclusive benefit of MLI (the "MLI Account"). The number of
Paired Shares in the MLI Account in excess of the number of
Paired Shares equal to the Adjustment Shares (the "Additional
Shares") shall continue to be treated as Interim Settlement
Shares for purposes of this Agreement.
iv. Upon reduction of the Reference Amount in the Secured Adjustment
Agreement to zero (-0-) dollars through the payment of cash by
the Companies to MLI: (i) a Reset Date shall occur, (ii) the
lesser of (x) 2,645,000 Paired Shares or (y) such number of
Paired Shares as remains in the Collateral Account shall be
transferred to the MLI Account, (iii) the number of Adjustment
Shares shall be increased by such number of Paired Shares
determined pursuant to clause (ii) above, and (iv) the Reference
Price shall be recalculated by multiplying the Reference Price
determined
10
<PAGE>
as of such Reset Date by the quotient of (x) the number of
Adjustment Shares immediately prior to such transfer pursuant to
clause (ii) above divided by (y) the number of Adjustment Shares
calculated pursuant to clause (iii) above.
v. The transfer of Additional Shares pursuant to Section 4.1(c) or
the transfer of Paired Shares pursuant to Section 4.1(d) shall
constitute the purchase of a securities entitlement from the
Companies for value by MLI and the transfer of all right, title
and interest in and to the Additional Shares to MLI, and after
such transfer MLI shall be the owner of such Additional Shares
for all purposes.
b. Settlement Mechanics.
i. (i) After November 11, 1998 and any Business Day thereafter, any
and all cash amounts in the Collateral Account (if any)
shall be transferred to MLI to reduce the Reference Amount.
(ii) After November 11, 1998, the Companies can no longer direct
the settlement of Adjustment Shares pursuant to Section 3.1
of this Agreement without the Merrill Lynch Parties'
consent.
ii. [Intentionally omitted]
iii. If, on the Settlement Date, the Settlement Amount is greater than
the Reference Amount, MLI will pay the Companies an amount in
cash equal to the difference.
iv. In all events, MLI will pay to the Companies an amount equal to
all cash distributions received by MLI that are payable to
holders of the Paired Shares but not paid prior to the Settlement
Date, on a number of Paired Shares equal to the Settlement
Shares, on the Business Day after the relevant distribution
payment date declared by the Boards of Directors of the REIT and
OPCO.
v. If the number of Paired Shares sold by MLI pursuant to Section
4.1 is greater than the number of Settlement Shares, the
Companies shall deliver to MLI, on the Settlement Date, a number
of Paired Shares equal to the difference. If the number of Paired
Shares sold by MLI pursuant to Section 4.1 is less than the
number of Settlement Shares, MLI shall deliver to the Companies,
on the Settlement Date, a number of Paired Shares equal to the
difference.
vi. If MLI, in connection with any Settlement, receives net sales
proceeds, as calculated pursuant to the definition of Settlement
Amount, from the sale of Paired Shares prior to the applicable
Settlement Date, MLI, on the Settlement Date, shall pay the
Companies an amount in cash representing interest that could have
been earned on such net sales proceeds at the USD LIBOR rate
having a designated maturity of 1 month, plus 75 basis points,
11
<PAGE>
for the period from the date that such net sales proceeds are
received by MLI until such Settlement Date.
5. Interim Settlements.
i. On and after November 11, 1998, within 5 Business Days following
each Reset Date or Interim Settlement Date, as the case may be,
the Companies shall deliver to the Collateral Account an amount
of Paired Shares as follows:
(i) During the pendency of the Standstill, 125% of the Interim
Settlement Amount in Interim Settlement Shares;
(ii) After the Standstill, 100% of the Interim Settlement Amount
in Interim Settlement Shares unless, subject to clause (iii)
below, the date on which such Interim Settlement Shares are
delivered is a Black-Out Day, in which case, 150% of the
Interim Settlement Amount in Interim Settlement Shares;
(iii) If the date on which such Interim Settlement Shares are
delivered is a Black-Out Day due to regulatory delays, as
described in Section 5.2 of the Purchase Agreement, as
amended by the Amendment to Purchase Agreement, and the
Companies shall have elected to deliver additional Interim
Settlement Shares and to increase the Spread rather than
delivering the $25 million payment contemplated therein,
the greater of (A) 200% of the Interim Settlement Amount in
Interim Settlement Shares, or (B) that number of Interim
Settlement Shares such that such number of Interim
Settlement Shares plus any Interim Settlement Shares and
Adjustment Shares then held by the Merrill Lynch Parties
valued at the Closing Price on such Reset Date or Interim
Settlement Date will equal at least 120% of the Reference
Amount.
Notwithstanding the foregoing, in the event that on any Reset Date there
are Interim Settlement Shares in the Collateral Account, then such Interim
Settlement Shares shall be deemed redelivered to the Collateral Account pursuant
to the preceding sentence. Interim Settlement Shares shall be registered in the
stock register of the Companies as instructed by MLI and shall be held by MLPF&S
or a custodian or depository designated by MLPF&S.
ii. On any Interim Settlement Date, if Interim Settlement Shares are
held by MLI, MLI shall deliver to the Companies within five (5)
Business Days after such Reset Date, the amount in Interim
Settlement Shares by which the amount in Interim Settlement
Shares held by MLI (valued at the Closing Price on such Reset
Date) plus any cash amounts in the Collateral Account exceeds the
required number of Interim Settlement Shares provided for in
ss.5(a).
12
<PAGE>
iii. As provided by Section 5 of the Settlement Agreement,
Distributions on the Interim Settlement Shares will be paid to
MLI pursuant to ss.3.3 hereof.
iv. Once the Reference Amount is reduced to zero (-0-) dollars, MLI
shall immediately release all claims to any Interim Settlement
Shares not used in Settlement and deliver such Interim Settlement
Shares to the Companies.
v. The Companies and the Merrill Lynch Parties confirm that the
Companies have granted to the Merrill Lynch Parties and that the
Merrill Lynch Parties have a first priority security interest in
any and all Interim Settlement Shares and any and all cash
amounts heretofore or hereafter delivered to the Merrill Lynch
Parties or their respective agent and held in the Collateral
Account pursuant to this Section 5. MLPF&S acknowledges that it
is holding and will hold any and all Interim Settlement Shares
and any and all cash (if any) now or hereafter held in the
Collateral Account pursuant to Section 5 of this Agreement as
pledge agent and bailee on behalf of the Merrill Lynch Parties as
pledgee.
6. Certain Covenants and Other Provisions.
a. Par Value.
MLI shall pay to the Companies $.10 par value per share for each share
comprising a Paired Share delivered to MLI pursuant to this Agreement.
b. Limitation on Ownership of Paired Shares.
MLPF&S will manage the settlement process in such a way as to ensure that
the Merrill Lynch Parties combined not be the beneficial owner, or be deemed to
be the beneficial owner, at any given time of a number of Paired Shares that is
greater than 9.25% of the Companies' outstanding Paired Shares.
c. Allocation of Payments by the MLI.
When making any payment to the Companies pursuant to this Agreement, MLI
shall allocate such payment between the REIT and OPCO in the manner specified by
the Companies.
d. Purchase Price Adjustment Treatment
The Companies and the MLI agree, to the extent relevant to their respective
business and commercial activities and in the absence of an administrative
determination or judicial ruling to the contrary, to treat for United States
federal income tax and financial accounting purposes
13
<PAGE>
payments and deliveries made under this Agreement as adjustments to the purchase
price paid for the Purchase Shares pursuant to Section 2 of the Purchase
Agreement.
e. Registration Statement.
Any Paired Shares delivered by the Companies to MLI pursuant to this
Agreement shall be the subject of an Effective Registration Statement. The
Companies further agree that they will cause any registration statement to
remain in effect until the earliest of the date on which (i)<0- 95>the
Adjustment Shares plus all Interim Settlement Shares have been sold by or on
behalf of MLI, (ii) MLI has advised the Companies that it no longer requires
that such registration be effective or (iii) the date on which the Reference
Amount shall have been reduced to zero (-0-). The provisions of Section 5.2 and
Section 7.2 of the Purchase Agreement shall be deemed to apply to any
registration statement filed by the Companies pursuant to this Agreement.
f. Delivery of Paired Shares.
The Companies covenant and agree with MLI that Paired Shares delivered by
the Companies pursuant to settlement events in accordance herewith will be duly
authorized, validly issued, fully paid and nonassessable. The issuance of such
Paired Shares will not require the consent, approval, authorization,
registration, or qualification of any government authority, except such as shall
have been obtained on or before the delivery date to MLI in connection with any
registration statement filed with respect to any such Paired Shares.
g. Securities Law Compliance.
Each party agrees that it will comply, in connection with this Transaction
and all related or contemporaneous sales and purchases of the Companies' Paired
Shares, with the applicable provisions of the Securities Act, the Exchange Act
and the rules and regulations thereunder and any rules or regulations or code of
conduct of, or agreements with, (i) the National Association of Securities
Dealers, Inc., and (ii) the Relevant Exchange.
h. Regulatory Compliance.
Each party agrees that if the delivery of Paired Shares upon settlement is
subject to any restriction imposed by a regulatory authority, it shall not be an
event of default, and the parties will negotiate in good faith a procedure to
effect settlement of such shares in a manner which complies with any relevant
rules of such regulatory authority and which is satisfactory in form and
substance to their respective counsel, subject to Section 6.2 of this Agreement
and Section 7 of the Purchase Agreement. Each party further agrees that any sale
pursuant to Section 3.1 of this Agreement may be delayed or postponed if, in
MLPF&S's judgement, such delay or postponement is necessary to comply with the
requirements of applicable law or regulation.
14
<PAGE>
i. Settlement Transfer.
All settlements shall occur through DTC or any other mutually acceptable
depository.
j. Trading Authorization.
The following individuals and/or any individual authorized in writing by
the respective Treasurers of the Companies are authorized by the Companies to
provide trading instructions to MLI with regard to this transaction.
For the REIT:
-------------
David Benson
Laurie Gerber
Michael Benjamin
Michael Bushee
For OPCO:
---------
William Baker
David Benson
Laurie Gerber
Michael Benjamin
The address, telephone number and facsimile number of each of these
individuals is: c/o The Meditrust Companies, 197 First Avenue, Needham,
Massachusetts 02194, telephone: (781) 4336000, and facsimile: (781) 4331290.
k. Specific Performance.
The parties acknowledge and agree that the failure of the Companies or MLI
to deliver Paired Shares in accordance with the provisions hereof would result
in damage to the other party that could not be adequately compensated by a
monetary award. The parties therefore agree that, if either party fails to
deliver Paired Shares in accordance with the provisions hereof, the other party
may, in addition to all other remedies, seek an order of specific performance
from a court of appropriate jurisdiction.
15
<PAGE>
l. Governing Law.
The Agreement will be governed by and construed in accordance with the laws
of the State of New York without reference to choice of law doctrine.
m. Confidentiality.
Subject to the other applicable subsections of this Section 6, to any
contrary requirement of law and to the right of each party to enforce its rights
hereunder in any legal action, each party shall keep strictly confidential and
shall cause its employees and agents to keep strictly confidential the terms of
this Agreement and any information relating to or concerning the other party
which it or any of its agents or employees may acquire pursuant to, or in the
course of performing its obligation under, any provision of this Agreement.
n. Return of Paired Shares and Cash Collateral.
Upon the date on which the Reference Amount has been reduced to zero, MLI
shall (i) transfer, assign and deliver to the Companies any cash and/or Paired
Shares previously delivered by the Companies pursuant to this Agreement
(including Paired Shares delivered pursuant to the Purchase Agreement) and not
previously delivered to the Companies or sold by the Merrill Lynch Parties
pursuant to the Restated Adjustment Agreements or, in the case of cash, applied
to reduce the Reference Amount, and (ii) release all claims to cash and Interim
Settlement Shares then held in the Collateral Account (including interest earned
thereon) and immediately deliver such amounts and all Interim Settlement Shares
to the Companies.
o. Reservation of Rights.
The Parties hereto expressly reserve their rights with respect to any
actions taken under the Forward Equity Transaction Documents (as defined in the
Settlement Agreement) prior to the date hereof, except that the Parties agree
that the Registration Statement declared effective on October 8, 1998 shall
constitute a Resale Registration Statement as contemplated by the Purchase
Agreement.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first above
written.
MERRILL LYNCH INTERNATIONAL
By: /s/ John O'Dowd
------------------------------
Name: John O'Dowd
Title: Vice President
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By: /s/ Onu Odim
------------------------------
Name: Onu Odim
Title: Managing Director
MEDITRUST OPERATING COMPANY
By: /s/ William Baker
------------------------------
Name: William C. Baker
Title: President
MEDITRUST CORPORATION
By: /s/ Michael Benjamin
------------------------------
Name: Michael S. Benjamin, Esq.
Title: Senior Vice President
17
AMENDED AND RESTATED
SETTLEMENT AGREEMENT
THIS AMENDED AND RESTATED SETTLEMENT AGREEMENT (the "Agreement") is made as
of this 11th day of November, 1998, by and among Meditrust Corporation, a
Delaware corporation ("REIT"), Meditrust Operating Company, a Delaware
corporation ("OPCO" and, together with REIT, the "Companies" and each a
"Company"), Merrill Lynch International ("MLI") and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, as agent acting for the account of MLI and as owner
of the Purchase Shares (as defined in the Purchase Agreement (as defined
herein)) and successor to the rights and obligations of MLI under the Purchase
Agreement ("Merrill Lynch" and, together with MLI, the "Merrill Lynch Parties").
The Companies and the Merrill Lynch Parties are sometimes referred to herein as
the "Parties" and each individually, a "Party." Capitalized terms used but not
defined herein shall have the meaning ascribed thereto in the Purchase Agreement
or the Adjustment Agreements, as the circumstances require.
WHEREAS, the Parties hereto entered into a Settlement Agreement dated as of
November 11, 1998 (the "Original Settlement Agreement") which sets forth certain
agreements and covenants, and as required by an Agreement between the Parties
hereto dated November 11, 1998, the Parties are entering into this Agreement
which is intended to amend and restate the Original Settlement Agreement.
Accordingly, the purpose of this Agreement is to amend and restate the Original
Settlement Agreement in its entirety and to set forth the terms and conditions
of the agreements contained herein.
WHEREAS, the Parties hereto are parties to that certain Purchase Agreement
dated as of February 26, 1998 (the "Original Purchase Agreement") and that
certain Purchase Price
<PAGE>
Adjustment Mechanism Agreement dated as of February 26, 1998 (the "Original
Adjustment Agreement"), as each have been amended by those certain Amendment
Agreements dated as of July 16, July 31 and September 11, 1998 (the "First
Amendment," "Second Amendment," and "Third Amendment," respectively, and
collectively, the "Amendments") (as so amended, the "Purchase Agreement" and the
"Adjustment Agreement," respectively, and, collectively, the "Forward Equity
Transaction Documents");
WHEREAS, the Parties desire to amend the Purchase Agreement pursuant to the
Amendment to Purchase Agreement substantially in the form attached as Exhibit A
hereto and to amend and restate the Adjustment Agreement by entering into the
Secured Purchase Price Adjustment Mechanism Agreement (the "Secured Adjustment
Agreement") and the Unsecured Purchase Price Adjustment Mechanism Agreement (the
"Unsecured Adjustment Agreement," and together with the Secured Adjustment
Agreement, the "Restated Adjustment Agreements"), each in substantially the form
attached as Exhibits B-1 and B-2 hereto, respectively;
WHEREAS, the Parties further desire to enter into certain other agreements
pertaining to those transactions contemplated by the Forward Equity Transaction
Documents, each of which will be set forth in this Agreement or in the other
documents and instruments delivered in connection herewith.
NOW, THEREFORE, in consideration of the agreements and covenants set forth
herein, the Parties hereto hereby covenant and agree as follows:
1. Amendment of Purchase Agreement and Amendment and Restatement of Adjustment
Agreement. The Parties hereto agree to execute and deliver on the date
hereof the Amendment to Purchase Agreement and the Restated Adjustment
Agreements, substantially in the forms attached as Exhibit A, Exhibit B-1
and Exhibit B-2 hereto,
2
<PAGE>
respectively. Upon execution and delivery of the Amendment to Purchase
Agreement and the Restated Adjustment Agreements, the Parties agree that
the Original Adjustment Agreement and the Amendments shall thereafter be
superseded and rescinded, respectively and, in each case, of no further
force and effect. However, the effect of the foregoing is not to affect any
action taken prior to the date hereof pursuant to the Original Adjustment
Agreement and the Amendments. Further, the Parties hereto expressly reserve
their rights with respect to any actions taken under the Forward Equity
Transaction Documents prior to the date hereof, except that the Parties
agree that the Registration Statement declared effective on October 8, 1998
shall constitute a Resale Registration Statement as contemplated by the
Purchase Agreement. The Companies agree and acknowledge that the Merrill
Lynch Parties are entering into this Agreement on the condition that the
Original Adjustment Agreement be amended and restated as provided herein,
and in reliance thereon, and that such amendment and restatement is an
essential part of the agreements contemplated herein.
2. Maximum Payment to Reduce Reference Amounts and Purchase Paired Shares. The
Parties agree that Schedules 2A and 2B hereto set forth calculations of the
Reference Amounts under the Restated Adjustment Agreements as of November
10, 1998. The Parties acknowledge and agree that the aggregate amount to be
paid or otherwise delivered to the Merrill Lynch Parties as payment on the
"Reference Amount" under the Restated Adjustment Agreements shall not
exceed the sum of (a) [$80,000,000] in the case of the Secured Adjustment
Agreement and [$197,312,500] in the case of the Unsecured Adjustment
Agreement, plus, in each case (b) the applicable amount determined in
accordance with Section 1(z)(i) of the respective Restated Adjustment
Agreements. Further, the Merrill Lynch Parties agree that, upon payment in
full of the then applicable Reference Amount under both of the Restated
Adjustment Agreements, they shall deliver, or cause to be delivered, to the
Companies, without further payment therefor, any and all Paired Shares
delivered to them in connection with, as a result of, or pursuant to the
Purchase Agreement or the Restated Adjustment Agreements and not previously
delivered to the Companies or sold by the Merrill Lynch Parties pursuant to
the Restated Adjustment Agreements.
3. Effect of Cash Payment to the Merrill Lynch Parties. Any and all cash paid
or otherwise delivered to the Merrill Lynch Parties by or on behalf of the
Companies (a)_pursuant to Sections 4.2(ii), 4.3, 5, 6.3(b), 6.4,
7(b), 8.1 and 9 of this Agreement and Section_5.2 of the Purchase
Agreement, as amended by the Amendment to Purchase Agreement, shall reduce
the Reference Amount (by reducing, on a per Adjustment Share basis, the
Reference Price) of the Unsecured Adjustment Agreement in the manner set
forth in Section 3.3 of the Unsecured Adjustment Agreement, and (b)
pursuant to Sections 6.1, 6.3(a), 6.5 and 9 of this Agreement, shall reduce
the Reference Amount (by reducing, on a per Adjustment Share basis, the
Reference Price) of the Secured Adjustment Agreement in the manner set
forth in Section_3.3 of the Secured Adjustment Agreement.
3
<PAGE>
4. Standstill.
a. Initial Standstill. In consideration of the Standstill Consideration
(as defined below), the Merrill Lynch Parties agree that, subject to
Section 4.4, from the date hereof and until January 31, 1999, they
will not directly or indirectly sell, assign, transfer, pledge or
otherwise dispose of, or enter into any put or other contract, option
or other arrangement or undertaking (including any socalled shortsale
which the Merrill Lynch Parties then intend to settle with the Paired
Shares delivered to them in connection with, as a result of, or
pursuant to the terms of the Forward Equity Transaction Documents or,
after the date hereof, the Purchase Agreement, as amended by the
Amendment to Purchase Agreement, or the Restated Adjustment
Agreements) with respect to the direct or indirect sale, assignment,
transfer or other disposition of, any Paired Shares delivered to them
in connection with, as a result of, or pursuant to the terms of, the
Forward Equity Transaction Documents prior to the date hereof or
pursuant to the Restated Adjustment Agreements on and after the date
hereof; provided, however, that the Merrill Lynch Parties may enter
into such an arrangement or undertaking (subject to the provisions of
the Purchase Agreement as amended by the Amendment to Purchase
Agreement, and the Restated Adjustment Agreements) in the event the
transaction contemplated by such arrangement or undertaking will not
be consummated until after January 31, 1999 (or February 28, 1999 in
the event the Standstill is extended pursuant to Section 4.3) (the
"Standstill"). The foregoing shall in no event restrict or limit sales
by the Merrill Lynch Parties for the account of clients or for their
own account so long as the Paired Shares to be sold were not delivered
to the Merrill Lynch Parties pursuant to the Purchase Agreement or the
Restated Adjustment Agreements. Further, the Parties agree that the
Companies shall not, during the term of the Standstill, be required to
comply with the requirements in the Purchase Agreement, as amended by
the Amendment to Purchase Agreement, and the Restated Adjustment
Agreements with respect to making an Effective Registration Statement
available to the Merrill Lynch Parties; provided, that the foregoing
shall in no way relieve the Companies' obligations contained in such
Agreements immediately following the termination of the Standstill.
b. Standstill Consideration. In consideration of the Merrill Lynch
Parties' Standstill, the Companies agree to (i) execute and deliver to
the Merrill Lynch Parties concurrently herewith (a) a Deed of Trust
Note and a Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing substantially in the form of Exhibits C1
and C2 hereto, respectively (collectively, the "NonRecourse Note and
Mortgage"), and (b) a Subordination and Attornment and Estoppel
Certificate of Los Angeles Turf Club, Incorporated substantially in
the form of Exhibits C3 and C4 hereto, respectively; and (ii) pay to
the Merrill Lynch Parties
4
<PAGE>
an aggregate of $25 million in cash on or prior to December 24, 1998
in the event the Companies (or the REIT) have not, on or prior to such
date, completed an offering or private placement of convertible
preferred stock, common stock or other equity securities or securities
convertible into equity securities the net proceeds of which (A)
exceed $100 million, and (B) have been paid or otherwise delivered to
the Merrill Lynch Parties to reduce the Reference Amount under the
Unsecured Adjustment Agreement (such $25 million payment, the
"December Payment" and, together with the NonRecourse Note and
Mortgage, the "Standstill Consideration"). The Companies agree to not
challenge in any legal proceeding the adequacy of the consideration
received by the Companies in connection with their delivery of, or
agreement to deliver, the Standstill Consideration. Such December
Payment shall reduce the Reference Amount under the Unsecured
Adjustment Agreement in accordance with the provisions of Section 3.3
of the Unsecured Adjustment Agreement.
c. Standstill Extension. Provided the Merrill Lynch Parties' Standstill
has not been terminated in accordance with the terms of this
Agreement, the Companies shall have the option to extend such
Standstill until February 26, 1999 upon written notice to the Merrill
Lynch Parties and payment by or on behalf of the Companies to the
Merrill Lynch Parties of $25 million (the "January Payment"),
delivered on or prior to the close of business on January 31, 1999.
The January Payment, if made, shall reduce the Reference Amount under
the Unsecured Adjustment Agreement in accordance with the provisions
of Section 3.3 of the Unsecured Adjustment Agreement.
d. Termination of Standstill. The Standstill shall terminate in the event
(i) the December Payment, if required, is not made to the Merrill
Lynch Parties on or prior to the close of business on December 24,
1998; provided, however, that the foregoing shall not relieve the
Companies of their obligation to make such $25 million December
Payment or preclude the Merrill Lynch Parties from pursuing any and
all legal remedies to collect such payment; (ii) the lender's title
insurance policy required by Section 6.2 hereof is not delivered
within the time period set forth therein; (iii) the Companies fail to
deliver promptly the Net Sales Proceeds (as defined in Section 6.4
hereof) after payment of the NonRecourse Note and Mortgage as
contemplated by Section 6.4; (iv) the Companies fail to deliver the
earnest money deposit as contemplated by Section 6.5 hereof; (v) the
Companies fail to deliver to MLI the net proceeds of an offering as
contemplated by the second sentence of Section 8.1 or fail to comply
with the provisions of the first and second sentence of Section 8.2
hereof; (vi) the Companies offer or sell any equity securities or
securities convertible into equity securities (except as specifically
permitted by Section 9 hereof) while the Reference Amount under either
of the Restated Adjustment Agreements exceeds zero (0) dollars and the
net
5
<PAGE>
proceeds from such offering or private placement (or the portion of
the net proceeds necessary to reduce the Reference Amount under both
of the Restated Adjustment Agreements to zero (0) dollars) are not
paid or otherwise delivered to MLI as contemplated by Section 9
hereof, (vii) the Companies fail to deliver to MLI any Interim
Settlement Shares, dividends on Interim Settlement Shares or cash
required by Section 5 of the Restated Adjustment Agreements within one
(1) Business Day of any date on which such delivery is required;
(viii) the Companies fail to comply with the obligations set forth in
the second to the last sentence of Section 4.2 hereof; or (ix) an
Event of Default under Section 23(a), (c), (h) or (l) of the Deed of
Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing shall have occurred and continues as of the date of such
Standstill termination. In the event such Standstill is so terminated,
then (i) any restrictions on the ability of the Merrill Lynch Parties
contained in this Agreement or any other agreement contemplated
hereunder to sell Paired Shares shall immediately cease and (ii) the
Companies shall promptly prepare and file any required amendment or
supplement to the Registration Statement and Prospectus covering the
Paired Shares held by the Merrill Lynch Parties and use their best
efforts to cause the required Resale Closing Documents to be promptly
delivered.
5. Collateral Account and Purchased Shares. The Parties acknowledge and agree
that, as of the close of business on November 9, 1998, the collateral
account established by MLI pursuant to the Forward Equity Transaction
Documents (the "Collateral Account") held the amount of cash and Paired
Shares set forth on Schedule 2 hereto. Merrill Lynch acknowledges that it
owns, and holds for its own account, 8,500,000 Paired Shares purchased by
MLI pursuant to the Purchase Agreement. The Companies hereby direct the
Merrill Lynch Parties to promptly transfer the cash held in the Collateral
Account as of the date of this Agreement to the order of MLI, which amount
shall reduce the Reference Amount in accordance with the provisions of
Section 3.3 of the Unsecured Adjustment Agreement. Further, the Companies
direct the Merrill Lynch Parties to promptly transfer the cash deposited
from time to time in the Collateral Account as dividends on the Paired
Shares then held in the Collateral Account by the Merrill Lynch Parties
(including the November 13 dividend) to the order of MLI, which amounts
shall, upon such transfer, reduce the Reference Amounts in accordance with
the provisions of Section 3.3 of the respective Restated Adjustment
Agreements.
6. Santa Anita Matters.
a. Return of Instrument; Discharge of Mortgage. Upon payment of $80
million to the order of MLI on account of the NonRecourse Note and
Mortgage (which shall reduce the Reference Amount under the Secured
Adjustment Agreement in accordance with the provisions of Section 3.3
of the Secured Adjustment Agreement), the Merrill Lynch Parties shall
deliver to the Companies, the NonRecourse Note and Mortgage, any and
all documents delivered in connection
6
<PAGE>
therewith and a Discharge of Mortgage reasonably satisfactory to the
buyer of the Santa Anita Racetrack and the Companies and any interest
of the Merrill Lynch Parties in the real property and operations which
are the subject of the NonRecourse Note and Mortgage shall terminate.
The Merrill Lynch Parties acknowledge that time will be of the essence
for such delivery and agree that such instrument, if requested by the
Companies, will be delivered contemporaneously (including delivery at
the closing of any sale of the Santa Anita Racetrack) with such
payment.
b. Lender's Title Insurance. The Companies agree to deliver to the
Merrill Lynch Parties, on or prior to November 30, 1998, a customary
lender's title insurance policy on the real property interests subject
to the NonRecourse Note and Mortgage.
c. Effect of Foreclosure. (a) The Parties hereby acknowledge and agree
that $80 million of the net proceeds from the foreclosure (the "Net
Foreclosure Proceeds") of the NonRecourse Note and Mortgage upon
delivery to MLI shall reduce the Reference Amount under the Secured
Adjustment Agreement in accordance with the provisions of Section 3.3
of the Secured Adjustment Agreement and that such NonRecourse Note and
Mortgage shall, upon foreclosure, terminate.
i. The Net Foreclosure Proceeds, after payment of $80 million to
MLI, shall be payable to, and for the account of, the Companies;
provided, however, that the Merrill Lynch Parties shall retain
that amount of Net Foreclosure Proceeds (if any) in excess of the
amount of any federal, state or local income taxes of the
Companies directly attributable to such foreclosure (or the grant
of the underlying mortgage) reasonably determined by the
Companies (the "Tax Remittance"). To accomplish the foregoing,
the Companies shall notify the Merrill Lynch Parties of the
amount of such Tax Remittance, and shall deliver to the Merrill
Lynch Parties a schedule displaying the calculation of such Tax
Remittance, and the Merrill Lynch Parties shall promptly remit,
or cause to be remitted, to the Companies, such amount; provided,
however, that in no event shall the Merrill Lynch Parties be
required to remit amounts as a Tax Remittance if such remittance
would cause the Merrill Lynch Parties to retain less than $80
million of Net Foreclosure Proceeds (including the amount of such
proceeds applied to the NonRecourse Note and Mortgage). The
excess (if any) of such Net Foreclosure Proceeds after payment of
such $80 million and the delivery of such Tax Remittance (subject
to the proviso in the foregoing sentence) shall reduce the
Reference Amount under the Unsecured Adjustment Agreement in
accordance with the provisions of Section 3.3 of the Unsecured
Adjustment Agreement.
7
<PAGE>
ii. The "Net Foreclosure Proceeds" shall consist of the gross
proceeds in any such foreclosure less only the reasonable,
outofpocket costs directly attributable to such foreclosure
incurred and paid by or on behalf of the Merrill Lynch Parties,
provided, that, in no event shall taxes or other nonforeclosure
related expenses of the Merrill Lynch Parties be deducted in
calculating such Net Foreclosure Proceeds. The Merrill Lynch
Parties shall deliver to the Companies a schedule displaying the
calculation of such Net Foreclosure Proceeds within fifteen (15)
Business Days of such foreclosure.
d. Excess Proceeds on Sale of Santa Anita Racetrack.
i. The Companies agree to pay or to otherwise deliver to MLI the
amount of the net proceeds from the sale of the Santa Anita
Racetrack (the "Net Sales Proceeds") in excess of the $80 million
due and payable to MLI pursuant to the terms of the NonRecourse
Note and Mortgage, which excess amount will, upon delivery to
MLI, reduce the Reference Amount under the Unsecured Adjustment
Agreement in accordance with the provisions of Section 3.3 of the
Unsecured Adjustment Agreement.
ii. The "Net Sales Proceeds" shall consist of the gross proceeds in
any such sale less only (i) reasonable, outofpocket costs
directly attributable to such sale, and (ii) the amount of any
federal, state or local income taxes of the Companies directly
attributable to such sale (or to the grant or discharge of the
mortgage contemplated by this Agreement). The Companies shall
deliver to the Merrill Lynch Parties a schedule displaying the
calculation of such Net Sales Proceeds within fifteen (15)
Business Days of the consummation of such sale.
e. Forfeiture of Deposit. The Companies agree to promptly pay or
otherwise deliver the $6.5 million earnest money deposit to MLI in the
event such earnest money deposit is forfeited by the proposed buyer of
such facility under the terms of the agreement governing the delivery
and forfeiture of such earnest money deposit. Such earnest money
deposit, upon delivery to MLI, shall reduce the Reference Amount under
the Secured Adjustment Agreement in accordance with the provisions of
Section 3.3 of the Secured Adjustment Agreement.
7. Extension of NonRecourse Note and Mortgage. (a) The principal amount of the
NonRecourse Note and Mortgage, which amount shall not bear interest, shall
be due and payable in full on January 4, 1999 (the "Maturity Date").
Notwithstanding the foregoing, if the NonRecourse Note and Mortgage has not
been paid in full by January 4, 1999, the
8
<PAGE>
Companies shall have the right to extend (pursuant to one or more
extensions) the Maturity Date until March 31, 1999, provided that, during
such extension and until the principal amount of the NonRecourse Note and
Mortgage is paid in full, the Spread (as defined in the Adjustment
Agreement) under each of the Restated Adjustment Agreements shall be
increased as follows, in each case retroactive to January 4, 1999 and in
complete substitution of the prior month's Spread increase set forth below:
<TABLE>
<CAPTION>
Date Spread Increase To
---- ------------------
<S> <C>
1/04/99 - 1/31/99 150 Basis Points
2/1/99 - 2/28/99 250 Basis Points
3/1/99 - Non-Recourse 350 Basis Points
Note is Paid in Full
</TABLE>
The above described increase to the Spread shall be of no further force and
effect and the provisions of each Restated Adjustment Agreement shall control
upon (i) payment in full of the principal amount due under the NonRecourse Note
and Mortgage or (ii) foreclosure of the same pursuant to Section 6.3 hereof
resulting in Net Foreclosure Proceeds to the Merrill Lynch Parties in excess of
$80 million.
i. In the event the Net Foreclosure Proceeds received by the Merrill
Lynch Parties do not equal or exceed $80 million, the Companies
shall make a subsequent payment to the Merrill Lynch Parties
(which shall reduce the Reference Amount under the Unsecured
Adjustment Agreement in accordance with Section 3.3 of the
Unsecured Adjustment Agreement) and identify such payment as
allocable to the amount by which such Net Foreclosure Proceeds
were less than $80 million, in which case the abovedescribed
increase to the Spread shall be of no further force and effect
and the provisions of each Restated Adjustment Agreement shall
thereafter control.
9
<PAGE>
8. Preferred Stock Offering.
a. General. The REIT (or the Companies, if applicable) shall use its best
efforts to commence and complete one or more offerings or private
placements of convertible preferred stock, common stock or other
equity securities or securities convertible into equity securities on
or prior to December 24, 1998. The REIT (or the Companies, if
applicable) agrees that the net proceeds from such offering(s) (after
underwriting discounts and other direct expenses of the offering(s))
shall be paid or otherwise delivered to MLI to reduce the Reference
Amount under the Unsecured Adjustment Agreement in accordance with the
provisions of Section 3.3 of the Unsecured Adjustment Agreement.
b. Role of Merrill Lynch. The Parties agree that Merrill Lynch shall act
as lead manager or placement agent, as the case may be, in any such
public offering or private placement and shall receive usual and
customary (i) lead manager or placement agent compensation and (ii)
reasonable expense reimbursement. The Parties agree that the
underwriting discount for such public offering or private placement
shall be the usual and customary discount for such an offering or
private placement at the time of such offering or placement, provided,
that, such discount shall be no less than three and one half percent
(3-1/2%). The Parties agree that the REIT (or the Companies, if
applicable) shall have the right, in its sole discretion, to select
one or more comanagers or coplacement agents, as the case may be, for
any such public offering or private placement, which comanagers or
coplacement agents shall receive usual and customary comanagement or
coplacement agent terms (including compensation and reasonable expense
reimbursement). Any one of such comanagers in a public offering may
act, at the REIT's (or the Companies', if applicable) request, as a
qualified independent underwriter as defined in the National
Association of Securities Dealers, Inc. Conduct Rule 2720.
9. Additional Public Offerings or Private Placements. The Companies agree that
until the Reference Amount under both of the Restated Adjustment Agreements
has been reduced to zero (i) dollars, it shall not offer or sell any equity
securities or securities convertible into equity securities (except (x) in
connection with employee benefit plans, contracts or arrangements; or (y)
using such equity securities (or securities convertible into equity
securities) as consideration in acquisitions, joint ventures or similar
transactions, which consideration may not exceed $50 million in the
aggregate), unless (i) the net proceeds from such offering or placement (up
to the Reference Amount under both of the Restated Adjustment Agreements)
are paid or otherwise delivered to the Merrill Lynch Parties; or (ii) the
Companies have provided the Merrill Lynch Parties the opportunity to
include an amount of Paired Shares such that the net proceeds to the
Merrill Lynch Parties from such offering or placement will reduce the
Reference Amount under both of the Restated
10
<PAGE>
Adjustment Agreements to zero (0) dollars before any other Paired Shares
(on a primary or secondary basis) are included in such offering or
placement. The Parties acknowledge that any such offering or placement
contemplated by clause (i) above shall be subject to the approval of the
requisite percentage of lenders under the REIT's credit facility.
10. Press Releases. The Parties will consult with each other before issuing,
and provide each other the opportunity to review, comment upon and concur
with, any press release or other written public statements with respect to
the transactions contemplated by this Agreement, and will not issue any
such press release or make any such public statement prior to such
consultation, except as either party may determine is required by
applicable law, court process or by obligations pursuant to any listing
agreement with, or rules of, any national securities exchange. The Parties
agree that the language substantially in the form set forth in Exhibit D
hereto shall be acceptable for use in a press release by the Companies,
describing, among other things, the transactions contemplated by this
Agreement and the exhibits and schedules appended hereto. Notwithstanding
the foregoing, each of the parties hereto shall be permitted to make press
releases in the ordinary course, including those which refer generally to
the existence of this transaction.
11. Representations.
a. Representations of the Companies. The Companies hereby represent and
warrant to the Merrill Lynch Parties that (i) this Agreement and each
other agreement, document and instrument executed by each Company
pursuant to or in connection with this Agreement constitutes, or when
executed and delivered will constitute, the valid and binding
obligation of each such Company, enforceable in accordance with its
terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium and other rights affecting creditors' rights generally, and
general equitable principles; and (ii) the lenders under the REIT's
senior credit facility have consented to the use of the proceeds from
the sale of the Santa Anita Racetrack to pay the NonRecourse Note and
Mortgage in full and to reduce the Reference Amount under the Restated
Adjustment Agreements by an equivalent amount of such payment
(inclusive of both $80 million payment of the NonRecourse Note and
Mortgage and the excess proceeds (if any)) and no other consents of
the lenders in connection with the grant of the NonRecourse Note and
Mortgage, the payment of the net proceeds from the sale of the Santa
Anita Racetrack to the Merrill Lynch Parties, the preferred stock
offering contemplated by Section 8 hereof and the other transactions
contemplated by this Agreement and the other Forward Equity
Transaction Documents is necessary.
Section 11.2 Representations of the Merrill Lynch Parties. The Merrill
Lynch Parties hereby represent and warrant to the Companies that (i) this
Agreement and each other agreement, document and instrument executed by each
such Merrill Lynch Party pursuant to or in
11
<PAGE>
connection with this Agreement constitutes, or when executed and delivered will
constitute, the valid and binding obligation of each such Merrill Lynch Party,
enforceable in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other rights affecting creditors'
rights generally, and general equitable principles.
12. [Intentionally omitted.]
13. General Provisions.
a. Notices. All notices, consents and other communications required
hereunder shall be delivered in the manner set forth in the Purchase
Agreement.
b. Changes. This Agreement may not be modified or amended except pursuant
to an instrument in writing signed by the Parties hereto.
c. Headings. The headings of the various sections of this Agreement have
been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
d. Severability. In case any provision contained in this Agreement should
be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
e. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon (i) the successors of the Merrill Lynch Parties
and (ii) any assignee or transferee of rights and obligations of the
Merrill Lynch Parties pursuant to the Amended Purchase Agreement, as
amended by Amendment to Purchase Agreement, the Restated Adjustment
Agreements or this Agreement. Any permitted transferee of the Merrill
Lynch Parties pursuant to the Amended Purchase Agreement, as amended
by Amendment to Purchase Agreement, the Restated Adjustment Agreements
or this Agreement, and any successor, assignee, or transferee thereto,
shall be held subject to all of the terms of this Agreement. Except as
set forth in this Section 13, neither the Companies nor the Merrill
Lynch Parties may assign any of their respective rights, or delegate
any of their respective duties under this Agreement.
f. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without
regard to the conflicts of law principles thereof.
g. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of
which, when taken together, shall
12
<PAGE>
constitute but one instrument, and shall become effective when one or
more counterparts have been signed by each party hereto and delivered
to the other parties.
h. Conflicts with Other Agreements. In the event any conflict between the
provisions of this Agreement and the Amended Purchase Agreement (as
amended by the Amendment to Purchase Agreement), the Restated
Adjustment Agreements or the NonRecourse Note and Mortgage, the terms
and provisions of this Agreement shall govern.
i. Expenses. Except as specifically provided herein, the Parties shall
each pay their respective fees and expenses incurred in connection
with the negotiation and execution of this Agreement and the
consummation of the transactions contemplated hereby; provided, that
the Companies shall reimburse the Merrill Lynch Parties for their
reasonable, documented outofpocket expenses incurred in connection
with the transactions contemplated by this Settlement Agreement up to
a maximum of $200,000.
j. Escrow. This Agreement and each of the documents contemplated hereby
shall be held pursuant to the terms of the Escrow Agreement attached
as Exhibit E hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the date first above written.
MERRILL LYNCH INTERNATIONAL
By: /s/ John O'Dowd
------------------------------
Name: John O'Dowd
Title: Vice President
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ Onu Odim
------------------------------
Name: Onu Odim
Title: Managing Director
MEDITRUST OPERATING COMPANY
By: /s/ William Baker
------------------------------
Name: William C. Baker
Title: President
MEDITRUST CORPORATION
By: /s/ Michael Benjamin
------------------------------
Name: Michael S. Benjamin, Esq.
Title: Senior Vice President
14
<PAGE>
Schedule 2A
-----------
See attached schedule.
15
<PAGE>
Schedule 2B
-----------
See attached schedule.
16
<PAGE>
Exhibit A
---------
See attached Form of Amendment to Purchase Agreement.
17
<PAGE>
Exhibit B-1
-----------
See attached Form of Secured Purchase Price Adjustment Mechanism Agreement.
18
<PAGE>
Exhibit B-2
-----------
See attached Form of Unsecured Purchase Price Adjustment Mechanism Agreement.
19
<PAGE>
Exhibits C1 through C4
See attached form of NonRecourse Note and Mortgage (Exhibits C1 and C2) and
related documents (Exhibits C3 and C4).
20
<PAGE>
Exhibit D
---------
Form of Language for Press Release
----------------------------------
Meditrust has entered into an agreement to fully settle its existing $277
million FEIT with Merrill Lynch International and certain of its affiliates.
Under the agreement, Meditrust has agreed to grant a mortgage of the Santa Anita
Racetrack to Merrill Lynch and anticipates repaying Merrill Lynch approximately
50% of the FEIT obligation in cash generated in part from the sale of certain
assets. It is anticipated that the remaining FEIT obligation will be discharged
from the proceeds of the sale of equity securities of The Meditrust Companies
with terms to be finalized shortly which, if offered publicly, will be offered
pursuant to a prospectus. Merrill Lynch has agreed, subject to the terms of the
settlement agreement, not to sell any shares of the existing FEIT until February
28, 1999 while Meditrust completes the sale of equity securities and certain
assets.
Mr. Benson said, "We believe this arrangement regarding our only forward
equity obligation should remove market uncertainty for Meditrust's paired common
stock, with the ultimate objective of minimizing possible dilution to funds from
operations (FFO) associated with this obligation."
21
<PAGE>
Exhibit E
---------
Form of Escrow Account
----------------------
See attached form of Escrow Agreement.
22
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as of
November 23, 1998, by and among MEDITRUST CORPORATION (the "Borrower"), MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Administrative
Agent"), BANKERS TRUST COMPANY, as Syndication Agent, BANKBOSTON, N.A., as
Co-Documentation Agent, FLEET NATIONAL BANK, as Co-Documentation Agent, and the
BANKS listed on the signature pages hereof.
W I T N E S S E T H:
--------------------
WHEREAS, the Borrower and the Banks have entered into the
Credit Agreement, dated as of July 17, 1998 (the "Credit Agreement"); and
WHEREAS, the parties desire to modify the Credit Agreement
upon the terms and conditions set forth herein.
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
1. Definitions. All capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Credit Agreement.
2. Annual EBITDA. The definition of "Annual EBITDA" is hereby
deleted and the following substituted therefor:
"Annual EBITDA" means, measured as of the last day of each
calendar quarter, an amount derived from (i) total revenues as
determined in accordance with GAAP and reflected in the
combined
<PAGE>
consolidated financial statements relating to the Borrower,
MOC and their Consolidated Subsidiaries or to the Borrower's
or MOC's direct or indirect interest in Minority Holdings for
the previous four consecutive calendar quarters including the
quarter then ended, on an accrual basis, less (ii) total
operating expenses and other expenses relating to the
Borrower, MOC and their Consolidated Subsidiaries and relating
to the Borrower's and MOC's direct or indirect interest in
Minority Holdings for such period (other than interest, taxes,
depreciation, amortization, and other non-cash items, as well
as nonrecurring, one-time cash charges, not to exceed
(together with those one-time cash charges set forth in clause
(iii) below), for the period commencing October 1, 1998,
$250,000,000 in the aggre gate), less (iii) total corporate
operating expenses (including general overhead expenses) and
other expenses of the Borrower, MOC, their Consolidated
Subsidiaries and such expenses relating to the Bor rower's and
MOC's direct or indirect interest in Minority Holdings (other
than interest, taxes, depreciation, amortization and other
non-cash items, as well as nonrecurring, one-time cash
charges, not to exceed (together with those one-time cash
charges set forth in clause (ii) above), for the period
commencing October 1, 1998, $250,000,000 in the aggregate),
for such period.
3. Applicable Margin. The definition of "Applicable Margin" is hereby
deleted and the following substituted therefor: "'Applicable Margin' means, with
respect to each Euro-Dollar Loan, 2.625%, and with respect to each Base Rate
Loan, 1.75%; provided, however, that if the Borrower, MOC and/or any of their
Subsidiaries shall fail to complete one or more offerings or private placements
of convertible preferred stock, common stock or other equity securities or
securities convertible into equity securities (collectively, "Securities"), in
an aggregate amount not less than $100,000,000 on or before February 1, 1999,
then, commenc ing as of February 1, 1999, the "Applicable Margin" shall be
increased by the
2
<PAGE>
Capital Markets Condition Spread until such time as Securities in an amount not
less than $100,000,000 shall have been issued. For purposes hereof, "Capital
Markets Condition Spread" means an amount equal to 0.25%."
4. Debt. The following clause "(E)" is hereby added to the definition of
"Debt: ", and (E) all repurchase and similar obligations of such Person." In
addition, the following sentence is hereby added to the end of the definition of
"Debt": "Notwithstanding anything contained herein to the contrary, Debt shall
not be deemed to include any amounts evidenced by the nonrecourse mortgage note
payable to Merrill Lynch International and secured by a mortgage or deed of
trust on the Santa Anita Racetrack."
5. FEITS Agreement. The following definition is hereby added after the
definition of "Federal Reserve Board": "'FEITS Agreement' means the Purchase
Agreement, dated as of February 26, 1998, among the Borrower, MOC, Merrill Lynch
International and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent
for the account of Merrill Lynch International, as amended by Amendment
Agreements, dated as July 16, 1998 and July 31, 1998, and all other agreements
executed in connection therewith (a true and complete copy of which has been
delivered by the Borrower to the Administrative Agent, the Syndication Agent and
the Co-Documentation Agents), as the same may be amended from time to time in
accordance with the provisions hereof."
3
<PAGE>
6. Guaranty. The definition "Guarantor Subsidiary" is hereby deleted and
all references thereto in the Credit Agreement and the other Loan Documents are
hereby deemed to be deleted. In addition, the definition of "Guaranty" is hereby
amended by substituting the phrase "all Consolidated Subsidiaries of the
Borrower and/or MOC that are required to deliver a Guaranty pursuant to Section
5.22 hereof" for the phrase "a Guarantor Subsidiary".
7. Loan Documents. The definition of "Loan Documents"" is hereby deleted
and the following substituted therefor:
"Loan Documents" means this Agreement, the Notes, any
Guaranty, the Letter(s) of Credit, the Letter of Credit
Documents, the Pledges, the Subordination Agreement and any
related documents.
8. Net Offering Proceeds. The definition of "Net Offering Proceeds"" is
hereby deleted and the following substituted therefor:
"Net Offering Proceeds" means all cash received by the
Borrower or MOC as a result of the sale and/or issuance of (x)
common stock, preferred stock, partnership interests, limited
liability company interests, or other ownership or equity
interests in the Borrower or MOC (or evidence of indebtedness
of the Borrower or MOC con vertible into any of the
foregoing), or (y) debt securities or any other debt
instruments, whether or not securities, including, without
limitation, notes and loan agreements with banks, life
insurance companies and all other lenders, less, in either
case, customary costs and discounts of issuance paid by the
Borrower or MOC, as the case may be, and exclusive of any cash
proceeds received in connection with the settlement of the
Forward Equity Issuance Transaction, dated as of February 26,
1998 with Merrill Lynch International.
4
<PAGE>
9. Permitted Liens. The following clause is hereby added to the end of the
definition of "Permitted Liens": ", and (i) Liens created pursuant to the
Pledges".
10. Pledges. The following definition is hereby added after the definition
of "Plan":
"Pledges" means, collectively, the Equity Interest Pledge
and Secu rity Agreement, the Mortgage Loan Pledge and
Security Agreement, and the Intercompany Debt Pledge and
Security Agreement, all dated as of November 23, 1998, by
the Borrower, MOC and certain of their Subsidiaries, for the
benefit of the Administrative Agent, on behalf of the Banks,
as well as for the benefit of the trustee(s) of the
bondholders (the "Bondholders") more particularly set forth
on Schedule 9 hereto.
11. Subordination Agreement. The following definition is hereby added to
the Credit Agreement following the definition of "Solvent": "Subordination
Agreement" means the Subordination Agreement, dated as of the date hereof, by
the Borrower, Meditrust Finance Corporation and Meditrust Mortgage Invest ments,
Inc., for the benefit of the Administrative Agent, on behalf of the Banks and
the Bondholders.
12. Unsecured Debt Ratio. The definition of "Unsecured Debt Ratio" is
hereby amended by adding the following: "For purposes of this definition, 'Unse
cured Debt of the Borrower, MOC and their Consolidated Subsidiaries' shall be
deemed to include the Obligations, as well as all other Debt that is secured by
the Pledges."
5
<PAGE>
13. Facility Fee. Section 2.8(a) of the Credit Agreement is hereby deleted,
and the following substituted therefor:
Facility Fee. During the Term, the Borrower shall pay to the
Administrative Agent for the account of the Banks ratably in
propor tion to their respective Commitments, a facility fee on
the daily average Commitments in any given quarter at a
percentage per annum equal to 0.375%.
The facility fee with respect to Tranche A Loans shall be
payable quarterly, in arrears, on each January 1, April 1,
July 1, and Octo ber 1, as well as on the applicable Maturity
Date, during the Term and any extensions thereof. The facility
fee with respect to Tranche B Loans, Tranche C Loans and
Tranche D Loans shall be payable on the last day of each
Interest Period and, if such Interest Period is longer than
three months, at intervals of three months after the first day
thereof, i.e. simultaneously with the payment of interest in
accordance with the provisions of Section 2.7.
14. Financial Covenants. Section 5.8 of the Credit Agreement is hereby
amended as follows:
(a) Section 5.8(a) of the Credit Agreement is hereby deleted and the
following substituted therefor:
(a) Total Liabilities to Total Fair Market Value. As of the last day
of each calendar quarter, the Total Debt Ratio will not be greater
than (i) 62.5% from October 1, 1998 through March 31, 1999, (ii) 60%
from April 1, 1999 through September 30, 1999, (iii) 57.5% from
October 1, 1999 through the final Maturity Date, and (iv)
notwithstanding the provisions of clauses (i), (ii), or (iii) to the
contrary, from and after the Conversion Date, 60%.
(b) Section 5.8(b) of the Credit Agreement is hereby deleted and the
following substituted therefor:
6
<PAGE>
(b) Total Debt to Annual EBITDA. As of the last day of each calendar
quarter, the ratio of (i) the sum, without duplication, of (x) the
Debt of the Borrower, MOC and their Consolidated Subsidiaries, and (y)
the Borrower's and MOC's pro rata share of the Debt of any Minority
Holdings of the Borrower or MOC to (ii) Annual EBITDA, will not be
more than (A) 5.5:1 commencing as of Octo ber 1, 1998 through March
31, 1999, (B) 5.25:1 from April 1, 1999 through September 30, 1999,
(C) 5.0:1 from October 1, 1999 through December 31, 1999, and (D)
4.75:1 thereafter. For pur poses of this clause (b), prior to June 30,
1999, Annual EBITDA shall be calculated on an annualized basis,
commencing as of the quarter ending September 30, 1998, and from and
after July 1, 1999, Annual EBITDA shall be calculated based upon the
Annual EBITDA for the preceding four quarters.
(c) Section 5.8(e) of the Credit Agreement is hereby deleted and the
following substituted therefor:
(c) Unsecured Debt Ratio. As of the last day of each calendar quarter,
the Unsecured Debt Ratio will not be less than (A) 0.87:1 commencing
as of October 1, 1998 through March 31, 1999, (B) 0.90:1 from April 1,
1999 through June 30, 1999, (C) 0.95:1 from July 1, 1999 through
September 30, 1999, and (D) 1.0:1 thereafter.
(d) Section 5.8(g) of the Credit Agreement is hereby deleted and the
following substituted therefor:
(d) Minimum Consolidated Tangible Net Worth. The Consolidated Tangible
Net Worth will at no time be less than the sum of (i) $2,000,000,000,
(ii) 75% of all Net Offering Proceeds set forth in clause (x) of the
definition thereof, and (iii) in the case of convertible Debt in
existence as of the Closing Date, upon conversion of any such Debt to
an equity interest in the Borrower or MOC, 75% of the principal amount
of such Debt so converted.
(e) Section 5.8(h) of the Credit Agreement is hereby deleted and the
following substituted therefor:
7
<PAGE>
(e) Limitation on Secured Debt. Secured Debt of the Borrower, MOC and
their Consolidated Subsidiaries shall at no time exceed ten percent
(10%) of Total Fair Market Value, exclusive of any Mort gages
delivered in connection with the Security Conversion, the Pledges, any
mortgage delivered to Merrill Lynch International, encumbering the
Santa Anita Racetrack to secure the Borrower's obligations under the
FEITS Agreement, or any intercompany debt otherwise permitted
hereunder.
15. Restriction on Fundamental Changes; Operation and Control. Section
5.9(a) of the Credit Agreement is hereby deleted and the following substituted
therefor:
(a) None of the Borrower, MOC or any Subsidiary shall (i)enter into
any merger or consolidation (not including mergers and consoli dations
with each other), unless the Borrower, MOC or such Subsid iary, as the
case may be, is the surviving entity, or (ii) except in the case of a
Subsidiary of either the Borrower or MOC (unless the same shall
constitute a substantial part of the Borrower's or MOC's business or
property), liquidate, wind-up or dissolve (or suffer any liquidation
or dissolution), discontinue its business or convey, lease, sell,
transfer or otherwise dispose of (except in each case to another
Subsidiary), in one transaction or series of transactions, any substan
tial part of its business or property, or (iii) sell or transfer all
or any substantial part, to one Person or a group of related Persons
(other than a Consolidated Subsidiary of the Borrower or MOC), (A) the
ownership, financing or operation of the Healthcare Properties, or (B)
the ownership, financing or operation of the Hotel Properties (it
being understood that such a transfer to a Consolidated Subsidiary and
the subsequent dividending out of the stock thereof, or any other form
of "spin-off" transaction shall be deemed to be a transfer for
purposes hereof), without the prior written consent of the Banks in
their sole discretion.
8
<PAGE>
16. Use of Proceeds. Section 5.16 of the Credit Agreement is hereby amended
by deleting the second sentence thereof and substituting the following therefor:
The Borrower may also use the proceeds of the Tranche A Loans to repay
its obligations under the FEITS Agreement, but only to the extent that
the Borrower shall have previously repaid the Tranche A Loans, in
accordance with the provisions of Section 2.10(b), with the Net Cash
Proceeds from the sale of the Santa Anita Racetrack (including
associated artwork).
17. Subsidiaries Guaranty. Section 5.22 is hereby deleted and the follow
ing substituted therefor:
Section 5.22. Guaranties, Pledges and Subordination Agreements. The
Borrower, simultaneously herewith, shall cause MOC, as well as each of
the Borrower's and MOC's Consolidated Subsidiaries (other than, in the
case of the Borrower, those Subsidiaries set forth on Schedule 5.22
attached hereto, consisting of those Persons whose assets are
currently contemplated to be sold to HealthSouth Corpora tion
(provided, however, if such sale is not consummated on or before
February 15, 1999, the Borrower promptly shall cause each such
Subsidiary to deliver a Guaranty and a Pledge), and, in the case of
MOC, MOC Healthcare Company, The Santa Anita Companies, Inc. and its
Subsidiaries, Meditrust Acquisition Company and Meditrust Operating
LLC) and, in the case of the Borrower and MOC, any Subsidiaries
holding only liquor licenses, to execute and deliver to the
Administrative Agent, for the benefit of the Banks, a Guaranty and the
Pledges. In addition, within twenty (20) Domestic Business Days' after
the creation of any Subsidiary or Minority Holding, the Borrower
shall, or shall cause MOC to, cause any such Subsidiary to execute and
deliver to the Administrative Agent, for the benefit of the Banks, a
Guaranty and the applicable parent(s) of such Subsidiary or Minority
Holding, to execute and deliver to the Administrative Agent, for the
benefit of the Banks and the trustee(s) for the benefit of the
Bondholders, the applicable Pledge. The
9
<PAGE>
Banks hereby acknowledge and agree that, provided that no Event of
Default shall have occurred and be continuing, the Borrower and MOC
shall have the right to sell, or cause to be sold, the assets or stock
of, or other ownership interests in, any such Subsidiary or Minority
Holding, and to accept prepayment or repayment of any Healthcare
Mortgage or intercompany loan, free and clear of the Lien of the
applicable Pledge, provided further that sale, prepayment or repayment
shall otherwise be in accordance with the provisions of the Credit
Agreement, including, without limitation, Sections 2.10 and 5.21. In
addition, the Banks further acknowledge and agree that, provided no
Event of Default shall have occurred and be continuing, the Borrower
and MOC shall have the right to transfer assets, stock and other
ownership interests among their respective Subsidiaries and Minority
Holdings, to form additional Subsidiaries and Minority Holdings, to
merge Subsidiaries with each other or their parent entities, and to
dissolve Subsidiaries that no longer hold any assets, provided,
however, that at all times the Administrative Agent shall hold, for
the benefit of the Banks and the Bondholders, a perfected first
priority Lien on the stock, partnership, membership or other ownership
interests in all existing Subsidiaries and Minority Hold ings of the
Borrower and MOC (except as specifically set forth above).
(b) The Borrower, simultaneously herewith, shall cause MOC, as well as
each of the Borrower's and MOC's applicable Consolidated Subsidiaries
that are the holders of any intercompany debt to execute and deliver
to the Administrative Agent, for the benefit of the Banks and
Bondholders, a Subordination Agreement. In addition, if at any time
during the term of the Loans, any other Subsidiary shall be come the
holder of any debt, the obligor of which is the Borrower, MOC or any
Subsidiary or either, then such Subsidiary shall imme diately execute
and deliver to the Administrative Agent, for the benefit of the Banks
and Bondholders, together with the applicable Pledge, a Subordination
Agreement.
18. Additional Covenants. (a) The following Section 5.23 is hereby added to
the Credit Agreement:
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<PAGE>
Section 5.23. The FEITS Agreement. The Borrower shall not amend the
FEITS Agreement as in effect as of today (the "Current FEITS
Agreement") in any way that would result in (i) any addi tional cash
payments to Merrill Lynch International or any of its affiliates, (ii)
an increase in the Spread (as defined in the Current FEITS Agreement),
(iii) the granting of any additional mortgage collateral, or (iv)
convert any obligations of the Borrower under the Current FEITS
Agreement into "Debt" or other recourse contractual obligation. If an
Event of Default shall have occurred and be contin uing, the Borrower
shall not amend or modify the Current FEITS Agreement in any way. In
addition, in no event shall any preferred stock issued by the
Borrower, MOC, or any Subsidiary in connec tion with the settlement of
the FEITS Agreement include a put option prior to July 17, 2003. The
Borrower will use its best efforts to settle the FEITS Agreement in
accordance with the provisions hereof on or before November 30, 1998.
(b) The following Section 5.24 is hereby added to the Credit Agreement:
Section 5.24. Repurchase of Securities. The Borrower shall not, and
shall not permit MOC or any of their Consolidated Subsidiaries to
repurchase any of their stock or prepay any of the junior securi ties,
other than in connection with the settlement of the FEITS Agreement,
as contemplated by Section 5.23 hereof.
(c) The following Section 5.25 is hereby added to the Credit Agreement:
Section 5.25. Healthcare Investments. In the event that the Borrower,
MOC or any of their Subsidiaries makes any payment to Merrill Lynch
International or any of its Affiliates (collectively, "Merrill Lynch")
pursuant to Sections 4.2(ii) or 4.3 of the Settlement Agreement, dated
as of November 11, 1998, which constitutes part of the FEITS
Agreement, or as a Black-out Period Extension Fee (as defined in the
Amendment to Purchase Agreement, dated as of November 11, 1998, which
constitutes a part of the FEITS Agreement) (the "Merrill Lynch Cash
Payments"), then for the period from January 1, 1999 through December
31, 1999, the Borrower and/or MOC shall not, and shall not permit any
of their Subsidiaries to grant mortgage loans secured by Healthcare
Proper-
11
<PAGE>
ties or acquire Healthcare Properties under transactions that are not
committed to as of November 23, 1998 (by contract, commitment, lease
or otherwise) (the "Healthcare Investments"), the amount of which
shall exceed $125,000,000 in the aggregate, less any Merrill Lynch
Cash Payments (the "Healthcare Investment Cap"). Notwithstanding the
foregoing, however, (i) if the Borrower, MOC and/or their Subsidiaries
complete one or more offerings or private place ments of Securities of
not less than $100,000,000, the Healthcare Investment Cap shall be
equal to $125,000,000, and (ii) this Section 5.25 shall be of no
further force or effect at such time as the Bor rower, MOC and/or
their Subsidiaries shall have completed one or more offerings or
private placements of Securities equal to not less than the sum of
$100,000,000 and the Merrill Lynch Cash Payments actually made. For
purposes of the foregoing, (a) Healthcare Invest ments shall not
include refinancings, substitutions of properties or the like, to the
extent that such transactions do not constitute the investment of
additional funds, and (b) the Merrill Lynch Cash Payments shall be
reduced by the amount of Net Cash Proceeds attributable to the sale of
the Santa Anita Artwork.
19. Events of Default. The following Section 6.1(p) is hereby added to the
Credit Agreement:
(p) the filing group under Section 13(d) of the Securities Exchange
Act of 1934, as amended, consisting of the Bass Brothers interests,
Taylor & Co., and their affiliates do not maintain ownership of at
least 10 million shares of common stock of the Borrower through
December 31, 1999 (unless a reduction is required to maintain the
Borrower's status as a REIT).
20. Effective Date. This Amendment shall become effective when each of the
following conditions is satisfied (or waived by the Required Banks) (the date
such conditions are satisfied or waived being deemed the "Effective Date"):
(a) the Borrower shall have executed and delivered to the Adminis
trative Agent a duly executed original of this Amendment;
12
<PAGE>
(b) the Required Banks shall have executed and delivered to the
Administrative Agent a duly executed original of this Amendment;
(c) MOC shall have executed and delivered to the Administrative Agent
a duly executed original of the Confirmation of Guaranty;
(d) each of the Guarantors (as defined in the Guaranty) shall have
executed and delivered to the Administrative Agent a duly executed
original of the Guaranty;
(e) each of the parties thereto shall have executed and delivered to
the Administrative Agent duly executed originals of each of the
Pledges;
(f) each of the Affiliated Lenders (as defined in the Subordination
Agreement) shall have executed and delivered to the Administrative
Agent a duly executed original of the Subordination Agreement;
(g) Meditrust Mortgage Investments, Inc. shall have delivered to the
Administrative Agent all original executed notes evidencing the
Healthcare Mortgages, endorsed in blank, executed assignments in blank
of the Healthcare Mortgages and related recorded documents, in
recordable form, executed assignments in blank of all unrecorded
documents executed in connection with the Healthcare Mortgages,
together with UCC-3 Financing Statements, in blank;
(h) the Borrower and Meditrust Mortgage Investments, Inc. shall have
delivered to the Administrative Agent all original executed
Intercompany Notes (as defined in the Subordination Agreement),
endorsed in blank;
(i) the Pledgors (as defined in the Equity Interests Pledge and Secu
rity Agreement) shall have delivered to the Administrative Agent all
original stock certificates in connection with pledges thereunder of
interests in corporations, together with executed stock powers, in
blank;
(j) each of the pledgors under the Pledges shall have executed and
delivered to the Administrative Agent UCC-1 Financing Statements;
(k) the Administrative Agent shall have received an opinion of Nutter,
McClennen & Fish, LLP and Goodwin, Procter & Hoar LLP, counsel for the
Borrower, MOC and the other parties (the "Other Parties") to the
Pledges, the Guaranty and the Subordination Agreement (other than the
Administrative Agent), acceptable to the Administrative Agent, the
Banks and their counsel;
(l) the Administrative Agent shall have received all documents the
Administrative Agent may reasonably request relating to the exis-
13
<PAGE>
tence of the Borrower, MOC, and the Other Parties, the authority for
and the validity of this Amendment, the Pledges, the Subordina tion
Agreement and the other documents executed in connection therewith,
and any other matters relevant hereto, all in form and substance
reasonably satisfactory to the Administrative Agent. Such
documentation shall include, without limitation, the certificate of
incorporation and by-laws (or other organizational documents) of the
Borrower, MOC, and the Other Parties, as amended, modified or
supplemented prior to the Effective Date, each certified to be true,
correct and complete by an officer of the Borrower, MOC or the Other
Parties, as of a date not more than ten (10) days prior to the
Effective Date, together with a good standing certificate from the
Secretary of State (or the equivalent thereof) of the State of Dela
ware with respect to the Borrower and MOC and from the applicable
Secretary of State with respect to each of the Other Parties, each to
be dated not more than ten (10) days prior to the Closing Date;
(m) the Administrative Agent shall have received all certificates,
agreements and other documents and papers referred to in this
Amendment, unless otherwise specified, in sufficient counterparts,
satisfactory in form and substance to the Administrative Agent in its
reasonable discretion;
(n) the Administrative Agent shall have received UCC-1 searches,
ordered by the Borrower, with respect to the Borrower, MOC and each of
the Other Parties that are parties to the Pledges;
(o) the Borrower, MOC and each of the Other Parties shall have taken
all actions required to authorize the execution and delivery of this
Amendment, the Pledges, the Subordination Agreement, the Guaranty, the
Confirmation of Guaranty and the other documents executed in
connection herewith and the performance thereof by the Borrower, MOC
and the Other Parties;
(p) the Administrative Agent shall have received, for its and all
other Banks' account, a fee equal to 0.125% of the Commitments, and
the reasonable fees and expenses accrued through the Effective Date of
Skadden, Arps, Slate, Meagher & Flom LLP;
(q) the representations and warranties of the Borrower contained in
the Credit Agreement shall be true and correct in all material re
spects on and as of the Effective Date; and
(r) receipt by the Administrative Agent and the Banks of a certifi
cate of an officer of the Borrower certifying that the Borrower is in
14
<PAGE>
compliance with all covenants of the Borrower contained in the Credit
Agreement, including, without limitation, the requirements of Section
5.8, as of the Effective Date.
21. Post-Closing. Notwithstanding anything contained herein to the
contrary, on or before December 14, 1998, the Borrower shall deliver to the
Administrative Agent, (i) a complete table of contents of the mortgage loan
files with respect to all the Healthcare Mortgages, (ii) recording information
(which may be in the form of copies of the applicable pages of the mortgagee
title insurance policies) with respect to each Healthcare Mortgage, (iii)
executed amendments to any of the Subsidiary Operating Agreements set forth on
Schedule 3 to the Equity Interest Pledge and Security Agreement, so as to permit
the pledge pursuant thereto, as well as any transfer, whether by foreclosure or
otherwise, pursuant thereto, provided, however, that with respect to those
amendments to Subsidiary Operating Agreements that require the consent of a
Person that is not an Affiliate of the Borrower or MOC, the Borrower and/or MOC
shall only be required to use reasonable, good faith efforts to deliver the
same, and (iv) copies of the Subsidiary Operating Agreements and other
documents, if any, set forth on Schedule 4 to the Equity Interest Pledge and
Security Agreement. In addition, at any time during the continuance of an Event
of Default, upon request by the Administrative Agent, the Borrower promptly
shall deliver to the Administrative Agent copies of the entire Healthcare
Mortgages loan files.
15
<PAGE>
22. Entire Agreement. This Amendment constitutes the entire and final
agreement among the parties hereto with respect to the subject matter hereof and
there are no other agreements, understandings, undertakings, representations or
warranties among the parties hereto with respect to the subject matter hereof
except as set forth herein.
23. Governing Law. This Amendment shall be governed by, and con strued in
accordance with, the law of the State of New York.
24. Counterparts. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
agree ment, and any of the parties hereto may execute this Amendment by signing
any such counterpart.
25. Headings, Etc. Section or other headings contained in this Amendment
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Amendment.
26. No Further Modifications. Except as modified herein, all of the terms
and conditions of the Credit Agreement, as modified hereby shall remain in full
force and effect and, as modified hereby, the Borrower confirms and ratifies all
of the terms, covenants and conditions of the Credit Agreement in all respects.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
BORROWER: MEDITRUST CORPORATION
By: /s/ Michael Benjamin
------------------------------
Name: Michael S. Benjamin
Title: Senior Vice President
17
<PAGE>
BANKS:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as a
Bank and as Administrative Agent
By: /s/ Richard Dugoff
------------------------------
Name: Richard Dugoff
Title: Vice President
18
<PAGE>
BANKERS TRUST COMPANY, as a Bank
and as Syndication Agent
By: /s/ G. Andrew Keith
------------------------------
Name: G. Andrew Keith
Title: Vice President
19
<PAGE>
FLEET NATIONAL BANK, as a Bank and as
Co-Documentation Agent
By: /s/ Cliff Mellor
------------------------------
Name: Cliff Mellor
Title: Vice President
20
<PAGE>
BANKBOSTON, N.A., as a Bank and as Co-
Documentation Agent
By: /s/ Douglas Novitch
------------------------------
Name: Douglas Novitch
Title:
21
<PAGE>
NATIONSBANK, N.A., as a Bank
By: /s/ Forrest Scott Singhoff
------------------------------
Name: Forrest Scott Singhoff
Title: Senior Vice President
22
<PAGE>
VIA BANQUE, as a Bank
By:___________________________________
Name:
Title:
23
<PAGE>
OAK BROOK BANK, as a Bank
By:___________________________________
Name:
Title:
24
<PAGE>
PARIBAS CAPITAL FUNDING LLC, as a
Bank
By:___________________________________
Name:
Title:
25
<PAGE>
THE TRAVELERS INSURANCE COMPANY,
as a Bank
By:___________________________________
Name:
Title:
26
<PAGE>
TORONTO DOMINION (TEXAS), INC., as a
Bank
By:___________________________________
Name:
Title:
27
<PAGE>
CANADIAN IMPERIAL BANK OF COM
MERCE, as a Bank
By:___________________________________
Name:
Title:
28
<PAGE>
ML CLO XIX STERLING (CAYMAN) LTD.
By: Sterling Asset Manager, LLC, as
its Investment Advisor
By:_______________________________
Name:
Title:
29
<PAGE>
MERRILL LYNCH GLOBAL INVESTMENT
SERIES: INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management LP,
as Investment Advisor
By:_______________________________
Name:
Title:
30
<PAGE>
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management LP,
as Investment Advisor
By:_______________________________
Name:
Title:
31
<PAGE>
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: Merrill Lynch Asset management LP,
as Investment Advisor
By:_______________________________
Name:
Title:
32
<PAGE>
MERRILL, LYNCH, PIERCE, FENNER &
SMITH INC.
By:___________________________________
Name:
Title:
33
<PAGE>
VAN KAMPEN AMERICAN CAPITAL
SENIOR FLOATING RATE FUND
By:___________________________________
Name:
Title:
34
<PAGE>
VAN KAMPEN AMERICAN CAPITAL
SENIOR INCOME TRUST
By:___________________________________
Name:
Title:
35
<PAGE>
AERIES FINANCE LTD.
By:___________________________________
Name:
Title:
36
<PAGE>
CERES FINANCE LTD.
By:___________________________________
Name:
Title:
37
<PAGE>
STRATA FUNDING LTD.
By:___________________________________
Name:
Title:
38
<PAGE>
MORGAN STANLEY SENIOR FUNDING,
INC.
By:___________________________________
Name:
Title:
39
<PAGE>
CREDITANSTALT CORPORATE FINANCE
INC.
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
40
<PAGE>
BANK ONE, ARIZONA, NA
By:___________________________________
Name:
Title:
41
<PAGE>
BAYERISCHE HYPO- UND VEREINSBANK
AG, NEW YORK BRANCH
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
42
<PAGE>
CAPTIVA FINANCE LTD.
By:___________________________________
Name:
Title:
43
<PAGE>
CAPTIVA II FINANCE LTD.
By:___________________________________
Name:
Title:
44
<PAGE>
THE CHASE MANHATTAN BANK
By:___________________________________
Name:
Title:
45
<PAGE>
DLJ CAPITAL FUNDING, INC.
By:___________________________________
Name:
Title:
46
<PAGE>
DRESDNER KLEINWORT BENSON
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
47
<PAGE>
ERSTE BANK NEW YORK BRANCH
By:___________________________________
Name:
Title:
By:___________________________________
Name:
Title:
48
<PAGE>
FIRST UNION NATIONAL BANK
By:___________________________________
Name:
Title:
49
<PAGE>
KEY CORPORATE CAPITAL INC.
By:___________________________________
Name:
Title:
50
<PAGE>
KZH III LLC
By:___________________________________
Name:
Title:
51
<PAGE>
KZH SHOSHONE LLC
By:___________________________________
Name:
Title:
52
<PAGE>
KZH STERLING LLC
By:___________________________________
Name:
Title:
53
<PAGE>
LEHMAN SYNDICATED LOAN FUNDING
TRUST
BY: LEHMAN COMMERCIAL PAPER
INC., NOT IN ITS INDIVIDUAL
CAPACITY BUT SOLELY AS ASSET
MANAGER
By:_______________________________
Name:
Title:
54
<PAGE>
ML CBO IV (CAYMAN) LTD.
By: Highland Capital Management, L.P.,
as Collateral Manager
By:_______________________________
Name:
Title:
55
<PAGE>
MOUNTAIN CLO TRUST
By:___________________________________
Name:
Title:
56
<PAGE>
OXFORD STRATEGIC INCOME FUND
By: Eaton Vance Management
as Investment Advisor
By:_______________________________
Name:
Title:
57
<PAGE>
PAM CAPITAL FUNDING L.P.
By: Highland Capital Management, as
Collateral Agent
By:_______________________________
Name:
Title:
58
<PAGE>
PAMCO CAYMAN LTD.
By: Highland Capital Management, as
Collateral Manager
By:_______________________________
Name:
Title:
59
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research
as Investment Advisor
By:_____________________________
Name:
Title:
60
<PAGE>
WAINWRIGHT BANK & TRUST COMPANY
By:___________________________________
Name:
Title:
61
<PAGE>
SCHEDULE 9
----------
SECURITIES
1. 7.4% Senior Notes due 2005, under Indenture, dated as of September 15,
1995, between La Quinta Inns, Inc. and U.S. Trust Company of Texas, N.A.
2. 7.25% Senior Notes due 2004, under Indenture, dated as of September 15,
1995, between La Quinta Inns, Inc. and U.S. Trust Company of Texas, N.A.
3. Medium term Notes due from 9 Months to 30 Months, under Indenture, dated as
of September 15, 1995, between La Quinta Inns, Inc. and U.S. Trust Company
of Texas, N.A.
4. 7.375% Notes due July 15, 2000 pursuant to the First Supplemental Inden
ture, dated as of July 26, 1995, to Indenture, dated as of July 26, 1995,
between Meditrust and Fleet National Bank, as trustee, as supplemented by
the Eighth Supplemental Indenture, dated as of November 5, 1997, between
Meditrust Corporation, formerly known as Santa Anita Realty Enterprises,
Inc. (successor by merger to Meditrust), and State Street Bank and Trust
Company (successor trustee to Fleet National Bank).
5. 7.60% Notes due July 15, 2001 pursuant to the First Supplemental Indenture,
dated as of July 26, 1995, to Indenture, dated as of July 26, 1995, between
Meditrust and Fleet National Bank, as trustee, as supplemented by the
Eighth Supplemental Indenture, dated as of November 5, 1997, between
Meditrust Corporation, formerly known as Santa Anita Realty Enterprises,
Inc. (succes sor by merger to Meditrust), and State Street Bank and Trust
Company (successor trustee to Fleet National Bank).
6. 8.54% Convertible Senior Notes due July 1, 2000 pursuant to the Second
Supplemental Indenture, dated as of July 28, 1995, to Indenture, dated as
of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as
supplemented by the Eighth Supplemental Indenture, dated as of November 5,
1997, between Meditrust Corporation, formerly known as Santa Anita Realty
Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank
and Trust Company (successor trustee to Fleet National Bank).
7. 8.56% Convertible Senior Notes due July 1, 2002 pursuant to the Second
Supplemental Indenture, dated as of July 28, 1995, to Indenture, dated as
of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as
supplemented by the Eighth Supplemental Indenture, dated as of November 5,
1997, between Meditrust Corporation, formerly known as Santa Anita
62
<PAGE>
Realty Enterprises, Inc. (successor by merger to Meditrust), and State
Street Bank and Trust Company (successor trustee to Fleet National Bank).
8. Medium-Term Notes due from 9 Months to 30 Years from Date of Issue,
pursuant to the Third Supplemental Indenture, dated as of August 10, 1995,
to Indenture, dated as of July 26, 1995, between Meditrust and Fleet
National Bank, as trustee, as supplemented by the Eighth Supplemental
Indenture, dated as of November 5, 1997, between Meditrust Corporation,
formerly known as Santa Anita Realty Enterprises, Inc. (successor by merger
to Meditrust), and State Street Bank and Trust Company (successor trustee
to Fleet National Bank).
9. 7.82% Notes due September 10, 2026, pursuant to the Fourth Supplemental
Indenture, dated as of September 10, 1996, to Indenture, dated as of July
26, 1995, between Meditrust and Fleet National Bank, as trustee, as supple
mented by the Eighth Supplemental Indenture, dated as of November 5, 1997,
between Meditrust Corporation, formerly known as Santa Anita Realty
Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank
and Trust Company (successor trustee to Fleet National Bank).
10. 7% Notes due August 15, 2007, pursuant to the Fifth Supplemental Inden
ture, dated as of August 12, 1997, to Indenture, dated as of July 26, 1995,
between Meditrust and Fleet National Bank, as trustee, as supplemented by
the Eighth Supplemental Indenture, dated as of November 5, 1997, between
Meditrust Corporation, formerly known as Santa Anita Realty Enterprises,
Inc. (successor by merger to Meditrust), and State Street Bank and Trust
Company (successor trustee to Fleet National Bank).
63
<PAGE>
SCHEDULE 5.22
-------------
EXCLUDED SUBSIDIARIES
Northeast Arkansas Rehabilitation Limited Partnership
Topeka Associates Limited Partnership
Northern Louisiana Associates Limited Partnership
Acadian Healthcare Associates Limited Partnership
Harco Associates Limited Partnership
Fort Worth Rehabilitation Limited Partnership
Exhibit 11
MEDITRUST CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C> <C>
Basic:
Weighted average number of shares outstanding ......... 121,820 76,274 71,445
Net income from continuing operations ................. $160,931 $162,324 $157,976
Preferred stock dividends ............................. (8,444) -- --
Income from continuing operations available to
common shareholders .................................. $152,487 $162,324 $157,976
Per share amounts:
Net income per share .................................. (A) $ 1.25 $ 2.13 $ 2.21
Diluted:
Weighted average number of shares used in Basic
calculation .......................................... 121,820 76,274 71,445
Dilutive effect of:
Contingently issuable shares .......................... 4,757 -- --
Stock options ......................................... 236 733 306
Diluted weighted average shares and equivalent
shares outstanding ................................... (B) 126,813 77,007 71,751
Net income from continuing operations ................. $160,931 $162,324 $157,976
Preferred stock dividends ............................. (8,444) -- --
Income from continuing operations available to
common shareholders .................................. $152,487 $162,324 $157,976
Per share amounts:
Net income per share .................................. (A) $ 1.20 $ 2.11 $ 2.20
</TABLE>
- - ------------
(A) This calculation is submitted in accordance with Regulation S-K item 601(b)
(11)
(B) Convertible debentures are not included due to their antidilutive effect.
Exhibit 11
MEDITRUST OPERATING COMPANY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1998 1997 1996
------------- -------------- -----
<S> <C> <C> <C> <C>
Basic: (C)
Weighted average number of shares outstanding ......... 120,515 82,490 n/a
Loss from continuing operations ....................... $(19,851) $ (362)
Preferred stock dividends ............................. -- --
Loss from continuing operations available to common
shareholders ......................................... $(19,851) $ (362) n/a
Per share amounts:
Net loss per share .................................... (A) $ (0.16) (0.01) n/a
Diluted:
Weighted average number of shares used in Basic
calculation .......................................... 120,515 82,490 n/a
Dilutive effect of:
Contingently issuable shares .......................... -- --
Stock options ......................................... -- --
Diluted weighted average shares and equivalent
shares outstanding ................................... (B) 120,515 82,490 n/a
Net loss from continuing operations ................... $(19,851) $ (362)
Preferred stock dividends ............................. -- --
Loss from continuing operations available to common
shareholders ......................................... $(19,851) $ (362) n/a
Per share amounts:
Net loss per share .................................... (A) $ (0.16) $ (0.01) n/a
</TABLE>
- - ------------
(A) This calculation is submitted in accordance with Regulation S-K item 601(b)
(11)
(B) Convertible debentures are not included due to their antidilutive effect.
(C) From inception date of Octotober 3, 1997 to December 31, 1997
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
REGISTRANT: MEDITRUST CORPORATION
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
State of
Name Incorporation
- - ------------------------------------------ --------------
Meditrust Acquisition Corporation III Delaware
Meditrust of Arkansas, Inc. Arkansas
Meditrust of Baton Rouge, Inc. Louisiana
Meditrust of California, Inc. Delaware
Meditrust Company LLC Delaware
Meditrust of Connecticut, Inc. Delaware
Meditrust Finance Corporation Delaware
Meditrust Financial Services Corporation Delaware
Meditrust of Bedford, Inc. Delaware
Meditrust of Houston, Inc. Massachusetts
Meditrust of Kansas, Inc. Kansas
Meditrust of Louisiana, Inc. Louisiana
Meditrust Management Corp. Delaware
Meditrust Mortgage Investments, Inc. Delaware
Meditrust of the U.K., Inc. Delaware
MT General, LLC Delaware
MT Limited I, LLC Delaware
New England Finance Corporation Delaware
Paramount Management Services, Inc. Delaware
Paramount Real Estate Services, Inc. Delaware
Meditrust Golf Group, Inc. Delaware
Escondido Consulting, Inc. California
Foothills Holding Company, Inc. Nevada
Bellows Golf Group, Inc. Arizona
OVLC Management Corporation California
Oceanside Golf Management Corp. California
</TABLE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
REGISTRANT: MEDITRUST CORPORATION
(Continued)
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
State of
Name Incorporation
- - ------------------------------------- --------------
Pecan Grove Country Club Texas
Lakeway Golf Clubs, Inc. Texas
Woodcrest Golf Club, Inc. Texas
Virginia Golf Country Club, Inc. Virginia
CSR Golf Group, Inc. Texas
ELS Golf Group, Inc. Florida
La Quinta Financial Corporation Texas
La Quinta Realty Corporation Texas
La Quinta Plaza, Inc. Texas
La Quinta Investments, Inc. Delaware
La Quinta Acquisition Corporation Delaware
La Quinta of Lubbock, Inc. Texas
La Quinta Inns of Puerto Rico, Inc. Delaware
Meditrust Hotel Group, Inc. Delaware
Meditrust Golf Group II, Inc. Delaware
</TABLE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
REGISTRANT: MEDITRUST OPERATING COMPANY
SUBSIDIARY CORPORATIONS
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
State of
Name Incorporation
- - ------------------------------------------------- ---------------
The Cobblestone Golf Companies, Inc. Delaware
Cobblestone Enterprises of Arizona, Inc. Arizona
Cobblestone Enterprises of California, Inc. California
Cobblestone Enterprises of Virginia, Inc. Virginia
Cobblestone Enterprises of Florida, Inc. Florida
Texas Cobblestone Ventures, Inc. Texas
Cobblestone Beverage of Texas, Inc. Texas
Cobblestone Enterprises of Georgia, Inc. Georgia
ELW Water, Inc. Florida
Cobblestone Enterprises of North Carolina, Inc. North Carolina
Club Ranch Texas
The Liquor Club at Pecan Grove, Inc. Texas
Lakeways Clubs, Inc. Texas
Club Stonebridge Texas
Sweetwater Beverage, Inc. Texas
The La Quinta Company Delaware
La Quinta Inns, Inc. Delaware
MOC Holding Company Delaware
Robert H. Grant Corporation California
MOC -- Arcadia, Inc. Delaware
MOC -- SAE, Inc. California
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Meditrust Corporation and/or Meditrust Operating Company on Form S-8 (File Nos.
333-57483, 333-39771, 333-39771-01) and on Form S-3 (File Nos. 333-48051,
33-50835, 33-45979, 333-40055 and 333-40055-01) of our report dated February 8,
1999, except for Note 21 for which the date is March 10, 1999, on our audits of
the financial statements of The Meditrust Companies and Meditrust Corporation as
of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997
and 1996, and Meditrust Operating Company as of December 31, 1998 and 1997 and
for the year ended December 31, 1998 and the initial period ended December 31,
1997, and of our report dated February 8, 1999 on the financial statement
schedules of The Meditrust Companies as of December 31, 1998, which reports are
included in the Companies' Reports on Form 10-K.
/s/ PricewaterhouseCoopers, LLP
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1998 and the Consolidated
Statement of Income for the year ended December 31, 1998 of Meditrust
Corporation and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000313749
<NAME> MEDITRUST CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 292,694
<SECURITIES> 0
<RECEIVABLES> 42,039
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,097,553
<DEPRECIATION> 227,970
<TOTAL-ASSETS> 6,320,985
<CURRENT-LIABILITIES> 0
<BONDS> 3,301,722
0
70
<COMMON> 3,835,499
<OTHER-SE> (949,088)
<TOTAL-LIABILITY-AND-EQUITY> 6,320,985
<SALES> 0
<TOTAL-REVENUES> 518,872
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178,374
<INCOME-PRETAX> 160,931
<INCOME-TAX> 0
<INCOME-CONTINUING> 160,931
<DISCONTINUED> (295,875)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (134,944)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.13)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1998 and the Consolidated
Statement of Operations for the year ended December 31, 1998 of Meditrust
Operating Company and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000314661
<NAME> MEDITRUST OPERATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLALRS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 12,762
<SECURITIES> 0
<RECEIVABLES> 12,673
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 82,732
<PP&E> 31,655
<DEPRECIATION> 760
<TOTAL-ASSETS> 198,190
<CURRENT-LIABILITIES> 82,786
<BONDS> 0
0
0
<COMMON> 123,934
<OTHER-SE> (21,906)
<TOTAL-LIABILITY-AND-EQUITY> 198,190
<SALES> 0
<TOTAL-REVENUES> 253,249
<CGS> 0
<TOTAL-COSTS> 124,183
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 796
<INCOME-PRETAX> (24,651)
<INCOME-TAX> (4,800)
<INCOME-CONTINUING> (19,851)
<DISCONTINUED> 1,648
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,203)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
