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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / 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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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, MASSACHUSETTS NEEDHAM, MASSACHUSETTS
02494-9127 02494-9127
(Address of principal executive offices including zip code) (Address of principal executive offices including zip code)
(781) 433-6000 (781) 453-8062
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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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
71/2% 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 Series A Preferred Stock,
New York Stock Exchange
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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 February 4, 2000
was $485,429,000. The number of shares of common stock, par value $.10 per
share, outstanding as of February 4, 2000 for Meditrust Corporation was
142,520,988 and Meditrust Operating Company was 141,215,611.
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 2000 Annual Meeting of
Shareholders, to be filed pursuant to Regulation 14A...... III
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CERTAIN MATTERS DISCUSSED HEREIN MAY 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 THE 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 IN GENERAL, THE IDENTIFICATION OF SATISFACTORY PROSPECTIVE
BUYERS FOR HEALTHCARE RELATED ASSETS OF THE COMPANIES' AND THE AVAILABILITY OF
FINANCING FOR SUCH PROSPECTIVE BUYERS, THE AVAILABILITY OF FINANCING FOR THE
COMPANIES' CAPITAL INVESTMENT PROGRAM, INTEREST RATES, COMPETITION FOR HOTEL
SERVICES AND HEALTHCARE FACILITIES IN A GIVEN MARKET, 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, THE FURTHER
IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS TO, AS WELL AS THE FINANCIAL
CONDITION OF, OPERATORS OF REALTY'S HEALTHCARE RELATED ASSETS, INCLUDING THE
FILING FOR PROTECTION UNDER THE US BANKRUPTCY CODE BY ANY OPERATORS OF THE
COMPANIES HEALTHCARE ASSETS, THE IMPACT OF THE PROTECTION OFFERED UNDER THE US
BANKRUPTCY CODE FOR THOSE OPERATORS WHO HAVE ALREADY FILED FOR SUCH PROTECTION,
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.
ITEM 1. BUSINESS
THE MEDITRUST COMPANIES
GENERAL
The Meditrust Companies consist of two separate companies, Meditrust
Corporation ("Realty") and Meditrust Operating Company ("Operating"), 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. Realty is a REIT and
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." This structure permits the shares of common stock of
both companies to trade and to be 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 was adopted in July 1998. A more
detailed discussion of this legislation can be found on page 2 herein.
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REALTY
At December 31, 1999, Realty's real estate investments were in two principal
areas: healthcare related real estate and hotels. 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 either
leases facilities that it owns or invests in, or provides financing to,
third-party operators principally of long-term care (skilled nursing),
retirement and assisted living facilities and medical office buildings. In the
case of its hotels, 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 business conducted on the lodging related real
estate that it leases from Realty.
OPERATING
Operating operates the lodging related real estate owned or leased by
Realty. Operating does not conduct any activities related to Realty's healthcare
related real estate. Operating's business is conducted under the La
Quinta-Registered Trademark- brand name and is headquartered in Dallas, Texas.
As more fully described below, the La Quinta-Registered Trademark- brand name,
hotels and operations were acquired by The Meditrust Companies in July 1998.
DIVISIONS
The Meditrust Companies conduct their businesses and make their investments
through two principal divisions: healthcare related real estate and hotels. 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 business, which is conducted through the La
Quinta-Registered Trademark- division, consists of real estate assets owned by
Realty and operations performed by Operating.
HEALTHCARE--At January 31, 2000, Realty owns, invests in and provides
financing for 318 geographically dispersed healthcare facilities operated by
approximately 25 different third-party operators. As described below, during
1998, 1999, and into 2000, Realty has been selling its interests in certain
healthcare related properties.
LODGING--The Companies' lodging business is conducted under the La
Quinta-Registered Trademark- brand name. At January 31, 2000, the La
Quinta-Registered Trademark- division owns and operates an aggregate of 230 La
Quinta-Registered Trademark- Inns and 70 La Quinta-Registered Trademark- Inn &
Suites in 28 states with over 39,000 hotel rooms. La
Quinta-Registered Trademark- 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").
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 of the Companies from its headquarters, which was moved
from San Antonio, Texas to Dallas, Texas in August, 1999.
Additional segment information can be found in the financial statements and
the notes thereto appearing elsewhere in this Joint Annual Report on Form 10-K.
BACKGROUND--NOVEMBER 1998 COMPREHENSIVE RESTRUCTURING PLAN
The Meditrust Companies consummated the acquisition of Cobblestone
Holdings, Inc. (the "Cobblestone Merger") and the La Quinta Merger on May 29,
1998 and July 17, 1998, respectively. 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"), which limited 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
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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 (including in the golf and lodging industries) was
substantially limited. In addition, during the summer of 1998 and thereafter,
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.
During the third and fourth quarters of 1998, the Companies performed 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 "1998 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:
- 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;
- Continue to operate the Companies' healthcare and lodging businesses using
the existing paired-share REIT structure until the healthcare spin-off
takes place;
- Sell more than $1 billion of non-strategic assets, including the portfolio
of golf-related real estate and operating properties (the "Cobblestone
Golf Group"), the Santa Anita Racetrack and approximately $550 million of
healthcare properties;
- Use the proceeds from these asset sales to achieve significant near-term
debt reduction;
- Settle fully the Companies' forward equity issuance transaction ("FEIT")
with certain affiliates of Merrill Lynch & Co.; and
- Reduce capital investments to respond to current operating conditions in
each industry.
During the latter part of 1998 and throughout 1999, the Companies
implemented the various parts of the 1998 Plan including:
- The sale of more than $1.4 billion of assets, including the Cobblestone
Golf Group, the Santa Anita Racetrack and approximately $820 million of
healthcare properties;
- The repayment of more than $625 million in debt;
- The full settlement of the FEIT; and
- The realignment of capital investments to respond to the current operating
environment in the healthcare and lodging industries.
The Companies also endeavored to separate its healthcare and lodging
businesses. However, the ability to separate these businesses was contingent on
the ability of each business to obtain a separate credit facility. The ability
to obtain separate credit facilities was hindered by the capital markets
heightened uncertainty surrounding both the long-term healthcare and mid-priced
lodging industries. The Companies' boards of directors continued to evaluate the
Companies' businesses and the capital market's response to these businesses. As
a result, the boards considered the Companies' alternatives and, after such
consideration, adopted a reorganization plan that is no longer focused on the
separation of the businesses and the spin-off of the healthcare business.
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RECENT DEVELOPMENTS--ADOPTION OF FIVE POINT PLAN OF REORGANIZATION
On January 28, 2000, the Companies announced that their boards of directors
had approved a five-point plan of reorganization (the "Five Point Plan"). The
reorganization plan provides for:
- an orderly disposition of a significant portion of healthcare assets;
- suspension of the REIT common share dividend;
- expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- substantial reduction in debt; and
- future disciplined investment in the lodging division.
The intent of the Five Point Plan is to improve the overall financial
condition of the Companies by substantially deleveraging the balance sheet. The
Five Point Plan takes advantage of the Companies' demonstrated ability to sell
healthcare assets and use the proceeds from these sales to repay debt
obligations. Also, the suspension of the common dividend will provide additional
funds to repay debt and strengthen the Companies' balance sheet. These actions
will permit the Companies, when appropriate, to make disciplined investments to
position its lodging division to benefit from improving industry trends when the
supply/demand imbalance in its sector begins to moderate.
DIVESTITURE OF HEALTHCARE ASSETS
Consistent with the Five Point Plan, the Companies intend to implement an
orderly disposition of a significant portion of its healthcare assets. It is
anticipated that the proceeds generated from the sales of these assets will be
used to repay debt and substantially deleverage the Companies' balance sheet. A
number of factors have negatively impacted the long-term care (skilled nursing)
and assisted living sectors of the healthcare industry. These include the
federal government's shift to a Medicare prospective payment system in the
skilled nursing industry, increased labor costs, fill-up periods of longer
duration for assisted living facilities, increased regulation and tighter and
more costly capital markets for both healthcare operating and financing
companies. These factors have caused investment spreads to narrow and have
caused a significant decline in the growth rate in the assisted living and
nursing home industries. Therefore, a decision has been made to reduce the
Companies' investment in healthcare assets and focus its resources on its
lodging division. As of December 31, 1999, the Companies' healthcare portfolio
had a book value of approximately $2.2 billion. As part of the 1998 Plan and the
Five Point Plan, the Companies have generated gross proceeds from the sale of
healthcare assets which have permitted them to repay over $625 million of term
debt.
DIVIDEND
As part of the Five Point Plan, Realty suspended the payment of its common
share dividend. The suspension of the common share dividend will provide
additional liquidity to the Companies. Realty's common share dividend amounted
to approximately $65 million per quarter in 1999. The additional funds available
to the Companies as a result of the suspension of the common share dividend will
be used for debt repayment or, when appropriate, future disciplined lodging
investments consistent with the Five Point Plan.
Realty expects that its board of directors will declare the minimum
dividend, if any, required to maintain its REIT status in December 2000, which
will equal at least 95% of Realty's ordinary taxable income for the year ending
December 31, 2000. The timing and amount of the sales of the healthcare assets
as well as the operating results of both the healthcare and lodging divisions,
during the year 2000, will impact any minimum dividend required to maintain
Realty's REIT status. Realty expects that the 9% dividend for the Series A
preferred stock will continue to be declared and paid quarterly.
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DEBT REPAYMENT
The Five Point Plan contemplates that the funds generated from the sale of
healthcare assets and the available funds from the suspension of the common
share dividend will permit the Companies to repay a significant amount of debt
to substantially deleverage its balance sheet. The Companies have approximately
$210 million in debt that matures in 2000 and approximately $1.4 billion in debt
that matures in 2001. The Companies intend to repay $210 million of term debt
that matures in July 2000 through a combination of availability under its
revolving credit facility and the proceeds from the sale of healthcare related
assets. As previously announced on December 30, 1999, the Companies repaid
$250 million of its term debt that would have otherwise matured on January 17,
2000.
FUTURE DISCIPLINED LODGING INVESTMENT
As part of its Five Point Plan of reorganization, the Companies intend to
focus on enhancing the long-term growth potential of its lodging division.
Although La Quinta continues to be impacted by the supply/demand imbalance in
the mid-priced lodging segment, the Companies believe that by focusing on
internal growth and improving the efficiency of operations, the lodging division
will be positioned to benefit from improving industry trends when the
supply/demand imbalance begins to moderate. Given the long-term upside potential
in the sector, when deemed appropriate, some of the funds generated from the
healthcare divestitures and dividend suspension will be targeted for the
disciplined investment in the lodging division.
MANAGEMENT
The Companies' boards of directors are continuing their search for
candidates with significant lodging industry experience to fill the position of
chief executive officer in the reorganized Companies and are working with a
professional search firm to assist in this process.
CAPITAL TRANSACTIONS
FORWARD EQUITY TRANSACTION
During February 1998, the Companies entered into the FEIT with certain
affiliates of Merrill Lynch & Co., Inc. (together with its agent and successor
in interest, "MLI") pursuant to which MLI purchased shares of capital stock of
the Companies which were ultimately converted into paired shares. The FEIT was
designed to mature one year after issuance and provided MLI the right to sell
sufficient paired shares (including the shares originally purchased) to provide
MLI with a guaranteed return. The FEIT also included a purchase price adjustment
mechanism which, from time to time, resulted in the issuance of additional
paired shares to MLI as a result of declines in the paired shares' market price.
After announcing in November 1998 that the Companies intended to settle
fully the FEIT during December 1998, the Companies repurchased all of the paired
shares issued pursuant to the purchase price adjustment mechanism, as well as
some of the paired shares originally sold to MLI resulting in a reduction of the
Companies FEIT obligation from $277,000,000 to $120,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI 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 6,865,000 paired shares originally
issued to MLI in the FEIT. On April 1, 1999, the Companies fully settled the
FEIT by paying MLI $89,840,000 for the repurchase of the remaining 6,865,000
paired shares.
SERIES B PREFERRED STOCK
On October 7, 1999, Realty issued 1,000 shares of 9% Series B Cumulative
Redeemable Convertible Preferred Stock, par value $.10 per share (the "Series B
Preferred Stock") to the sole shareholder of
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Telematrix, Inc. ("Telematrix"), a Florida corporation which provides certain
telecommunications services to, among others, the lodging industry for all of
the common stock, par value $1.00 per share, of Telematrix.
CREDIT AGREEMENT
During July 1998, Realty entered into an unsecured bank facility (the
"Credit Facility") in an amount of $2,250,000,000. Subsequently in
November 1998, and again in March 1999, the Credit Facility was amended. Also
during 1999, $750,000,000 of the Credit Facility's principal was permanently
repaid. At December 31, 1999, the Credit Facility consisted of two
tranches--Tranche A, a revolving credit facility with total borrowing
availability of $850,000,000, and Tranche D, a $500,000,000 term loan. The
Credit Facility matures on July 17, 2001 and bears interest at the prime rate
plus 2.0% (or "Base Rate"), or LIBOR plus 2.875% and is secured by a pledge of
all of the Companies' subsidiaries' capital stock.
Of the $850,000,000 revolving tranche, $146,000,000 was available at
December 31, 1999, with interest at the Base Rate (10.5%) or LIBOR plus 2.875%
(9.375% at December 31, 1999). As of February 7, 2000, $266,000,000 was
available on the revolving tranche.
SHELF REGISTRATION STATEMENT
The Companies have an effective shelf registration statement on file with
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.
The Companies believe that various sources of capital available over the
next twelve months are adequate to finance pending real estate commitments,
mortgage financings and dividends. Over the next twelve months, if and when the
Companies identify appropriate investment opportunities, they may raise
additional capital through the sale of assets, common or preferred shares, the
issuance of additional long-term debt or through a securitization transaction.
CAPITAL REQUIREMENTS AND AVAILABILITY OF FINANCING
The Companies' business is capital intensive, and it will have significant
capital requirements in the future. The Companies' leverage could affect its
ability to obtain financing in the future or to undertake refinancings on terms
and subject to conditions deemed acceptable by the Companies. In the event that
the Companies' cash flow and working capital are not sufficient to fund the
Companies' 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 the
Companies to meet its obligations. Moreover, even if the Companies were able to
meet its obligations, its leveraged capital structure could significantly limit
its ability to finance its capital expenditures, to compete effectively or to
operate successfully under adverse economic conditions. Additionally, financial
and operating restrictions contained in the Companies' existing indebtedness may
limit the Companies' ability to secure additional financing, and may prevent the
Companies from engaging in transactions that might otherwise be beneficial to
the Companies and to holders of the Companies' common stock. The Companies'
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 the Companies' control.
SHORT-TERM INVESTMENTS
The Companies invest its cash in certain short-term investments during
interim periods between the receipt of revenues and payment of obligations and
dividends. Cash not invested in facilities may be invested in interest-bearing
bank accounts, certificates of deposit, short-term money-market securities,
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short-term United 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. The Companies' ability to make certain of these investments may be
limited by tax considerations. The Companies' return on these short-term
investments may be more or less than its return on real estate investments.
BORROWING POLICIES
The Companies may incur additional indebtedness when, in the opinion of the
boards, it is advisable. For short-term purposes, the Companies may, from time
to time, negotiate lines of credit, arrange for other short-term borrowings from
banks or others or issue commercial paper. The Companies may arrange for
long-term borrowing from banks, insurance companies, public offerings or private
placements to institutional investors.
In addition, the Companies may incur mortgage indebtedness on real estate
which it has acquired through purchase, foreclosure or otherwise. When terms are
deemed favorable, the Companies may invest in properties subject to existing
loans or mortgages. The Companies 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
The Ticket to Work and Work Incentives Improvement Act of 1999 (the "Act"),
signed into law by the President of the United States on December 17, 1999, has
modified certain provisions of federal income tax law applicable to REITs. All
of the changes described below will be effective with respect to the Companies
beginning after the year ending December 31, 2000. These changes include new
rules permitting a REIT to own up to 100% of the stock of a corporation (a
"taxable REIT subsidiary"), taxable as a C corporation, that may provide
non-customary services to the REIT's tenants and may engage in certain other
business activities. The taxable REIT subsidiary, however, cannot directly or
indirectly operate or manage a lodging or healthcare facility. Although the
taxable REIT subsidiary may lease a lodging facility (i.e., a hotel) from the
REIT (provided no gambling revenues were derived from the hotel or on its
premises), with the lodging facility operated by an "eligible independent
contractor," such eligible independent contractor must be actively engaged in
the trade or business of operating lodging facilities for persons or entities
unrelated to the REIT. On account of the foregoing restrictions imposed on the
use of taxable REIT subsidiaries in the case of lodging and healthcare
facilities, the opportunity for the Companies to make use of taxable REIT
subsidiaries will be limited.
The Act also replaces the former rule permitting a REIT to own more than 10%
of a corporate subsidiary by value, provided its ownership of the voting power
is limited to 10% (a "decontrolled subsidiary"), with a new rule prohibiting a
REIT from owning more than 10% of a corporation by vote or value, other than a
taxable REIT subsidiary (described above) or a "qualified REIT subsidiary" (a
wholly owned corporate subsidiary that is treated as part of the REIT for all
federal income tax purposes). Existing decontrolled subsidiaries are
grandfathered, but will lose such status if they engage in a substantial new
line of business or acquire any substantial new asset after July 12, 1999, other
than pursuant to a contract binding on such date and at all times thereafter
prior to acquisition. Accordingly, and taking into account the Companies'
general inability to utilize taxable REIT subsidiaries, the Act severely limits
the ability of Realty to own substantial ownership interests in taxable
corporate subsidiaries. Direct ownership by Realty of assets that otherwise
would be held in a decontrolled subsidiary may not be possible without
disqualifying Realty as a REIT, and transfer of such assets to Operating
similarly may not be possible without causing Realty to recognize taxable income
or jeopardizing the Companies' current grandfather status under the 1998
anti-paired share legislation enacted as part of the Reform Act.
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Other provisions in the Act include a reduction in the annual minimum
distribution requirement from 95% to 90% of its taxable income (excluding net
capital gain). Another provision permits a REIT to own and operate a healthcare
facility for at least two years (with extensions for up to another four years
possible) if the facility is acquired by the termination or expiration of a
lease, with net income with respect to such property subject to corporate tax
but not counted as disqualifying income for purposes of qualification as a REIT.
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 related to
the acquisition of the paired share structure or otherwise adversely affect the
Companies.
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 1999, Realty
invested primarily in (i) healthcare facilities located throughout the United
States, and (ii) lodging properties located throughout the western and southern
United States. As of December 31, 1999, Realty had investments in 656 facilities
consisting of 356 healthcare facilities and 300 hotels.
Realty intends to continue 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 had a net decrease in gross real estate investments of $628,828,000
during 1999 consisting of the following:
<TABLE>
<CAPTION>
TRANSACTIONS INCREASING TRANSACTIONS DECREASING
REAL ESTATE PORTFOLIO REAL ESTATE PORTFOLIO
- ----------------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C>
- - Providing development loan financing to - Sale of healthcare assets to operators of
third-party healthcare properties
- - Completing the construction of 13 La - Sale of Cobblestone Golf Group
Quinta Inn & Suites
- Repayment of principal on permanent
mortgage loans and development loans
</TABLE>
Realty's principal executive offices are located at 197 First Avenue, Suite
300, Needham, Massachusetts 02494-9127, 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 1998 Plan and the Five Point Plan and each of their
respective component parts, you are encouraged to read the section entitled
"Certain Factors You Should Consider" beginning on page 66 of this Joint Annual
Report on Form 10-K.
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HEALTHCARE RELATED REAL ESTATE
As of December 31, 1999, Realty had investments in 356 healthcare facilities
including 198 long-term care facilities, 117 retirement and assisted living
facilities, 34 medical office buildings, one acute care hospital campus and six
other healthcare facilities. Of Realty's 356 healthcare facilities, 205 are
directly owned by Realty. On February 2, 2000, Realty announced the sale of 23
medical office buildings, three medical office building mortgage loans and its
medical office building management company. Additionally, Realty announced the
sale of 12 assisted living facilities. At December 31, 1999, third-party
operators leased 181 of Realty's healthcare facilities, 24 medical office
buildings were leased to tenants of the facilities and 151 constituted
investments through the provision of permanent mortgage loan or development loan
financing. Realty has historically invested in high-quality healthcare
facilities that are managed by a diverse group of experienced third-party
operators. Realty achieved diversity in its healthcare property portfolio by
investing in several different sectors of the healthcare industry, and in
different geographic regions and provided financing to or leased properties to a
number of different third-party operators. Realty's healthcare properties are
located in 36 states and are operated by 25 different operators. A private
healthcare company and Sun Healthcare Group, Inc. operate approximately 40.5% of
Realty's healthcare real estate investments in the aggregate. No other
healthcare operator operates more than 10% of Realty's healthcare related real
estate investments.
INVESTMENTS
SALE/LEASEBACK TRANSACTIONS--During 1999, Realty provided funding of
$38,312,000 for ongoing construction of healthcare facilities committed to prior
to 1999. Realty leases 181 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 has historically earned fixed monthly rents, although in some
circumstances Realty has earned 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 1999, Realty provided $935,000 to
construct additions at facilities for which Realty already held a permanent
mortgage. The permanent mortgage financing provided by Realty has historically
consisted 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 1999, Realty provided $32,386,000 of
development funding for ongoing construction at facilities for which development
commenced prior to January 1, 1999. Historically, Realty has provided
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 1999, Realty received an aggregate
of $136,619,000 of principal payments on permanent mortgage loans from
third-party operators of healthcare facilities. Realty also received net
proceeds of $242,340,000 from the sale of three long-term care facilities, 40
assisted living facilities, one rehabilitation facility and one alcohol and
substance abuse treatment facility, which included certain assets sold in
connection with the implementation of the 1998 Plan. As part of the Five Point
Plan, Realty intends to sell a significant amount of its healthcare assets and
use the proceeds to substantially reduce its debt.
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,
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<PAGE>
through sale/leaseback transactions, of nursing homes located in the United
Kingdom. Realty does not have the right to vote in excess of 9.99% of the shares
of common stock of NHP plc. As of September 30, 1999 (NHP plc's year end), NHP
plc had invested approximately L630,020,000 in 343 nursing homes with a total of
approximately 17,822 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,
1999, the market value of this investment was $61,352,000 and is included in
Realty's and the Companies' financial statements. The resulting difference,
$4,148,000, 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 1,081,000 shares of capital
stock and warrants to purchase 5,000 shares of capital stock, in Balanced Care
Corporation, a healthcare operator. The aggregate cost of this investment is
$1,106,000, it has a market value of $1,426,000 at December 31, 1999 and is
included in Realty's and the Companies' financial statements. The difference of
$320,000 between the market value and the aggregate cost of the shares is
included in shareholders' equity in Realty's and the Companies' financial
statements.
FUTURE HEALTHCARE INVESTMENTS--As part of the Five Point Plan announced
January 28, 2000, Realty has decided to begin an orderly disposition of a
significant portion of its healthcare assets. 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 currently is not planning to make any new healthcare related real
estate investments. However, if and when Realty decided to make new investments,
in evaluating such potential investments Realty would consider 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) 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.
COMPETITION IN THE HEALTHCARE INDUSTRY
For healthcare investments, if and when Realty decided to make new
investments, it would compete with real estate partnerships, other real estate
investment trusts, banks and other investors generally in the acquisition,
leasing and financing of healthcare related facilities. As part of the Five
Point Plan, however, Realty is not planning to make any new investments in
healthcare related real estate.
The operators of Realty's healthcare investments 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 of
Realty's 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.
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MEDICARE, MEDICAID, BLUE CROSS AND OTHER PAYORS
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, the Balanced Budget Act ("BBA") was
enacted. The BBA 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") was 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 is being phased in over the next four years. PPS has resulted 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. During
1999, many operators of these long-term care facilities have experienced
liquidity problems and have cited the PPS reimbursement system as one of the
causes. One of Realty's largest operators, Sun Healthcare Group, Inc. filed for
protection under Chapter 11 of the U.S. Bankruptcy Code during the fourth
quarter of 1999. During January and February 2000, two other operators of
Realty's long-term care facilities, Integrated Health Services, Inc. and Mariner
Health Group, Inc., have also filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Other operators of Realty's facilities may also file for
protection under Chapter 11 of the U.S. Bankruptcy Code.
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 (SKILLED NURSING) 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 the physical buildings and
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. Long-term care 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.
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.
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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 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
requirements for psychiatric hospitals include 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, 1999, Realty had investments in 300 hotels including 230
La Quinta-Registered Trademark- Inns, 68 La Quinta-Registered Trademark- Inn &
Suites hotels and two hotels owned by Realty which are marketed under a brand
name other than La Quinta-Registered Trademark-. These hotels, which are located
in 28 states and have an aggregate of 39,000 rooms in service, are leased by
Realty (or the respective property owning subsidiary) to a subsidiary of
Operating. Additionally two La Quinta Inn & Suites hotels are owned and operated
by subsidiaries 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.
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HOTELS IN SERVICE
Realty's portfolio of hotels consists principally of wholly-owned hotels.
Realty (and previously through its predecessor, La Quinta Inns, Inc.) has
historically acquired either directly or with a development partner, real estate
upon which to develop a hotel. Realty's hotel division has historically
identified 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 business.
Realty leases two types of hotels, La Quinta-Registered Trademark- Inn and La
Quinta-Registered Trademark- Inn & Suites. La Quinta-Registered Trademark- Inns
consist of hotels with an average of 130 single rooms per hotel and are operated
in the mid-priced lodging segment. La Quinta Inn & Suites hotels offer single
rooms and also a select number of deluxe two-room suites with separate sitting
and sleeping areas, on-site amenities and are operated at the high-end of the
mid-priced segment.
HOTELS IN DEVELOPMENT
Currently, Realty does not have a plan to commence any new construction of
hotels until market conditions will foster such new development and the capital
markets are more appropriately accessible to finance any such new development.
Realty's lodging division will evaluate and concentrate on hotels in service in
order to maximize the overall return from Realty's lodging portfolio. Realty
intends to pursue development opportunities for La Quinta-Registered Trademark-
Inn & Suites, when, as and if appropriate.
SALE OF COBBLESTONE GOLF GROUP
On March 31, 1999, Realty, together with Operating, sold the subsidiaries
that owned 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. Realty no longer owns interests, directly or
indirectly, in any golf course properties.
EMPLOYEES
As of January 31, 2000, the operations of Realty were maintained by 31
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.
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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, we cannot assure you 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 hotels is subject to real property taxes. The real property
taxes on the hotels 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 currently operates the business
conducted on Realty's lodging related real estate. Operating does not operate
any businesses conducted on, or related to, Realty's healthcare related real
estate. As of December 31, 1999, Operating leased from Realty and managed 300
hotels. In addition, until Cobblestone Golf Group was sold, Operating also
leased or subleased from Realty 43 golf courses. 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 previously described, the Companies announced a comprehensive
restructuring plan during November 1998 that was designed to clarify the
Companies investment and operating strategy by focusing on the healthcare and
lodging business segments. As a result, Operating, together with Realty, sold
all of its subsidiaries that operated the businesses conducted on Realty's golf
course properties. Accordingly, Operating's business is now focused on the
lodging business.
Operating's principal executive offices are based at 197 First Avenue, Suite
100, Needham, Massachusetts 02494-9127, 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 1998 Plan and the Five Point Plan each of their respective
component parts, you are encouraged to read the section entitled "Certain
Factors You Should Consider" beginning on page 66 of this Joint Annual Report on
Form 10-K.
LODGING
The lodging portion of Operating's business is conducted under the La
Quinta-Registered Trademark- 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 66.6% and an
average daily room rate ("ADR") of $61.02 for the year ended December 31, 1999
and an occupancy percentage of 67.0% and an ADR of $59.29 for the five and one
half-month post merger period ended December 31, 1998. La Quinta operated Inns
and Inn & Suites hotels with a combined total of approximately 39,000 rooms at
the end of 1999.
PRODUCT
La Quinta-Registered Trademark- 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, we believe that La Quinta offers its customers
exceptional value by providing rooms that are comparable in quality to
full-service hotels at lower prices.
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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 continental breakfast, 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, 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 lodging industry, focusing on enhancing revenues,
cash flow and profitability. Specifically, La Quinta's strategy centers upon:
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 January 31, 2000, Realty and Operating owned 100%
of 300 La Quinta lodging properties including 70 Inn & Suites, and 50% or more
of an additional two inns. As a result, we believe that La Quinta 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
Dallas, Texas. Centralized corporate services and functions include marketing,
financing, purchasing, quality control, development, legal and training.
Accounting, information system and reservation functions are centralized in a
service center located in San Antonio, Texas.
Hotel operations are currently organized into seven La Quinta Inn regions
and two La Quinta Inn & Suites regions with each region headed by a Regional
Vice President. Each Regional Vice President is responsible for supervising
operations of approximately 33 hotels and is assisted by approximately six area
general managers within his or her region. The Regional Vice Presidents are
responsible for the service, cleanliness and profitability of the inns in their
respective regions.
Hotel managers are responsible for overseeing the day to day operation of a
specific hotel. These managers receive extensive management training in service,
cleanliness, cost control, sales and basic repair skills. La Quinta's
professionally trained managers are substantially relieved of responsibility for
food service and are therefore better able to devote their attention to assuring
friendly guest service and quality facilities, consistent with chain wide
standards.
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 63% of
rooms rented. These core customers typically
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visit a given area several times a year, and include salespersons and
technicians, covering a specific territory and government and military
personnel. La Quinta also targets both vacation travelers and senior citizens.
For the convenience of these targeted customer groups, hotels 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-Registered Trademark- Club" offering members preferred status and rates
at La Quinta inns, along with rewards for frequent stays. The
Returns-Registered Trademark-Club had over 400,000 members as of December 31,
1999.
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 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. 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.
During the fourth quarter of 1999, La Quinta enhanced its revenue management
focus by increasing the number of revenue managers to nine and re-aligning their
responsibilities with those of the regional vice presidents. This re-alignment
allows pricing decisions to be managed centrally and retains the benefit of
local market information provided by the hotel general managers. To further
strengthen its ability to manage pricing centrally, La Quinta is currently
working with a leading third party vendor to implement a new revenue management
system which will supply recommendations to its property management system and
its reservation system. La Quinta plans to have its new revenue management
system in place by the second quarter of 2000.
La Quinta provides a central reservation system,
"teLQuik-Registered Trademark-," which currently accounts for advance
reservations for approximately 34% of room nights. The
teLQuik-Registered Trademark- 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. As a result of the above mentioned
revenue management objective, La Quinta is also planning to replace its current
reservation system in order to ensure compatibility with its new revenue
management system. La Quinta, through its national sales managers, markets its
reservation services to travel agents and corporate travel planners who may
access teLQuik-Registered Trademark- through five major airline reservation
systems.
Information regarding hotel locations, services and amenities, as well as
reservation capabilities and a virtual reality tour of the new Gold Medal rooms,
is also available to La Quinta's customer on La Quinta's Travel Web site at
http://www.laquinta.com.
COMPETITION
Each La Quinta hotel 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 and Comfort Inns. There is no
single
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competitor or group of competitors of La Quinta that is dominant in the
mid-priced lodging segment. Competitive factors in the industry include
reasonableness of room rates, quality of accommodations, service level and
convenience of locations.
The profitability of hotels 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 has historically operated hotels in markets that contain numerous
competitors, and the continued success of its hotels 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. 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 hotel 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. We cannot assure you that
demographic, geographic or other changes in markets will not adversely affect
the convenience or desirability of the locations of La Quinta's hotels.
Furthermore, there are no assurances that, in the markets in which LaQuinta inns
operate, competing hotels will not provide greater competition for guests than
currently exists, and that new hotels will not enter such markets.
SEASONALITY
The lodging industry is seasonal in nature. Generally, La Quinta's 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 the revenue, profit margins and net earnings of La Quinta.
SUPPLY AND DEMAND
In recent years, construction of mid-priced hotels in the United States has
resulted in an excess supply of available rooms, particularily in the west south
central region of the United States where 45% of La Quinta's rooms are located.
This oversupply has had an adverse effect on occupancy levels and room rates in
this segment. The mid-priced segment of the lodging industry has been adversely
impacted by and may continue to be negatively 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 hotels. 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 hotels 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.
EMPLOYEES
La Quinta's future success will depend, in part, on its continuing ability
to attract, retain and motivate highly qualified personnel. At December 31,
1999, La Quinta employed approximately 8,000 persons, of whom approximately 90%
were compensated on an hourly basis. Approximately 400 individuals were
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employed at the corporate headquarters or support services centers and 7,600
were employed directly in hotel operations. La Quinta's employees are not
currently represented by labor unions and management believes its ongoing labor
relations are good.
LODGING INDUSTRY OPERATING RISKS
La Quinta is subject to all operating risks common to the lodging industry.
These risks include, but are not limited to, (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.
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. Currently, Operating is not paying any federal income taxes.
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 31,1999
regarding the Companies' healthcare and lodging properties. A description of
each type of property follows the table:
<TABLE>
<CAPTION>
ANNUAL
NUMBER PURCHASE BASE RENT
NUMBER OF PRICE SEE OR
OF BEDS/ OR MORTGAGE REFERENCES INTEREST
LOCATION FACILITIES ROOMS(1) AMOUNT(2) BELOW PAYMENT(3)
- -------- ---------- -------- ----------- ---------- -----------
(DOLLARS IN (DOLLARS IN
THOUSANDS) 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 43,518 (4) 5,707
California............................ 9 740 70,024 (5) 6,895
Colorado.............................. 15 1,448 76,074 (4) 8,246
Connecticut........................... 13 1,880 99,671 (6) 12,747
Florida............................... 17 1,974 127,492 (7) 12,011
Idaho................................. 3 546 27,436 (4) 2,627
Indiana............................... 13 1,723 65,569 (8) 7,263
Kansas................................ 3 379 9,832 (4) 1,282
Kentucky.............................. 2 283 15,343 (9) 1,596
Massachusetts......................... 25 3,893 265,507 (10) 32,236
Maryland.............................. 1 170 18,188 1,910
Michigan.............................. 2 212 15,305 2,127
Missouri.............................. 15 2,099 74,511 (11) 8,946
North Carolina........................ 1 118 2,388 (4) 259
Nebraska.............................. 2 263 6,777 (4) 735
New Hampshire......................... 7 642 46,599 3,420
New Jersey............................ 8 1,283 123,484 (12) 11,792
New Mexico............................ 1 206 12,671 (4) 1,180
Nevada................................ 3 564 22,271 (4) 2,153
New York.............................. 5 512 50,978 (13) 1,260
Ohio.................................. 8 956 46,629 (14) 4,437
Pennsylvania.......................... 3 381 18,331 (15) 2,191
Rhode Island.......................... 2 332 14,831 (4) 1,504
South Carolina........................ 1 88 3,882 (4) 387
Tennessee............................. 6 743 29,857 (4) 3,349
Texas................................. 3 360 18,500 (4) 2,698
Utah.................................. 2 240 12,312 (4) 1,397
Washington............................ 10 1,267 62,294 (16) 6,207
Wisconsin............................. 1 119 13,888 1,400
West Virginia......................... 7 615 29,265 (17) 2,891
Wyoming............................... 2 312 14,616 (4) 1,709
--- ------ ---------- --------
TOTAL LONG-TERM CARE.................. 198 25,726 $1,454,194 $154,384
--- ------ ---------- --------
ASSISTED LIVING
Arkansas.............................. 2 102 $ 7,638 $ 2,072
Arizona............................... 1 48 4,275 621
California............................ 2 196 16,100 1,504
Colorado.............................. 1 70 5,237 (4) 467
Florida............................... 20 1,545 144,715 (18) 13,483
Idaho................................. 1 43 3,722 (4) 698
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
ANNUAL
NUMBER PURCHASE BASE RENT
NUMBER OF PRICE SEE OR
OF BEDS/ OR MORTGAGE REFERENCES INTEREST
LOCATION FACILITIES ROOMS(1) AMOUNT(2) BELOW PAYMENT(3)
- -------- ---------- -------- ----------- ---------- -----------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C>
Kansas................................ 5 144 7,831 754
Michigan.............................. 14 774 70,491 (19) 6,656
Minnesota............................. 5 99 5,927 599
North Carolina........................ 4 232 22,945 2,097
New York.............................. 1 80 9,120 1,063
Ohio.................................. 6 471 26,661 3,128
Oklahoma.............................. 2 59 3,430 323
Pennsylvania.......................... 4 253 16,954 5,618
South Carolina........................ 2 76 7,870 978
Tennessee............................. 3 226 14,322 1,104
Texas................................. 20 793 39,972 4,523
Virginia.............................. 2 134 8,266 986
Washington............................ 1 45 3,340 (4) 675
Wisconsin............................. 18 384 21,506 1,994
--- ------ ---------- --------
TOTAL ASSISTED LIVING............... 114 5,774 $ 440,322 $ 49,343
--- ------ ---------- --------
MEDICAL OFFICE BUILDINGS
Arizona............................... 2 $ 39,637 (20) $ 3,348
California............................ 3 36,085 4,836
Florida............................... 18 172,605 (21) 20,485
Massachusetts......................... 2 1,850 903
New Jersey............................ 2 49,972 (22) 5,203
Nevada................................ 1 3,027 (4) 255
Tennessee............................. 2 32,579 (4) 2,583
Texas................................. 4 54,496 6,595
--- ---------- --------
TOTAL MEDICAL OFFICE BUILDINGS...... 34 $ 390,251 $ 44,208
--- ---------- --------
ACUTE CARE HOSPITAL
Arizona............................... 1 492 $ 65,650 $ 7,222
--- ------ ---------- --------
RETIREMENT LIVING FACILITIES
North Carolina........................ 1 190 $ 5,330 (4) $ 472
Ohio.................................. 1 104 6,577 (4) 640
Utah.................................. 1 287 8,808 (4) 975
--- ------ ---------- --------
TOTAL RETIREMENT LIVING............. 3 581 $ 20,715 $ 2,087
--- ------ ---------- --------
PSYCHIATRIC HOSPITALS AND ALCOHOL AND
SUBSTANCE ABUSE
California............................ 1 61 $ 5,750 $ 719
Florida, New York and Oklahoma........ 5 564 31,967 (4) 3,935
--- ------ ---------- --------
TOTAL PSYCHIATRIC AND ALCOHOL AND
SUBSTANCE ABUSE................... 6 625 $ 37,717 $ 4,654
--- ------ ---------- --------
TOTAL HEALTHCARE.................... 356 33,198 $2,408,849 $261,898
--- ------ ---------- --------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
ANNUAL
NUMBER PURCHASE BASE RENT
NUMBER OF PRICE SEE OR
OF BEDS/ OR MORTGAGE REFERENCES INTEREST
LOCATION FACILITIES ROOMS(1) AMOUNT(2) BELOW PAYMENT(3)
- -------- ---------- -------- ----------- ---------- -----------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C>
LAND UNDER DEVELOPMENT
California............................ $ 330
Florida............................... 14,625 (4) $ 1,655
--- ---------- --------
TOTAL LAND UNDER DEVELOPMENT........ $ 14,955 $ 1,655
---------- --------
OTHER
California............................ $ 3,800 (4) $ 496
HOTELS
Alabama............................... 8 1,001 $ 61,097
Arkansas.............................. 5 604 30,811
Arizona............................... 12 1,555 117,212
California............................ 17 2,436 196,880 (24) $ 75
Colorado.............................. 15 1,868 158,517
Florida............................... 34 4,501 346,043
Georgia............................... 17 2,198 116,127
Illinois.............................. 7 919 58,197
Indiana............................... 3 364 19,807
Kansas................................ 2 228 12,443 (24) 30
Kentucky.............................. 1 129 6,276
Louisiana............................. 15 2,058 156,777 (24) 197
Missouri.............................. 2 235 12,933
Mississippi........................... 2 245 8,536
North Carolina........................ 10 1,307 99,659
Nebraska.............................. 1 130 4,880
New Mexico............................ 7 834 60,096
Nevada................................ 4 623 33,400 (24) 365
Ohio.................................. 1 122 5,065
Oklahoma.............................. 8 962 62,682
Pennsylvania.......................... 1 127 6,717
South Carolina........................ 6 717 40,772
Tennessee............................. 11 1,402 77,594
Texas................................. 101 13,011 863,555 (24) 54
Utah.................................. 4 466 37,680
Virginia.............................. 4 511 18,123
Washington............................ 3 419 33,111
Wyoming............................... 1 105 3,418
--- ------ ---------- --------
TOTAL HOTELS.......................... 302 39,077 $2,648,408 $ 721
--- ------ ---------- --------
TOTAL ALL FACILITIES(23)............ 658 72,275 $5,076,012 $264,770
=== ====== ========== --------
</TABLE>
OTHER HEALTHCARE INVESTMENTS
(1) Includes 33,198 total beds for healthcare facilities and 39,077 rooms for
hotels. The La Quinta hotels had an average occupancy of 66.6% for the year
ended December 31, 1999. 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
21
<PAGE>
September 30, 1999, was as follows: 84% long-term care facilities, 77%
alcohol and substance abuse treatment facilities, 75% assisted living, 70%
retirement living facilities, and 59% acute care hospitals. Generally,
average occupancy rates are determined by dividing the number of days or
occupied rooms in each period by the average number of licensed bed days or
available rooms during such period.
(2) Represents purchase price or mortgage amount at December 31, 1999 for
operating facilities and the funded 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,
1999 was an aggregate of $14,264,000 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.
(4) Permanent mortgage loans.
(5) Includes permanent mortgage loans of $43,465,000.
(6) Includes permanent mortgage loans of $20,463,000.
(7) Includes permanent mortgage loans of $77,708,000.
(8) Includes permanent mortgage loans of $58,241,000.
(9) Includes permanent mortgage loans of $5,343,000.
(10) Includes permanent mortgage loans of $95,830,000.
(11) Includes permanent mortgage loans of $65,713,000.
(12) Includes permanent mortgage loans of $54,826,000.
(13) Includes permanent mortgage loans of $152,000.
(14) Includes a permanent mortgage loan of $9,162,000.
(15) Includes a permanent mortgage loan of $6,799,000.
(16) Includes a permanent mortgage loan of $56,432,000.
(17) Includes permanent mortgage loans of $12,066,000.
(18) Includes permanent mortgage loans of $100,140,000.
(19) Includes a permanent mortgage loan of $10,083,000.
(20) Includes permanent mortgage loans of $30,832,000.
(21) Includes a permanent mortgage loan of $6,316,000.
(22) Includes a permanent mortgage loan of $24,786,000.
(23) Investments by Realty in facilities operated by Life Care Centers of
America, Inc., Sun Healthcare Group, Inc., and Alternative Living Services
represented 11%, 8%, and 4%, respectively, of Realty's total portfolio as of
December 31, 1999.
(24) Represents annual base rent on ground operating leases.
DESCRIPTION OF TYPES OF PROPERTIES
LONG-TERM CARE (SKILLED NURSING) FACILITIES. The long-term care facilities
offer restorative, rehabilitative and custodial nursing care for patients not
requiring more extensive and sophisticated treatment
22
<PAGE>
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 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.
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.
HOTELS. La Quinta hotels 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 hotels, each hotel 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 hotel. La Quinta spent approximately
$22,010,000 in capital improvements to existing hotels during 1999. La Quinta
has made approximately $323,185,000 in investments in La Quinta Inns during the
period 1995-1999. As a result of these expenditures, La Quinta believes it has
been able to maintain a chain-wide quality of rooms and common areas at its
hotels unmatched by any other national mid-priced hotel chain.
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
23
<PAGE>
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 September 30, 1999 (NHP Plc's year-end),
NHP Plc had invested approximately L630,020,000 in 343 nursing homes, totaling
17,822 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.
Realty also has an investment consisting of 1,081,000 shares of capital
stock and warrants to purchase 5,000 shares of stock in Balanced Care
Corporation, a healthcare operator. This investment has a market value of
$1,426,000 at December 31, 1999 and is included in Realty's and the Companies'
financial statements.
LEASES
HEALTHCARE FACILITIES
Generally, each healthcare facility (which includes the land, buildings,
improvements, related easements, and rights and fixtures (the "Leased Healthcare
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 Healthcare 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.
Realty's Leased Healthcare Properties aggregated approximately
$1,335,269,000 at December 31, 1999. The base rents range from approximately
7.83% to 13.75% per annum of Realty's equity investment in the Leased Healthcare
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 Healthcare 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 a 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 (which includes land, easements and rights,
buildings, improvements, furniture, fixtures and equipment) that is owned by
Realty is leased to Operating 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 $2,627,528,000
at December 31, 1999. The base rents range from 3.45% to 15.26% per annum of
Realty's equity investment in the leased hotel facilities. The
24
<PAGE>
hotel facility lease arrangements between Realty and Operating include quarterly
base or minimum rents plus contingent or percentage rents based on quarterly
gross revenue thresholds for each facility.
Operating 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 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
$1,092,335,000 permanent mortgage loans at face value as of December 31, 1999
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, 1999 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 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 has historically required 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,
25
<PAGE>
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 requires 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, 1999 Realty had outstanding development financing of
$11,161,000 and was committed to providing additional financing of approximately
$23,000,000 related to healthcare transactions. As with Realty's sale/leaseback
transactions or permanent mortgage financing programs, the developments
historically have included a variety of additional forms of security and
collateral. See "Leases" and "Permanent Mortgage Loans." During the development
period, Realty historically has required 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 will often
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.
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
The Companies are party to a number of other claims and lawsuits arising out
of the normal course of business. We believe that none of these claims or
pending lawsuits, either individually or in the aggregate, will have a material
adverse affect on our businesses or on our consolidated financial position or
results of operations.
26
<PAGE>
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 January 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH REALTY
- ---- -------- --------------------------------------------------------
<S> <C> <C>
Clive D. Bode............... 56 Chairman
William G. Byrnes........... 49 Chief Executive Officer and Director
Michael F. Bushee........... 42 Chief Operating Officer
Michael S. Benjamin......... 42 Senior Vice President, Secretary and General Counsel
Laurie T. Gerber............ 42 Chief Financial Officer and Treasurer
John G. Demeritt............ 39 Controller
Stephen C. Mecke............ 37 Vice President of Acquisitions
Debora A. Pfaff............. 35 Vice President of Operations
Richard W. Pomroy........... 42 Vice President of Development
</TABLE>
CLIVE D. BODE has been Chairman of the Board of Realty since October 1999.
Mr. Bode has been a special advisor to certain members of the Bass family of
Fort Worth, Texas for the past 10 years. Mr. Bode is also Director of Kelly,
Hart & Hallman, a Fort Worth based law firm.
WILLIAM G. BYRNES has been the Chief Executive Officer since January 28,
2000 and a director of Operating since 1998. He was previously a Distinguished
Professor of Finance at Georgetown University, from August 1998 to May 1999, and
was associated with Alex.Brown and Sons, investment bankers, from 1981 through
1998. Mr. Byrnes is also Chairman and CEO of Capital Market Solutions LLC and a
Director of JDN Realty Corporation, a real estate development and asset
management company traded on the New York Stock Exchange and a Director of
Security Capital Preferred Growth Incorporated and non-executive Chairman of
Pulpfree, Inc.
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. Mr. Bushee 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 and was named Treasurer in February,
2000. 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.
Mr. Demeritt was Vice President of Finance and Treasurer of Salem Sportswear
Corporation, a manufacturer and marketer of licensed sports apparel, from
June 1991 to
27
<PAGE>
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, a Certified Public Accountant, 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 January 31, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH OPERATING
- ---- -------- --------------------------------------------------------
<S> <C> <C>
Clive D. Bode............... 56 Chairman
William C. Baker............ 67 President
Lodging--LaQuinta Inns:
William S. McCalmont........ 44 Interim President and Chief Executive Officer, Senior
Vice President and Chief Financial Officer
John F. Schmutz............. 52 Senior Vice President and General Counsel
Vito J. Stellato............ 47 Senior Vice President
Thomas F. Hall.............. 52 Senior Vice President-Operations
</TABLE>
CLIVE D. BODE has been Chairman of the Board of Operating since
October 1999. Mr. Bode has been a special advisor to certain members of the Bass
Family of Fort Worth, Texas for the past 10 years. Mr. Bode is also Director of
Kelly, Hart & Hallman, a Fort Worth based law firm.
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).
WILLIAM S. MCCALMONT has been interim President and Chief Executive Officer
of La Quinta Inns since October 1999 and 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. Mr. McCalmont served as Senior Vice President and Chief Financial
Officer of FelCor Suite Hotels from
28
<PAGE>
July 1996 to October 1997, as Vice President-Treasurer of Harrah's Entertainment
from June 1995 to July 1996 and as Vice President-Treasurer of The Promus
Companies from November 1991 to June 1995.
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. Mr. Schmutz served as Vice
President-General Counsel of Sbarro, Inc. from May 1991 to June 1992 and as Vice
President-Legal of Hardee's Food Systems, Inc. from April 1983 to May 1991.
VITO J. STELLATO has been 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. Mr. Stellato was Vice President of Human Resources for Embassy
Suites Hotels and has also held positions with Holiday Inns and the U.S. Office
of Personnel Management.
THOMAS F. HALL has been 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 Mr. Hall held senior level
positions within Promus Companies as Vice President Operations for Embassy
Suites' Eastern Region and Vice President Operations for Hampton Inns, Inc.
PART II
ITEM 5A. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PAIRED SHARES OF COMMON STOCK
MARKET INFORMATION. The Companies' common 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
La Quinta and Cobblestone Mergers:
<TABLE>
<CAPTION>
1999 1998
QUARTER HIGH LOW QUARTER HIGH LOW
- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
First.................. $16.25 $11.56 First.................. $36.75 $29.19
Second................. $14.19 $11.38 Second................. $31.56 $25.13
Third.................. $13.00 $ 8.00 Third.................. $27.50 $13.69
Fourth................. $ 8.50 $ 5.44 Fourth................. $18.94 $11.81
</TABLE>
HOLDERS. There were approximately 13,374 holders of record of the
Companies' paired common shares as of January 31, 2000. Included in the number
of shareholders of record are paired common shares held in "nominee" or "street"
name.
DIVIDENDS. Realty has declared the following distributions on the paired
common shares during its two most recent fiscal years. Pursuant to Internal
Revenue Code Section 857 (b) (3) (C), for the year ended December 31, 1999,
Realty designates the following cash distributions to holders of Realty common
shares as capital gains dividends, in the amounts set forth below:
29
<PAGE>
COMMON SHARES
CUSIP 58501T306
<TABLE>
<CAPTION>
NON-TAXABLE
DATE DATE OF PER SHARE ORDINARY 25% CAPITAL RETURN OF
DECLARED RECORD PAY DATE AMOUNT INCOME GAIN CAPITAL
- -------- --------- ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
14-Jan-99 29-Jan-99 16-Feb-99 $0.46000 $0.41544 $0.00130 $0.04326
14-Apr-99 30-Apr-99 14-May-99 0.46000 0.41544 0.00130 0.04326
12-Jul-99 30-Jul-99 16-Aug-99 0.46000 0.41544 0.00130 0.04326
15-Oct-99 29-Oct-99 15-Nov-99 0.46000 0.41544 0.00130 0.04326
-------- -------- -------- --------
Total $1.84000 $1.66176 $0.00520 $0.17304
======== ======== ======== ========
Percentage 100% 90.31283% 0.28187% 9.40530%
======== ======== ======== ========
</TABLE>
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 Realty common shares as capital gains dividends in the amounts set
forth below:
<TABLE>
<CAPTION>
NON-TAXABLE
DATE DATE OF PER SHARE ORDINARY 25% CAPITAL 20% 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>
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. 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 common shares of at least 95% of its "real estate investment trust
taxable income", including net taxable gains for the year ended December 31,
2000. As part of the Five Point Plan, the dividend on Realty's common shares was
suspended in January 2000. Realty's Board of Directors expects to declare the
minimum dividend required to maintain Realty's REIT status in December 2000.
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").
<TABLE>
<CAPTION>
1999 1998
QUARTER HIGH LOW QUARTER HIGH LOW
- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
First.................. $22.31 $19.44 First.................. -- --
Second................. $22.25 $19.13 Second................. $25.25 $25.00
Third.................. $21.44 $14.88 Third.................. $25.38 $19.13
Fourth................. $15.63 $11.81 Fourth................. $23.00 $19.00
</TABLE>
HOLDERS. There were approximately 239 holders of record of Realty's
Series A Depositary Shares as of January 31, 2000. Included in the number of
holders of record are Series A Depositary Shares held in "nominee" or "street"
name.
30
<PAGE>
DIVIDENDS. Pursuant to Internal Revenue Code Section 857 (b)(3)(C), for the
year ended December 31, 1999, Realty designates the following cash distributions
to its holders of Series A Depositary Shares as capital gains dividends, in the
amount set forth below:
PREFERRED SERIES A SHARES
CUSIP 588501T405
<TABLE>
<CAPTION>
DATE OF PER SHARE ORDINARY 25% CAPITAL
DATE DECLARED RECORD PAY DATE AMOUNT INCOME GAIN
- ------------- ---------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
05-Mar-99 15-Mar-99 31-Mar-99 $ 0.56250 $0.56075 $ 0.00175
01-Jun-99 15-Jun-99 30-Jun-99 0.56250 0.56075 0.00175
01-Sep-99 15-Sep-99 30-Sep-99 0.56250 0.56075 0.00175
03-Dec-99 15-Dec-99 31-Dec-99 0.56250 0.56075 0.00175
--------- --------- ---------
Total $ 2.25000 $2.24300 $ 0.00700
========= ========= =========
Percentage 100% 99.68886% .31114%
========= ========= =========
</TABLE>
Pursuant to Internal Revenue Code Section 857 (b)(3)(c), for the year ended
December 31, 1998, Realty designates the following cash distribution to its
holders of Series A Depository Shares as capital gains dividends in the amount
set forth below:
<TABLE>
<CAPTION>
DATE DATE OF PER SHARE ORDINARY 25% CAPITAL 20% 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>
31
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The following data sets forth certain financial information for the
Companies, Realty, and Operating. 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 on Form 10-K.
FOR THE MEDITRUST COMPANIES, ON A COMBINED BASIS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue................................................... $911,981 $ 639,377 $289,038 $254,024 $209,369
-------- --------- -------- -------- --------
Expenses:
Hotel operations........................................ 283,988 119,584
Depreciation and amortization........................... 135,853 87,228 26,838 21,651 16,620
Amortization of goodwill................................ 21,470 13,265 2,349 1,556 1,556
Interest expense........................................ 244,973 178,458 87,412 64,216 64,163
Rental property operating expenses...................... 36,517 15,638 210
General and administrative expenses..................... 32,826 27,098 10,257 8,625 7,058
Other................................................... 108,984 111,215
(Income) loss from unconsolidated joint venture......... (906) 10
Gain on sale of assets and securities, net.............. (12,042) (48,483)
-------- --------- -------- -------- --------
Total expenses...................................... 852,569 503,097 127,076 96,048 89,397
-------- --------- -------- -------- --------
Income from continuing operations before benefit of income
taxes................................................... 59,412 136,280 161,962 157,976 119,972
Income tax benefit........................................ 4,800
-------- --------- -------- -------- --------
Income from continuing operations......................... 59,412 141,080 161,962 157,976 119,972
Discontinued operations, net.............................. 30,413 (294,227) 450
-------- --------- -------- -------- --------
Net income (loss) before extraordinary item............... 89,825 (153,147) 162,412 157,976 119,972
Loss on prepayment of debt................................ 33,454
-------- --------- -------- -------- --------
Net income (loss)......................................... 89,825 (153,147) 162,412 157,976 86,518
Preferred stock dividends................................. (16,283) (8,444)
-------- --------- -------- -------- --------
Net income (loss) available to Paired Common
Shareholders............................................ $ 73,542 $(161,591) $162,412 $157,976 $ 86,518
======== ========= ======== ======== ========
</TABLE>
32
<PAGE>
FOR THE MEDITRUST COMPANIES, ON A COMBINED BASIS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Per Share Data:
Basic earnings (loss) per Paired Common Share:
Income from continuing operations................... $ .41 $ 1.17 $ 2.13 $ 2.21 $ 2.10
Discontinued operations, net........................ .22 (2.44) 0.01 --
----------- ----------- --------- --------- ---------
Net income (loss) before extraordinary item......... .63 (1.27) 2.14 2.21 2.10
Loss on prepayment of debt.......................... (0.59)
----------- ----------- --------- --------- ---------
Net income (loss)................................... .63 (1.27) 2.14 2.21 1.51
Preferred stock dividends........................... (.11) (0.07)
----------- ----------- --------- --------- ---------
Net income (loss) available to Paired Common
shareholders...................................... $ .52 $ (1.34) $ 2.14 $ 2.21 $ 1.51
=========== =========== ========= ========= =========
Diluted earnings (loss) per Paired Common Share:
Income from continuing operations................... $ .41 $ 1.12 $ 2.12 $ 2.20 $ 2.09
Discontinued operations, net........................ .21 (2.35)
----------- ----------- --------- --------- ---------
Net income (loss) before extraordinary item......... .62 (1.23) 2.12 2.20 2.09
Loss on prepayment of debt.......................... (0.58)
----------- ----------- --------- --------- ---------
Net income (loss)................................... .62 (1.23) 2.12 2.20 1.51
Preferred stock dividends........................... (.11) (0.06)
----------- ----------- --------- --------- ---------
Net income (loss) available to Paired Common
shareholders...................................... $ .51 $ (1.29) $ 2.12 $ 2.20 $ 1.51
=========== =========== ========= ========= =========
Weighted average shares outstanding:
Basic............................................... 142,783 120,515 76,070 71,445 57,152
----------- ----------- --------- --------- ---------
Diluted............................................. 142,907 125,508 76,524 71,751 57,457
----------- ----------- --------- --------- ---------
Distributions paid.................................. $ 1.84 $ 3.34 $ 2.38 $ 2.31 $ 2.25
----------- ----------- --------- --------- ---------
Cash Flow Data:
Cash provided by operating activities............... $ 230,178 $ 176,171 $ 184,412 $ 188,551 $ 149,997
Cash provided by (used in) investing activities..... 575,948 (1,104,060) (571,325) (437,150) (310,135)
Cash provided by (used in) financing activities..... (1,104,362) 1,189,613 387,919 247,077 164,449
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate investments, net...................... $4,672,659 $5,086,736 $2,935,772 $2,188,078 $1,777,798
Total assets...................................... 5,467,757 6,459,551 3,280,283 2,316,875 1,891,852
Indebtedness...................................... 2,597,438 3,301,722 1,377,438 858,760 762,291
Total liabilities................................. 2,794,544 3,508,623 1,454,544 931,934 830,097
Total shareholders' equity........................ 2,673,213 2,950,928 1,825,739 1,384,941 1,061,755
</TABLE>
33
<PAGE>
FOR MEDITRUST CORPORATION
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenue................................................... $608,166 $ 518,872 $289,119 $254,024 $209,369
-------- --------- -------- -------- --------
Expenses:
Hotel operations........................................ 4,723 2,060
Depreciation and amortization........................... 128,642 84,327 26,838 21,651 16,620
Amortization of goodwill................................ 20,723 12,505 2,214 1,556 1,556
Interest expense........................................ 246,413 178,374 87,412 64,216 64,163
Rental property operating expenses...................... 36,517 15,638 210
General and administrative expenses..................... 13,968 18,374 10,111 8,625 7,058
Other................................................... 79,308 96,052
(Income) loss from unconsolidated joint venture......... (906) 10
Gain on sale of assets and securities, net.............. (12,042) (48,483)
-------- --------- -------- -------- --------
Total expenses...................................... 518,252 357,941 126,795 96,048 89,397
-------- --------- -------- -------- --------
Income from continuing operations before benefit of income 89,914 160,931 162,324 157,976 119,972
taxes...................................................
Discontinued operations, net.............................. 40,216 (295,875) 688
-------- --------- -------- -------- --------
Net income (loss) before extraordinary item............... 130,130 (134,944) 163,012 157,976 119,972
Loss on prepayment of debt................................ 33,454
-------- --------- -------- -------- --------
Net income (loss)......................................... 130,130 (134,944) 163,012 157,976 86,518
Preferred stock dividends................................. (16,283) (8,444)
-------- --------- -------- -------- --------
Net income (loss) available to Paired Common $113,847 $(143,388) $163,012 $157,976 $ 86,518
shareholders............................................
======== ========= ======== ======== ========
Per Share Data:
Basic earnings (loss) per Paired Common Share:
Income from continuing operations......................... $ .62 $ 1.32 $ 2.13 $ 2.21 $ 2.10
Discontinued operations, net.............................. .28 (2.43) 0.01
-------- --------- -------- -------- --------
Net income (loss) before extraordinary item............... .90 (1.11) 2.14 2.21 2.10
Loss on prepayment of debt................................ 0.59
-------- --------- -------- -------- --------
Net income (loss)......................................... .90 (1.11) 2.14 2.21 1.51
Preferred stock dividends................................. (.11) (0.07)
-------- --------- -------- -------- --------
Net income (loss) available to Paired Common $ .79 $ (1.18) $ 2.14 $ 2.21 $ 1.51
shareholders............................................
======== ========= ======== ======== ========
</TABLE>
34
<PAGE>
FOR MEDITRUST CORPORATION
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per Paired Common Share
Income (Loss) from continuing operations............ $ .62 $ 1.27 $ 2.11 $ 2.20 $ 2.09
Discontinued operations, net........................ .28 (2.33) 0.01
----------- ----------- --------- --------- ---------
Net income (loss) before extraordinary item......... .90 (1.06) 2.12 2.20 2.09
Loss on prepayment of debt.......................... 0.58
----------- ----------- --------- --------- ---------
Net income (loss)................................... .90 (1.06) 2.12 2.20 1.51
Preferred stock dividends........................... (.11) (0.07)
----------- ----------- --------- --------- ---------
Net income (loss) available to Paired Common $ .79 $ (1.13) $ 2.12 $ 2.20 $ 1.51
shareholders......................................
----------- ----------- --------- --------- ---------
Weighted average shares outstanding:
Basic............................................... 144,088 121,820 76,274 71,445 57,152
----------- ----------- --------- --------- ---------
Diluted............................................. 144,212 126,813 77,007 71,751 57,457
----------- ----------- --------- --------- ---------
Distributions paid.................................. $ 1.84 $ 3.34 $ 2.38 $ 2.31 $ 2.25
----------- ----------- --------- --------- ---------
Cash Flow Data:
Cash provided by operating activities............... $ 260,414 $ 187,606 $ 185,195 $ 188,551 $ 149,997
Cash provided by (used in) investing activities..... 550,858 (1,128,412) (580,560) (437,150) (310,135)
Cash provided by (used in) financing activities..... (1,098,187) 1,209,441 376,698 247,077 164,449
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate investments, net...................... $4,652,631 $5,067,217 $2,935,772 $2,188,078 $1,777,798
Total assets...................................... 5,375,049 6,320,985 3,215,928 2,316,875 1,891,852
Indebtedness...................................... 2,597,438 3,301,722 1,377,438 858,760 762,291
Total liabilities................................. 2,737,271 3,447,632 1,423,688 931,934 830,097
Total shareholders' equity........................ 2,637,778 2,873,353 1,792,240 1,384,941 1,061,755
</TABLE>
35
<PAGE>
FOR MEDITRUST OPERATING COMPANY
<TABLE>
<CAPTION>
YEAR ENDED INITIAL PERIOD
DECEMBER 31, ENDED
--------------------- DECEMBER 31,
1999 1998 1997
--------- --------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Operating Data:
Revenue.............................................. $595,896 $253,249 $ 48
Expenses:
Hotel operations................................... 279,265 117,524
Depreciation and amortization...................... 7,211 2,901
Amortization of goodwill........................... 747 760 135
Interest expense................................... 273 796 129
General and administrative expenses................ 18,858 8,724 146
Royalty to Meditrust Corporation................... 16,350 6,326
Rent to Meditrust Corporation...................... 274,018 125,706
Other.............................................. 29,676 15,163
-------- -------- ---------
Total expenses....................................... 626,398 277,900 410
-------- -------- ---------
Loss from continuing operations before (30,502) (24,651) (362)
benefit of income taxes............................
Income tax benefit................................... (4,800)
-------- -------- ---------
Loss from continuing operations...................... (30,502) (19,851) (362)
Discontinued operations.............................. (9,803) 1,648 (238)
-------- -------- ---------
Net loss............................................. $(40,305) $(18,203) $ (600)
======== ======== =========
Per Share Data:
Basic earnings (loss) per common share:
Loss from continuing operations...................... $ (.21) $ (0.16) $ (.01)
Discontinued operations, net......................... (.07) 0.01
-------- -------- ---------
Net loss............................................. $ (.28) $ (0.15) $ (.01)
======== ======== =========
Diluted earnings (loss) per common share:
Loss from continuing operations...................... $ (.21) $ (0.16) $ (.01)
Discontinued operations, net......................... (.07) 0.01
-------- -------- ---------
Net loss............................................. $ (.28) $ (0.15) $ (.01)
======== ======== =========
Weighted average shares outstanding
Basic................................................ 142,783 120,515 82,490
Diluted.............................................. 142,907 120,515 82,490
Cash Flow Data:
Cash used in operating activities.................... $(30,236) $(11,435) $ (783)
Cash provided by (used in) investing activities...... 25,090 24,352 (34,427)
Cash provided by (used in) financing activities...... (6,175) (19,828) 54,883
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Total assets................................................ $160,814 $198,190 $120,426
Total liabilities........................................... 125,221 119,683 63,338
Total shareholders' equity.................................. 35,593 78,507 57,088
</TABLE>
36
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN MATTERS DISCUSSED HEREIN MAY 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 THE 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 IN GENERAL, THE IDENTIFICATION OF SATISFACTORY PROSPECTIVE
BUYERS FOR HEALTHCARE RELATED ASSETS OF THE COMPANIES AND THE AVAILABILITY OF
FINANCING FOR SUCH PROSPECTIVE BUYERS, THE AVAILABILITY OF 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
ON FORM 10-K, 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, THE FURTHER IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS
TO, AS WELL AS THE FINANCIAL CONDITIONS OF OPERATORS OF REALTY'S HEALTHCARE
RELATED ASSETS, INCLUDING THE FILING FOR PROTECTION UNDER THE US BANKRUPTCY CODE
BY ANY OPERATORS OF THE COMPANIES' HEALTHCARE ASSETS, THE IMPACT OF THE
PROTECTION OFFERED UNDER THE US BANKRUPTCY CODE FOR THOSE OPERATORS WHO HAVE
ALREADY FILED FOR SUCH PROTECTION AND OTHER RISKS DETAILED FROM TIME TO TIME IN
THE FILINGS OF REALTY AND OPERATING WITH THE 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
registrants under the Securities and Exchange Act of 1934, as amended.
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, a Massachusetts business trust ("Meditrust's
Predecessor") 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's Predecessor and Meditrust Acquisition
Company were treated as the acquirers for accounting purposes. Accordingly, the
financial history is that of Meditrust's Predecessor and Meditrust Acquisition
Company prior to the Santa Anita Mergers.
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 the
"La Quinta Merger") and Cobblestone Holdings, Inc. and its wholly owned
subsidiary (collectively "Cobblestone" and the "Cobblestone Merger"),
respectively. In February 1998, legislation was proposed which limited the
ability of the Companies to utilize the paired share structure.
37
<PAGE>
The Companies consummated the Cobblestone Merger and the La Quinta Merger on
May 29, 1998 and July 17, 1998, respectively. On July 22, 1998, the Internal
Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act") was
enacted. The Reform Act limits the Companies' 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 began to deteriorate, thus limiting
the Companies' access to cost-efficient capital.
COMPREHENSIVE RESTRUCTURING PLAN
During the third and fourth quarters of 1998 the Companies performed 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 "1998 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:
- Pursue the separation of the Companies' primary businesses, healthcare and
lodging, by creating two separately traded publicly listed REITs. The
Companies intended to spin off the healthcare financing business into a
stand-alone REIT;
- Continue to operate the Companies' healthcare and lodging businesses using
the existing paired share REIT structure until a healthcare spin-off were
to take place;
- Sell more than $1 billion of assets, including the portfolio of
golf-related real estate and operating properties ("Cobblestone Golf
Group"), the Santa Anita Racetrack and approximately $550 million of
healthcare properties;
- Use the proceeds from these asset sales to achieve significant near-term
debt reduction;
- Settle fully the Companies' forward equity issuance transaction ("FEIT")
with Merrill Lynch;
- Reduce capital investments to reflect the current operating condition in
each industry.
During the latter part of 1998 and throughout 1999, the Companies
implemented the various parts of the 1998 Plan including:
- The sale of more than $1,400,000,000 of assets, including the Cobblestone
Golf Group, the Santa Anita Racetrack and approximately $820,000,000 of
healthcare properties;
- The repayment of more than $625,000,000 of debt;
- The full settlement of the FEIT; and
- The realignment of capital investments to respond to the current operating
environment in the healthcare and lodging industries.
The Companies also endeavored to separate its healthcare and lodging
businesses. However, the ability to separate these businesses was contingent
upon the ability of each business to obtain a separate credit facility. The
ability to obtain separate credit facilities was hindered by the capital
market's heightened uncertainty surrounding both the long-term healthcare and
mid-priced lodging industries. The Companies' Boards of Directors continued to
evaluate the Companies' businesses and the capital market's response to these
businesses. As a result, the Boards considered the Companies' alternatives and,
after such consideration, adopted a reorganization plan that is no longer
focused on the separation of the businesses and the spin-off of the healthcare
business.
38
<PAGE>
As part of the 1998 Plan, the Companies classified golf and horseracing
activities as discontinued operations for financial reporting purposes.
Accordingly, management's discussion and analysis of the results of operations
are focused on the Companies' primary businesses, healthcare and lodging.
FIVE POINT PLAN OF REORGANIZATION
During the latter part of 1999, the Companies continued to analyze and
evaluate the impact of the Companies' continued inability 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, and
included a review of the current state of the Companies' investments in the
healthcare industry and the long-term prospects of both the healthcare and
lodging industries.
A number of factors have negatively impacted the long-term care and assisted
living sectors of the healthcare industry. These include the federal
government's shift to a Medicare prospective payment system ("PPS") in the
skilled nursing industry, increased labor costs, fill-up periods of longer
duration for assisted living facilities, increased regulation and tighter and
more costly capital markets for both healthcare operating and financing
companies. These factors have caused investment spreads to narrow and have
caused a significant decline in the growth rate in the assisted living and
nursing home industries. Therefore, a decision was made to reduce the Companies'
investment in healthcare assets and focus its resources on its lodging division.
The mid-priced lodging segment has experienced a greater increase in the
supply of available rooms than in demand in much of the United States. The
relationship between supply and demand varies by region, however, the
supply/demand imbalance has been most significant in the west south central
region of the United States, thus this imbalance has impacted La Quinta to a
greater extent than its competitors due to its concentration of hotels in this
region. Although the mid-priced lodging segment continues to be impacted by the
supply/demand imbalance, the Companies believe that by focusing on internal
growth and improving the efficiency of operations, the lodging division will be
positioned to benefit from improving industry trends when the supply/demand
imbalance begins to moderate. Given the Companies' belief that there is
long-term upside potential in the mid-priced lodging segment, when deemed
appropriate, some of the funds generated from the healthcare divestitures and
operating cash may be targeted for disciplined investment in the lodging
division.
This analysis culminated in the development of a five-point plan of
reorganization (the "Five Point Plan") designed to improve the overall financial
condition of the Companies by substantially deleveraging its balance sheet. The
Five Point Plan takes advantage of the Companies' demonstrated ability to sell
healthcare assets and use the proceeds from these sales to repay debt
obligations. As part of the Five Point Plan, the Companies suspended Realty's
common share dividend to provide additional operating funds to repay debt and
strengthen the Companies' balance sheet. These actions will permit the
Companies, when appropriate, to make disciplined investments to position its
lodging division to benefit from improving industry trends when the
supply/demand imbalance in its sector begins to moderate. The Five Point Plan
was announced on January 28, 2000 and included the following components:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five
Point Plan to reduce its emphasis on the healthcare division, David F. Benson
would be leaving as Chief Executive Officer, President, and Treasurer of Realty.
Mr. Benson will continue to assist the Companies on a consulting
39
<PAGE>
basis as the Companies move forward to implement the Five Point Plan. William G.
Byrnes, a member of the Board of Directors of Operating, will act as Chief
Executive Officer of Realty. The Boards of Directors are also conducting a
search for candidates with significant lodging industry experience to assume the
role of Chief Executive Officer in the reorganized Companies.
THE MEDITRUST COMPANIES-COMBINED RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
Revenue for the year ended December 31, 1999, was $911,981,000 compared to
$639,377,000 for the year ended December 31, 1998, an increase of $272,604,000.
Revenue growth was primarily attributable to the increase in hotel operating
revenues of $343,622,000 because there were twelve months of hotel operations in
1999 compared to the post-acquisition period of July 17, 1998 through
December 31, 1998. Hotel operating revenues generally are measured as a function
of the average daily rate ("ADR") and occupancy. The ADR increased to $61.02 in
1999 from $60.25 in the calendar year 1998, an increase of $.77 or 1.3%.
Occupancy percentage decreased 2.1 percentage points to 66.6% in 1999 from 68.7%
for the twelve months ended 1998. Revenue per available room ("RevPAR"), which
is the product of occupancy percentage and ADR, decreased 1.7% when compared to
the year 1998. The decrease in RevPAR is primarily due to a greater increase in
the supply of available rooms than in demand in the west south central region of
the United States. The relationship between supply and demand varies by region
and it has impacted La Quinta to a greater extent than its competitors due to
its concentration of hotels in the southwest. The revenue impact of the
oversupply of available rooms was somewhat mitigated by revenue increases
resulting from a higher proportion of room rental income from the Inn & Suites
hotels as compared to the Inns during the comparable periods. Inn & Suites
hotels generally have higher room rental income per night than the Inns. Other
factors contributing to the decrease in RevPAR include the short term disruptive
impact of the introduction of the new property management system, the
reorganization of the operations and the sales organizations during the third
quarter and certain pricing decisions which adversely impacted RevPAR. In
addition, in October 1999 the lodging segment acquired Telematrix, a provider of
telephone software and equipment for the lodging industry. Revenues related to
Telematrix were $4,532,000. These increases in revenue were partially offset by
a net decrease to rental and interest income of $41,313,000. The decrease
primarily resulted from asset sales and mortgage repayments over the last year
net of the effect of additions to real estate investments made during the same
period. Other income for the year ended December 31, 1999 was $1,750,000,
compared to $35,987,000 for the same period in 1998. This non-recurring income
arose from lease breakage fees and prepayment and make-whole gains received from
the sale of healthcare-owned properties and the repayment of mortgages.
For the year ended December 31, 1999, total recurring operating expenses
were $353,331,000 compared to $162,320,000 for the year ended December 31, 1998,
an increase of $191,011,000. This increase was primarily attributable to the
increase in hotel expenses including increases in operating expenses of
$161,840,000 and general and administrative expenses of $11,321,000. Hotel
operating and general and administrative expenses primarily include costs
associated with operations such as salaries, 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. The increase in operating expenses and overhead for the lodging
segment is attributable to the inclusion of twelve months of lodging activity in
1999 compared to the post-acquisition period in 1998. In addition, $2,564,000 of
operating costs was related to the operations of Telematrix, Inc. General and
administrative expenses includes $1,005,000 of expense related to Telematrix,
Inc. Rental property operating expenses related to the hotels increased by
$18,800,000 due to the inclusion of twelve months of activity in 1999 compared
to the post-acquisition period in 1998. Rental property operating expenses
primarily consist of property taxes.
For the year ended December 31, 1999, rental property operating expenses
attributable to the healthcare business were $9,278,000 compared to $7,199,000
for the year ended December 31, 1998,
40
<PAGE>
an increase of $2,079,000. The increase was due to the management of additional
medical office buildings in 1999 compared to 1998. Rental property operating
expenses attributed to the healthcare business principally consist of expenses
for the management and operation of medical office buildings. General and
administrative expenses related to healthcare decreased by $6,598,000 primarily
due to state tax savings associated with the legal reformation of certain
healthcare subsidiaries, and reductions in legal and other overhead expenses.
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 $556,900,000 for the
year ended December 31, 1999, of which $281,388,000 related to healthcare and
$275,512,000 related to lodging. The contribution of the healthcare business
decreased $36,794,000 from $318,182,000 for the comparative twelve months ended
December 31, 1998. The decrease was primarily a result of the impact on revenue
of asset sales and mortgage repayments over the last year net of the impact of
savings in general and administrative expenses.
The Lodging contribution was $274,549,000 or 45.6% of Lodging revenues
during the twelve months ended December 31, 1999, compared to $122,888,000 and
47.6% for the five and one half months in 1998. This deterioration in
contribution margin reflects the decrease RevPar due to the oversupply of
available room and other factors mentioned above while fixed operating costs
remained relatively constant.
In addition, Realty acquired Telematrix, Inc., a provider of telephone
software and equipment for the lodging industry. Telematrix was acquired in
October 1999, and generated a contribution of $963,000 during the fourth
quarter, which was comprised of revenue of $4,532,000, operating expenses of
$2,564,000 and general and administrative expenses of $1,005,000. Operations of
Telematrix are included in the lodging revenue and expense categories of the
combined and consolidated statements since consummation of the acquisition and
separately disclosed as "Other Contribution" in Note 20 "Segment Reporting" of
the combined and consolidated statements.
Interest expense increased by $66,515,000 as a result of increases in the
borrowing rate and debt arising from the acquisitions of La Quinta and
Cobblestone, net of amounts repaid from various asset sales made over the past
year. Depreciation and amortization increased by $56,830,000 which was primarily
a result of increased real estate investments and amortization of goodwill from
the La Quinta acquisition completed on July 17, 1998.
ASSET SALES
During the year ended December 31, 1999, Realty realized gains on the sale
of healthcare related real estate assets of $12,042,000. Sales of healthcare
properties included 40 assisted living facilities, three long-term care
facilities, one rehabilitation facility and one alchohol and substance abuse
treatment facility. Realty also sold a hotel and land held for development on
which there was no realized gain or loss.
During the year ended December 31, 1998, Realty realized gains on the sale
of real estate assets of $52,642,000. Sales of healthcare properties 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 year ended December 31, 1999, the Companies recorded
approximately $108,984,000 in other expenses.
41
<PAGE>
On May 10, 1999, the Companies entered into a separation agreement with
Abraham D. Gosman, former Director and Chairman of the Companies and Chief
Executive Officer and Treasurer of Operating. Under the terms of the separation
agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash
and the continuation of certain life insurance benefits. The Companies
established a Special Committee of The Boards of Directors of Realty and
Operating (the "Special Committee") to evaluate Mr. Gosman's employment contract
and whether such severance or other payments were appropriate. Based on the
results of the evaluation and recommendation of the Special Committee, the
Boards of Directors concluded that the separation agreement was in the long-term
best interest of the shareholders of the Companies and approved the separation
agreement.
In accordance with the Five Point Plan, the Companies classified certain
assets as held for sale as of December 31, 1999, based on commitments for
transactions expected to close in 2000. Based on estimated net sales proceeds,
the Companies recorded a provision for loss on assets held for sale of
$48,344,000 and related receivables of $6,209,000. The provision reduces the
carrying value of 23 medical office buildings, 12 assisted living facilities and
one long-term care facility to the estimated net sales proceeds less costs to
sell. In addition, based on management's assessment of the collectibility of
principal due on the loans as a result of planned asset transactions, a
provision for loss on five real estate mortgage loans of $13,223,000 was
recorded.
The Companies incurred approximately $12,210,000 of costs associated with
the development and implementation of the 1998 Plan as well as a reorganization
of the lodging division. These costs primarily relate to the early repayment and
modification of certain debt, employee severance, advisory fees related to the
restructuring plan, and other professional fees related to the separation
agreement with Mr. Gosman.
Also, in conjunction with the implementation of the 1998 Plan, which
included a change in the focus of the lodging division to internal growth, La
Quinta management performed a review of the front desk system under development
for its hotels, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, the availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded during the year ended December 31, 1999.
DISCONTINUED OPERATIONS
As part of the 1998 Plan, the Companies sold the Santa Anita Racetrack
during the fourth quarter of 1998 and sold the Cobblestone Golf Group during the
first quarter of 1999. The Companies have reflected the financial results for
1999 and 1998 of Santa Anita and Cobblestone as discontinued operations. During
1999, the Companies adjusted the provision for loss on disposal of the
Cobblestone Golf Group by recording a gain of approximately $27,452,000 which
includes the final working capital purchase price adjustment, cost of sale
adjustments, and a revision of the estimated income tax provision for the
disposal. In addition, the Companies recorded $2,961,000 as final working
capital purchase price adjustments and differences to estimated costs of sale of
the Santa Anita Racetrack. For the year ended December 31, 1998, the Companies
have presented income from discontinued operations of $10,721,000, a loss on
disposal of Santa Anita of $67,913,000 and a provision for loss on disposal of
Cobblestone Golf Group of $237,035,000.
NET INCOME
The resulting net income available for the common shareholders, after
deducting preferred share dividends, for the year ended December 31, 1999, was
$73,542,000 compared to a net loss of $161,591,000 for the year ended
December 31, 1998. The net income per paired common share (diluted) for the year
ended December 31, 1999 was $.51 compared to a net loss per paired common
42
<PAGE>
share (diluted) of $1.29 for the year ended December 31, 1998. The per paired
common share amount increased primarily due to the provisions recorded in 1998
for the loss on disposal of discontinued operations as well as to adjust the
carrying value of certain healthcare related assets and to record a valuation
reserve related to the mortgage portfolio in each period.
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 revenues generally are measured as a
function of the 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. 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 hotel expenses including operating expenses of $119,584,000 and
general and administrative expenses of $7,512,000. Hotel operating and general
administrative 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 related to healthcare
increased by $9,329,000 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
$318,182,000 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 $122,888,000 or 48% of lodging revenues during the same
period, compared to 47% for the second
43
<PAGE>
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 during 1998
and the acquisitions of La Quinta and 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. Sales of healthcare related properties,
pursuant to the 1998 Plan accounted for $52,096,000 of the total and included
three long-term care facilities, 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 related 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 Reform Act was enacted. The Reform Act 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 began to deteriorate, 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 related
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 the 1998 Plan, which was announced on
November 12, 1998, which included the sale of approximately $550,000,000 of
non-strategic healthcare assets.
44
<PAGE>
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 expected that the remaining assets would 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 have been 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 would likely not have
been 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 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 the 1998 Plan, the Companies announced plans to refocus their
capital investment program by reducing healthcare related investments and
ceasing development of any new hotels other than the completion of those La
Quinta-Registered Trademark- Inn 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 1998
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.
Based upon the analysis described above, other expenses were recorded for
1998, as follows:
<TABLE>
<CAPTION>
1998
--------------
(IN THOUSANDS)
<S> <C>
ASSET RELATED:
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
External consulting fees.................................. 11,882
--------
SUBTOTAL.................................................. 27,751
--------
OTHER
Costs of transactions not consummated..................... 3,110
--------
TOTAL..................................................... $111,215
========
</TABLE>
45
<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, during November, 1998,
the Companies approved the 1998 Plan which included the disposal of the
horseracing and golf segments as well as the sale of certain healthcare and
other non-strategic assets.
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 sold
the Cobblestone Golf Group for $393,000,000 on March 31, 1999.
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.
THE MEDITRUST COMPANIES--COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Companies earn revenue by (i) leasing healthcare assets under long-term
triple net leases in which the rental rate is generally fixed with annual
escalators; (ii) providing mortgage financing for healthcare facilities in which
the interest is generally fixed with annual escalators subject to certain
conditions and (iii) owning and operating 232 La Quinta Inns and 70 La Quinta
Inn and Suites. Approximately $1,165,000,000 of the Companies debt obligations
are floating rate obligations in which interest rate and related cash flows vary
with the movements in the London Interbank Offered Rate ("LIBOR"). The general
fixed nature of the Companies' assets and the variable nature of a portion of
the Companies' debt obligations creates interest rate risk. If interest rates
were to rise significantly, the Companies' interest payments may increase
resulting in decreases in net income and funds from operations. To mitigate this
risk the Companies have entered into interest rate swaps to convert some of
their floating rate debt obligations to fixed rate debt obligations. Interest
rate swaps generally involve the exchange of fixed and floating rate interest
payments on an underlying notional amount. At December 31, 1999, the Companies
had $750,000,000 of interest rate swaps outstanding in which the Companies pay a
fixed rate of 5.7% to the counterparty and receive LIBOR from the counterparty.
Accordingly, at December 31, 1999, the Companies have approximately $415,000,000
of variable debt outstanding with interest rates that fluctuate with changes in
LIBOR. On January 17, 2000, $250,000,000 of interest rate swaps expired.
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, if any, 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 distributions to shareholders.
46
<PAGE>
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Companies provide funding for new investments and costs associated with
restructuring through a combination of long-term and short-term financing
including both debt and equity, as well as the previously announced sale of
healthcare related assets. As part of the Five Point Plan, the Companies have
decided to sell additional healthcare related assets to meet their commitments
and to provide them with additional liquidity. The Companies obtain long-term
financing through the issuance of shares, long-term secured or 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 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.
During February 1998, the Companies entered into the FEIT with certain
affiliates of Merrill Lynch & Co., Inc. (together with its agent and successor
in interest, "MLI") pursuant to which MLI purchased shares of capital stock of
the Companies which were ultimately converted into paired shares. The FEIT was
designed to mature one year after issuance and provided MLI the right to sell
sufficient paired shares (including the shares originally purchased) to provide
MLI with a guaranteed return. The FEIT also included a purchase price adjustment
mechanism which, from time to time, resulted in the issuance of additional
paired shares to MLI as a result of declines in the paired shares' market price.
After announcing in November 1998 that the Companies intended to settle
fully the FEIT, during December 1998, the Companies repurchased all of the
paired shares issued pursuant to the purchase price adjustment mechanism, as
well as some of the paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a credit agreement (the "Credit
Agreement") which provided Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's then existing $365,000,000 revolving credit
facilities. The Credit Agreement provided 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 matured July 17, 1999 and which had 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 matured
July 17, 1999 with a six month extension option which management exercised for a
fee of 12.5 basis points; 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.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentage of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, to provide for 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
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 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
47
<PAGE>
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan
that was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
the elimination of limitations on certain healthcare related investments and a
lowering of the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI to use
the proceeds from the sale of Cobblestone Golf Group in excess of $300,000,000
to purchase all or a portion of the remaining 6,865,000 paired shares originally
issued to MLI in the FEIT. On April 1, 1999, the Companies fully settled the
FEIT by paying MLI $89,840,000 for the repurchase of 6,865,000 paired common
shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on
July 17, 1999.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which
matured on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
At December 31, 1999, the Companies had approximately $146,000,000 in
available borrowings under its revolving tranche commitment. During the calendar
year 2000, the Companies have approximately $211,000,000 of debt maturing. The
Companies expect to obtain the necessary funds to repay these obligations
through asset sales and through the capacity available under the Companies
revolving tranche commitment. However, there can be no assurance that the
Companies will be successful in its efforts to repay these obligations as they
come due or to meet its other liquidity requirements. As of February 7, 2000,
the Companies had outstanding borrowings under its revolving tranche commitment
of $545,000,000 (8.86% weighted average rate at February 7, 2000) and capacity
for additional borrowing of approximately $266,000,000.
As of December 31, 1999, the Companies' gross real estate investments
totaled approximately $5,076,012,000 consisting of 302 hotel facilities in
service, 198 long-term care facilities, 117 retirement and assisted living
facilities, 34 medical office buildings, one acute care hospital campus and six
other healthcare facilities. At December 31, 1999, Realty was committed to
provide additional financing of approximately $23,000,000 relating to two
assisted living facilities as well as additions to existing facilities in the
portfolio.
The Companies had shareholders' equity of $2,673,213,000 and debt
constituted 49% of the Companies' total capitalization as of December 31, 1999.
On January 28, 2000, the Companies' announced that the boards of directors
had approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five
Point Plan to reduce its emphasis on the healthcare division, David F. Benson
would be leaving as Chief Executive Officer,
48
<PAGE>
President, and Treasurer of Realty. Mr. Benson will continue to assist the
Companies on a consulting basis as the Companies move forward to implement the
Five Point Plan. Realty also entered into a separation and consulting agreement
with Mr. Benson, pursuant to which Realty will make a cash payment of
approximately $9,500,000 (including paying consulting fees), convert 155,000
restricted paired common shares into unrestricted paired common shares and
continue certain medical, dental and other benefits.
In January 2000, the Companies sold Paramount Real Estate Services Inc., its
medical office building management company, as well as the majority of its
medical office building portfolio. Total consideration of $204,000,000 included
$144,000,000 in cash, $8,000,000 of assumed debt and $52,000,000 of subordinated
indebtedness due January 2005 bearing interest at 9%. The transaction involved
the sale of the medical office building management company, 23 medical office
buildings and three medical office building mortgage loans. Additionally, the
Companies sold 12 assisted living facilities for $28,000,000 and received a
partial repayment of one mortgage loan for $4,000,000. The proceeds from the
sale of these healthcare assets will be used to repay debt maturing in
July 2000.
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 common stock, preferred stock, 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, including
availability under the credit facility, operating cash flow and proceeds from
the sale of certain healthcare related assets as contemplated by the Five Point
Plan, are adequate to finance their operations as well as their existing
commitments, including financing commitments related to certain healthcare
facilities and repayment of debt maturing within the next twelve months.
INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS
As of December 31 1999, healthcare related facilities (the "Healthcare
Portfolio") comprised approximately 47.8% of the Companies' total real estate
investments. A private healthcare company and Sun Healthcare Group, Inc. ("Sun")
currently operate approximately 19.4% of the total real estate investments, or
40.5% of the Healthcare Portfolio. Approximately 9.1% of the Companies' total
real estate investments (and approximately 19.0% of the Healthcare Portfolio)
are operated by companies in the assisted living sector of the healthcare
industry.
The Companies monitor credit risk for its Healthcare Portfolio by evaluating
a combination of publicly available financial information, information provided
by the operators themselves and information otherwise available to the
Companies. The financial condition and ability of these healthcare operators to
meet their rental and other obligations will, among other things, have an impact
on the Companies' revenues, net income (loss), funds available from operations
and its ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of
a longer duration, and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have preannounced anticipated earnings
shortfalls and have experienced a significant decline in their stock prices.
These factors have had a detrimental impact on the liquidity of some assisted
living operators, which has caused their growth plans to decelerate and may have
a negative effect on their operating cash flows.
49
<PAGE>
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of December 31,
1999, the Companies had a portfolio of 42 properties operated by Sun, which
consisted of 38 owned properties with net assets of approximately $309,135,000
and four mortgages with net assets of approximately $30,490,000. During the year
ended December 31, 1999, income derived from these properties included rental
income of $47,275,000 from owned properties and interest income for the ten
months ended October 1999 of $2,926,000 from mortgages.
Sun has not formally indicated whether it will accept or reject any of the
Companies' leases. However, Sun has indicated that it will continue to make
lease payments to the Companies unless and until such leases are rejected. If
necessary, the Companies have a plan in place to transition and to continue
operating any of Sun's properties. The Companies have not received interest
payments related to the mortgages since November 1, 1999, and accordingly, such
mortgages were put on non-accrual status.
During January and February 2000, two other operators of Realty's long-term
care facilities, Integrated Health Services, Inc. ("Integrated") and Mariner
Health Group, Inc. ("Mariner"), also filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. As of December 31, 1999, the Companies had a portfolio
of 12 properties operated by Integrated and Mariner, which consisted of 11 owned
properties with net assets of approximately $45,627,000 and one mortgage with
net assets of approximately $7,029,000. During the year ended December 31, 1999,
income derived from these properties included rental income of $9,677,000 from
owned properties and interest income of $977,000 from mortgages.
Management has proactively initiated various actions to protect its interest
under its leases and mortgages including the drawdown of certain escrow
accounts. Except for certain owned properties and mortgages held for sale,
management does not believe any of its owned real estate or mortgages is
impaired at December 31, 1999. However, the ultimate outcome of these
bankruptcies are not currently predictable and management is not able to make a
meaningful estimate of the amount or range of loss, if any, that could result
from an unfavorable outcome. It is possible that an unfavorable outcome could
have a material adverse effect on the Companies' cash flow, revenues and results
of operations in a particular quarter or annual period. However, the Companies
believe that even if the outcome of these bankruptcies are materially adverse to
the Companies' cash flow, revenues and results of operations, they should not
have a material adverse effect on the Companies' financial position.
COMBINED FUNDS FROM OPERATIONS
Combined Funds from Operations of the Companies was $285,711,000,
$277,280,000 and $191,511,000 for the years ended December 31, 1999, 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 1999 and 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 accepted
accounting principles 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, 1999, 1998
and 1997. Certain reconciling items include amounts reclassified
50
<PAGE>
from discontinued operations and, accordingly, do not necessarily agree to
revenue and expense captions in the Companies' financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss) available to common shareholders......... $ 73,542 $(161,591) $162,412
Depreciation of real estate and intangible
amortization............................................. 147,184 106,272 29,099
Provision for loss on sale of discontinued operations.... 237,809
Other capital gains and losses........................... (48,509) 19,562
Other income............................................. (1,750) (35,987)
Other expenses........................................... 115,244 111,215
-------- --------- --------
Funds from Operations...................................... $285,711 $ 277,280 $191,511
-------- --------- --------
Weighted average paired common shares outstanding:
Basic.................................................... 142,783 120,515 76,070
-------- --------- --------
Diluted.................................................. 142,907 125,508 76,524
</TABLE>
REALTY-RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
Revenue for the year ended December 31, 1999 was $608,166,000 compared to
$518,872,000 for the year ended December 31, 1998, an increase of $89,294,000.
Revenue growth was primarily attributable to increases in rent and royalty
income of $158,336,000 from Operating, related to hotel facilities acquired in
the La Quinta Merger and the increase in revenue of $6,656,000 from hotels
operated by Realty. These increases are attributable to the inclusion of hotel
operations for the year ended December 31, 1999 compared to the post-acquisition
period of July 17, 1998 through December 31, 1998. These increases were
partially offset by a decrease in rental and interest income of $41,461,000. The
decrease resulted primarily from asset sales and mortgage repayments over the
last year net of the affect of additions to real estate investments made during
the same period. Other income was $1,750,000 for the year ended December 31,
1999 compared to $35,987,000 for the same period in 1998. This non-recurring
income arose from lease breakage fees and prepayment and make-whole gains
received from the sale of healthcare-owned properties and the repayment of
mortgages.
For the year ended December 31, 1999, total recurring expenses increased by
$139,708,000 to $450,986,000 from $311,278,000 in 1998. Interest expense
increased by $68,039,000 as a result of increases in the borrowing rate and in
debt arising from the acquisitions of La Quinta and Cobblestone, net of amounts
repaid from various asset sales made over the past year. Depreciation and
amortization increased by $52,533,000 which was primarily a result of increased
real estate investments and amortization of goodwill from the La Quinta Merger
completed on July 17, 1998. General and administrative expenses decreased by
$4,406,000 primarily due to state tax savings associated with the legal
reformation of certain healthcare subsidiaries, and reductions in legal and
other overhead expenses compared to 1998.
Rental and hotel property operating expenses increased by $23,542,000
primarily due to the inclusion of twelve months of hotel activity in 1999
compared to the post-acquisition period in 1998, and, to a lesser extent, the
management of additional medical office buildings in 1999 compared to 1998.
51
<PAGE>
ASSET SALES
During the year ended December 31, 1999, Realty realized gains on the sale
of healthcare related real estate assets of $12,042,000. Sales of healthcare
properties included 40 assisted living facilities, three long-term care
facilities, three rehabilitation facilities and one alcohol and substance abuse
treatment facility. Realty also sold a hotel and land held for development on
which there was no realized gain or loss.
During the year ended December 31, 1998, Realty realized gains on the sale
of real estate assets of $52,642,000. Sales of healthcare properties accounted
for $52,096,000 of the total and included 32 assisted living facilities, one
long-term care facility 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 year ended December 31, 1999, other expenses of $79,308,000 were
incurred which related to the 1998 Plan.
In accordance with the Five Point Plan, the Companies classified certain
assets as held for sale as of December 31, 1999, based on commitments for
transactions expected to close in 2000. Based on estimated net sales proceeds,
the Companies recorded a provision for loss on assets held for sale of
$48,344,000 and related receivables of $6,209,000. The provision reduces the
carrying value of 23 medical office buildings, 12 assisted living facilities and
one long-term care facility to the estimated net sales proceeds less costs to
sell. In addition, based on management's assessment of the collectibility of
principal due on the loans as a result of planned asset transactions, a
provision for loss on five real estate mortgage loans of $13,223,000 was
recorded.
Other expenses also included approximately $4,907,000 of capitalized debt
costs and $1,119,000 of breakage fees associated with repaid debt and related
termination of swap contracts. Also there were approximately $5,506,000 in
professional and advisory fees incurred related to the 1998 Plan.
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Realty has classified golf and horseracing
activities as discontinued operations for financial reporting purposes.
Accordingly, Realty has presented as discontinued operations approximately
$40,216,000 of gains on disposal of the golf and horseracing segments during the
year ended December 31, 1999. Realty has recorded a gain of $33,561,000 related
to the sale of the Cobblestone Golf Group, which was sold on March 31, 1999. The
horseracing segment was sold on December 10, 1998. During the year ended
December 31, 1999, a gain of $6,655,000 was recorded which related to an
adjustment of the selling price between Realty and Operating. For the year ended
December 31, 1998, Realty has presented income from discontinued operations of
$14,635,000, a loss on disposal of Santa Anita of $82,953,000 and a provision
for loss on disposal of Cobblestone Golf Group of $227,557,000.
NET INCOME
The resulting net income available for common shareholders, after deducting
preferred share dividends, for the year ended December 31, 1999, was
$113,847,000 compared to a net loss of $143,388,000 for the year ended
December 31, 1998. The net income per common share (diluted) for the year ended
December 31, 1999 was $0.79 compared to a net loss per common share (diluted) of
$1.13 for the year ended December 31, 1998. The per common share amount
increased primarily due to the provisions recorded in 1998 for the loss on
disposal of discontinued operations as well as to adjust the carrying value of
certain healthcare related assets and to record a valuation reserve related to
the mortgage portfolio in each period.
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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 attributable to the addition of rent, royalty and
interest income of $132,744,000 from Operating and other income of $5,781,000,
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
$184,493,000. 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 expenses increased by $8,263,000 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 $17,488,000 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. Sales of healthcare properties, pursuant to the 1998 Plan
accounted for $52,096,000 of the total and included three long-term care
facilities, 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 related 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 Reform Act was enacted. 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
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and lodging industries) was substantially limited. In addition, during the
summer of 1998, the debt and equity capital markets available to REITs began to
deteriorate, 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' continued inability to access the capital markets, and the
operating strategy of the Companies' existing businesses. The analysis
culminated in the development of the 1998 Plan, which was announced on
November 12, 1998, which included the sale of approximately $550,000,000 of
non-strategic healthcare assets.
Based upon the analysis of the Companies' businesses described above, other
expenses were recorded on the books of Realty for the year ended December 31,
1998, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
ASSET RELATED:
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.
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Pursuant to the 1998 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 Inn 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 incurred for various consultants
engaged to assist in the development and implementation of the 1998 Plan.
Realty also incurred $3,110,000 in costs related to the evaluation of
certain acquisition targets, which Realty is 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, during November 1998,
the Companies approved the 1998 Plan which included 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, 1999 and $688,000 of income from the horseracing segment during the
year ended December 31, 1998. 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 expected the transaction
to close in early 1999 which would 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.
REALTY-LIQUIDITY AND CAPITAL RESOURCES
Realty earns revenue by (i) leasing healthcare assets under long-term triple
net leases in which the rental rate is generally fixed with annual escalators;
(ii) providing mortgage financing for healthcare facilities in which the
interest rate is generally fixed with annual escalators subject to certain
conditions and (iii) leasing its 230 La Quinta Inns and 68 La Quinta Inn and
Suites to Operating. Approximately $1,165,000,000 of Realty's debt obligations
are floating rate obligations in which interest rate and related cash flows vary
with the movement in LIBOR. The general fixed nature of Realty's assets and the
variable nature of a portion of Realty's debt obligations creates interest rate
risk. If interest rates were to rise significantly, Realty's interest payments
may increase resulting in decreases in net income and funds from operations. To
mitigate this risk Realty has entered into interest rate swaps to convert some
of their floating rate debt obligations to fixed rate debt obligations. Interest
rate swaps generally involve the
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exchange of fixed and floating rate interest payments on an underlying notional
amount. As of December 31, 1999, Realty has $750,000,000 of interest rate swaps
outstanding in which Realty pays a fixed rate of 5.7% to the counterparty and
receives LIBOR from the counterparty. Accordingly at December 31, 1999, Realty
has approximately $415,000,000 of variable debt outstanding with interest rates
that fluctuate with changes in LIBOR. On January 17, 2000, $250,000,000 of
interest rate swaps expired.
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, if any, 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 healthcare related
assets. Realty obtains long-term financing through the issuance of shares,
long-term secured and 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 utilizes 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.
During February 1998, the Companies entered into the FEIT in which MLI
purchased shares of capital stock of the Companies which were ultimately
converted into paired shares. The FEIT was designed to mature one year after
issuance and provided MLI the right to sell sufficient paired shares (including
the shares originally purchased) to provide MLI with a guaranteed return. The
FEIT also included a purchase price adjustment mechanism which, from time to
time, resulted in the issuance of additional paired shares to MLI as a result of
declines in paired shares' market price.
During December 1998, the Companies repurchased all of the paired shares
issued pursuant to the purchase price adjustment mechanism, as well as some of
the paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a Credit Agreement which provided
Realty with up to $2,250,000,000 in credit facilities, replacing Realty's then
existing $365,000,000 revolving credit facilities. The Credit Agreement provided
for borrowings in four separate Tranches: 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 matured July 17, 1999 and which had 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
matured July 17, 1999 with a six month extension option which management
exercised for a fee of 12.5 basis points; 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.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, to provide for 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
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
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<PAGE>
at least $100,000,000 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan
that was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
the elimination of limitations on certain healthcare related investments and a
lowering of the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, Realty entered into an agreement with MLI to use the
proceeds from the sale of Cobblestone Golf Group in excess of $300,000,000 to
purchase all or a portion of the remaining 6,865,000,000 paired shares
originally issued to MLI in the FEIT. On April 1, 1999, the Companies settled
the FEIT by paying MLI $89,840,000 for the repurchase of 6,865,000 paired common
shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on
July 17, 1999.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which
matured on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
At December 31, 1999, Realty had approximately $146,000,000 in available
borrowings under its revolving tranche commitment. During the calendar year
2000, Realty has approximately $211,000,000 of debt maturing. Realty expects to
obtain the necessary funds to repay these obligations through asset sales and
through the capacity available under Realty's revolving tranche commitment.
However, there can be no assurance that Realty will be successful in its efforts
to repay these obligations as they come due or to meet its other liquidity
requirements. As of February 7, 2000, Realty had outstanding borrowings under
its revolving tranche commitment of $545,000,000 (8.86% weighted average rate at
February 7, 2000) and capacity for additional borrowing of approximately
$266,000,000.
As of December 31, 1999, Realty's gross real estate investments totaled
approximately $5,055,131,000 consisting of 300 hotel facilities in service, 198
long-term care facilities, 117 retirement and assisted living facilities, 34
medical office buildings, one acute care hospital campus and six other
healthcare facilities. At December 31, 1999, Realty was committed to provide
additional financing of approximately $23,000,000 relating to two assisted
living facilities as well as additions to existing facilities in the portfolio.
Realty had shareholders' equity of $2,637,778,000 and debt constituted 50%
of the Companies' total capitalization as of December 31, 1999.
On January 28, 2000, the Companies' announced that the boards of directors
had approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
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Realty also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Realty.
Mr. Benson will continue to assist the Companies on a consulting basis as the
Companies move forward to implement the Five Point Plan. Realty also entered
into a separation and consulting agreement with Mr. Benson, pursuant to which
Realty will make a cash payment of approximately $9.5 million (including paying
consulting fees), convert 155,000 restricted paired common shares into
unrestricted paired common shares and continue certain medical, dental and other
benefits.
In January 2000, the Companies sold Paramount Real Estate Services Inc., its
medical office building management company, as well as the majority of its
medical office building portfolio. Total consideration of $204,000,000 included
$144,000,000 in cash, $8,000,000 of assumed debt and $52,000,000 of subordinated
indebtedness due January 2005 bearing interest at 9%. The transaction involved
the sale of the medical office building management company, 23 medical office
buildings and three medical office building mortgage loans. Additionally, the
Companies sold 12 assisted living facilities for $28,000,000 and the partial
repayment of one mortgage loan for $4,000,000. The proceeds from the sale of
these healthcare assets will be used to repay debt maturing in July 2000.
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 its various sources of capital, including availability
under the credit facility, operating cash flow and proceeds from the sale of
healthcare assets as contemplated by the Five Point Plan, are adequate to
finance its operations as well as its existing commitments, including financing
commitments related to certain healthcare facilities, and repayment of its debt
maturing within the next twelve months.
INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS
As of December 31 1999, the Healthcare Portfolio comprised approximately
47.8% of Realty's total real estate investments. A private healthcare company
and Sun currently operate approximately 19.4% of the total real estate
investments, or 40.5% of the Healthcare Portfolio. Approximately 9.1% of
Realty's total real estate investments (and approximately 19.0% of the
Healthcare Portfolio) are operated by companies in the assisted living sector of
the healthcare industry.
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of
a longer duration, and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have preannounced anticipated earnings
shortfalls and have experienced a significant decline in their stock prices.
These factors have had a detrimental impact on the liquidity of some assisted
living operators, which has caused their growth plans to decelerate and may have
a negative effect on their operating cash flows.
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Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of December 31,
1999, Realty had a portfolio of 42 properties operated by Sun, which consisted
of 38 owned properties with net assets of approximately $309,135,000 and four
mortgages with net assets of approximately $30,490,000. During the year ended
December 31, 1999, income derived from these properties included rental income
of $47,275,000 from owned properties and interest income for the ten months
ended October 1999 of $2,926,000 from mortgages.
Sun has not formally indicated whether it will accept or reject any of
Realty's leases. However, Sun has indicated that it will continue to make lease
payments to Realty unless and until such leases are rejected. If necessary,
Realty has a plan in place to transition and to continue operating any of Sun's
properties. Realty has not received interest payments related to the mortgages
since November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
During January and February 2000, two other operators of Realty's long term
care facilities, Integrated and Mariner, also filed for protection under Chapter
11 of the U.S. Bankruptcy Code. As of December 31, 1999, Realty had a portfolio
of 12 properties operated by Integrated and Mariner, which consisted of 11 owned
properties with net assets of approximately $45,627,000 and one mortgage with
net assets of approximately $7,029,000. During the year ended December 31, 1999,
income derived from these properties included rental income of $9,677,000 from
owned properties and interest income of $977,000 from the mortgage.
Management has proactively initiated various actions to protect its interest
under its leases and mortgages including the drawdown of certain escrow
accounts. Except for certain owned properties and mortgages held for sale,
management does not believe any of its owned real estate or mortgages is
impaired at December 31, 1999. However, the ultimate outcome of these
bankruptcies are not currently predictable and management is not able to make a
meaningful estimate of the amount or range of loss, if any, that could result
from an unfavorable outcome. It is possible that an unfavorable outcome could
have a material adverse effect on Realty's cash flows, revenues and results of
operations in a particular quarter or annual period. However, Realty believes
that even if the outcome of these bankruptcies are materially adverse to
Realty's cash flows, revenues and results of operations, it should not have a
material adverse effect on Realty's financial position.
OPERATING-RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
Operating has derived its revenue primarily from hotel operations since the
consummation of the La Quinta Merger on July 17, 1998. Hotel revenues for the
year ended December 31, 1999 were $591,364,000 compared to $253,249,000 for the
year ended December 31, 1998, or an increase of $338,115,000. Revenue growth was
primarily attributable to the increase in hotel operating revenues because there
were twelve months of hotel operations in 1999 compared to the post-acquisition
period of July 17, 1998 through December 31, 1998. Approximately $566,484,000 or
96% of hotel revenues were derived from room rentals during the year ended
December 31, 1999 compared to $241,868,000 and 96% during the year ended
December 31, 1998. Hotel operating revenues generally are measured as a function
of ADR and occupancy. The ADR increased to $61.02 in 1999 from $60.25 in 1998,
an increase of $.77 or 1.3%. Occupancy percentage decreased 2.1 percentage
points to 66.6% in 1999 from 68.7% in 1998. RevPAR, which is the product of
occupancy percentage and ADR, decreased 1.7% when compared to 1998. The decrease
in RevPAR is primarily due to a greater increase in the supply of available
rooms than in demand in the west south central region of the United States. The
relationship between supply and demand varies by region and it has impacted La
Quinta to a greater extent than its competitors due to its concentration of
hotels in the southwest. The revenue impact of the oversupply of available rooms
was somewhat mitigated by revenue increases resulting from a higher proportion
of room rental income from the Inn & Suites hotels as compared to the Inns
during the comparable periods. Inn & Suites hotels generally have higher room
rental income per night then the Inns. Other factors
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contributing to the decrease in RevPAR include the short term disruptive impact
of the introduction of the new property management system, the reorganization of
the operations and the sales organizations during the third quarter and certain
pricing decisions which adversely impacted RevPAR.
Other sources of hotel revenues during the year ended December 31, 1999
include: guest services revenue of approximately $13,094,000, which is derived
from charges to guests for long distance service, fax use and laundry service;
and approximately $7,725,000 related to meeting and banquet rentals, restaurant
rental and management services. Commission revenue of approximately $2,305,000
was earned on phone, movie and vending services. Interest and other income was
$1,756,000 for the year ended December 31, 1999 compared to $607,000 for the
same period in 1998. In addition, in October 1999 the lodging segment acquired
Telematrix, a provider of telephone software and equipment for the lodging
industry. Revenues associated with this acquisition were $4,532,000.
For the year ended December 31, 1999, total recurring expenses were
$596,722,000 compared to $262,737,000 for the year ended December 31, 1998, an
increase of $333,985,000. This increase was primarily attributable to increases
in lodging related expenses, which include an increase in operating expenses of
$161,741,000, increases to rent, royalty and interest due to Realty of
$157,624,000 and an increase to general and administrative expenses of
$10,134,000. The increase in operating expenses, net rent, royalty and interest
due to Realty as well as overhead for the lodging segment is attributable to the
inclusion of twelve months of activity in 1999 compared to the post-acquisition
period in 1998, and to a lesser extent, inclusion of $2,564,000 of operating
costs incurred related to the Telematrix acquisition. Hotel operating expenses
and overhead primarily includes costs associated with the operation such as
salaries, 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. The increase in general and
administrative expenses of $10,134,000 includes an increase of $9,129,000 in
overhead for the lodging segment, and $1,005,000 related to Telematrix.
Depreciation and amortization expense for the year ended December 31, 1999 was
$7,958,000 compared to $3,661,000 for the same period in 1998. The increase is
due to the depreciation and amortization associated with furniture and fixtures
and intangible assets acquired in the La Quinta Merger. Interest due to third
parties of $273,000 was incurred during the year ended December 31, 1999
compared to $84,000 for the same period in 1998.
At December 31, 1999, La Quinta operated 302 hotels (including 232 Inns and
70 Inn & Suites) with approximately 39,000 rooms, compared to 280 hotels
(including 233 Inns and 47 Inn & Suites) with approximately 36,000 rooms at the
merger date of July 17, 1998.
OTHER EXPENSES
During the year ended December 31, 1999, Operating recorded approximately
$29,676,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with
Abraham D. Gosman, former Director and Chairman of the Companies and Chief
Executive Officer and Treasurer of Operating. Under the terms of the separation
agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash
and the continuation of certain life insurance benefits. The Companies
established a Special Committee to evaluate Mr. Gosman's employment contract and
whether such severance or other payments were appropriate. Based on the results
of the evaluation and recommendation of the Special Committee, the Boards of
Directors concluded that the separation agreement was in the long-term best
interest of the shareholders of the Companies and approved the separation
agreement.
In conjunction with the implementation of the 1998 Plan, which included a
change in the focus of the lodging division to internal growth, La Quinta
management performed a review of the front desk system under development for its
lodging facilities, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, availability of more suitable and flexible
externally developed software and a shift
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in information systems philosophy toward implementation of externally developed
software and outsourcing of related support services. A charge of approximately
$3,998,000 to write-off certain internal and external software development costs
related to the project was recorded in the first quarter of 1999. Operating also
incurred approximately $678,000 associated with the reorganization of the
lodging division including employee severance and other expenses.
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Operating has classified golf and horseracing
activities as discontinued operations for financial reporting purposes.
Accordingly, Operating has presented as discontinued operations approximately
$9,803,000 of losses on disposal from the golf and horseracing segments during
the year ended December 31, 1999. Operating has recorded a loss of $6,109,000
related to the sale of the Cobblestone Golf Group, which was sold on March 31,
1999. The loss includes a final accounting of working capital balances at the
sale date. The horseracing segment was sold on December 10, 1998. During the
year ended December 31, 1999, a loss of $6,655,000 was recorded which related to
an adjustment of the selling price between Realty and Operating. This loss was
partially offset by a gain of $2,961,000 arising from a final adjustment
relating to working capital balances at the sale date. For the year ended
December 31, 1998, Realty has presented a loss from discontinued operations of
$3,914,000, a gain on disposal of Santa Anita of $15,040,000 and a provision for
loss on disposal of Cobblestone Golf Group of $9,478,000.
NET LOSS
The resulting net loss for the year ended December 31, 1999, was $40,305,000
compared to $18,203,000 for the year ended December 31, 1998. The net loss per
common share for the year ended December 31, 1999 was $.28 compared to $.15 for
the year ended December 31, 1998. The per common share amount decreased
primarily due to other non-recurring expenses incurred in 1999, related to the
separation agreement with Mr. Gosman.
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
$117,524,000 and general and administrative expenses of $8,724,000 were incurred
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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. 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.
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 Reform Act was enacted. The Reform Act 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 began to deteriorate, 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' continued inability to access the capital
markets, and the operating strategy of the Companies' existing businesses. The
analysis culminated in the development of the 1998 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 1998 Plan, that were recorded on the
books of Operating for the year ended December 31, 1998, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
COMPREHENSIVE RESTRUCTURING PLAN:
Employee severance........................................ $ 6,443
Write-off of capitalized pre-development costs............ 8,720
-------
Total..................................................... $15,163
=======
</TABLE>
Pursuant to the 1998 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 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, during November 1998,
the Companies approved the 1998 Plan including the disposal of the horseracing
and golf segments as well as the sale of certain healthcare and other
non-strategic assets.
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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 losses from the horseracing segment during the
year ended December 31, 1998. 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
expected the transaction to close in early 1999 which would 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 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. Operating obtains long-term financing through the issuance of common
shares and unsecured notes. Operating obtains short-term financing through
borrowings from Realty.
During February 1998, the Companies entered into the FEIT pursuant to which
MLI purchased shares of capital stock of the Companies which were ultimately
converted into paired shares. The FEIT was designed to mature one year after
issuance and provided MLI the right to sell sufficient paired shares (including
the shares originally purchased) to provide MLI with a guaranteed return. The
FEIT also included a purchase price adjustment mechanism which, from time to
time, resulted in the issuance of additional paired shares to MLI as a result of
declines in paired shares' market price.
During December 1998, the Companies repurchased all of the paired shares
issued pursuant to the purchase price adjustment mechanism, as well as some of
the paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a Credit Agreement which provided
Realty with up to $2,250,000,000 in credit facilities, replacing Realty's then
existing $365,000,000 revolving credit facilities. The Credit Agreement provided
for borrowings in four separate Tranches: 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 matured July 17, 1999 and which had 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
matured July 17, 1999 with a six month extension option which management
exercised for a fee of 12.5 basis points; 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.
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On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT to provide for 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 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 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
elimination of limitations on certain healthcare related investments and a
lowering of the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI to use
the proceeds from the sale of Cobblestone Golf Group in excess of $300,000,000
to purchase all or a portion of the remaining 6,865,000,000 paired shares
originally issed to MLI in the FEIT. On April 1, 1999, the Companies fully
settled the FEIT by paying MLI $89,840,000 for the repurchase of the remaining
6,865,000 paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on
July 17, 1999.
On August 16, 1999 Realty repaid $12,500,000 of its notes payable which
matured on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
Operating had shareholders' equity of $35,593,000 as of December 31, 1999.
On January 28, 2000, the Companies' announced that the boards of directors
had approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
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 common stock, 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 its various sources of capital available including
operating cash flow and borrowings from Realty are adequate to finance its
operations.
RECENT LEGISLATIVE DEVELOPMENTS
The Ticket to Work and Work Incentives Improvement Act of 1999 (the "Act"),
signed into law by the President of the United States on December 17, 1999, has
modified certain provisions of federal income
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tax law applicable to REITs. All of the changes described below will be
effective with respect to the Companies beginning after the year ending
December 31, 2000. These changes include new rules permitting a REIT to own up
to 100% of the stock of a corporation (a "taxable REIT subsidiary"), taxable as
a C corporation, that may provide non-customary services to the REIT's tenants
and may engage in certain other business activities. However, the taxable REIT
subsidiary cannot directly or indirectly operate or manage a lodging or
healthcare facility. Although the taxable REIT subsidiary may lease a lodging
facility (I.E., a hotel) from the REIT (provided no gambling revenues were
derived from the hotel or on its premises), with the lodging facility operated
by an "eligible independent contractor," such eligible independent contractor
must be actively engaged in the trade or business of operating lodging
facilities for persons or entities unrelated to the REIT. On account of the
foregoing restrictions imposed on the use of taxable REIT subsidiaries in the
case of lodging and healthcare facilities, the opportunity for the Companies to
make use of taxable REIT subsidiaries will be limited.
The Act also replaces the former rule permitting a REIT to own more than 10%
of a corporate subsidiary by value, provided its ownership of the voting power
is limited to 10% (a "decontrolled subsidiary"), with a new rule prohibiting a
REIT from owning more than 10% of a corporation by vote or value, other than a
taxable REIT subsidiary (described above) or a "qualified REIT subsidiary" (a
wholly owned corporate subsidiary that is treated as part of the REIT for all
federal income tax purposes). Existing decontrolled subsidiaries are
grandfathered, but will lose such status if they engage in a substantial new
line of business or acquire any substantial new asset after July 12, 1999, other
than pursuant to a contract binding on such date and at all times thereafter
prior to acquisition. Accordingly, and taking into account the Companies'
general inability to utilize taxable REIT subsidiaries, the Act severely limits
the ability of Realty to own substantial ownership interests in taxable
corporate subsidiaries. Direct ownership by Realty of assets that otherwise
would be held in a decontrolled subsidiary may not be possible without
disqualifying Realty as a REIT, and transfer of such assets to Operating
similarly may not be possible without causing Realty to recognize taxable income
or jeopardizing the Companies' current grandfather status under the 1998
anti-paired share legislation enacted as part of the Reform Act.
Other provisions in the Act include a reduction in the annual minimum
distribution requirement from 95% to 90% of its taxable income (excluding net
capital gain) and a provision which allows a REIT to own and operate a
healthcare facility for at least two years (with extensions for up to another
four years possible) if the facility is acquired by the termination or
expiration of a lease, with net income with respect to such property subject to
corporate tax but not counted as disqualifying income for purposes of
qualification as a REIT.
NEWLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("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.
During 1999, Financial Accounting Standards Board Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities--deferral of the
Effective Date of the Statement of Financial Accounting Standards No. 133"
("SFAS 137") was issued. This statement amended SFAS 133 by deferring the
effective date to fiscal quarters of all fiscal years beginning after June 15,
2000.
In November 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges"
("SAB 100"). This SAB expresses the views of the Staff regarding the accounting
for the disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. The Companies do not expect the provisions
of SAB 100 to have a material impact on its financial statements.
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In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Companies do not expect the provisions of SAB 101 to have a
material impact on its financial statements.
YEAR 2000
The "Year 2000 problem" arose as a result of the fact that many existing
computer programs and embedded chip technology systems were developed using only
the last two digits (rather than four) to define the applicable year. Thus, any
information technology ("IT") systems with time-sensitive software might
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations and system failures. In addition, the Companies
were at risk from Year 2000 failures on the part of third parties with which the
Companies interact.
The Companies use a significant number of IT systems that are essential to
their operations. For this reason, the Companies developed and implemented a
five-phase plan to address their year 2000 issues (the "Year 2000 Plan") and to
insure that the Companies' IT systems would function properly in the year 2000
and thereafter.
The Companies believe that they have successfully rendered IT systems year
2000 compliant. Since January 1, 2000, the Companies have experienced no
disruptions to their business operations as a result of year 2000 compliance
problems or otherwise and have received no reports of any material year 2000
compliance problems with any third parties with which they have material
interactions. Although the Companies do not believe that they have continued
exposure to the year 2000 issue, the Companies cannot give assurances that they
will not detect unanticipated year 2000 compliance issues in the future.
The Companies budgeted $1,650,000 for its year 2000 Plan and estimate that
the costs of repairing, updating and replacing their standard IT systems was
approximately $1,600,000. Additionally, the Companies estimate that they spent
approximately $300,000 to address other Year 2000 issues. Because the Companies
year 2000 assessment is ongoing and additional funds may be required as a result
of unexpected future findings in the first few quarters of the year 2000, the
Companies are not able to estimate the final aggregate cost of the year 2000
problem. While these efforts may 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 have funded the costs to date of addressing the Year
2000 issue from cash flows resulting from operations.
The preceeding "Year 2000 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 of
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, 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
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "WE," "US," OR
"OUR" REFER GENERALLY TO MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY,
COLLECTIVELY, THEIR SUBSIDIARIES AND RESPECTIVE PREDECESSOR ENTITIES FOR THE
APPLICABLE PERIODS, ALTHOUGH THE CONTEXT MAY, IN CERTAIN SITUATIONS, REQUIRE
THAT THESE WORDS REFER TO EITHER MEDITRUST CORPORATION OR MEDITRUST OPERATING
COMPANY INDIVIDUALLY.
PRESENTED BELOW ARE CERTAIN FACTORS THAT YOU SHOULD CONSIDER WITH RESPECT TO
AN INVESTMENT IN OUR SECURITIES. YOU SHOULD BE AWARE THAT THERE ARE VARIOUS
RISKS, INCLUDING THOSE DESCRIBED BELOW, WHICH MAY MATERIALLY IMPACT YOUR
INVESTMENT IN OUR 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 CAREFULLY CONSIDER THESE FACTORS. 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 37.
OUR STRATEGIC FOCUS ON LODGING RELATED PROPERTIES EXPOSES INVESTORS TO RISKS
COMMON IN THAT INDUSTRY THAT MAY ADVERSELY AFFECT AN INVESTMENT IN OUR
SECURITIES.
We have made a significant investment in lodging related facilities through
our acquisition of La Quinta Inns, Inc. La Quinta is operated by a subsidiary of
Meditrust Operating Company and its real estate assets are owned by Meditrust
Corporation or a subsidiary of Meditrust Corporation. The results of operations
of La Quinta hotels are subject to many factors, including:
- changes in the national, regional and local general economic climate;
- competition from comparable hotels;
- the desirability of particular locations;
- the quality, philosophy and performance of the lodging facility managers;
- changes in room rates and increases in operating costs due to inflation;
- the need to periodically repair the lodging facilities;
- increases in travel expenses that reduce business and leisure travel; and
- the relationship between supply of and demand for hotel rooms (an
oversupply of hotel properties or a reduction in demand for hotel rooms).
LA QUINTA OPERATES IN A VERY COMPETITIVE MARKET.
La Quinta hotels generally operate in markets that contain numerous
competitors, including a wide range of lodging facilities offering full-service,
limited-service and all-suite lodging options to the public. The continued
success of our hotels will be dependent, in large part, upon our ability to
compete in such areas as affordable and competitive 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, have resulted in
the creation of several large, multi-branded hotel chains with diversified
operations and may adversely impact our business, financial condition and
results of operations. We cannot give assurances that demographic, geographic or
other changes in markets will not adversely affect the convenience or
desirability of the locations of our hotels. Furthermore, we cannot give
assurances that competing hotels will not provide greater competition for guests
than currently exists, in the markets in which our hotels operate, and that new
hotels will not enter such markets.
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OUR LODGING RELATED PROPERTIES ARE GEOGRAPHICALLY CONCENTRATED.
La Quinta's hotels are concentrated in the western and southern regions of
the United States. As a result, our lodging properties are particularly
sensitive to adverse economic and competitive conditions and trends in those
regions and such conditions may specifically affect our cash available for
distribution to stockholders. The concentration of properties in one region may
expose us to risks of adverse economic developments which are greater than if
our portfolio were more geographically diverse.
OUR LODGING RELATED BUSINESS AND OPERATIONS ARE SUBJECT TO EXTENSIVE EMPLOYMENT
AND OTHER GOVERNMENTAL REGULATION.
The lodging 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
Meditrust Operating Company 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 us.
FLUCTUATIONS IN OPERATING RESULTS ARE COMMON IN THE LODGING INDUSTRY.
The lodging industry may be adversely affected by, among other things:
- changes in economic conditions,
- changes in local market conditions,
- oversupply of hotel rooms,
- 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, we cannot give
assurances that the recent strength in the lodging industry generally, or in the
segment of the industry in which we operate, 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.
FLUCTUATIONS IN AND DIFFICULTY WITH LODGING CONSTRUCTION MAY HAVE AN ADVERSE
AFFECT ON US.
If La Quinta resumes its historical strategy of growing through new
construction, we 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. We 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
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foregoing factors could adversely affect La Quinta's operations which, in turn,
could materially adversely affect us and our ability to make distributions to
stockholders and to pay amounts due on our indebtedness.
THE SEASONALITY OF THE LODGING INDUSTRY MAY AFFECT THE ABILITY OF MEDITRUST
CORPORATION'S
LESSEES AND OPERATORS TO MAKE TIMELY RENT PAYMENTS.
The seasonality of the lodging industry causes fluctuations in hotel
revenues and may, from time to time, affect either the amount of rent that
accrues under Meditrust Corporation's hotel leases or the ability of Meditrust
Corporation's lessees and operators to make timely rent payments under the
leases. A lessee's or operator's inability to make timely rent payments to
Meditrust Corporation could adversely affect our financial condition and ability
to service debt and make distributions to our stockholders.
MEDITRUST CORPORATION'S OWNERSHIP OF HEALTHCARE RELATED PROPERTIES EXPOSES
INVESTORS TO RISKS COMMON IN THAT INDUSTRY THAT MAY ADVERSELY AFFECT AN
INVESTMENT IN OUR SECURITIES.
THERE ARE A NUMBER OF OPERATING RISKS THAT COULD HAVE AN ADVERSE AFFECT ON
MEDITRUST
CORPORATION'S HEALTHCARE RELATED BUSINESS.
One of Meditrust Corporation's primary businesses is that of buying,
selling, financing and leasing healthcare related properties. Operating risks in
this business include, among other things:
- competition for tenants;
- competition from other healthcare financing providers, a number of which
may have greater marketing, financial and other resources and experience
than us;
- changes in government regulation of healthcare;
- 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 on general and local economic conditions.
EXTENSIVE FEDERAL, STATE AND LOCAL REGULATION OF THE SKILLED NURSING INDUSTRY
MAY ADVERSELY AFFECT THE ABILITY OF THIRD-PARTY OPERATORS OF MEDITRUST
CORPORATION'S HEALTHCARE PROPERTIES TO MAKE THEIR PAYMENTS.
The skilled nursing businesses of the third-party operators of Meditrust
Corporation's healthcare related real estate, and the healthcare industry
generally, are subject to extensive federal, state and local regulation
governing the licensing and conduct of operations at healthcare facilities,
certain capital expenditures, the quality of services provided, the manner in
which the services are provided, financial and other arrangements between
healthcare 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 effectiveness in operating the facility or
facilities. Any such ineffectiveness could impair such operator's ability to
make payments to Meditrust Corporation and thereby adversely affect us.
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A HIGH CONCENTRATION OF INVESTMENT IN THE SKILLED NURSING INDUSTRY COMPOUNDS THE
RISKS
ASSOCIATED WITH THIS INDUSTRY.
As of September 30, 1999, skilled nursing facilities comprised 28.8% of
Meditrust Corporation's real estate investments. For the reasons mentioned in
the risk factor above, such a concentration in this type of facility could have
a material adverse effect on us.
WE RELY HEAVILY ON THIRD-PARTY OPERATORS ASSOCIATED WITH MANY OF OUR PROPERTIES.
Third-party operators manage skilled nursing facilities on each of our
properties. Our financial position may be adversely affected by financial
difficulties experienced by any such operators, including the 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 Meditrust
Corporation cannot lease these facilities to other operators on comparable
terms. In particular, Meditrust Corporation's investments in the facilities
operated by its two largest healthcare operators at September 30, 1999 amounts
to approximately 20% of its total real estate investments. Such a concentration
in these operators could have a material adverse effect on us.
WE HAVE NO CONTROL OVER INCREASED GOVERNMENT REGULATION IN THE HEALTHCARE
INDUSTRY GENERALLY.
The healthcare industry is subject to changing political, economic,
regulatory and demographic influences that may affect the operations of
healthcare facilities and providers. During the past several years, the
healthcare industry has been subject to changes in government regulation of many
aspects of the industry (for example, reimbursement rates and certain capital
expenditures). Some elected officials have announced that they intend to examine
certain aspects of the United States healthcare system, including proposals
which may further increase governmental involvement in healthcare. For example,
the President and Congress have in the past, and may in the future, propose
healthcare reforms which could impose additional regulations on Meditrust
Corporation and its operators or limit the amounts that operators may charge for
services. Meditrust Corporation's healthcare facility operators 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.
RECENT SIGNIFICANT HEALTHCARE REFORM HAS, AND LIKELY WILL CONTINUE TO, ADVERSELY
AFFECT OUR
OPERATIONS IN THE HEALTHCARE INDUSTRY.
The Balanced Budget Act of 1997, which was signed by the President on
August 5, 1997, enacted significant changes to the Medicare and Medicaid
programs designed to modernize payment and healthcare delivery systems while
achieving substantial budgetary savings. In seeking to limit Medicare
reimbursement for skilled nursing services, the Balanced Budget Act of 1997
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 is being
phased in over a four-year period beginning on or after July 1, 1998. Under
provisions of the Balanced Budget Act of 1997, states will be provided
additional flexibility in managing their Medicaid program. Among other things,
the Balanced Budget Act of 1997 repealed a federal 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. We have no control over these federal
reimbursement rates, which may change periodically. Additionally, these
healthcare reforms may reduce reimbursement to levels that are insufficient to
cover the cost of providing patient care, which could adversely affect the
revenues
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of Meditrust Corporation's third-party borrowers and lessees. Such adverse
effects on Meditrust Corporation's third party borrowers may negatively impact
those borrowers' and lessees' abilities to make their loan or lease payments to
Meditrust Corporation. In fact, three of Meditrust Corporation's third party
operators have cited these healthcare reforms as the precipitating factor in
filing for bankruptcy protection. Failure of the borrowers or lessees to make
their loan or lease payments would have a direct and material adverse effect on
us.
WE CANNOT GIVE ASSURANCES THAT THIRD-PARTY REIMBURSEMENT FOR MEDITRUST
CORPORATION'S
OPERATORS WILL CONTINUE TO BE AVAILABLE.
The cost of many of the services offered by the current operators of
Meditrust Corporation's healthcare facilities are reimbursed or paid for by
third-party payers 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 such third-party reimbursement to
Meditrust Corporation's operators will continue to be available or when
reimbursement will be offered or that reimbursement rates will not be reduced.
The increase in the number of providers contracting to provide per person fixed
cost healthcare to a patient population has increased pressure on third-party
payers to lower costs.
A significant portion of the revenue from the third-party operators who
lease or receive financing from Meditrust Corporation 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 healthcare services,
which Meditrust Corporation has no control over. Moreover, healthcare facilities
have experienced increasing pressures from private payers such as health
maintenance organizations attempting to control healthcare costs. Reimbursement
from private payers has in many cases effectively been reduced to levels
approaching those of government payers. Concern regarding healthcare costs may
result in significant reductions in payment to healthcare facilities, and there
can be no assurance that future payment rates from either governmental or
private healthcare 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 Meditrust Corporation and thereby adversely affect those
entities' ability to make their lease or loan payments to Meditrust Corporation.
Failure of these entities to make their lease or loan payments would have a
direct and material adverse impact on us.
A FAILURE TO COMPLY WITH THE MORE PREVALENT FRAUD AND ABUSE LAWS AND
GOVERNMENTAL PROGRAM INTEGRITY REGULATIONS MAY HAVE A MATERIAL ADVERSE EFFECT ON
US.
In the past several years, due to rising healthcare costs, there has been an
increased emphasis on detecting and eliminating fraud and abuse in the Medicare
and Medicaid programs. Federal and state statutes generally prohibit payment of
any remuneration to induce the referral of Medicare and Medicaid patients. 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 Balanced Budget Act of 1997 provided the federal government with
expanded enforcement powers to combat waste, fraud and abuse in the delivery of
healthcare services. In addition, the Office of Inspector General and the
Healthcare Financing Administration 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.
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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 of
Meditrust Corporation 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 us by adversely affecting the borrower's or lessee's ability to make
debt or lease payments to Meditrust Corporation.
The foregoing factors could adversely affect the ability of the operators of
Meditrust Corporation's healthcare facilities to generate revenues and make
payments to it. This, in turn, could materially adversely affect us and our
ability to make distributions to stockholders and to pay amounts due on our
indebtedness.
IT IS DIFFICULT TO BE CONTINUOUSLY UP-TO-DATE WITH CURRENT INFORMATION REGARDING
THIRD-PARTY
OPERATORS OF MEDITRUST CORPORATION'S HEALTHCARE PROPERTIES.
As of December 31, 1999, our healthcare portfolio comprised approximately
48% of Meditrust Corporation's total real estate investments. A private
healthcare company and Sun Healthcare currently operate approximately 19% of the
total real estate investments and 41% of the healthcare portfolio. Approximately
29% of Meditrust Corporation's total real estate investments (approximately 60%
of the healthcare portfolio) are operated by companies in the skilled nursing
sector of the healthcare industry and 9% of Meditrust Corporation's total real
estate investments (approximately 18% of the healthcare portfolio) are operated
by companies in the assisted living sector of the healthcare industry.
Meditrust Corporation monitors credit risk for our healthcare portfolio by
evaluating a combination of publicly available financial information,
information provided by the operators themselves and information otherwise
available to us. The financial condition and ability of these healthcare
operators to meet their rental and other obligations will, among other things,
have an impact on Meditrust Corporation's revenues, net income or loss, funds
available from operations and on our ability to make distributions to our
stockholders. The operations of the skilled nursing companies have been
negatively impacted by changes in Medicare reimbursement rates, increases in
labor costs, increases in their leverage and various other factors. In addition,
any failure by these operators to effectively conduct their operations could
have a material adverse effect on their business reputation or on their ability
to enlist and maintain patients in their facilities.
Operators of assisted living and skilled nursing facilities are experiencing
fill-up periods of a longer duration, and are being impacted by concerns
regarding the potential of over-building, increased regulation and the use of
certain accounting practices. Accordingly, many of these operators have
pre-announced anticipated earnings shortfalls and have experienced a significant
decline in their stock prices. These factors have had a detrimental impact on
the liquidity of some assisted living operators, which has caused their growth
plans to decelerate and may have a negative effect on their operating cash
flows.
THREE OF MEDITRUST CORPORATION'S HEALTHCARE FACILITY OPERATORS HAVE FILED FOR
BANKRUPTCY.
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun Healthcare filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of
December 31, 1999, Meditrust Corporation had a portfolio of 42 properties
operated by Sun Healthcare, which consisted of 38 owned properties with net
assets of approximately $309 million and 4 mortgages with net assets of
approximately $30 million. During the year ended December 31, 1999, income
derived from these properties included rental income of $47 million from owned
properties and interest income of $3 million from mortgages. No mortgage
interest payments were received after October 14, 1999
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Sun Healthcare has not formally indicated whether it will accept or reject
any of Meditrust Corporation's leases. Sun Healthcare has indicated, however,
that they will continue to make lease payments to Meditrust Corporation unless
and until such leases are rejected. If necessary, Meditrust Corporation has a
plan in place to transition and to continue operating any of such rejected Sun
Healthcare properties. Since October 1999, Meditrust Corporation has not
received interest payments related to the mortgages. Accordingly, such mortgages
have been put on non-accrual status.
Should Sun Healthcare reject certain leases and revise lease terms for the
respective facilities, Meditrust Corporation's cash flows, revenues and results
of operations may be impacted and these amounts may be material. Management is
not currently able to predict the outcome of the Sun Healthcare bankruptcy or
the related impact on Meditrust Corporation's cash flows, revenues or results of
operations.
Citing reasons similar to Sun Healthcare, Mariner Health Group, Inc. and
Integrated Health Services, Inc. also filed for protection under Chapter 11 of
the U.S. Bankruptcy Code on January 18, 2000 and February 2, 2000, respectively.
As of December 31, 1999, Meditrust Corporation had a portfolio of two properties
operated by Mariner, which consisted of one owned property with net assets of
approximately $7 million and one mortgage with net assets of approximately
$7 million. During the year ended December 31, 1999, we derived interest and
rental income from the Mariner properties of approximately $2 million. If we do
not receive interest payments related to the mortgage we will not continue to
record interest income. As of December 31, 1999, Integrated Health Services
operated 10 of Meditrust Corporation's owned properties that had a book value of
approximately $38 million in the aggregate. During the year ended December 31,
1999, we derived approximately $6.9 million in rental income from the Integrated
Health Services properties.
OUR SUBSTANTIAL DEBT, AS WELL AS THE VARIOUS OTHER RISKS ASSOCIATED WITH DEBT
AND PREFERRED STOCK FINANCING, COULD RESULT IN ADVERSE CONSEQUENCES FOR US.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL.
To qualify as a real estate investment trust, Meditrust Corporation must
distribute to its stockholders each year at least 95% of Meditrust Corporation's
net taxable income (90% commencing in 2001), excluding any net capital gain.
Because of these distribution requirements, it is not likely that Meditrust
Corporation will be able to fund all future capital needs, including capital
required for potential acquisitions, from income from operations. Meditrust
Corporation, therefore, will have to rely on third-party sources of capital,
which may or may not be available on favorable terms or at all. Meditrust
Corporation's access to third-party sources of capital depends upon a number of
factors, including general market conditions, the market's perception of
Meditrust Corporation's growth potential, Meditrust Corporation's current and
potential future earnings and cash distributions and the market price of
Meditrust Corporation's common stock. Moreover, additional equity offerings may
result in substantial dilution of stockholders' interests, and additional debt
financing may substantially further leverage Meditrust Corporation.
MEDITRUST CORPORATION IS SUBSTANTIALLY LEVERAGED.
Meditrust Corporation's debt-to-total market capitalization ratio was
approximately 49% as of September 30, 1999. Meditrust Operating Company, as a
guarantor under Meditrust Corporation's credit facility, is also substantially
leveraged. This degree of debt could have important consequences for investors
and for us, some of which include:
- our ability to obtain additional financing may be impaired, both currently
and in the future;
- a substantial portion of our cash flow from operations must be dedicated
to the payment of principal and interest on this indebtedness, thereby
reducing the funds available for other purposes;
- our cash flow may be insufficient to meet required payments of principal,
interest or dividends;
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- we may be substantially more leveraged than our competitors, putting us at
a competitive disadvantage; and
- our flexibility to adjust to market conditions is limited, leaving us
vulnerable in a downturn in general economic conditions or in our
business.
Despite our plan to decrease the amount of our debt as announced on
January 28, 2000 in our plan of reorganization, we cannot make assurances that
we will be able to repay enough debt to successfully deleverage.
MEDITRUST CORPORATION MAY NOT BE ABLE TO RENEW, REPAY OR REFINANCE WHEN DUE THE
INDEBTEDNESS ON OUR PROPERTIES OR UNSECURED INDEBTEDNESS OR THE TERMS OF ANY
RENEWAL OR REFINANCING WILL NOT BE AS FAVORABLE AS THE TERMS OF SUCH ORIGINAL
INDEBTEDNESS.
If Meditrust Corporation were unable to refinance the indebtedness on
acceptable terms, or at all, we may be forced to dispose of one or more of our
properties on disadvantageous terms, which might result in losses, which losses
could have a material adverse effect on us and our ability to make distributions
to stockholders and to pay amounts due on such indebtedness. Meditrust
Corporation has $207 million in term debt that will mature in July 2000 and an
additional $1.4 billion in debt that matures in 2001. If a property is mortgaged
to secure payment of indebtedness and Meditrust Corporation is unable to meet
mortgage payments, the mortgagee could foreclose upon the property, appoint a
receiver and receive an assignment of rents and leases or pursue other remedies,
all with a consequent loss of revenues and asset value to us. Foreclosures could
also create taxable income without accompanying cash proceeds, thereby hindering
Meditrust Corporation's ability to meet the real estate investment trust
distribution requirements of the Internal Revenue Code.
WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH INDEBTEDNESS THAT BEARS INTEREST AT
VARIABLE RATES.
We have incurred, and expect in the future to incur, indebtedness which
bears interest at variable rates. Accordingly, increases in interest rates would
increase our 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 us and our ability to make distributions to stockholders and
to pay amounts due on our indebtedness or cause us to be in default under
certain debt instruments. In addition, an increase in market interest rates may
lead our stockholders to demand a higher yield on their paired shares from our
distributions, which could adversely affect the market price for the paired
shares and could also adversely affect the market price of any preferred stock
issued by either or both of The Meditrust Companies.
MEDITRUST CORPORATION'S REAL PROPERTY INVESTMENTS ARE SUBJECT TO THE MANY
VARYING TYPES AND DEGREES OF RISK INHERENT IN OWNING REAL ESTATE AND THAT MAY
AFFECT THE VALUE OF OUR ASSETS AND OUR ABILITY TO GENERATE REVENUE, NET INCOME
AND CASH AVAILABLE FOR DISTRIBUTION TO OUR STOCKHOLDERS.
THE ILLIQUIDITY OF REAL ESTATE AS AN INVESTMENT LIMITS MEDITRUST CORPORATION'S
ABILITY TO SELL PROPERTIES QUICKLY IN RESPONSE TO MARKET CONDITIONS.
Real estate investments are relatively illiquid and therefore cannot be
purchased or sold rapidly in response to changes in economic or other
conditions. Buyers may not be identified quickly or such buyers may not be able
to secure suitable financing to consummate a transaction. In addition, the
Internal Revenue Code limits Meditrust Corporation's ability as a real estate
investment trust to make sales of properties held for fewer than four years.
Furthermore, sales of certain appreciated property could generate material
adverse tax consequences, which may affect Meditrust Corporation's ability to
sell properties in response to market conditions and adversely affect returns to
stockholders. Consequently, there can be no assurances that we will be able to
accomplish an orderly disposition of a significant portion of the healthcare
assets as announced on January 28, 2000.
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MEDITRUST CORPORATION DEPENDS AND RELIES ON THE ABILITY AND SUCCESS OF THOSE WHO
OPERATE, MANAGE, LEASE AND MAINTAIN OUR PROPERTIES.
Federal income tax law restricts real estate investment trusts from deriving
revenues directly from operating their properties. Thus, the underlying value of
Meditrust Corporation's real estate investments, results of operations and
ability to make distributions to stockholders and pay amounts due on
indebtedness depends on the ability of the operators, managers, lessees and
Meditrust Operating Company to operate Meditrust Corporation's properties in a
manner sufficient to maintain or increase revenues and to generate sufficient
revenues in excess of operating expenses to make rent payments under their
leases or loan payments in respect of their loans from Meditrust Corporation.
THE RESULTS OF OPERATIONS OF MEDITRUST CORPORATION'S PROPERTIES MAY BE ADVERSELY
AFFECTED BY MANY FACTORS OUTSIDE OF MEDITRUST CORPORATION'S CONTROL.
Results of operations of Meditrust Corporation's properties may also be
adversely affected by, among other things:
- 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
financing;
- the impact of present or future environmental legislation and compliance
with environmental laws and other regulatory requirements;
- the ongoing need for capital improvements, particularly in older
structures;
- changes in real estate tax rates and assessments and other operating
expenses;
- adverse changes in governmental rules and fiscal policies;
- adverse changes in zoning and other land use laws; and
- civil unrest, earthquakes and other natural disasters (which may result in
uninsured losses) and other factors which are beyond our control.
MEDITRUST CORPORATION DEPENDS ON THE RENTAL INCOME FROM OUR REAL PROPERTY.
Meditrust Corporation's cash flow, results of operations and the value of
our assets would be adversely affected if a significant number of third-party
operators of our properties failed to meet their lease obligations. These lease
payments are one of Meditrust Corporation's principal sources of revenue.
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 from the
property. We have no control over such reduction and cannot assure investors
that any of our third-party operators will have sufficient assets, income, and
access to financing to enable them to satisfy their obligations under any such
lease. 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).
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MEDITRUST CORPORATION'S OPERATING COSTS MAY BE AFFECTED BY 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.
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 our ability to
use such real property as collateral in borrowing.
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 such 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,
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 asbestos-containing materials or other hazardous materials.
Environmental laws may also impose restrictions on the use or transfer of
property, and these restrictions may require various expenditures by Meditrust
Corporation. In connection with the ownership and operation of any of Meditrust
Corporation's properties, we (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 us and our
ability to make distributions to stockholders and to pay amounts due on our
indebtedness.
OUR FAILURE TO COMPLY WITH THE REQUIREMENTS OF THE AMERICANS WITH DISABILITIES
ACT OF 1990 WOULD HAVE A MATERIAL ADVERSE EFFECT ON US AND OUR ABILITY TO MAKE
DISTRIBUTIONS TO OUR STOCKHOLDERS AND TO PAY AMOUNTS DUE ON OUR INDEBTEDNESS,
OUR BUSINESS AND OUR RESULTS OF OPERATIONS.
Under the Americans with Disabilities Act of 1990, all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. A determination that we are not in compliance with the
Americans with Disabilities Act could result in the imposition of fines and/or
an award of damages to private litigants. If we were required to make
modifications to comply with the Americans with Disabilities Act, there could be
a material adverse effect on us and our ability to make distributions to
stockholders and to pay amounts due on our indebtedness.
MEDITRUST CORPORATION'S FAILURE TO OBTAIN AND MAINTAIN PROPER INSURANCE ON OUR
PROPERTIES WOULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Meditrust Corporation is directly responsible for insuring our lodging
related properties. Additionally, each of Meditrust Corporation's leases and
mortgage loans typically specifies that comprehensive insurance is to be
maintained on each of the applicable properties, including liability, fire and
extended coverage. Leases and loan documents for new investments (including
those leased to Meditrust Operating Company) typically contain similar
provisions. There are certain types of losses, generally of a catastrophic
nature, such as earthquakes and floods, that may be uninsurable or not
economically insurable. We will use our discretion in determining amounts,
coverage limits and deductibility provisions of insurance, with a view to
maintaining appropriate insurance coverage on our investments 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
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property after such property has been damaged or destroyed. Under such
circumstances, the insurance proceeds, if any, received by Meditrust Corporation
might not be adequate to restore our economic position with respect to such
property.
AN INVESTMENT IN OUR SECURITIES MAY HAVE ADVERSE TAX CONSEQUENCES TO THE
INVESTOR.
MEDITRUST CORPORATION'S FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
COULD HAVE SERIOUS ADVERSE FINANCIAL CONSEQUENCES.
Meditrust Corporation operates, and intends to continue to operate in the
future, so as to qualify as a real estate investment trust for federal income
tax purposes. Meditrust Corporation believes that it has operated in a manner
that permits it to qualify as a real estate investment trust under the Internal
Revenue Code. Qualification as a real estate investment trust, however, involves
the application of highly technical and complex provisions of the Internal
Revenue 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 real estate investment trust. In addition, real estate investment
trust qualification involves the determination of factual matters and
circumstances not entirely within our control. For example, in order to qualify
as a real estate investment trust, Meditrust Corporation must derive at least
95% of its gross income in any year from qualifying sources and Meditrust
Corporation must distribute annually to stockholders 95% (90% commencing in
2001) of its real estate investment trust taxable income, excluding net taxable
gains.
As a result, although we believe Meditrust Corporation is organized and
operating in a manner that permits it to remain qualified as a real estate
investment trust, we cannot guarantee that Meditrust Corporation will be able to
continue to operate in such a manner. In addition, if we are ever audited by the
Internal Revenue Service with respect to any past year, the Internal Revenue
Service may challenge Meditrust Corporation's qualification as a real estate
investment trust for such year.
If Meditrust Corporation were to fail to qualify as a real estate investment
trust, it would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates. Such
failure to qualify as a real estate investment trust would result in additional
tax liability for the year or years involved. This additional tax could
significantly reduce, or possibly eliminate, the amount of cash Meditrust
Corporation would have available for investment or distribution to stockholders.
In addition, the failure to qualify as a real estate investment trust would
also:
- constitute a default under certain of our debt obligations, which would
generally allow the holders thereof to demand the immediate repayment of
such indebtedness, and
- significantly reduce the market value of our stock.
Each of these possible outcomes could have a material adverse effect on us.
RECENT LEGISLATION HAS CURBED THE USE OF THE PAIRED SHARE STRUCTURE.
Meditrust Corporation's ability to qualify as a real estate investment trust
is further dependent upon its continued exemption from the anti-pairing rules of
Section 269B(a)(3) of the Code, which would ordinarily prevent it from
qualifying as a real estate investment trust. Subject to the discussion below
regarding recent legislation, the "grandfathering" rules governing Section 269B
generally provide that Section 269B(a)(3) does not apply to a paired share real
estate investment trust if the real estate investment trust and its paired
operating company were paired on June 30, 1983. On June 30, 1983, Meditrust
Corporation (then known as Santa Anita Enterprises, Inc.) was paired with the
Meditrust Operating Company (which was then known as Santa Anita Operating
Company). There are, however, no judicial or administrative authorities
interpreting this "grandfathering" rule. Moreover, if for any reason Meditrust
Corporation failed to qualify as a real estate investment trust in 1983, the
benefit of the "grandfathering" rule would not be available to it, in which case
Meditrust Corporation would not qualify as a real estate investment trust for
any taxable year from and after 1983. Such failure to qualify as a real
77
<PAGE>
estate investment trust would have a material adverse effect on us and our
ability to make distributions to our stockholders and to pay amounts due on our
indebtedness.
On July 22, 1998, the President signed into law the Internal Revenue Service
Restructuring and Reform Act of 1998. Included in the Reform Act is a freeze on
the grandfathered status of paired share real estate investment trusts. Under
this legislation, the anti-pairing rules provided in the Internal Revenue Code
apply to real property interests we acquired after March 26, 1998, or acquired
by a subsidiary or partnership in which a 10% or greater interest we own,
unless:
- the real property interests are acquired pursuant to a written agreement
that was binding on March 26, 1998 and at all times thereafter, or
- the acquisition of such real property interests was described in a public
announcement or in a filing with the Securities and Exchange Commission on
or before March 26, 1998.
These restrictions on the activities of a grandfathered paired share real
estate investment trust provided for in the Reform Act may in the future make it
impractical or undesirable for us to continue to maintain our paired share
structure. Restructuring our operations to comply with the rules provided by the
Reform Act could cause us to incur tax liabilities, to recognize an impairment
loss on their goodwill assets, or otherwise materially adversely affect us and
our ability to make distributions to stockholders and to pay amounts due on our
indebtedness.
WE HAVE NO CONTROL OVER CHANGES IN LEGISLATION, REGULATIONS, ADMINISTRATIVE
INTERPRETATIONS OR COURT DECISIONS.
We can give no assurances that new legislation, regulations, administrative
interpretations or court decisions will not change the tax law with respect to
qualification as a real estate investment trust and the federal income tax
consequence of such qualification. Such legislation, regulations, administrative
interpretations or court decisions could have a material adverse effect on us
and our ability to make distributions to stockholders and to pay amounts due on
our indebtedness. In addition, this type of legislation could prevent us from
growing as originally intended.
MEDITRUST CORPORATION IS SUBJECT TO SOME TAXES EVEN IF IT QUALIFIES AS A REAL
ESTATE INVESTMENT TRUST.
Even if Meditrust Corporation qualifies as a real estate investment trust,
it is subject to some federal, state and local taxes on its income and property.
For example, Meditrust Corporation pays taxes on certain income it does not
distribute. Also, Meditrust Corporation's income derived from properties located
in some states are subject to local taxes and, if Meditrust Corporation enters
into transactions which the Internal Revenue Code labels as "prohibited
transactions," Meditrust Corporation's net income from such transactions would
be subject to a 100% tax.
THE REAL ESTATE INVESTMENT TRUST MINIMUM DISTRIBUTION REQUIREMENTS MAY RESULT IN
ADVERSE CONSEQUENCES TO INVESTORS.
MEDITRUST CORPORATION MAY BE SUBJECT TO TAXES IN CONNECTION WITH THE
DISTRIBUTION OF ASSETS ACQUIRED IN ACQUISITIONS.
In order to qualify as a real estate investment trust, Meditrust Corporation
is generally required each year to distribute to its stockholders at least 95%
(90% commencing in 2001) of its taxable income, excluding any net capital gain.
In addition, if Meditrust Corporation was to dispose of assets acquired in
certain acquisitions during the ten-year period following the acquisition, it
would be required to distribute at least 95% (90% commencing in 2001) of the
amount of any "built-in gain" attributable to such assets that Meditrust
Corporation recognizes in the disposition, less the amount of any tax paid with
respect to such recognized built-in gain. Meditrust Corporation generally is
subject to a 4% nondeductible excise
78
<PAGE>
tax on the amount, if any, by which certain distributions paid by Meditrust
Corporation with respect to any calendar year are less than the sum of:
- 85% of Meditrust Corporation's ordinary income for that year,
- 95% of Meditrust Corporation's capital gain net income for that year, and
- 100% of Meditrust Corporation's undistributed income from prior years.
MEDITRUST CORPORATION MAY NEED TO BORROW MONEY TO MEET ITS MINIMUM DISTRIBUTION
REQUIREMENTS AND TO CONTINUE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST.
Meditrust Corporation's ability to make distributions to stockholders could
be adversely affected by increased debt service obligations if it needs to
borrow money in order to maintain its real estate investment trust
qualification. For example, differences in timing between when Meditrust
Corporation receives income and when it has to pay expenses could require
Meditrust Corporation to borrow money to meet the requirement that Meditrust
Corporation distributes to its stockholders at least 95% (90% commencing in
2001) of its net taxable income each year excluding net capital gains. The
incurrence of large expenses also could cause Meditrust Corporation to need to
borrow money to meet this requirement. Meditrust Corporation might need to
borrow money for these purposes even if we believe that market conditions are
not favorable for such borrowings and, therefore, we may borrow money on
unfavorable terms.
MEDITRUST CORPORATION'S FUNDS FROM OPERATIONS AND CASH DISTRIBUTIONS MAY AFFECT
THE MARKET PRICE OF OUR PUBLICLY TRADED SECURITIES.
We believe that the market value of a real estate investment trust's equity
securities is based primarily upon the market's perception of the real estate
investment trust's growth potential, including its prospects for accretive
acquisitions and development and its current and potential future cash
distributions, and is secondarily based upon the real estate market value of the
underlying assets. For that reason, our common stock may trade at prices that
are higher or lower than the net asset value per share. To the extent Meditrust
Corporation retains operating cash flow for investment purposes, working capital
reserves or other purposes, these retained funds, while increasing the value of
our underlying assets, may not correspondingly increase the market price of our
common stock. Meditrust Corporation's failure to meet the market's expectations
with regard to future funds from operations and cash distributions would likely
adversely affect the market price of our publicly traded securities.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR PUBLICLY TRADED
SECURITIES.
One of the factors that investors consider important in deciding whether to
buy or sell shares of a real estate investment trust is the distribution rate on
such shares, as a percentage of the price of such shares relative to market
interest rates. If market interest rates go up, prospective purchasers of our
equity securities may expect a higher dividend yield. Higher interest rates
would not, however, result in more funds for Meditrust Corporation to distribute
and, in fact, would likely increase our borrowing costs and potentially decrease
cash available for distribution to the extent that our indebtedness has floating
interest rates. Thus, higher market interest rates could cause the market price
of our publicly traded securities to go down.
PROVISIONS OF OUR CHARTERS AND BYLAWS COULD INHIBIT CHANGES IN CONTROL THAT
COULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our charters and bylaws may delay or prevent a change
in control or other transaction that could provide our stockholders with a
premium over the then-prevailing market price of their paired shares or which
might otherwise be in their best interests. These include a staggered Board of
Directors as well as the ownership limitations in each of our respective Amended
and Restated Certificates of Incorporation.
79
<PAGE>
WE DEPEND ON OUR KEY PERSONNEL.
We depend on the efforts of our executive officers and other key personnel.
While we believe that we could find replacements for these key personnel, the
loss of their services could have a significant adverse effect on our
operations.
WE CANNOT GIVE ASSURANCES THAT NO FURTHER RISKS REMAIN WITH RESPECT TO THE YEAR
2000.
Although at this point we have not identified any specific business
functions that have suffered any material disruptions as a result of Year 2000
events, we cannot give assurances that there is not risk of Year 2000 related
disruptions in the future, which could have a material adverse effect on us.
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>
2000 2001 2002 2003 2004 THEREAFTER FACE VALUE FAIR VALUE
--------- ---------- -------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt Obligations
Long Term Debt:
Fixed Rate..................... $210,335 $ 252,455 $92,279 $207,882 $255,447 $430,006 $1,448,404 $1,219,920
Average interest rate.......... 7.583% 7.657% 7.775% 7.360% 7.362% 7.381% 7.477%
Variable rate.................. $1,165,359 $1,165,359 $1,170,653
Average interest rate.......... 8.935% 8.935%
Interest rate derivatives
Interest rate swap:
Notional amount................ $250,000 $ 500,000 750,000 (5,973)
Pay rate....................... 5.685% 5.700% 5.695%
Receive rate................... (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 of 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
Credit Facility.
80
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Real estate investments, net.............................. $4,672,659 $5,086,736
Cash and cash equivalents................................. 7,220 305,456
Fees, interest and other receivables...................... 79,042 54,712
Goodwill, net............................................. 480,673 486,051
Net assets of discontinued operations..................... -- 305,416
Other assets, net......................................... 228,163 221,180
---------- ----------
Total assets............................................ $5,467,757 $6,459,551
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net........................................ $1,144,406 $1,155,837
Convertible debentures, net............................... 185,468 185,013
Bank notes payable, net................................... 1,154,182 1,831,336
Bonds and mortgages payable, net.......................... 113,382 129,536
---------- ----------
Total indebtedness...................................... 2,597,438 3,301,722
Accounts payable, accrued expenses and other liabilities.... 197,106 206,901
---------- ----------
Total liabilities....................................... 2,794,544 3,508,623
---------- ----------
Commitments and contingencies............................... -- --
Shareholders' equity:
Meditrust Corporation Preferred Stock, $.10 par value;
6,000 shares authorized; 701 and 700 shares issued and
outstanding in 1999 and 1998, respectively.............. 70 70
Paired Common Stock, $.20 combined par value; 500,000
shares authorized; 141,015 and 149,326 paired shares
issued and outstanding in 1999 and 1998, respectively
(including treasury shares in 1998)..................... 28,203 29,865
Additional paid-in-capital................................ 3,654,358 3,891,987
Treasury stock at cost, 1,635 paired common shares in
1998.................................................... -- (163,326)
Unearned compensation..................................... (6,760) (6,718)
Accumulated other comprehensive income.................... 4,468 16,971
Distributions in excess of net income..................... (1,007,126) (817,921)
---------- ----------
Total shareholders' equity.............................. 2,673,213 2,950,928
---------- ----------
Total liabilities and shareholders' equity.............. $5,467,757 $6,459,551
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
81
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenue:
Rental................................................... $165,431 $ 191,874 $137,868
Interest................................................. 138,223 153,093 151,170
Hotel.................................................... 606,577 258,423 --
Other.................................................... 1,750 35,987 --
-------- --------- --------
911,981 639,377 289,038
-------- --------- --------
Expenses:
Interest................................................. 244,973 178,458 87,412
Depreciation and amortization............................ 135,853 87,228 26,838
Amortization of goodwill................................. 21,470 13,265 2,349
General and administrative............................... 32,826 27,098 10,257
Hotel operations......................................... 283,988 119,584 --
Rental property operations............................... 36,517 15,638 210
Loss on sale of securities............................... -- 4,159 --
Gain on sale of assets................................... (12,042) (52,642) --
Income from unconsolidated joint venture................. -- (906) 10
Other.................................................... 108,984 111,215 --
-------- --------- --------
852,569 503,097 127,076
-------- --------- --------
Income from continuing operations before benefit for income
taxes.................................................... 59,412 136,280 161,962
Income tax benefit......................................... -- (4,800) --
-------- --------- --------
Income from continuing operations.......................... 59,412 141,080 161,962
Discontinued operations:
Income from operations, net................................ -- 10,721 450
Adjustment to loss (loss) on disposal of Santa Anita,
net...................................................... 2,961 (67,913) --
Adjustment to loss (loss) on disposal of Cobblestone Golf
Group, net............................................... 27,452 (237,035) --
-------- --------- --------
Net income (loss).......................................... 89,825 (153,147) 162,412
Preferred stock dividends.................................. (16,283) (8,444) --
-------- --------- --------
Net income (loss) available to Paired Common
shareholders............................................. $ 73,542 $(161,591) $162,412
======== ========= ========
Basic earnings per Paired Common Share:
Income from continuing operations........................ $ .30 $ 1.10 $ 2.13
Discontinued operations.................................. .22 (2.44) .01
-------- --------- --------
Net income (loss)........................................ $ .52 $ (1.34) $ 2.14
======== ========= ========
Diluted earnings per Paired Common Share:
Income from continuing operations........................ $ .30 $ 1.06 $ 2.12
Discontinued operations.................................. .21 (2.35) --
-------- --------- --------
Net income (loss)........................................ $ .51 $ (1.29) $ 2.12
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
82
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SHARES OF
BENEFICIAL ACCUMULATED
INTEREST OR PAIRED OTHER
COMMON SHARES PRE- ADDITIONAL UNEARNED COMPRE-
---------------------- FERRED PAID-IN TREASURY COMPEN- HENSIVE
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME
(IN THOUSANDS) -------- ----------- -------- ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ 73,717 $ 1,517,926 $ 2,528
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
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.... 1,041
------ ----------- --- ---------- --------- ------- ---------
BALANCE, DECEMBER 31, 1997........ 88,128 17,626 1,997,517 3,569
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 $(6,718)
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...............
Change in market value of equity
investments in excess of cost... 13,402
------ ----------- --- ---------- --------- ------- ---------
<CAPTION>
COMPRE-
DISTRIBUTIONS HENSIVE
IN EXCESS OF INCOME
EARNINGS TOTAL (LOSS)
(IN THOUSANDS) ------------- ---------- ---------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ $ (135,513) $1,384,941
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
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
---------- ---------- ---------
BALANCE, DECEMBER 31, 1997........ (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.......................... 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)
Change in market value of equity
investments in excess of cost... 13,402 13,402
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
83
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SHARES OF
BENEFICIAL INTEREST ACCUMULATED
OR PAIRED OTHER
COMMON SHARES PRE- ADDITIONAL UNEARNED COMPRE-
------------------- FERRED PAID-IN TREASURY COMPEN- HENSIVE
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME
-------- -------- -------- ---------- --------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998......... 149,326 29,865 70 3,891,987 (163,326) (6,718) 16,971
Issuance of Paired Common Shares
for employee compensation and
stock options.................... 128 26 1,691
Purchase and retirement of treasury
stock............................ (8,501) (1,700) (265,345) 163,326
Issuance of restricted stock
grants........................... 230 46 3,241 (3,287)
Retirement of forfeited restricted
stock grants..................... (168) (34) (2,216) 2,109
Amortization of unearned
compensation..................... 1,136
Effect of Telematrix acquisition... 25,000
Dividends paid.....................
Change in market value of equity
investments in excess of cost.... (12,503)
Net income for the year ended
December 31, 1999................
------- ------- --- ---------- -------- -------- -------
BALANCE, DECEMBER 31, 1999......... 141,015 $28,203 $70 $3,654,358 $ -- $ (6,760) $ 4,468
======= ======= === ========== ======== ======== =======
<CAPTION>
DISTRIBUTIONS COMPRE-
IN EXCESS OF HENSIVE
EARNINGS TOTAL INCOME (LOSS)
------------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1998......... (817,921) 2,950,928 $(139,745)
=========
Issuance of Paired Common Shares
for employee compensation and
stock options.................... 1,717
Purchase and retirement of treasury
stock............................ (103,719)
Issuance of restricted stock
grants...........................
Retirement of forfeited restricted
stock grants..................... (141)
Amortization of unearned
compensation..................... 1,136
Effect of Telematrix acquisition... 25,000
Dividends paid..................... (279,030) (279,030)
Change in market value of equity
investments in excess of cost.... (12,503) $ (12,503)
Net income for the year ended
December 31, 1999................ 89,825 89,825 89,825
----------- ---------- ---------
BALANCE, DECEMBER 31, 1999......... $(1,007,126) $2,673,213 $ 77,322
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
84
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 89,825 $ (153,147) $ 162,412
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of real estate............................... 125,714 90,446 26,750
Goodwill amortization..................................... 21,470 15,826 2,349
Loss (gain) on sale of assets............................. (42,455) 19,430 --
Shares issued for compensation............................ 159 438 1,994
Equity in income of joint venture, net of dividends
received................................................ -- 544 --
Other depreciation, amortization and other items, net..... 35,781 27,384 1,538
Other non cash items...................................... 70,900 318,457 --
---------- ---------- ---------
Cash Flows from Operating Activities Available for
Distribution.............................................. 301,394 319,378 195,043
Net change in other assets and liabilities of discontinued
operations................................................ (4,227) (18,331) --
Net change in other assets and liabilities.................. (66,989) (124,876) (10,631)
---------- ---------- ---------
Net cash provided by operating activities............... 230,178 176,171 184,412
---------- ---------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of paired common and Realty
preferred stock......................................... -- 456,713 --
Purchase of treasury stock................................ (103,269) (163,326) --
Proceeds from borrowings on bank notes payable............ 1,176,000 2,445,000 1,078,000
Repayment of bank notes payable........................... (1,868,641) (767,000) (512,015)
Repayment of notes payable................................ (12,500) (220,000) --
Equity offering and debt issuance costs................... (1,303) (47,393) (5,896)
Repayment of convertible debentures....................... -- (43,152) --
Principal payments on bonds and mortgages payable......... (15,937) (37,625) (5,098)
Dividends/distributions to shareholders................... (279,030) (438,639) (176,210)
Proceeds from exercise of stock options................... 318 5,035 9,138
---------- ---------- ---------
Net cash provided by (used in) financing activities..... (1,104,362) 1,189,613 387,919
---------- ---------- ---------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding........ (129,492) (636,989) (292,607)
Investment in real estate mortgages and development
funding................................................. (33,321) (222,524) (299,861)
Prepayment proceeds and principal payments received on
real estate mortgages................................... 136,619 407,241 54,618
Proceeds from sale of assets.............................. 615,330 484,467 6,173
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 --
Cash acquired in Telematrix acquisition................... 1,433 -- --
Working capital and notes receivable advances, net of
repayments and collections.............................. (14,621) 6,211 (210)
Investment in equity securities........................... -- (30,222) (52,708)
---------- ---------- ---------
Net cash provided by (used in) investing activities..... 575,948 (1,104,060) (571,325)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents.... (298,236) 261,724 1,006
Cash and cash equivalents at:
Beginning of year......................................... 305,456 43,732 42,726
---------- ---------- ---------
End of year............................................... $ 7,220 $ 305,456 $ 43,732
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
85
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Real estate investments, net................................ $4,652,631 $5,067,217
Cash and cash equivalents................................... 5,779 292,694
Fees, interest and other receivables........................ 59,004 42,039
Goodwill, net............................................... 451,240 451,672
Due from Meditrust Operating Company........................ 30,525 --
Net assets of discontinued operations....................... -- 280,330
Other assets, net........................................... 175,870 187,033
---------- ----------
Total assets............................................ $5,375,049 $6,320,985
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net........................................ $1,144,406 $1,155,837
Convertible debentures, net............................... 185,468 185,013
Bank notes payable, net................................... 1,154,182 1,831,336
Bonds and mortgages payable, net.......................... 113,382 129,536
---------- ----------
Total indebtedness...................................... 2,597,438 3,301,722
---------- ----------
Due to Meditrust Operating Company.......................... -- 29,169
Accounts payable, accrued expenses and other liabilities.... 139,833 116,741
---------- ----------
Total liabilities....................................... 2,737,271 3,447,632
---------- ----------
Commitments and contingencies............................... -- --
Shareholders' equity:
Preferred Stock, $.10 par value; 6,000 shares authorized;
701 and 700 shares issued and outstanding in 1999 and
1998, respectively........................................ 70 70
Common Stock, $.10 par value; 500,000 shares authorized;
142,320 and 150,631 shares issued and outstanding in 1999
and 1998, respectively (including treasury shares in
1998)..................................................... 14,232 15,063
Additional paid-in-capital.................................. 3,586,994 3,820,436
Treasury stock at cost, 1,635 common shares in 1998......... -- (160,223)
Unearned compensation....................................... (6,104) (6,718)
Accumulated other comprehensive income...................... 4,468 16,971
Distributions in excess of net income....................... (948,018) (799,118)
---------- ----------
2,651,642 2,886,481
Due from Meditrust Operating Company........................ (736) --
Note receivable-Meditrust Operating Company................. (13,128) (13,128)
---------- ----------
Total shareholders' equity.............................. 2,637,778 2,873,353
---------- ----------
Total liabilities and shareholders' equity.............. $5,375,049 $6,320,985
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
86
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenue:
Rental................................................... $165,431 $ 191,874 $137,868
Interest................................................. 138,180 152,486 151,122
Rent from Meditrust Operating Company.................... 274,018 125,706 --
Interest from Meditrust Operating Company................ -- 712 129
Royalty from Meditrust Operating Company................. 16,350 6,326 --
Hotel.................................................... 12,437 5,781 --
Other.................................................... 1,750 35,987 --
-------- --------- --------
608,166 518,872 289,119
-------- --------- --------
Expenses:
Interest................................................. 244,700 178,374 87,412
Interest to Meditrust Operating Company.................. 1,713 -- --
Depreciation and amortization............................ 128,642 84,327 26,838
Amortization of goodwill................................. 20,723 12,505 2,214
General and administrative............................... 13,968 18,374 10,111
Hotel operations......................................... 4,723 2,060 --
Rental property operations............................... 36,517 15,638 210
Loss on sale of securities............................... -- 4,159 --
Gain on sale of assets................................... (12,042) (52,642) --
Income from unconsolidated joint venture................. -- (906) 10
Other.................................................... 79,308 96,052 --
-------- --------- --------
518,252 357,941 126,795
-------- --------- --------
Income from continuing operations.......................... 89,914 160,931 162,324
Discontinued operations:
Income from operations, net.............................. -- 14,635 688
Adjustment to loss (loss) on disposal of Santa Anita,
net.................................................... 6,655 (82,953) --
Adjustment to loss (loss) on disposal of Cobblestone Golf
Group, net............................................. 33,561 (227,557) --
-------- --------- --------
Net income (loss)........................................ 130,130 (134,944) 163,012
Preferred stock dividends................................ (16,283) (8,444) --
-------- --------- --------
Net income (loss) available to Common Shareholders....... $113,847 $(143,388) $163,012
======== ========= ========
Basic earnings per Common Share:
Income from continuing operations........................ $ .51 $ 1.25 $ 2.13
Discontinued operations.................................. .28 (2.43) .01
-------- --------- --------
Net income (loss)........................................ $ .79 $ (1.18) $ 2.14
======== ========= ========
Diluted earnings per Common Share:
Income from continuing operations........................ $ .51 $ 1.20 $ 2.11
Discontinued operations.................................. .28 (2.33) .01
-------- --------- --------
Net income (loss)........................................ $ .79 $ (1.13) $ 2.12
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
87
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SHARES OF
BENEFICIAL INTEREST ACCUMULATED
OR PAIRED COMMON OTHER
SHARES ADDITIONAL UNEARNED COMPRE-
---------------------- PREFERRED PAID-IN TREASURY COMPEN- HENSIVE
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME
-------- ----------- --------- ---------- --------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996...................... 73,717 $ 1,517,926 $2,528
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
Distributions paid..........
Net income for the year
ended December 31, 1997...
Change in market value of
equity investment in
excess of cost............ 1,041
------ ----------- --- ---------- --------- ------- ------
BALANCE, DECEMBER 31,
1997...................... 89,433 8,943 1,985,229 3,569
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 $(6,718)
<CAPTION>
COMPRE-
DISTRIBUTIONS NOTE HENSIVE
IN EXCESS RECEIVABLE DUE FROM INCOME
OF EARNINGS OPERATING OPERATING TOTAL (LOSS)
------------- ----------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1996...................... $(135,513) $1,384,941
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
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
--------- -------- --------- ---------- --------
BALANCE, DECEMBER 31,
1997...................... (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.................... 235
</TABLE>
The accompanying notes are an integral part of these financial statements
88
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SHARES OF
BENEFICIAL INTEREST ACCUMULATED
OR PAIRED OTHER
COMMON SHARES ADDITIONAL UNEARNED COMPRE- DISTRIBUTIONS
------------------- PREFERRED PAID-IN TREASURY COMPEN- HENSIVE IN EXCESS
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME OF EARNINGS
-------- -------- --------- ---------- -------- --------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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................. (438,639)
Property distribution.......... (33,162)
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..... 150,631 15,063 70 3,820,436 (160,223) (6,718) 16,971 (799,118)
Issuance of shares of Common
Stock for employee
compensation and stock
options...................... 128 13 1,673
Purchase and retirement of
treasury stock............... (8,501) (850) (261,126) 160,223
Issuance of restricted stock
grants....................... 230 23 3,201 (287)
Retirement of forfeited
restricted stock grants...... (168) (17) (2,190)
Amortization of unearned
compensation................. 901
Effect of Telematrix
acquisition.................. 25,000
Dividends paid................. (279,030)
Change in market value of
equity investments in excess
of cost...................... (12,503)
Net income for the year ended
December 31, 1999............ 130,130
------- ------- --- ---------- -------- ------- -------- ---------
Balance, December 31, 1999..... 142,320 $14,232 $70 $3,586,994 $ -- $(6,104) $ 4,468 $(948,018)
======= ======= === ========== ======== ======= ======== =========
<CAPTION>
COMPRE-
NOTE HENSIVE
RECEIVABLE DUE FROM INCOME
OPERATING OPERATING TOTAL (LOSS)
---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Issuance of shares of Common St
Conversion of debentures, net
of unamortized issue costs
of $1...................... 7,030
Employee compensation and
stock options.............. 5,371
Dividends paid................. (438,639)
Property distribution.......... (33,162)
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..... (13,128) 2,873,353 $(121,542)
=========
Issuance of shares of Common
Stock for employee
compensation and stock
options...................... 1,686
Purchase and retirement of
treasury stock............... (101,753)
Issuance of restricted stock
grants....................... $(2,943) (6)
Retirement of forfeited
restricted stock grants...... 2,207
Amortization of unearned
compensation................. 901
Effect of Telematrix
acquisition.................. 25,000
Dividends paid................. (279,030)
Change in market value of
equity investments in excess
of cost...................... (12,503) $ (12,503)
Net income for the year ended
December 31, 1999............ 130,130 130,130
-------- ------- ---------- ---------
Balance, December 31, 1999..... $(13,128) $ (736) $2,637,778 $ 117,627
======== ======= ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements
89
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 130,130 $ (134,944) $ 163,012
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of real estate............................... 123,253 86,395 26,750
Goodwill amortization..................................... 20,723 15,066 2,214
Loss (gain) on sale of assets............................. (52,258) 34,470 --
Shares issued for compensation............................ 133 430 1,994
Equity in income of joint venture, net of dividends
received................................................ -- 544 --
Other depreciation, amortization and other items, net..... 26,462 15,749 1,367
Other non cash items...................................... 66,544 309,612 --
---------- ---------- ----------
Cash Flows from Operating Activities Available for
Distribution.............................................. 314,987 327,322 195,337
Net change in other assets and liabilities.................. (54,573) (139,716) (10,142)
---------- ---------- ----------
Net cash provided by operating activities............... 260,414 187,606 185,195
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from issuance of common and preferred stock...... -- 447,044 --
Purchase of treasury stock................................ (101,303) (160,223) --
Proceeds from borrowings on bank notes payable............ 1,176,000 2,445,000 1,078,000
Repayment of bank notes payable........................... (1,868,641) (767,000) (512,015)
Repayment of notes payable................................ (12,500) (220,000) --
Equity offering and debt issuance costs................... (1,303) (47,288) (5,896)
Intercompany lending, net................................. 4,215 26,385 (11,175)
Repayment of convertible debentures....................... -- (43,152) --
Principal payments on bonds and mortgages payable......... (15,937) (37,625) (5,098)
Dividends/distributions to shareholders................... (279,030) (438,639) (176,210)
Proceeds from exercise of stock options................... 312 4,939 9,092
---------- ---------- ----------
Net cash provided by (used in) financing activities..... (1,098,187) 1,209,441 376,698
---------- ---------- ----------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding........ (128,316) (636,707) (292,607)
Investment in real estate mortgages and development
funding................................................. (33,321) (222,524) (299,861)
Prepayment proceeds and principal payments received on
real estate mortgages................................... 136,619 407,241 54,618
Proceeds from sale of assets.............................. 589,067 459,833 6,173
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 in Cobblestone merger....................... -- 723 --
Cash acquired in La Quinta merger......................... -- 18,004 --
Cash acquired in Telematrix acquisition................... 1,430 -- --
Working capital and notes receivable advances, net of
repayments and collections.............................. (14,621) 6,211 (134)
Investment in MAC......................................... -- -- (43,662)
Investment in equity securities........................... -- (30,222) (14,052)
---------- ---------- ----------
Net cash provided by (used in) investing activities..... 550,858 (1,128,412) (580,560)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.... (286,915) 268,635 (18,667)
Cash and cash equivalents at:
Beginning of year......................................... 292,694 24,059 42,726
---------- ---------- ----------
End of year............................................... $ 5,779 $ 292,694 $ 24,059
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
90
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 1,441 $ 12,762
Fees, interest and other receivables...................... 20,038 12,673
Due from Meditrust Corporation............................ -- 46,874
Other current assets, net................................. 12,643 10,423
-------- --------
Total current assets.................................... 34,122 82,732
Investment in common stock of Meditrust Corporation....... 37,581 37,581
Goodwill, net............................................. 29,433 34,379
Property, plant and equipment, less accumulated
depreciation of $2,572 and $760, respectively........... 51,669 30,895
Other non-current assets.................................. 8,009 12,603
-------- --------
Total assets............................................ $160,814 $198,190
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.......................................... $ 20,803 $ 18,349
Accrued payroll and employee benefits..................... 21,452 33,457
Accrued expenses and other current liabilities............ 10,030 30,980
Due to Meditrust Corporation.............................. 54,820 --
-------- --------
Total current liabilities............................... 107,105 82,786
Note payable to Meditrust Corporation..................... 13,128 13,128
Other non-current liabilities............................. 4,988 7,629
Net liabilities of discontinued operations................ -- 16,140
-------- --------
Total liabilities....................................... 125,221 119,683
Commitments and contingencies............................. -- --
Shareholders' equity:
Common Stock, $.10 par value; 500,000 shares authorized;
141,015 and 149,326 shares issued and outstanding in
1999 and 1998, respectively (including treasury shares
in 1998)................................................ 14,102 14,933
Additional paid-in-capital................................ 104,814 109,001
Unearned compensation..................................... (656) --
Treasury stock at cost, 1,635 shares in 1998.............. -- (3,103)
Retained earnings (deficit)............................... (59,108) (18,803)
-------- --------
59,152 102,028
Due from Meditrust Corporation............................ (23,559) (23,521)
-------- --------
Total shareholders' equity.............................. 35,593 78,507
-------- --------
Total liabilities and shareholders' equity............ $160,814 $198,190
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
91
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE INITIAL
ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue:
Hotel.............................................. $594,140 $252,642 $ --
Interest........................................... 43 607 48
Interest from Meditrust Corporation................ 1,713 -- --
-------- -------- -----
595,896 253,249 48
-------- -------- -----
Expenses:
Hotel operations................................... 279,265 117,524 --
Depreciation and amortization...................... 7,211 2,901 --
Amortization of goodwill........................... 747 760 135
Interest and other................................. 273 84 --
Interest to Meditrust Corporation.................. -- 712 129
General and administrative......................... 18,858 8,724 146
Royalty to Meditrust Corporation................... 16,350 6,326 --
Rent to Meditrust Corporation...................... 274,018 125,706 --
Other.............................................. 29,676 15,163 --
-------- -------- -----
626,398 277,900 410
-------- -------- -----
Loss from continuing operations before benefit for
income taxes....................................... (30,502) (24,651) (362)
Income tax benefit................................... -- (4,800) --
-------- -------- -----
Loss from continuing operations...................... (30,502) (19,851) (362)
Discontinued operations:
Loss from operations, net.......................... -- (3,914) (238)
Adjustment to loss (loss) on disposal of
Santa Anita, net................................. (3,694) 15,040 --
Adjustment to loss (loss) on disposal of
Cobblestone Golf Group, net...................... (6,109) (9,478) --
-------- -------- -----
Net loss............................................. $(40,305) $(18,203) $(600)
======== ======== =====
Basic earnings per Common Share:
Loss from continuing operations.................... $ (.21) $ (.16) $(.01)
Discontinued operations............................ (.07) .01 --
-------- -------- -----
Net loss........................................... $ (.28) $ (.15) $(.01)
======== ======== =====
Diluted earnings per Common Share:
Loss from continuing operations.................... $ (.21) $ (.16) $(.01)
Discontinued operations............................ (.07) .01 --
-------- -------- -----
Net loss........................................... $ (.28) $ (.15) $(.01)
======== ======== =====
</TABLE>
The accompanying notes are an integral part of these financial statements
92
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE INITIAL PERIOD ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST OR
COMMON STOCK ADDITIONAL DUE FROM
--------------------- PAID-IN TREASURY UNEARNED MEDITRUST RETAINED
SHARES AMOUNT CAPITAL STOCK COMPENSATION CORPORATION EARNINGS TOTAL
--------- --------- ---------- -------- ------------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <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
Issuance of shares of Common
Stock for employee
compensation and stock
options..................... 128 13 20 (33)
Purchase and retirement of
treasury stock.............. (8,501) (850) (4,219) 3,103 (1,966)
Issuance of restricted stock
grants...................... 230 23 40 $(3,000) (5) (2,942)
Retirement of forfeited
restricted stock grants..... (168) (17) (28) 2,109 2,064
Amortization of unearned
compensation................ 235 235
Net loss for the year ended
December 31, 1999........... (40,305) (40,305)
-------- -------- -------- ------- ------- -------- -------- -------
BALANCE, DECEMBER 31, 1999.... 141,015 $ 14,102 $104,814 $ -- $ (656) $(23,559) $(59,108) $35,593
======== ======== ======== ======= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
93
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE INITIAL
FOR THE YEAR ENDED FOR THE YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------------ ------------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss................................... $(40,305) $(18,203) $ (600)
Adjustments to reconcile net loss to cash
used in operating activites:
Goodwill amortization...................... 747 760 135
Loss (gain) on sale of assets.............. 9,803 (15,040) --
Shares issued for compensation............. 26 8 --
Other depreciation and amortization........ 11,780 15,686 171
Other items................................ 4,356 8,845 --
Net change in other assets and liabilities
of discontinued operations............... (4,227) (6,852) --
Net change in other assets and
liabilities.............................. (12,416) 3,361 (489)
-------- -------- -------
Net cash used in operating activities.... (30,236) (11,435) (783)
-------- -------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of stock............ -- 9,669 43,662
Purchase of treasury stock................. (1,966) (3,103) --
Equity offering costs...................... -- (105) --
Intercompany lending, net.................. (4,215) (26,385) 11,175
Proceeds from stock option exercises....... 6 96 46
-------- -------- -------
Net cash provided by (used in) financing
activities............................. (6,175) (19,828) 54,883
-------- -------- -------
Cash Flows from Investing Activities:
Capital improvements to real estate........ (1,176) (282) --
Proceeds from sale of assets............... 26,263 24,634 --
Cash acquired from Santa Anita merger...... -- -- 4,305
Cash acquired in Telematrix acquisition.... 3 -- --
Collection of receivables and repayment of
working capital advances................. -- -- (76)
Investment in equity securities............ -- -- (38,656)
-------- -------- -------
Net cash provided by (used in) investing
activities............................. 25,090 24,352 (34,427)
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents............................ (11,321) (6,911) 19,673
Cash and cash equivalents at:
Beginning of year or at inception.......... 12,762 19,673 --
-------- -------- -------
End of year................................ $ 1,441 $ 12,762 $19,673
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
94
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Meditrust Corporation ("Realty") and Meditrust Operating Company and
subsidiaries ("Operating") (collectively the "Companies" or "The Meditrust
Companies") are two separate companies, the common stock of which trades as a
single unit on the New York Stock Exchange under a stock pairing arrangement.
Realty is a self administered real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended, and invests primarily in
healthcare and lodging facilities.
The healthcare facilities include nursing homes, assisted living facilities,
medical office buildings 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, who is responsible for
operating the hotels, or to other third party lessees (the "Lessees"). At
December 31, 1999, Realty leased 298 of its hotel investments to Operating for
5 year terms, 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 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"), and leases the respective
facilities and licenses 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, 1999, La Quinta
operated 302 hotels, with over 39,000 rooms located in the western and southern
regions of the United States.
BASIS OF PRESENTATION AND CONSOLIDATION
Separate financial statements have been presented for Realty and for
Operating. Combined Realty and Operating 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 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 a comprehensive restructuring plan announced in November
1998, the Companies have reflected the golf-related real estate and operating
properties (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.
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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 that 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.
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, DEVELOPMENT AND INTEREST COSTS
Realty capitalizes 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' weighted average cost of financing and is reflected as rental income.
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.
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GOODWILL
Goodwill represents the excess of cost over the fair value of assets
acquired and is 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.
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, 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, Telematrix, Inc. and Realty's previous
investment advisor which are being amortized on a straight-line basis over 20,
15 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,
a non-compete agreement 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.
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SHAREHOLDERS' EQUITY
The outstanding shares of Realty's common stock and Operating'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'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 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 newly constructed
hotels and or the timing of hotel acquisitions may cause variation of revenue
from quarter to quarter.
EARNINGS PER SHARE
In 1998, the Companies adopted Financial Accounting Standards Board
Statement No. 128 "Earnings Per Share" ("SFAS 128"). 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 as of
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December 31, 1999 and 1998 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, generally no provision for federal income taxes
is believed necessary in the financial statements of Realty except for certain
transactions resulting in capital gains which may require a federal tax
provision.
The reported amount of the Companies' net assets exceeds their tax basis by
approximately $1,514,100,000 and $1,638,700,000 as of December 31, 1999 and
1998, respectively.
Operating 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.
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
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("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.
During 1999, Financial Accounting Standards Board Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities--deferral of the
Effective Date of the Statement of Financial Accounting Standards No. 133"
("SFAS 137") was issued. This statement amended SFAS 133 by deferring the
effective date to fiscal quarters of all fiscal years beginning after June 15,
2000.
In November 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges"
("SAB 100"). This SAB expresses the views of the Staff regarding the accounting
for the disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. The Companies do not expect the provisions
of SAB 100 to have a material impact on its financial statements.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This SAB summarizes
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certain of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Companies do not
expect the provisions of SAB 101 to have a material impact on its financial
statements.
RECLASSIFICATION
Certain reclassifications have been made to the 1998 presentation to conform
to the 1999 presentation.
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,
-------------------------------
1999 1998 1997
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Change in fees, interest and other receivables.............. $ (2,922) $ 24,946 $(10,581)
Change in other assets...................................... (28,357) (6,544) (1,657)
Change in accrued expenses and other liabilities............ (35,710) (143,278) 1,607
-------- --------- --------
$(66,989) $(124,876) $(10,631)
======== ========= ========
</TABLE>
Details of other non-cash items follow:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for assets held for sale.......................... $ 48,344 $ 33,218 $ --
Provision for loss on real estate mortgage and loans
receivable................................................ 13,223 16,036 --
Straight line rent.......................................... (3,357) (12,555) --
Provision for loss on working capital and other
receivables............................................... 6,209 16,400 --
Provision for real estate assets............................ -- 14,700 --
Provision for loss on discontinued operations............... -- 236,570 --
Write-off of capitalized pre-development costs.............. -- 8,720 --
Reserve for restructuring expenses.......................... 2,125 5,668 --
Write-off of software development costs..................... 3,998 --
Other....................................................... 358 (300) --
-------- --------- --------
$ 70,900 $ 318,457 $ --
======== ========= ========
</TABLE>
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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,
----------------------------------
1999 1998 1997
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid during the period........................... $241,115 $ 166,452 $ 75,936
Interest capitalized during the period.................... 7,116 13,480 4,627
Non-cash investing and financing transactions:
Value of real estate acquired:
Land, land improvements and buildings................. 11,493
Retirements and write-offs of project costs............. (19,798) (20,651)
Accumulated depreciation and provisions of buildings
sold.................................................. 27,425 33,161
Increase (reduction) in real estate mortgages net of
participation reduction............................... 431 (31,483) 256
Change in market value of equity securities in excess of
cost.................................................. (12,503) 13,402 1,041
Value of shares issued for conversion of debentures..... 7,167 48,161
In connection with the Telematrix Merger:
Fair value of assets acquired........................... 8,436
Excess purchase consideration over estimated fair market
value of assets acquired.............................. 21,986
Liabilities assumed..................................... (5,422)
Value of the issuance of Preferred Shares............... 25,000
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>
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MEDITRUST CORPORATION:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
----------------------------------
1999 1998 1997
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid during the period........................... $240,023 $ 166,181 $ 75,936
Interest capitalized during the period.................... 6,223 13,480 4,627
Non-cash investing and financing transactions:
Value of real estate acquired:
Land, land improvements and buildings................. 11,493
Retirements and write-offs of project costs............. (19,798) (20,651)
Accumulated depreciation and provisions of buildings
sold.................................................. 27,425 33,161
Increase (reduction) in real estate mortgages net of
participation reduction............................... 431 (31,483) 256
Change in market value of equity securities in excess
of cost............................................... (12,503) 13,402 1,041
Value of shares issued for conversion of debentures..... 7,031 47,347
Property distribution................................... (33,162)
Stock dividend of MAC shares............................ 43,662
In connection with the Telematrix Merger:
Fair value of assets acquired........................... 8,436
Excess purchase consideration over estimated fair market
value of assets acquired.............................. 21,986
Liabilities assumed..................................... (5,422)
Value of the issuance of preferred shares............... 25,000
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>
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MEDITRUST OPERATING COMPANY:
<TABLE>
<CAPTION>
FOR THE INITIAL PERIOD
FOR THE YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
1999 1998 1997
-------- --------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid during the period........................ $1,092 $ 324 $ --
Interest capitalized during the period................. 893
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. Accordingly, the operations of La Quinta are included in
the combined and consolidated financial statements since the consummation of the
La Quinta Merger.
The total consideration paid in connection with the La Quinta Merger was
approximately $2,980,000,000. At the time of the La Quinta Merger, the excess of
the purchase price, including costs of the La Quinta Merger, over the fair
market value of the net assets acquired approximated $302,000,000 and was
recorded as goodwill in the accompanying financial statements. During 1999,
certain pre-acquisition contingencies as well as other estimates that were made
in recording the La Quinta Merger in 1998 were quantified and finalized. As a
result, goodwill has increased for payments made to former and current
executives under specific employment agreements that were in effect at the date
of the La Quinta Merger in the amount of $6,000,000. Also, goodwill decreased as
a result of the reversal of certain self insurance reserves and other accrued
liabilities being settled for amounts that were less than previously anticipated
in the amount of $5,000,000.
As a result of plans contemplated at the time of the La Quinta Merger,
management relocated certain functions of the La Quinta corporate headquarters,
including marketing, legal, development, 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. 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, was originally included in the acquisition costs as
liabilities assumed. As of December 31, 1999, substantially all of this
provision had been expended to cover relocation related expenditures referred to
above. Approximately $3,000,000
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of this provision related to certain severance and office and employee
relocation costs was reversed against goodwill.
Goodwill associated with the La Quinta Merger is being amortized over
20 years.
The following unaudited pro forma condensed combined consolidated results of
operations of Realty and Operating 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, 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 AND ACQUISITIONS
On October 7, 1999, Realty acquired Telematrix, Inc., a provider of
telephone software and equipment for the lodging industry. Total consideration
in connection with the purchase was approximately $26,341,000 and was comprised
of 1,000 shares of 9% Series B Cumulative Redeemable Convertible Preferred Stock
valued at $25,000,000, costs to acquire Telematrix and liabilities assumed. In
addition, Realty entered into a $1,000,000 5-year noncompete agreement with the
former owner of Telematrix. The excess purchase price over fair market value of
the net assets acquired approximated $21,986,000 and has been recorded as
goodwill and is being amortized over 15 years on a straight-line basis. This
acquisition has been accounted for under the purchase method and accordingly
operations of Telematrix are included in the lodging revenue and expense
categories of the combined and consolidated statements since consummation of the
acquisition.
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
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<PAGE>
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
During November 1998, the Boards of Directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan included the sale of Cobblestone Golf Group, which consisted
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.
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 for the year ended
December 31, 1998. During the year ended December 31, 1999, the Companies
recorded an adjustment of $2,961,000. This change in the previously estimated
loss on disposal resulted from working capital purchase price adjustments and
differences in estimated costs of sale.
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 were classified as net assets of discontinued
operations on the combined consolidated balance sheet. On March 31, 1999, the
Companies sold the Cobblestone Golf Group for $393,000,000. During the year
ended December 31, 1999, the Companies recorded a gain of $27,452,000 to adjust
the estimated loss on disposal of the Cobblestone Golf Group. This change
primarily resulted from revisions in the income tax provision necessitated by
the issuance of Internal Revenue Service temporary regulations related to the
treatment of built in gains, as well as working capital purchase price
adjustments and differences in estimated costs of sale.
105
<PAGE>
Combined operating results of discontinued golf operations for the year
ended December 31, 1999 (exclusive of any interest expense, depreciation and
corporate charges) follow. Operating results arose from the period between
January 1, 1999 and March 29, 1999:
<TABLE>
<CAPTION>
COBBLESTONE
GOLF GROUP
--------------
(IN THOUSANDS)
<S> <C>
Revenues.................................................... $22,694
Operating expenses.......................................... 20,536
-------
Contribution................................................ 2,158
Other expenses.............................................. 6,260
-------
Loss before income taxes.................................... (4,102)
Income tax benefit.......................................... --
-------
Net loss.................................................... $(4,102)
=======
</TABLE>
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,
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 444,523 $ 475,376
Buildings and improvements, net of accumulated depreciation
and other provisions of $272,107 and $186,594............. 2,876,418 3,381,392
Real estate mortgages and loans receivable, net of a
valuation allowance of $32,415 and $18,991................ 1,059,920 1,197,634
Assets held for sale, net of accumulated depreciation and
other provisions of $98,831 and $41,562................... 291,798 32,334
---------- ----------
$4,672,659 $5,086,736
========== ==========
</TABLE>
During 1999, Realty provided net funding of $38,312,000 for ongoing
construction of healthcare facilities committed to prior to 1999. The Companies
also provided net funding of $81,639,000 for construction and capital
improvements to hotels acquired in the La Quinta Merger, and net funding of
approximately $9,541,000 for capital improvements to golf courses which were
included in net assets of discontinued operations as of December 31, 1998 and
subsequently sold on March 31, 1999.
Realty also provided $33,321,000 for ongoing construction of mortgaged
facilities already in the portfolio.
During the year ended December 31, 1999, Realty received net proceeds of
$242,340,000 from the sale of three long-term care facilities, 40 assisted
living facilities, one rehabilitation facility and one alcohol and substance
abuse treatment facility. Realty realized a net gain on these sales of
$12,042,000.
106
<PAGE>
In connection with these sales, $1,044,000 in lease breakage fees were received
and have been included as other income in the consolidated statements of income.
Realty also received $4,306,000 from the sale of a hotel and land held for
development. There was no gain or loss realized on these sales.
On March 31, 1999, Realty sold 43 golf courses (or leasehold interests in
golf courses) as part of the sale of Cobblestone Golf Group (See Note 5). These
golf courses were included in net assets of discontinued operations as of
December 31, 1998.
During the year ended December 31, 1999, Realty received principal payments
of $136,619,000 on real estate mortgages. Of this amount, $120,973,000
represents payments in accordance with the restructuring plan (See Note 5). In
connection with these payments, Realty received $706,000 in prepayment fees
which have been classified as other income in the consolidated statements of
operations.
At December 31, 1999, Realty was committed to provide additional financing
of approximately $23,000,000 for two assisted living facilities as well as
additions to existing facilities in the portfolio.
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
$7,770,000 at December 31, 1999, and partner's equity in the partnership and
joint venture of approximately $6,563,000 are also included in accrued expenses
and other liabilities in the consolidated financial statements.
7. OTHER ASSETS
Other assets include primarily intangible assets, investments in equity
securities classified as available-for-sale, furniture, fixtures and equipment,
and other receivables.
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,
1999, the market value of this investment was $61,352,000. The difference
between market value and cost, $4,148,000, is included in shareholders' equity
in the accompanying balance sheet. The investment in equity securities also
includes 1,081,000 shares of stock and warrants to purchase 5,000 shares of
stock in Balanced Care Corporation, a healthcare operator. This investment has a
market value of $1,426,000 at December 31, 1999. The difference between market
value and cost, $320,000, is included in shareholders' equity in the
accompanying balance sheet.
Intangible assets consist of the La Quinta tradename, reservation system,
assembled workforce and Telematrix non-compete agreement with net book values at
December 31, 1999, of $90,961,000, $2,605,000, $4,819,000 and $953,000,
respectively, which were acquired as a result of the La Quinta Merger and the
purchase of Telematrix.
Realty provides for a valuation allowance against its assets on a periodic
basis. As of December 31, 1999 and 1998 the valuation allowance provided against
other assets and receivables aggregated approximately $8,095,000 and $1,941,000,
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 common shareholders during the years ended
December 31, 1999, 1998, and 1997 included a return of capital per share of
9.4%, 4.1%, and 31.7%, respectively. The 1998 distribution
107
<PAGE>
also included a long-term capital gain distribution of 30.2% per share. The 1999
and 1998 distributions also include unrecaptured Internal Revenue Code
Section 1250 depreciation from real property of .3% and 6.3% per share,
respectively.
During 1998, Realty issued 7,000,000 depository shares, each representing
one-tenth of a share of the 9% Series A Cumulative Redeemable Preferred Stock
(the "Series A 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. The Series A Preferred Stock is entitled to
quarterly dividends at the rate of 9% per annum of the $250 per share
liquidation preference. On and after June 17, 2003, the Series A 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. Total distributions to holders of
Series A Preferred Stock during the year ended December 31, 1998 included long
term capital gain distributions of 31.4% per share. The 1999 and 1998
distributions also included unrecaptured Internal Revenue Code Section 1250
depreciation from real property of .3% and 6.6% per share, respectively.
During 1999, Realty issued 1,000 shares of 9% Series B Cumulative Redeemable
Convertible Preferred Stock (the "Series B Preferred Stock") with a par value of
$.10 per share in connection with the acquisition of Telematrix, Inc. The
Series B Preferred Stock is entitled to quarterly dividends at the rate of 9%
per annum of the $25,000 per share liquidation preference. On and after
October 7, 2004, the Series B 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 $25,000 per share, plus accrued and unpaid dividends, if any, to the
redemption date. The Series B Preferred Stock is convertible, at the option of
the holder, into paired common shares on October 7, 2004 or the first day that
dividends on any shares of Series B Preferred Stock are in arrears for six or
more dividend periods. Each share of Series B Preferred Stock converts into
2,680 paired common shares. The conversion ratio may be adjusted from time to
time as defined. Total distributions to holders of Series B Preferred Stock
during the year ended December 31, 1999 included unrecaptured Internal Revenue
Code Section 1250 depreciation from real property of .3% per share.
The following classes of Preferred Stock, Excess Stock and Series Common
Stock are authorized as of December 31, 1999; no shares were issued or
outstanding at December 31, 1999 and 1998:
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 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
$987,540,000 and $1,177,368,000 as of December 31, 1999 and 1998, respectively.
The carrying value
108
<PAGE>
of these mortgages is $1,059,920,000 and $1,197,634,000 as of December 31, 1999
and 1998, 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
$2,390,573,000 and $3,293,946,000 as of December 31, 1999 and 1998,
respectively. The carrying value of these convertible debentures and other debt
is $2,613,763,000 and $3,307,947,000 as of December 31, 1999 and 1998,
respectively.
The following table summarizes the underlying notional amounts and fair
values of interest rate swap agreements as of December 31 (in millions):
<TABLE>
<CAPTION>
1999 1998
- ------------------- -------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
- -------- -------- -------- --------
<S> <C> <C> <C>
75$0... $6.0 $1,250 $(11.3)
==== ==== ====== ======
</TABLE>
10. INDEBTEDNESS
Indebtedness at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Notes payable, net:
Principal payments aggregating $106,000 and $118,500,
respectively, due from August 1999 to August 2015, bearing
interest at rates between 7.25% and 8.625%................ $ 105,575 $ 117,950
Principal payments aggregating $125,000 due in July 2000,
bearing interest at 7.375%................................ 124,731 124,508
Principal payments aggregating $80,000 due in July 2001,
bearing interest at 7.6%.................................. 79,828 79,685
Principal payments aggregating $50,000 due in October 2001,
bearing interest at 7.11%................................. 50,000 50,000
Principal payments aggregating $100,000 due in March 2004,
bearing interest at 7.25%................................. 100,710 100,880
Principal payments aggregating $100,000 due in September
2005, bearing interest at 7.40%........................... 99,945 99,936
Principal payments aggregating $50,000 due in February 2007,
bearing interest at 7.27%................................. 50,000 50,000
Principal payments aggregating $160,000 due in August 2007,
bearing interest at 7%.................................... 157,629 157,316
Principal payments aggregating $50,000 due in April 2008,
bearing interest at 7.33%................................. 50,000 50,000
Principal payments aggregating $150,000 due in August 2011,
bearing interest at 7.114%................................ 149,131 148,947
Principal payments aggregating $175,000 due in September
2026, (redeemable September 2003 at the option of the note
holder bearing interest at 7.82%)......................... 174,357 174,115
Other....................................................... 2,500 2,500
---------- ----------
1,144,406 1,155,837
---------- ----------
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Convertible debentures, net:
8.54% interest, convertible at $27.15 per share, due July
2000.................................................... 42,157 41,999
7 1/2% interest, convertible at $30.11 per share, due
March 2001.............................................. 89,492 89,406
9% interest, convertible at $22.47 per share, due January
2002.................................................... 2,370 2,351
8.56% interest, convertible at $27.15 per share, due July
2002.................................................... 51,449 51,257
---------- ----------
185,468 185,013
---------- ----------
Bank notes payable, net:
Revolving credit agreement expiring July 17, 2001........... 658,322 594,625
Term loans, due July 17, 1999............................... -- 743,398
Term loan, due July 17, 2001................................ 495,860 493,313
---------- ----------
1,154,182 1,831,336
---------- ----------
Bonds and mortgages payable, net:
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............................................ 38,561 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.................. 3,205 3,285
Mortgage loans maturing July 2000 through November 2001,
8.67% weighted average effective interest rate............ 44,483 48,292
Industrial development revenue bonds, maturing July 1999
through February 2012, 3.53% weighted average effective
interest rate............................................. 27,133 33,773
---------- ----------
113,382 129,536
---------- ----------
$2,597,438 $3,301,722
========== ==========
</TABLE>
The notes payable, convertible debentures, bank notes payable, bonds and
mortgages payable are presented net of unamortized debt issuance costs of
$16,325,000 and $33,535,000 at December 31, 1999 and 1998, respectively.
Amortization expense associated with the debt issuance costs amounted to
$13,130,000, $12,264,000 and $2,692,000 for the years ended December 31, 1999,
1998 and 1997, respectively, and is reflected in interest expense.
NOTES PAYABLE
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.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which
matured on that date and bore interest at 7.25%.
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.
The 6 7/8% 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.
110
<PAGE>
The 8.54% debentures issued in July 1995 are subject to redemption by the
Companies at 100% of the principal amount plus accrued interest.
The 7 1/2% debentures issued in March 1994 are subject to redemption by the
Companies at 100% of the principal amount plus accrued interest. During the year
ended December 31, 1998, $65,000 of debentures were converted into 2,158 paired
common shares.
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 year ended December 31, 1998, $1,410,000 of debentures were converted into
62,746 paired common shares.
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 credit agreement (the "Credit
Agreement") which provided Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's then existing $365,000,000 revolving credit
facilities. The Credit Agreement provided 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 matured July 17, 1999 and which had 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 matured
July 17, 1999 with a six month extension option that was exercised in June,
1999; 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 Credit Agreement include LIBOR, base rate and money market borrowings.
Pricing on the loan commitments, lines and letters of credit under the Credit
Agreement varies according to the pricing level commensurate with the credit
quality of Realty. Events of default under the 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 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 Credit
Agreement includes covenants with respect to maintaining certain financial
benchmarks, limitations on the types and percentage of investments in certain
business lines, a subjective acceleration clause contingent upon the occurrence
of an event with a material adverse effect on the Companies, limitations on
dividends of Realty and Operating, and other restrictions. In addition,
Operating is a guarantor of all of the obligations of Realty under the Credit
Agreement.
During July 1998, Realty entered into an interest rate swap agreement to
reduce the impact on interest expense of fluctuating interest rates on
$1,250,000,000 of its 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 January and
April 1999, Realty cancelled two $250,000,000 contracts from the interest rate
swap agreement in connection with the repayments described above. At
December 31, 1999, Realty was a fixed rate payor of approximately 5.69% and
received a variable rate of approximately 6.46%. Differentials in the swapped
amounts are recorded as adjustments to interest expense of Realty. Total
interest expense related to the swap agreement was approximately $4,101,000 for
the year ended December 31, 1999 and $995,000 for the period from July to
December 1998.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its Forward Equity Issuance Transaction
("FEIT"), 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
111
<PAGE>
the event that an equity offering of at least $100,000,000 had not been
completed by February 1, 1999. On February 1, 1999 this increase went into
effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan
that was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment, which was subject to
the successful completion of the sale of Cobblestone Golf Group, provided for a
portion of the sale proceeds to be applied to settle a portion of the FEIT. The
second amendment also provided for, among other things, deletion of limitations
on certain healthcare investments and lowering the Tranche A loan commitments to
$850,000,000. On March 31, 1999, the Companies completed the sale of Cobblestone
Golf Group.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract that was scheduled to mature in
July 1999.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
Of the $850,000,000 revolving tranche commitment, approximately $145,839,000
was available at December 31, 1999, carrying interest at Realty's option of the
base rate (10.50%) or LIBOR plus 2.875% (9.16% weighted average rate at
December 31, 1999).
BONDS AND MORTGAGES PAYABLE
Realty is obligated by agreements relating to sixteen issues of Industrial
Revenue Bonds ("IRBs"), in an aggregate amount of $26,940,000, 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, 1999, 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, 2000 and
the remarketing agents are unable to resell such bonds, the maturities of
long-term debt shown below would increase by $6,855,000 for the year ending
December 31, 2002.
The aggregate maturities of notes payable, convertible debentures, bank
notes payable and bonds and mortgages payable, for the five years subsequent to
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- ---- --------------
<S> <C>
2000................................ $ 210,335
2001................................ 1,417,814
2002................................ 92,279
2003................................ 207,882
2004................................ 255,447
Thereafter.......................... 430,006
----------
$2,613,763
==========
</TABLE>
11. FORWARD EQUITY ISSUANCE TRANSACTION
On February 26, 1998, the Companies entered into transactions 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
112
<PAGE>
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 received 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 was
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 was 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 increased significantly as the market price of
the paired shares declined further below the original purchase price. Prior to
the settlement, MLI held 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 was 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.
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. MLI 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 MLI $152,000,000 ($127,000,000 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 April 1, 1999, the Companies settled the FEIT with MLI with a payment
totaling approximately $89,840,000. MLI returned approximately 6,865,000 paired
common shares representing all of the remaining outstanding paired common shares
under the FEIT on that date.
113
<PAGE>
12. OTHER EXPENSES
During the year ended December 31, 1999, the Companies recorded
approximately $108,984,000 in other expenses.
On May 10, 1999, The Meditrust Companies entered into a separation agreement
with Abraham D. Gosman, former Director and Chairman of the Companies and Chief
Executive Officer and Treasurer of Operating. Under the terms of the separation
agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash
and the continuation of certain life insurance benefits. The Meditrust Companies
established a Special Committee of The Boards of Directors of Realty and
Operating (the "Special Committee") to evaluate Mr. Gosman's employment contract
and whether such severance or other payments were appropriate. Based on the
results of the evaluation and recommendation of the Special Committee, the
Boards of Directors concluded that the separation agreement was in the long-term
best interest of the shareholders of the Companies and approved the separation
agreement.
The Companies classified certain assets as held for sale as of December 31,
1999, as a result of an analysis of its healthcare portfolio and related
commitments for transactions expected to close in 2000. Based on estimated net
sales proceeds, the Companies recorded a provision for loss on assets held for
sale of $48,344,000 (of which $5,966,000 was recorded in accrued liabilities)
and related receivables of $6,209,000. The provision reduces the carrying value
of 23 medical office buildings, 12 assisted living facilities and one long-term
care facility to the estimated net sales proceeds less costs to sell. During
1999, the Companies recognized $25,948,000 in net income from these assets. In
addition, based on management's assessment of the collectibility of principal
due on the loans as a result of planned asset transactions, a provision for loss
on five real estate mortgage loans of $13,223,000 was recorded.
The Companies incurred approximately $12,210,000 of costs associated with
the development and implementation of the restructuring plan as well as a
reorganization of the lodging division. These costs primarily relate to the
early repayment and modification of certain debt, employee severance, advisory
fees related to the restructuring plan, and other professional fees related to
the separation agreement with Mr. Gosman.
Also, in conjunction with the implementation of the restructuring plan,
which included a change in the focus of the lodging division to internal growth,
La Quinta management performed a review of the front desk system under
development for its hotels, and made a decision to abandon the project. The
decision was based primarily on management's intent to integrate the front desk
system with new revenue management software, availability of more suitable and
flexible externally developed software and a shift in information systems
philosophy toward implementation of externally developed software. A charge of
approximately $3,998,000 to write-off certain internal and external software
development costs related to the project was recorded during the year ended
December 31, 1999.
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 related 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 of the United States signed into law the
Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform
Act"). The Reform Act 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 began to deteriorate,
thus limiting the Companies' access to cost-efficient capital.
114
<PAGE>
As a result of these events, the Companies commenced a strategic evaluation
of their business which included an extensive review of their healthcare related
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 the comprehensive restructuring plan, which was
announced in November 1998, which included the sale of approximately
$550,000,000 of non-strategic healthcare assets.
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 expected that the remaining assets would 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 have been 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 would likely not have been 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 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 the restructuring plan, the Companies announced plans to refocus
their capital investment program by reducing healthcare related investments and
ceasing development of any new hotels other than the completion of those La
Quinta-Registered Trademark- Inn 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
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.
115
<PAGE>
Based upon the analysis described above, other expenses were recorded for
the year ended December 31, 1999 and 1998, as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSET RELATED:
Provision for assets held for sale........................ $ 48,344 $ 33,218
Provision for real estate assets.......................... -- 14,700
Provision for loss on real estate mortgage and loans
receivable.............................................. 13,223 16,036
Provision for loss on working capital and other
receivables............................................. 6,209 16,400
-------- --------
SUBTOTAL.................................................. 67,776 80,354
-------- --------
COMPREHENSIVE RESTRUCTURING PLAN:
Employee severance........................................ 25,358 7,149
Write-off of capitalized pre-development costs............ -- 8,720
External consulting fees.................................. 5,826 11,882
Write-off software development costs...................... 3,998 --
Write-off capitalized debt costs and swap breakage fees... 6,026 --
-------- --------
SUBTOTAL.................................................. 41,208 27,751
-------- --------
OTHER
Costs of transactions not consummated..................... -- 3,110
-------- --------
TOTAL....................................................... $108,984 $111,215
======== ========
</TABLE>
13. LEASE COMMITMENTS
HEALTHCARE
Realty's healthcare related property and facilities are generally leased
pursuant to non-cancelable, fixed-term operating leases expiring from 2000 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.
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,
1999, are as follows:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- ---- --------------
<S> <C>
2000................................ $138,796
2001................................ 133,660
2002................................ 130,554
2003................................ 99,019
2004................................ 98,255
Thereafter.......................... 209,429
</TABLE>
LODGING
The Participating Hotel Facility Leases between Realty and Operating are
generally long-term and provide for quarterly base or minimum rents plus
contingent or percentage rents based on quarterly
116
<PAGE>
gross revenue thresholds for each hotel facility. Operating 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 to Realty under such leases was approximately $274,018,000 and
$125,706,000 for the years ended December 31, 1999 and 1998, respectively, of
which approximately $50,715,000 and $29,494,000, respectively was contingent
rent.
Realty's future minimum rents at December 31, 1999 receivable from Operating
under noncancelable Participating Hotel Facility Leases for the years ending
December 31, are as follows:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- ---- --------------
<S> <C>
2000................................ $232,845
2001................................ 232,845
2002................................ 232,845
2003................................ 116,423
</TABLE>
Realty also leases restaurants it owns to third parties. These leases are
accounted for as operating leases and expire over a period from 2000 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
1999 and 1998 was $7,188,000 and $3,382,000, respectively, which consisted of
$6,079,000 and $2,812,000 minimum rent and $1,109,000 and $570,000,
respectively, of contingent rent.
Realty's future minimum rents at December 31, 1999 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>
2000................................ $6,437
2001................................ 5,746
2002................................ 4,878
2003................................ 3,946
2004................................ 3,159
Thereafter.......................... 12,334
</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-cancelable lease terms in excess of one year at December 31,
1999 follow:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- ---- ----------------
<S> <C>
2000................................ $ 356
2001................................ 356
2002................................ 294
2003................................ 272
2004................................ 272
Thereafter.......................... 1,065
</TABLE>
Total rent for ground leases was $481,000 for 1999 and $297,000 for 1998.
Operating 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.
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<PAGE>
Operating's future minimum rents at December 31, 1999 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>
2000................................ 3,100
2001................................ 2,949
2002................................ 3,069
2003................................ 3,020
2004................................ 1,562
Thereafter.......................... 6,304
</TABLE>
Total rent expense for operating leases was approximately $2,839,000 for the
year ended December 31, 1999 and $1,030,000 for the period from July 17, 1998 to
December 31, 1998.
14. CONTINGENCIES
The Companies are a party to a number of 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.
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 common 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, 1999, under
the Meditrust Corporation Plan and the Meditrust Operating Plan, 7,042,000 and
5,944,000 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, 1999 expire in
2001 through 2009.
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
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<PAGE>
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 January and August, 1999, 200,000 and 30,000 restricted shares,
respectively, of the Companies' stock were issued to key employees under the
Plans. During July and October, 1999, 168,000 of these restricted shares were
forfeited and thus cancelled and retired. 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.
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 1,210,000 Meditrust Corporation Shares and 279,000
Meditrust Operating Shares were exercisable as of December 31, 1999.
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,
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net income (loss) available to paired common shareholders:
As reported............................................... $73,542 $(161,591) $162,412
Pro forma................................................. 72,221 (162,120) 160,586
Earnings (loss) per paired common share:
Basic as reported......................................... $ .52 $ (1.34) $ 2.14
Diluted as reported....................................... .51 (1.29) 2.12
Basic pro forma........................................... .51 (1.35) 2.11
Diluted pro forma......................................... .51 (1.29) 2.09
</TABLE>
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 1999, 1998 and 1997, respectively. Dividend yield
of 17.0, 14.1 and 7.1, and expected volatility of 48, 33 and 16 percent for each
year, respectively. Risk-free interest rates of 5.1 and 4.4 percent in 1999 and
1998 ranging from 5.9 to 6.7 percent in 1997; and an expected life of four years
in 1999 and 1998 and six years in 1997 for each grant.
119
<PAGE>
A summary of the Companies' stock option activity and related information
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed options
Outstanding at beginning of year............... 5,022 $ 20 3,811 $ 30 1,171 $ 25
Granted........................................ 100 13 2,934 13 2,639 33
Options from merger............................ 452 4 288 17
Exercised...................................... (17) 4 (611) 8 (272) 24
Forfeited...................................... (794) 17 (1,564) 31 (15) 25
----- ----- ------ ----- ----- -----
Outstanding at end of year..................... 4,311 $ 21 5,022 $ 20 3,811 $ 30
----- ----- ------ ----- ----- -----
Options exercisable at year end................ 1,489 1,032 1,225
Weighted average fair value of options granted
during the year.............................. $1.54 $1.44 $2.71
</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, 1999:
(Entire table to be updated)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
AT 12/31/99 CONTRACTUAL LIFE PRICE AT 12/31/99 PRICE
----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Range of exercise prices
$21.85............................. 18,872 1.81 $21.85 18,872 $21.85
$27.46............................. 8,813 4.70 27.46 8,813 27.46
$25.07............................. 285,505 5.22 25.07 285,505 25.07
$27.98--$29.44..................... 60,381 6.63 28.55 60,381 28.55
$32.77............................. 1,321,760 7.61 32.77 528,700 32.77
$30.58--$34.17..................... 61,886 7.56 32.39 61,886 32.39
$13.44............................. 2,454,200 8.95 13.44
$11.63--$16.06..................... 99,800 9.25 13.30 524,799 13.44
--------- ---- ------ --------- ------
4,311,217 8.21 $20.68 1,488,956 $24.12
========= ==== ====== ========= ======
</TABLE>
RETIREMENT, PENSION AND OTHER BENEFITS
Realty entered into a non-qualified Trustee Retirement Plan (the "Retirement
Plan") during 1996. The Retirement Plan provided 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 Retirement Plan, totaled
$1,214,000 and $346,000 in the accompanying income statements for 1998 and 1997,
respectively.
On December 10, 1998, the Board of Directors of Realty voted to accept the
recommendations of the Compensation Committee to make a payment, pursuant to the
Meditrust Corporation Plan, of unrestricted stock of the Companies to certain
Directors that previously qualified under the Retirement Plan, in an amount
equal to the present value of each individual's accumulated benefit.
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<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 $538,000, $320,000 and $106,000,
for the years ended December 31, 1999, 1998 and 1997, respectively.
On July 17, 1998, the La Quinta Merger was completed. La Quinta sponsors the
La Quinta Retirement Plan; the projected benefit obligations and fair value of
assets on that date were $19,725,000 and $17,425,000, respectively.
On December 31, 1998, the La Quinta Supplemental Executive Retirement Plan
was established with a prior service cost of $3,004,000. During 1999, a
significant portion of the executives covered under the plan terminated
employment related to the acquisition resulting in a decrease in the projected
benefit obligation of $1,420,000 and an acceleration of prior service cost
recognition of $1,355,000. The impact on the statement of operations was a gain
of $56,000.
The projected benefit obligation, accumulated benefit obligation, and fair
value of assets for the La Quinta supplemental executive retirement plan with
accumulated benefit obligation in excess of plan assets were $1,361,000,
$402,000, and $0, respectively, as of December 31, 1999 and $3,004,000, $845,000
and $0, respectively, as of December 31, 1998.
Effective January 1, 1999, the Companies converted their existing La Quinta
Retirement Plan to a cash balance pension plan. Existing accrued benefits under
the La Quinta Retirement Plan were converted into a beginning account balance as
of January 1, 1999, which decreased the projected benefit obligation by
$1,122,000. Under the new cash balance pension plan, the Companies make
quarterly contributions to the account based on a percentage of quarterly
employee compensation and years of service. Interest credits to the account
balances are based on rates for one year U.S. Treasury Securities. The account
balances are available to employees after they reach age 55.
Prior to January 1, 1999, the La Quinta Retirement Plan was a defined
benefit pension plan covering all La Quinta employees. Benefits accrued to the
participant according to a career average benefit formula integrated with Social
Security benefits. The Companies' funding policy for this plan was to annually
contribute the minimum amount required by federal law.
121
<PAGE>
The following table provides detail of the changes in benefit obligations,
components of benefit costs and weighted-average assumptions for the La Quinta
Retirement Plan at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PENSION BENEFITS
-------------------
1999 1998
-------- --------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................... $21,806 $ --
Acquisition............................................... -- 19,725
Service cost.............................................. 2,567 899
Interest cost............................................. 1,433 558
Plan participants' contributions.......................... -- --
Amendments................................................ -- 1,882
Actuarial (gain)/loss..................................... (1,467) (775)
Benefits paid............................................. (2,391) (483)
Curtailment............................................... (1,420) --
Plan merger............................................... -- --
------- -------
Benefit obligation at end of year......................... $20,528 $21,806
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year............ $19,020 $ --
Acquisition............................................... -- 17,425
Actual return on plan assets.............................. 1,469 1,060
Employer contribution..................................... 2,411 1,018
Plan participants' contributions.......................... -- --
Benefits paid............................................. (2,391) (483)
Plan merger............................................... -- --
------- -------
Fair value of plan assets at end of year.................. $20,509 $19,020
Funded status............................................. $ (19) $(2,786)
Unrecognized actuarial (gain)/loss........................ (2,666) (1,281)
Unrecognized portion of net obligation/(asset) at
transition.............................................. -- --
Unrecognized prior service cost/(credit).................. 476 1,882
------- -------
Net amount recognized..................................... $(2,209) $(2,185)
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Prepaid benefit cost...................................... $ -- $ --
Accrued benefit liability................................. (2,209) (3,030)
Intangible asset.......................................... -- 845
Accumulated other comprehensive income.................... -- --
------- -------
Net amount recognized..................................... $(2,209) $(2,185)
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate as of end of year........................... 7.75% 6.75%
Expected return on plan assets for the year............... 8.00% 8.00%
Rate of compensation increase as of end of year
Management employees.................................... 6.00% 6.00%
Nonmanagement employees................................. 5.00% 5.00%
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
PENSION BENEFITS
-------------------
1999 1998
-------- --------
<S> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost.............................................. $ 2,567 $ 899
Interest cost............................................. 1,433 558
Expected return on plan assets............................ (1,551) (554)
Amortization of:
transition obligation/(asset)........................... -- --
prior service cost/(credit)............................. 51 --
actuarial loss/(gain)................................... -- --
Curtailment loss/(gain)................................... (65) --
------- -------
Net periodic benefit cost/(income)........................ $ 2,435 $ 903
======= =======
</TABLE>
In 1999 La Quinta established the La Quinta Executive Savings Plan (the
"ESP"). The ESP is a nonqualified deferred compensation plan covering a select
group of management and highly compensated employees of La Quinta. The ESP
allows eligible employees to defer receipt of a portion of their compensation by
making an election before the compensation is earned. La Quinta matches a
portion of such employee contributions which amounted to approximately $75,000
in 1999.
16. INCOME TAXES
As a REIT, Realty is normally taxed only on undistributed REIT income.
During the year ended December 31, 1999, Realty distributed at least 95% of its
REIT taxable earnings to its shareholders. However, on February 4, 2000, the IRS
released temporary and proposed regulations on the treatment of net built-in
gain of C corporation assets that become assets of a REIT in a carryover basis
transaction. The regulations generally require the C corporation to recognize
gain, and be subject to corporate level tax, as if it had sold all the assets
transferred at fair market value. In lieu of this treatment, the regulations
permit the REIT to elect to be subject to the rules of Section 1374 of the
Internal Revenue Code of 1986, as amended. These rules generally subject the
REIT to corporate level tax on built-in gains recognized from the sale of
transferred assets within ten years. Realty has determined that the regulations
are applicable to assets transferred from Cobblestone and La Quinta, and will
elect to be subject to the rules of Section 1374 of the Code for built-in gains
recognized within ten years with respect to the built-in gain recognized from
the sale of the Cobblestone assets on March 31, 1999. Realty estimates the
current federal income tax liability with respect to this gain to be
$25,100,000. This estimate is subject to change upon the issuance of final
regulations by the IRS.
Section 382 of the Code restricts a corporation's ability to use its net
operating loss ("NOL") carryforwards following certain "ownership changes."
Operating determined that such an ownership change occurred and accordingly a
portion of the NOL carryforwards available for use in any particular taxable
year will be limited. To the extent that Operating 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 20 years after the year in
which they arise (15 years for NOLs arising prior to 1998), and the last of
Operating's NOL carryforwards will expire in 2019. A valuation allowance is
provided for the full amount of the NOL's as the realization of the tax benefits
from such NOLs is not assured.
Operating recorded a deferred tax asset of $11,156,000 and a deferred tax
liability of $5,485,000 (since reduced to $2,821,000) 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 has provided a valuation allowance with respect to certain post-La
Quinta Merger increases in deferred tax assets as realization of these amounts
is not assured.
123
<PAGE>
Components of deferred income taxes for Operating as of December 31, 1999
and 1998 are as follows:
Deferred tax assets for continuing operations:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Federal net operating loss carryovers............. $ 18,542 $ 11,099
State net operating loss carryovers............... 2,111 1,488
Self-insurance deductible when paid............... 8,623 8,821
Vacation pay deductible when paid................. 1,417 1,391
Pension plan...................................... 259 592
Restructuring accruals deductible when paid....... 185 782
Other............................................. 961 442
Valuation allowance............................... (28,558) (20,460)
-------- --------
Total deferred tax assets....................... $ 3,540 $ 4,155
-------- --------
Deferred tax liabilities for continuing
operations:
Amortization of workforce-in-place and reservation
system.......................................... $ 2,821 $ 4,650
Depreciation...................................... 1,212
-------- --------
Total deferred tax liabilities.................. $ 4,033 $ 4,650
-------- --------
</TABLE>
A reconciliation of Operating's total income tax provision (benefit) for
calendar year 1999, 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:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax provision.... $ (5,124) $(8,628) $ --
State tax provision, net of federal
effect............................. (623) (887)
Premerger liabilities................ (956)
Relocation costs..................... (1,832)
Nondeductible compensation........... 878
Nondeductible meals and
entertainment...................... 138 79
Nondeductible amortization........... 299 304
Valuation allowance.................. 8,098 873
Gain from discontinued operations.... 2,581
-------- ------- -------
Total income tax benefit............. $ -- $(4,800) $ --
-------- ------- -------
</TABLE>
124
<PAGE>
17. EARNINGS PER SHARE
COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Income from continuing operations........................... $ 59,412 $141,080 $161,962
Preferred stock dividends................................... (16,283) (8,444) --
-------- -------- --------
Income from continuing operations available to common
shareholders.............................................. $ 43,129 $132,636 $161,962
======== ======== ========
Average outstanding shares of paired common stock........... 142,783 120,515 76,070
Dilutive effect of:
Contingently issuable shares.............................. 91 4,757
Stock options............................................. 33 236 454
-------- -------- --------
Dilutive potential paired common stock...................... 142,907 125,508 76,524
======== ======== ========
Earnings per share:
Basic..................................................... $ .30 $ 1.10 $ 2.13
======== ======== ========
Diluted................................................... $ .30 $ 1.06 $ 2.12
======== ======== ========
</TABLE>
Options to purchase 4,311,000, 3,471,000 and 27,000 paired common shares at
prices ranging from $11.63 to $43.81 were outstanding during the years ended
December 31, 1999, 1998 and 1997 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 2001 to July 2009, were still outstanding at
December 31, 1999.
Convertible debentures outstanding for the years ended December 31, 1999,
1998 and 1997 of 6,540,000, 6,579,000 and 9,600,000 paired common shares,
respectively, and convertible preferred stock for the year ended December 31,
1999 of 624,000 paired common shares are not included in the computation of
diluted EPS because the inclusion would result in an antidilutive effect.
125
<PAGE>
MEDITRUST CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Income from continuing operations........................... $ 89,914 $160,931 $162,324
Preferred stock dividends................................... (16,283) (8,444) --
-------- -------- --------
Income from continuing operations available to common
shareholders.............................................. $ 73,631 $152,487 $162,324
======== ======== ========
Average outstanding shares of common stock.................. 144,088 121,820 76,274
Dilutive effect of:
Contingently issuable shares.............................. 91 4,757 --
Stock options............................................. 33 236 733
-------- -------- --------
Dilutive potential common stock............................. 144,212 126,813 77,007
======== ======== ========
Earnings per share:
Basic..................................................... $ .51 $ 1.25 $ 2.13
======== ======== ========
Diluted................................................... $ .51 $ 1.20 $ 2.11
======== ======== ========
</TABLE>
Options to purchase 3,120,000, 3,471,000 and 27,000 paired common shares at
prices ranging from $12.63 to $43.81 were outstanding during the years ended
December 31, 1999, 1998 and 1997, 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 2001 to January 2009, were still outstanding at
December 31, 1999.
Convertible debentures outstanding for the years ended December 31, 1999,
1998 and 1997 of 6,540,000, 6,579,000 and 9,600,000 paired common shares,
respectively, and convertible preferred stock for the year ended December 31,
1999 of 624,000 paired common shares 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,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Loss from continuing operations............................. $(30,502) $(19,851) $ (362)
Preferred stock dividends................................... -- -- --
-------- -------- -------
Loss from continuing operations available to common
shareholders.............................................. $(30,502) $(19,851) $ (362)
======== ======== =======
Average outstanding shares of common stock.................. 142,783 120,515 82,490
Dilutive effect of:
Contingently issuable shares.............................. -- -- --
Stock options............................................. -- -- --
-------- -------- -------
Dilutive potential common stock............................. 142,783 120,515 82,490
======== ======== =======
Earnings per share:
Basic..................................................... $ (.21) $ (0.16) $ (0.01)
======== ======== =======
Diluted................................................... $ (.21) $ (0.16) $ (0.01)
======== ======== =======
</TABLE>
126
<PAGE>
Options to purchase 1,192,000 and 18,000 paired common shares at prices
ranging from $11.63 to $16.06 were outstanding during the years ended
December 31, 1999 and 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 outstanding at December 1998 expired in
December 1999. The options outstanding at December 1999 expire on dates ranging
from December 2008 to July 2009.
Convertible debentures outstanding for the years ended December 31, 1999,
1998 and 1997 of 6,540,000, 6,579,000, and 9,600,000 paired common shares,
respectively, and convertible preferred stock for the year ended December 31,
1999 of 624,000 paired common shares are not included in the computation of
diluted EPS because the inclusion would result in an antidilutive effect.
Operating 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, 1999. 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 Companies.
18. TRANSACTIONS BETWEEN REALTY AND OPERATING
Operating leases hotel facilities from Realty and its subsidiaries. The
Participating Hotel Facilities Lease arrangements between Operating and Realty
include base and additional rent provisions and require Realty to assume costs
attributable to property taxes and insurance.
Operating 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 with an
established value of $33,162,000. Realty and Operating accounted for this
transaction as a property distribution and contribution, respectively.
During 1999 and 1998, Realty and Operating issued shares under the Plans.
Amounts due from Realty and Operating 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, respectively.
In connection with certain acquisitions, Operating issued shares to Realty
and recorded a receivable. Due to the affiliation of Realty and Operating, the
receivable from Realty has been classified in Operating's shareholders' equity.
Operating 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, the note has been classified in shareholders' equity in
Realty and a note payable has been recorded in Operating. 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 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 owns 1,305,000 shares of Realty as a result of acquisition
activity.
Realty provides certain services to Operating 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.
127
<PAGE>
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial data summarizes the unaudited quarterly
results for the Companies for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED 1999
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue...................................... $227,304 $239,714 $235,722 $209,241
Income (loss) from continuing operations..... 14,875 47,643 46,659 (49,765)
Discontinued operations...................... 4,869 -- 16,644 8,900
Net income (loss)............................ 19,744 47,643 63,303 (40,865)
Basic earnings per Paired Common Share:
Income (loss) from continuing operations... .07 .31 .30 (.38)
Discontinued operations.................... .04 -- .12 .06
Net income (loss).......................... .11 .31 .42 (.32)
Diluted earnings per Paired Common Share:
Income (loss) from continuing operations... .07 .31 .30 (.38)
Discontinued operations.................... .04 -- .12 .06
Net income (loss).......................... .11 .31 .42 (.32)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED 1998
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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>
20. SEGMENT REPORTING
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 related 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.
Competitive factors in the industry include reasonableness of room rates,
quality of accommodations, service level and convenience of locations.
128
<PAGE>
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. The Companies
account for Realty and Operating 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. 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,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Healthcare:
Rental income (a)......................... $ 165,431 $ 191,874 $137,868
Interest income........................... 138,223 153,093 151,170
Rental property operating costs........... (9,278) (7,199) (210)
General and administrative expenses....... (12,988) (19,586) (10,257)
--------- --------- --------
Healthcare Contribution................... 281,388 318,182 278,571
--------- --------- --------
Lodging:
Room revenue.............................. 566,484 241,868 --
Guest services and other.................. 35,561 16,555 --
Operating expenses........................ (281,424) (119,584) --
Rental property operating costs........... (27,239) (8,439) --
General and administrative expenses....... (18,833) (7,512) --
--------- --------- --------
Lodging Contribution...................... 274,549 122,888 --
--------- --------- --------
Other contribution (b).................... 963
--------- --------- --------
Combined Contribution..................... 556,900 441,070 278,571
--------- --------- --------
Reconcilation to Combined Consolidated
Financial Statements:
Interest expense.......................... 244,973 178,458 87,412
Depreciation and amortization............. 135,853 87,228 26,838
Amortization of goodwill.................. 21,470 13,265 2,349
Loss on sale of securities................ -- 4,159 --
Gain on sale of assets.................... (12,042) (52,642) --
Income from unconsolidated joint
venture................................. -- (906) 10
Other income.............................. (1,750) (35,987) --
Other expenses............................ 108,984 111,215 --
--------- --------- --------
497,488 304,790 116,609
--------- --------- --------
</TABLE>
129
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Income from continuing operations before
benefit for income taxes................ 59,412 136,280 161,962
Income tax benefit........................ -- (4,800) --
--------- --------- --------
Income from continuing operations......... 59,412 141,080 161,962
Income from discontinued operations..... -- 10,721 450
Gain (loss) on disposal of discontinued
operations............................ 30,413 (67,913) --
Provision for loss on disposition of
discontinued operations............... -- (237,035) --
--------- --------- --------
Net income (loss)......................... 89,825 (153,147) 162,412
Preferred stock dividends................. (16,283) (8,444) --
--------- --------- --------
Net income (loss) available to Paired
Common Shareholders..................... $ 73,542 $(161,591) $162,412
========= ========= ========
</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.
(b) Other contribution includes Telematrix, a provider of telephone software and
equipment for the lodging industry. Telematrix was acquired in
October 1999, and generated a contribution of $963,000 during the fourth
quarter, which was comprised of revenue of $4,532,000, operating expenses of
$2,564,000 and general and administrative expenses of $1,005,000. Operations
of Telematrix are included in the lodging revenue and expense categories of
the combined and consolidated statements since consummation of the
acquisition.
The following table presents assets by reported segment and in the
aggregate.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Healthcare gross real estate investments...... $2,427,604 $2,738,927
Lodging gross real estate investments......... 2,648,408 2,594,956
Accumulated depreciation, valuation allowances
and provisions.............................. (403,353) (247,147)
---------- ----------
Net real estate by reportable segment......... 4,672,659 5,086,736
Other assets:
Cash and cash equivalents..................... 7,220 305,456
Fees, interest and other receivables.......... 79,042 54,712
Goodwill, net................................. 480,673 486,051
Net assets of discontinued operations......... -- 305,416
Other assets, net............................. 228,163 221,180
---------- ----------
Total assets.................................. $5,467,757 $6,459,551
========== ==========
</TABLE>
130
<PAGE>
The following table reconciles revenue to the accompanying financial
statements.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Healthcare:
Rental income............................................ $165,431 $191,874 $137,868
Interest income.......................................... 138,223 153,093 151,170
-------- -------- --------
Total healthcare revenue................................. 303,654 344,967 289,038
Total lodging revenue (a)................................ 606,577 258,423 --
Other income............................................. 1,750 35,987 --
-------- -------- --------
Total revenue............................................ $911,981 $639,377 $289,038
======== ======== ========
</TABLE>
- ------------------------
(a) Includes revenue from the acquisition of Telematrix in October 1999 of
$4,532,000.
21. CONCENTRATION OF RISK
As of December 31 1999, healthcare related facilities (the "Healthcare
Portfolio") comprised approximately 47.8% of Realty's total real estate
investments. A private healthcare company and Sun Healthcare Group, Inc. ("Sun")
currently operate approximately 19.4% of the total real estate investments, or
40.5% of the Healthcare Portfolio. Approximately 9.1% of Realty's total real
estate investments (and approximately 19.0% of the Healthcare Portfolio) are
operated by companies in the assisted living sector of the healthcare industry.
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of
a longer duration, and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have preannounced anticipated earnings
shortfalls and have experienced a significant decline in their stock prices.
These factors have had a detrimental impact on the liquidity of some assisted
living operators, which has caused their growth plans to decelerate and may have
a negative effect on their operating cash flows.
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of December 31,
1999, Realty had a portfolio of 42 properties operated by Sun, which consisted
of 38 owned properties with net assets of approximately $309,135,000 and four
mortgages with net assets of approximately $30,490,000. During the year ended
December 31, 1999, income derived from these properties included rental income
of $47,275,000 from owned properties and interest income for the ten months
ended October 1999 of $2,926,000 from mortgages.
Sun has not formally indicated whether it will accept or reject any of
Realty's leases. However, Sun has indicated that it will continue to make lease
payments to Realty unless and until such leases are rejected. If necessary,
Realty has a plan in place to transition and to continue operating any of Sun's
131
<PAGE>
properties. Realty has not received interest payments related to the mortgages
since November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
During January and February 2000, two other operators of Realty's long-term
care facilities, Integrated Health Services, Inc. ("Integrated") and Mariner
Health Group, Inc. ("Mariner"), also filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. As of December 31, 1999, Realty had a portfolio of 12
properties operated by Integrated and Mariner, which consisted of 11 owned
properties with net assets of approximately $45,627,000 and one mortgage with
net assets of approximately $7,029,000. During the year ended December 31, 1999,
income derived from these properties included rental income of $9,677,000 from
owned properties and interest income of $977,000 from the mortgage.
Management has proactively initiated various actions to protect its interest
under its leases and mortgages including the drawdown of certain escrow
accounts. Except for certain owned properties and mortgages held for sale,
management does not believe any of its owned real estate or mortgages is
impaired at December 31, 1999. However, the ultimate outcome of these
bankruptcies is not currently predictable and management is not able to make a
meaningful estimate of the amount or range of loss, if any, that could result
from an unfavorable outcome. It is possible that an unfavorable outcome could
have a material adverse effect on Realty's cash flows, revenues and results of
operations in a particular quarter or annual period. However, Realty believes
that even if the outcome of these bankruptcies is materially adverse to Realty's
cash flows, revenues and results of operations, it should not have a material
adverse effect on Realty's financial position.
22. SUBSEQUENT EVENTS
On January 28, 2000, the Companies' announced that the Boards of Directors
had approved a five point plan of reorganization (the "Five Point Plan"), which
provided for:
- An orderly disposition of a significant portion of its healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the plan
to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Meditrust
Corporation. Mr. Benson will continue to assist the Companies on a consulting
basis as the Companies move forward to implement the Five Point Plan. Realty
also entered into a separation and consulting agreement with Mr. Benson,
pursuant to which Realty will make a cash payment of approximately $9,500,000
(including prepaid consulting fees), convert 155,000 restricted paired common
shares into unrestricted paired common shares and continue certain medical,
dental and other benefits. William G. Byrnes, a member of the Board of Directors
of Operating will act as Chief Executive Officer of Realty.
In January 2000, the Companies sold Paramount Real Estate Services, Inc.,
its medical office building management company, as well as the majority of its
medical office building portfolio. Total consideration of $204,000,000 included
$144,000,000 in cash, $8,000,000 of assumed debt and $52,000,000 of subordinated
indebtedness due January 2005 bearing interest at 9%. The transaction involved
the sale of the medical office building management company, twenty-three medical
office buildings and three medical office building mortgage loans.
Also in January 2000, the Companies sold 12 assisted living facilities for
$28,000,000 and received a partial repayment of one mortgage loan for
$4,000,000.
132
<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 (collectively the "Companies") at
December 31, 1999 and 1998, 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, 1999, and the results of Meditrust
Operating Company's operations and its cash flows for the two years ended
December 31, 1999 and the initial period ended December 31, 1997, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States 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 2, 2000.
133
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Boards of Directors of Meditrust Corporation
and Meditrust Operating Company:
Our audits of the financial statements referred to in our report dated
February 2, 2000 appearing in this Joint Annual Report on Form 10-K of Meditrust
Corporation and Meditrust Operating Company also included an audit of the
financial statement schedules listed in Item 14(a) (2) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
February 2, 2000
134
<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 Fees,
Interest, and Other
Receivables and
Other Assets for the
year ended December
31:
1997.................. $1,157,195 $ 7,779,772 $ 8,054,572(A) $ (8,000,000)(B) $8,991,539
1998.................. $8,991,539 $15,731,584 $(2,955,000)(C) $(19,827,192)(D) $1,940,931
1999.................. $1,940,931 $ 6,153,936 -- -- $8,094,867
</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.
(D) Includes $21,936,412 related to receivables and working capital loans
charged off net of $2,109,220 of valuation allowance balances acquired in
the La Quinta Merger.
<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:
1997........................... $8,054,572 -- -- $(8,054,572)(A) $ --
1998........................... $ -- -- -- $ -- $ --
1999........................... $ -- -- -- $ -- $ --
</TABLE>
- ------------------------
(A) Includes $8,054,572 reclassified as a reduction to Other Assets.
135
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ALCOHOL AND SUBSTANCE
ABUSE TREATMENT CENTERS
AND PSYCHIATRIC
FACILITIES
Hollywood, CA............ $ 4,035,000 $ 4,035,000 $ 1,715,000 $ 5,750,000(5)
ACUTE CARE HOSPITAL
Phoenix, AZ.............. 63,960,000 63,960,000 1,690,000 65,650,000
ASSISTED LIVING
Blytheville, AR.......... 3,756,249 3,756,249 130,000 3,886,249(6)
Pocahontas, AR........... 3,701,500 3,701,500 50,000 3,751,500(6)
Flagstaff, AZ............ 3,725,000 3,725,000 550,000 4,275,000
Folsom, CA............... 9,280,000 9,280,000 620,000 9,900,000
Palm Desert, CA.......... 5,415,920 5,415,920 784,080 6,200,000
Deland, FL............... 2,615,000 2,615,000 275,000 2,890,000
Fort Meyers, FL.......... 3,252,481 3,252,481 513,000 3,765,481
Jacksonville, FL......... 3,348,171 3,348,171 380,000 3,728,171
Leesburg, FL............. 2,420,000 2,420,000 180,000 2,600,000
Ocala, FL................ 2,555,000 2,555,000 175,000 2,730,000
Ormond Beach, FL......... 2,580,000 2,580,000 310,000 2,890,000
Port Orange, FL.......... 2,435,000 2,435,000 295,000 2,730,000
Port Richey, FL.......... 4,602,955 4,602,955 1,322,045 5,925,000
Stuart, FL............... 2,380,000 2,380,000 270,000 2,650,000
Tampa, FL................ 3,366,481 3,366,481 399,000 3,765,481
Tequesta, FL............. 2,420,000 2,420,000 380,000 2,800,000
Tequesta, FL............. 2,649,586 2,649,586 -- 2,649,586
West Melbourne, FL....... 2,460,000 2,460,000 240,000 2,700,000
West Melbourne, FL....... 2,751,181 2,751,181 -- 2,751,181
Abilene, KS.............. 1,720,000 1,720,000 120,000 1,840,000
4 facilities in KS, 1
facility in OK......... 6,762,000 6,762,000 748,000 7,510,000
Davison, MI.............. 1,336,648 1,336,648 89,000 1,425,648
Delta, MI................ 3,520,133 3,520,133 494,000 4,014,133
Delta, MI................ 1,337,736 1,337,736 260,000 1,597,736
Farmington Hills, MI..... 3,205,250 3,205,250 215,600 3,420,850
Farmington Hills, MI..... 3,504,592 3,504,592 246,400 3,750,992
2 facilities in Holly,
MI..................... 13,154,821 13,154,821 -- 13,154,821
Lansing (Haslett), MI.... 6,518,771 6,518,771 436,000 6,954,771
Sterling Heights, MI..... 8,920,000 8,920,000 460,000 9,380,000
2 facilities in Troy,
MI..................... 13,355,257 13,355,257 -- 13,355,257
Utica, MI................ 3,077,414 3,077,414 277,200 3,354,614
Faribault, MN............ 1,125,390 1,125,390 60,000 1,185,390
Mankato, MN.............. 1,198,173 1,198,173 86,000 1,284,173
Sauk Rapids, MN.......... 905,825 905,825 82,000 987,825
Willmar, MN.............. 1,123,390 1,123,390 62,000 1,185,390
Winona, MN............... 1,200,173 1,200,173 84,000 1,284,173
Charlotte, NC............ 4,546,973 4,546,973 624,000 5,170,973
Charlotte, NC............ 6,515,381 6,515,381 504,000 7,019,381
Greensboro, NC........... 3,553,509 3,553,509 304,000 3,857,509
Greensboro, NC........... 6,321,281 6,321,281 576,000 6,897,281
Manlius, NY.............. $ 936,598 8,610,000 8,610,000 510,000 9,120,000
Barberton, OH............ 2,160,000 2,160,000 240,000 2,400,000
Colerain Township, OH.... 6,872,605 6,872,605 604,395 7,477,000
Englewood, OH............ 2,100,000 2,100,000 240,000 2,340,000
Lima, OH................. 3,716,373 3,716,373 277,000 3,993,373(6)
Marion, OH............... 2,515,000 2,515,000 270,000 2,785,000
Xenia, OH................ 7,283,245 7,283,245 382,000 7,665,245(6)
Bartlesville, OK......... 1,800,000 1,800,000 110,000 1,910,000
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
ALCOHOL AND SUBSTANCE
ABUSE TREATMENT CENTERS
AND PSYCHIATRIC
FACILITIES
Hollywood, CA............ $ 1,374,104 1957 5/88
ACUTE CARE HOSPITAL
Phoenix, AZ.............. 7,861,750 1954 2/95
ASSISTED LIVING
Blytheville, AR.......... 179,998 1996 4/96
Pocahontas, AR........... 177,375 1996 11/96
Flagstaff, AZ............ 195,942 1996 9/96
Folsom, CA............... 486,555 1997 1/98
Palm Desert, CA.......... 430,031 1996 2/87
Deland, FL............... 152,544 1996 9/97
Fort Meyers, FL.......... 250,712 1996 3/96
Jacksonville, FL......... 194,438 1996 11/97
Leesburg, FL............. 171,428 1996 3/97
Ocala, FL................ 182,628 1996 6/97
Ormond Beach, FL......... 153,316 1996 10/97
Port Orange, FL.......... 174,878 1996 6/97
Port Richey, FL.......... 367,512 1996 2/97
Stuart, FL............... 178,488 1996 6/96
Tampa, FL................ 259,518 1997 12/96
Tequesta, FL............. 184,471 1998 12/97
Tequesta, FL............. 164,951 1998 12/97
West Melbourne, FL....... 191,755 1998 10/97
West Melbourne, FL....... 111,401 1998 10/97
Abilene, KS.............. 148,153 1996 6/97
4 facilities in KS, 1
facility in OK......... 648,047 1993 3/96
Davison, MI.............. 50,130 1998 7/98
Delta, MI................ 132,011 1998 7/98
Delta, MI................ 50,166 1998 7/98
Farmington Hills, MI..... 247,086 1995 12/96
Farmington Hills, MI..... 270,137 1995 12/96
2 facilities in Holly,
MI..................... 438,496 1998 7/98
Lansing (Haslett), MI.... 377,519 1997 11/97
Sterling Heights, MI..... 701,503 1996 2/87
2 facilities in Troy,
MI..................... 445,182 1998 7/98
Utica, MI................ 237,207 1995 12/96
Faribault, MN............ 65,132 1997 11/97
Mankato, MN.............. 69,405 1997 11/97
Sauk Rapids, MN.......... 52,530 1997 11/97
Willmar, MN.............. 65,002 1997 11/97
Winona, MN............... 69,509 1997 11/97
Charlotte, NC............ 264,459 1997 11/97
Charlotte, NC............ 377,567 1997 11/97
Greensboro, NC........... 206,021 1997 11/97
Greensboro, NC........... 366,608 1997 11/97
Manlius, NY.............. 609,894 1994 5/97
Barberton, OH............ 99,000 1997 3/98
Colerain Township, OH.... 542,643 1996 2/87
Englewood, OH............ 100,625 1998 2/98
Lima, OH................. 154,040 1997 10/97
Marion, OH............... 104,797 1998 5/98
Xenia, OH................ 245,166 1997 10/97
Bartlesville, OK......... 97,500 1997 11/97
</TABLE>
136
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Beaver Falls, PA......... 4,283,345 4,283,345 330,000 4,613,345(6)
Dillsburg, PA............ 4,082,975 4,082,975 330,000 4,412,975(6)
Lewisburg, PA............ 2,753,367 2,753,367 175,000 2,928,367(6)
Yardley, PA.............. 4,494,920 4,494,920 504,000 4,998,920
Charleston, SC........... 3,676,366 3,676,366 399,000 4,075,366
(Irmo) Columbia, SC...... 3,562,784 3,562,784 231,800 3,794,584
Hendersonville, TN....... 4,195,321 4,195,321 -- 4,195,321(6)
Kingsport, TN............ 3,625,861 3,625,861 -- 3,625,861(6)
Knoxville, TN............ 6,501,258 6,501,258 -- 6,501,258(6)
Abilene, TX.............. 2,134,231 2,134,231 150,000 2,284,231
Big Springs, TX.......... 2,037,899 2,037,899 10,000 2,047,899
2 facilities in TX 4,257,036 4,257,036 222,000 4,479,036
Kerrville, TX............ 1,766,000 1,766,000 195,000 1,961,000
Lancaster, TX............ 1,500,000 1,500,000 175,000 1,675,000
3 facilities in, TX...... 5,456,834 5,456,834 240,000 5,696,834
3 facilities in, TX...... 4,968,892 4,968,892 230,000 5,198,892
San Antonio, TX.......... 2,450,000 2,450,000 250,000 2,700,000
6 facilities in TX 11,155,104 11,155,104 625,000 11,780,104
Temple, TX............... 1,900,000 1,900,000 250,000 2,150,000
Chesterfield, VA......... 4,659,767 4,659,767 -- 4,659,767(6)
Stafford, VA............. 3,135,835 3,135,835 470,000 3,605,835(6)
Brown Deer, WI........... 635,266 635,266 72,000 707,266
Eau Claire, WI........... 1,208,173 1,208,173 76,000 1,284,173
Kenosha, WI.............. 1,299,524 1,299,524 100,000 1,399,524
Manitowoc, WI............ 1,016,608 1,016,608 70,000 1,086,608
Medford, WI.............. 860,802 860,802 70,000 930,802
Menomonie, WI............ 912,000 912,000 57,000 969,000
Middleton, WI............ 1,405,738 1,405,738 76,000 1,481,738
Neenah, WI............... 1,312,955 1,312,955 70,000 1,382,955
New Richmond, WI......... 696,000 696,000 54,000 750,000
Onalaska, WI............. 1,205,931 1,205,931 84,000 1,289,931
Oshkosh, WI.............. 1,016,608 1,016,608 70,000 1,086,608
Plover, WI............... 2,093,924 2,093,924 140,000 2,233,924
Plymouth, WI............. 706,000 706,000 54,000 760,000
Sun Prairie, WI.......... 1,113,390 1,113,390 72,000 1,185,390
Sussex, WI............... 874,824 874,824 86,000 960,824
Wausau, WI............... 1,535,443 1,535,443 140,000 1,675,443
Wisconsin Rapids, WI..... 956,000 956,000 64,000 1,020,000
Wisconsin Rapids, WI..... 1,233,123 1,233,123 70,000 1,303,123
LONG TERM CARE
Alabaster, AL............ 7,609,000 7,609,000 150,000 7,759,000
Benton, AR............... 8,257,410 8,257,410 135,000 8,392,410
Fresno, CA............... 7,304,837 14,469,580 14,469,580 2,088,920 16,558,500
Kentfield, CA............ 9,650,000 9,650,000 350,000 10,000,000
Cheshire, CT............. 6,770,000 6,770,000 455,000 7,225,000
Danbury, CT.............. 5,295,000 5,295,000 305,000 5,600,000
Darien, CT............... 4,202,477 4,202,477 45,000 4,247,477
Milford, CT.............. 8,484,848 8,484,848 1,515,152 10,000,000
Milford, CT.............. 3,224,151 3,224,151 1,020,000 4,244,151
Newington, CT............ 8,970,000 8,970,000 430,000 9,400,000
Southbury, CT............ 4,719,842 4,719,842 818,748 5,538,590
Southfield, CT........... 7,750,000 7,750,000 750,000 8,500,000
Westport, CT............. 4,970,000 4,970,000 400,000 5,370,000
Wethersfield, CT......... 19,083,219 19,083,219 -- 19,083,219
Bradenton, FL............ 3,205,000 9,900,000 9,900,000 4,100,000 14,000,000
Naples, FL............... 6,528,616 6,528,616 26,775 6,555,391
Palm Beach, FL........... 12,300,000 12,300,000 2,700,000 15,000,000
Sarasota, FL............. 4,447,012 4,447,012 1,060,800 5,507,812
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
Beaver Falls, PA......... 150,468 1998 2/98
Dillsburg, PA............ 194,341 1998 2/98
Lewisburg, PA............ 85,424 1998 2/98
Yardley, PA.............. 346,468 1996 12/96
Charleston, SC........... 213,442 1997 11/97
(Irmo) Columbia, SC...... 206,319 1997 11/97
Hendersonville, TN....... 90,453 1998 7/98
Kingsport, TN............ 87,519 1998 7/98
Knoxville, TN............ 85,504 1998 7/98
Abilene, TX.............. 137,826 1996 6/96
Big Springs, TX.......... 131,626 1996 6/97
2 facilities in TX 278,705 1996 6/97
Kerrville, TX............ 117,728 1996 5/97
Lancaster, TX............ 84,379 1996 10/97
3 facilities in, TX...... 352,408 1996 6/97
3 facilities in, TX...... 414,080 1996 9/96
San Antonio, TX.......... 158,224 1997 6/97
6 facilities in TX 1,022,560 1996 5/96
Temple, TX............... 165,870 1996 3/97
Chesterfield, VA......... 80,751 1998 7/98
Stafford, VA............. 124,127 1970 6/98
Brown Deer, WI........... 48,988 1995 12/96
Eau Claire, WI........... 69,951 1996 11/97
Kenosha, WI.............. 48,728 1998 7/98
Manitowoc, WI............ 58,883 1996 11/97
Medford, WI.............. 50,846 1996 11/97
Menomonie, WI............ 58,900 1996 11/97
Middleton, WI............ 81,356 1996 11/97
Neenah, WI............... 75,965 1996 11/97
New Richmond, WI......... 44,950 1996 11/97
Onalaska, WI............. 92,944 1995 12/96
Oshkosh, WI.............. 58,883 1996 11/97
Plover, WI............... 123,560 1996 11/97
Plymouth, WI............. 45,601 1996 11/97
Sun Prairie, WI.......... 64,482 1996 11/97
Sussex, WI............... 67,451 1995 12/96
Wausau, WI............... 90,785 1996 11/97
Wisconsin Rapids, WI..... 67,672 1996 11/97
Wisconsin Rapids, WI..... 66,794 1997 6/97
LONG TERM CARE
Alabaster, AL............ 2,160,547 1971 8/87
Benton, AR............... 1,386,903 1975 6/94
Fresno, CA............... 3,274,163 1991 3/91
Kentfield, CA............ 2,834,666 1963 3/88
Cheshire, CT............. 2,404,740 1975 10/85
Danbury, CT.............. 1,880,793 1976 10/85
Darien, CT............... 595,340 1975 6/94
Milford, CT.............. 1,380,031 1971 6/94
Milford, CT.............. 450,039 1992 6/94
Newington, CT............ 3,186,209 1978 10/85
Southbury, CT............ 741,505 1975 6/94
Southfield, CT........... 1,194,802 1984 8/92
Westport, CT............. 1,765,362 1965 10/85
Wethersfield, CT......... 4,980,647 1965 8/86
Bradenton, FL............ 2,991,197 1985 12/87
Naples, FL............... 889,664 1969 1/96
Palm Beach, FL........... 3,384,724 1996 4/96
Sarasota, FL............. 444,720 1982 1/96
</TABLE>
137
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Venice, FL............... 8,592,203 8,592,203 128,500 8,720,703
Indianapolis, IN......... 2,455,612 2,455,612 114,700 2,570,312
New Haven, IN............ 4,628,541 4,628,541 128,100 4,756,641
Bowling Green, KY........ 9,091,205 9,091,205 908,795 10,000,000
Beverly, MA.............. 6,300,000 6,300,000 645,000 6,945,000
Concord, MA.............. 8,762,000 8,762,000 3,538,000 12,300,000
East Longmeadow, MA...... 15,995,928 15,995,928 400,000 16,395,928
Holyoke, MA.............. 12,664,918 12,664,918 121,600 12,786,518
Lexington, MA............ 11,210,000 11,210,000 590,000 11,800,000
Lowell, MA............... 10,492,351 10,492,351 500,000 10,992,351
Lynn, MA................. 14,163,515 14,163,515 1,206,734 15,370,249
Millbury, MA............. 10,233,000 10,233,000 467,000 10,700,000
New Bedford, MA.......... 7,492,000 7,492,000 1,008,000 8,500,000
New Bedford, MA.......... 9,773,373 9,773,373 1,085,930 10,859,303
Newton, MA............... 12,430,000 12,430,000 630,000 13,060,000
North Hampton, MA........ 2,709,612 2,709,612 187,500 2,897,112
Peabody, MA.............. 7,245,315 7,245,315 805,035 8,050,350
Randolph, MA............. 9,014,760 9,014,760 1,001,640 10,016,400
Weymouth, MA............. 10,719,932 10,719,932 850,000 11,569,932
Wilmington, MA........... 6,689,925 6,689,925 743,325 7,433,250
Montgomery Village, MD... 16,888,000 16,888,000 1,300,000 18,188,000
Battle Creek, MI......... 7,674,443 7,674,443 146,970 7,821,413(6)
Grand Blanc, MI.......... 7,363,800 7,363,800 120,000 7,483,800
Kansas City, MO.......... 8,559,900 8,559,900 238,000 8,797,900
Bedford, NH.............. 7,247,242 12,691,500 12,691,500 808,500 13,500,000
Effingham Falls, NH...... 11,984,845 11,984,845 1,478,800 13,463,645
Keene, NH................ 3,688,917 3,688,917 87,000 3,775,917
Milford, NH.............. 3,195,288 3,195,288 52,000 3,247,288
Milford, NH.............. 4,222,545 4,222,545 82,000 4,304,545
Peterborough, NH......... 4,779,992 4,779,992 128,700 4,908,692
Winchester, NH........... 3,363,325 3,363,325 35,000 3,398,325
Bound Brook, NJ.......... 1,624,000 1,624,000 1,176,000 2,800,000
Bridgewater, NJ.......... 12,678,944 12,678,944 1,193,400 13,872,344
Camden, NJ............... 8,334,780 8,334,780 450,250 8,785,030
Marlton, NJ.............. 14,060,000 14,060,000 240,000 14,300,000
New Milford, NJ.......... 11,110,000 11,110,000 1,090,000 12,200,000
Oradell, NJ.............. 14,986,000 14,986,000 1,714,000 16,700,000
Cortland, NY............. 27,812,817 27,812,817 263,000 28,075,817(6)
Niskayuna, NY............ 10,542,539 10,542,539 292,000 10,834,539(6)
Rensselaer, NY........... 1,269,059 1,269,059 130,941 1,400,000(6)
Troy, NY................. 10,459,237 10,459,237 56,100 10,515,337(6)
Bellbrook, OH............ 2,787,134 2,787,134 212,000 2,999,134
Huber Heights, OH........ 3,593,360 3,593,360 174,000 3,767,360
Medina, OH............... 12,367,785 12,367,785 232,000 12,599,785
New London, OH........... 2,110,837 2,110,837 22,600 2,133,437
Swanton, OH.............. 5,500,000 5,500,000 350,000 5,850,000
Troy, OH................. 6,206,197 6,206,197 210,600 6,416,797
West Carrolton, OH....... 3,483,669 3,483,669 216,400 3,700,069
Erie, PA................. 5,128,000 5,128,000 335,000 5,463,000
Greensburg, PA........... 5,544,012 5,544,012 525,000 6,069,012
MountlakeTerrace, WA..... 4,831,020 4,831,020 1,029,980 5,861,000
Waterford, WI............ 13,608,228 13,608,228 280,000 13,888,228(5)
4 facilities in WV....... 16,299,400 16,299,400 900,600 17,200,000
MEDICAL OFFICE BUILDINGS
Tempe, AZ................ 8,250,852 8,250,852 555,000 8,805,852(6)
Arcadia, CA.............. 7,098,864 10,813,693 10,813,693 3,500,000 14,313,693(6)
Lakewood, CA............. 8,317,585 8,317,585 -- 8,317,585(6)
Los Gatos, CA............ 13,453,194 13,453,194 -- 13,453,194(6)
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
Venice, FL............... 859,200 1985 1/96
Indianapolis, IN......... 245,568 1973 1/96
New Haven, IN............ 459,276 1982 1/96
Bowling Green, KY........ 1,386,348 1992 6/94
Beverly, MA.............. 2,237,815 1972 10/85
Concord, MA.............. 930,955 1995 11/95
East Longmeadow, MA...... 4,246,968 1986 9/87
Holyoke, MA.............. 2,302,813 1973 9/92
Lexington, MA............ 3,739,853 1965 8/86
Lowell, MA............... 1,907,188 1975 9/92
Lynn, MA................. 2,393,175 1960 4/93
Millbury, MA............. 615,660 1996 6/97
New Bedford, MA.......... 796,008 1995 11/95
New Bedford, MA.......... 1,490,689 1995 11/95
Newton, MA............... 4,415,263 1977 10/85
North Hampton, MA........ 383,860 1974 6/94
Peabody, MA.............. 2,479,809 1987 10/90
Randolph, MA............. 2,084,691 1987 10/90
Weymouth, MA............. 1,496,311 1994 6/94
Wilmington, MA........... 2,320,458 1987 10/90
Montgomery Village, MD... 1,794,335 1994 11/95
Battle Creek, MI......... 1,290,826 1983 4/93
Grand Blanc, MI.......... 2,083,340 1970 5/88
Kansas City, MO.......... 2,514,454 1965 3/88
Bedford, NH.............. 1,279,990 1920 6/94
Effingham Falls, NH...... 1,976,816 1985 4/93
Keene, NH................ 368,880 1965 1/96
Milford, NH.............. 319,536 1900 1/96
Milford, NH.............. 422,256 1972 1/96
Peterborough, NH......... 714,069 1976 1/96
Winchester, NH........... 336,336 1987 1/96
Bound Brook, NJ.......... 527,751 1963 12/86
Bridgewater, NJ.......... 1,245,355 1971 1/96
Camden, NJ............... 2,708,778 1984 12/86
Marlton, NJ.............. 1,493,892 1995 11/95
New Milford, NJ.......... 3,333,023 1971 12/87
Oradell, NJ.............. 1,592,271 1995 11/95
Cortland, NY............. 4,086,628 1971 8/93
Niskayuna, NY............ 1,659,753 1976 3/93
Rensselaer, NY........... 163,352 1975 11/94
Troy, NY................. 1,542,995 1972 8/93
Bellbrook, OH............ 642,765 1981 12/90
Huber Heights, OH........ 827,659 1984 12/90
Medina, OH............... 3,157,357 1954 4/88
New London, OH........... 486,955 1985 12/90
Swanton, OH.............. 690,751 1950 4/95
Troy, OH................. 599,066 1970 1/96
West Carrolton, OH....... 803,193 1983 12/90
Erie, PA................. 1,525,236 1977 12/87
Greensburg, PA........... 1,141,071 1991 6/90
MountlakeTerrace, WA..... 678,018 1987 5/93
Waterford, WI............ 2,266,908 1968 4/93
4 facilities in WV....... 1,665,773 1987 12/95
MEDICAL OFFICE BUILDINGS
Tempe, AZ................ 572,188 1997 1/98
Arcadia, CA.............. 577,412 1997 11/97
Lakewood, CA............. 656,881 1997 1/98
Los Gatos, CA............ 1,025,250 1997 1/98
</TABLE>
138
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Boca Raton, FL........... 18,113,689 18,113,689 -- 18,113,689(6)
Boca Raton, FL........... 8,847,282 8,847,282 3,900,000 12,747,282(6)
Boynton Beach, FL........ 4,900,274 4,900,274 -- 4,900,274(6)
Boynton Beach, FL........ 4,414,510 4,414,510 455,000 4,869,510(6)
Delray Beach, FL......... 19,653,421 19,653,421 -- 19,653,421(6)
Hollywood, FL............ 8,289,107 8,289,107 -- 8,289,107(6)
Jupiter, FL.............. 4,480,033 4,480,033 695,000 5,175,033(6)
Loxahatchee, FL.......... 2,563,876 3,556,503 3,556,503 880,000 4,436,503(6)
Loxahatchee, FL.......... 2,365,600 2,799,640 2,799,640 560,000 3,359,640(6)
Loxahatchee, FL.......... 2,731,681 3,607,378 3,607,378 -- 3,607,378(6)
Palm Bay, FL............. 3,115,229 3,115,229 390,000 3,505,229(6)
Palm Beach, FL........... 43,803,793 43,803,793 -- 43,803,793
Palm Spring, FL.......... 3,108,793 3,108,793 390,000 3,498,793(6)
Plantation, FL........... 7,837,387 8,238,623 8,238,623 1,090,000 9,328,623(6)
Plantation, FL........... 11,762,977 11,762,977 1,100,000 12,862,977(6)
West Palm Beach, FL...... 7,318,439 7,318,439 820,000 8,138,439(6)
Concord, MA.............. 1,850,000 1,850,000 -- 1,850,000
Voorhees, NJ............. 20,436,273 20,436,273 4,750,000 25,186,273(6)
Dallas, TX............... 16,305,418 16,305,418 220,000 16,525,418(6)
Edinburg, TX............. 10,788,525 10,788,525 95,000 10,883,525(6)
El Paso, TX.............. 16,804,249 16,804,249 -- 16,804,249(6)
Victoria, TX............. 10,282,627 10,282,627 -- 10,282,627
LAND
Temecula, CA............. 480,000 330,000 330,000(5)
------------ --------------- ------------- --------------- ------------- ---------------
SUBTOTAL................. 41,771,085 1,243,706,593 -- 1,243,706,593 91,562,615 1,335,269,208
------------ --------------- ------------- --------------- ------------- ---------------
HOTELS
Unallocated Dev & Const.
Costs.................... 23,490,528 (23,490,528) -- -- --
Birmingham, AL........... 4,139,503 116,891 4,256,394 728,062 4,984,456
Birmingham, AL........... 8,568,797 23,377 8,592,174 1,512,123 10,104,297
Birmingham, AL........... 7,891,894 21,156 7,913,050 1,367,572 9,280,623
Huntsville, AL........... 7,117,420 83,111 7,200,531 1,253,577 8,454,108
Huntsville, AL........... 6,906,010 55,662 6,961,672 1,216,269 8,177,941
Mobile, AL............... 5,075,001 191,100 5,266,102 893,150 6,159,252
Montgomery, AL........... 8,236,093 97,953 8,334,046 1,450,990 9,785,036
Tuscaloosa, AL........... 3,472,470 68,601 3,541,071 610,351 4,151,422
Little Rock, AR.......... 4,850,805 41,537 4,892,342 853,586 5,745,928
Little Rock, AR.......... 3,116,595 204,680 3,321,275 547,549 3,868,824
Little Rock, AR.......... 7,403,968 95,496 7,499,465 1,303,986 8,803,451
Little Rock, AR.......... 3,824,783 69,982 3,894,765 672,523 4,567,288
North Little Rock, AR.... 6,605,396 56,390 6,661,787 1,163,220 7,825,007
Chandler, AZ............. 6,076,813 693,732 6,770,545 953,474 7,724,019
Flagstaff, AZ............ 6,570,932 15,049 6,585,981 1,159,576 7,745,557
Mesa, AZ................. 7,370,306 172,631 7,542,937 1,327,392 8,870,329
Peoria, AZ............... 6,013,092 191,014 6,204,106 963,994 7,168,100
Phoenix, AZ.............. 8,894,259 53,327 8,947,586 1,567,137 10,514,723
Phoenix, AZ.............. 7,884,309 660,512 8,544,821 1,388,910 9,933,731
Phoenix, AZ.............. 7,036,272 115,686 7,151,958 821,636 7,973,594
Scottsdale, AZ........... 12,352,538 32,410 12,384,948 2,179,860 14,564,808
Tempe, AZ................ 12,584,021 44,465 12,628,486 2,218,271 14,846,757
Tucson, AZ............... 8,901,960 100,867 9,002,827 1,568,496 10,571,323
Tucson, AZ............... 7,789,754 109,905 7,899,660 1,372,224 9,271,884
Tucson, AZ............... 6,811,360 13,995 6,825,355 1,202,005 8,027,360
Bakersfield, CA.......... 5,756,768 64,512 5,821,280 1,013,462 6,834,742
Chula Vista, CA.......... 14,703,759 102,131 14,805,890 2,592,343 17,398,233
Costa Mesa, CA........... 7,592,769 122,777 7,715,546 1,337,462 9,053,008
Fremont, CA.............. 4,495,925 6,846,815 11,342,740 2,486,143 13,828,883
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
Boca Raton, FL........... 1,326,575 1985 1/98
Boca Raton, FL........... 274,692 1997 10/98
Boynton Beach, FL........ 301,878 1997 1/98
Boynton Beach, FL........ 362,524 1997 1/98
Delray Beach, FL......... 1,560,107 1997 1/98
Hollywood, FL............ 635,784 1997 1/98
Jupiter, FL.............. 348,574 1997 1/98
Loxahatchee, FL.......... 263,349 1997 1/98
Loxahatchee, FL.......... 216,836 1997 1/98
Loxahatchee, FL.......... 246,453 1997 1/98
Palm Bay, FL............. 232,907 1997 1/98
Palm Beach, FL........... 84,981 1997 5/98
Palm Spring, FL.......... 245,913 1997 1/98
Plantation, FL........... 655,692 1997 1/98
Plantation, FL........... 489,616 1997 1/98
West Palm Beach, FL...... 571,855 1997 1/98
Concord, MA.............. 15,416 1997 1/98
Voorhees, NJ............. 1,493,081 1997 1/98
Dallas, TX............... 1,279,727 1997 1/98
Edinburg, TX............. 743,136 1997 1/98
El Paso, TX.............. 1,106,253 1997 1/98
Victoria, TX............. 698,547 1997 1/98
LAND
Temecula, CA............. 11/97
-------------
SUBTOTAL................. 161,087,266
-------------
HOTELS
Unallocated Dev & Const.
Costs.................... -- -- 7/98
Birmingham, AL........... 274,411 1985 7/98
Birmingham, AL........... 445,680 1996 7/98
Birmingham, AL........... 410,100 1997 7/98
Huntsville, AL........... 409,864 1983 7/98
Huntsville, AL........... 393,091 1985 7/98
Mobile, AL............... 303,941 1979 7/98
Montgomery, AL........... 490,196 1982 7/98
Tuscaloosa, AL........... 223,697 1982 7/98
Little Rock, AR.......... 286,666 1983 7/98
Little Rock, AR.......... 204,948 1975 7/98
Little Rock, AR.......... 423,908 1980 7/98
Little Rock, AR.......... 255,681 1993 7/98
North Little Rock, AR.... 383,430 1983 7/98
Chandler, AZ............. 344,906 1998 7/98
Flagstaff, AZ............ 338,599 1996 7/98
Mesa, AZ................. 373,371 1997 7/98
Peoria, AZ............... 306,070 1998 7/98
Phoenix, AZ.............. 506,718 1973 7/98
Phoenix, AZ.............. 501,382 1993 7/98
Phoenix, AZ.............. 333,104 1997 7/98
Scottsdale, AZ........... 648,775 1996 7/98
Tempe, AZ................ 564,447 1982 7/98
Tucson, AZ............... 515,636 1991 7/98
Tucson, AZ............... 455,331 1973 7/98
Tucson, AZ............... 352,945 1996 7/98
Bakersfield, CA.......... 331,490 1986 7/98
Chula Vista, CA.......... 656,625 1986 7/98
Costa Mesa, CA........... 447,429 1980 7/98
Fremont, CA.............. 243,354 UC 7/98
</TABLE>
139
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Fresno, CA............... 3,965,010 35,735 4,000,746 697,269 4,698,015
Irvine, CA............... 10,816,163 81,154 10,897,318 1,906,297 12,803,615
La Palma, CA............. 11,057,877 383,470 11,441,347 1,948,952 13,390,299
Mission Valley, CA....... -- -- -- 3,645,267 3,645,267
Ontario, CA.............. 6,216,744 4,589,049 10,805,793 1,497,492 12,303,285
Redding, CA.............. 6,704,273 135,471 6,839,744 1,180,669 8,020,413
Sacramento, CA........... 10,521,578 70,268 10,591,846 -- 10,591,846
Sacramento, CA........... 9,148,634 235,209 9,383,844 1,612,009 10,995,853
San Bernardino, CA....... 10,729,322 121,958 10,851,281 1,890,972 12,742,253
San Buenaventura, CA..... 5,873,995 91,150 5,965,145 1,034,149 6,999,294
San Diego, CA............ 5,173,136 89,795 5,262,931 910,468 6,173,399
South San Francisco, CA.. 19,630,626 83,911 19,714,538 3,461,790 23,176,328
Stockton, CA............. 11,762,912 59,837 11,822,749 2,073,370 13,896,119
Valencia, CA............. -- -- -- 2,514,067 2,514,067
Vista, CA................ 6,608,756 42,359 6,651,116 1,163,813 7,814,929
Aurora, CO............... 10,090,478 71,433 10,161,911 1,778,234 11,940,145
Colorado Springs, CO..... 6,143,464 94,591 6,238,055 1,081,702 7,319,757
Colorado Springs, CO..... 7,570,317 355,830 7,926,148 1,260,261 9,186,409
Denver, CO............... 11,755,008 99,655 11,854,663 2,071,975 13,926,638
Denver, CO............... 6,500,817 243,528 6,744,346 1,144,765 7,889,111
Denver, CO............... 7,894,924 147,740 8,042,664 1,390,784 9,433,448
Denver, CO............... 13,981,316 79,307 14,060,623 2,467,291 16,527,914
Denver, CO............... 10,627,274 907,345 11,534,619 1,512,646 13,047,266
Grand Junction, CO....... 6,675,573 115,804 6,791,377 478,053 7,269,431
Lakewood, CO............. 7,571,644 942,809 8,514,453 1,106,781 9,621,234
Lewisville, CO........... 7,845,924 107,323 7,953,247 1,475,795 9,429,042
Pueblo, CO............... 7,280,369 (228,558) 7,051,810 800,619 7,852,429
Westminister, CO......... 8,880,218 108,301 8,988,520 1,564,659 10,553,179
Westminister, CO......... 9,863,738 99,275 9,963,014 1,738,221 11,701,235
Wheat Ridge, CO.......... 10,793,362 124,161 10,917,523 1,902,273 12,819,796
Altamonte Springs, FL.... 7,431,923 55,787 7,487,710 1,309,077 8,796,787
Brandon, FL.............. 8,192,791 30,276 8,223,066 1,208,344 9,431,411
Clearwater, FL........... 6,852,662 90,067 6,942,730 1,206,855 8,149,585
Coral Springs, FL........ 7,888,175 624,535 8,512,710 1,389,593 9,902,303
Daytona Beach, FL........ 7,201,071 177,426 7,378,498 1,268,339 8,646,837
Deerfield Beach, FL...... 6,432,943 107,101 6,540,044 1,132,787 7,672,831
Fort Lauderdale, FL...... 12,286,111 88,117 12,374,229 2,165,699 14,539,928
Fort Lauderdale, FL...... 9,039,567 687,878 9,727,445 1,416,013 11,143,457
Fort Myers, FL........... 7,471,064 76,073 7,547,138 1,315,985 8,863,123
Ft. Lauderdale, FL....... -- -- -- -- --
Gainesville, FL.......... 8,137,122 136,263 8,273,385 1,433,525 9,706,910
Jacksonville, FL......... 6,408,732 99,230 6,507,962 1,128,515 7,636,477
Jacksonville, FL......... 6,923,144 87,349 7,010,494 1,219,293 8,229,787
Jacksonville, FL......... 7,413,329 53,955 7,467,285 1,305,796 8,773,081
Jacksonville, FL......... 7,987,537 105,606 8,093,143 1,343,005 9,436,148
Lake Mary, FL............ 7,506,147 433,685 7,939,833 1,025,860 8,965,693
Lakeland, Fl, FL......... 7,973,877 135,387 8,109,264 1,189,768 9,299,032
Miami, FL................ 13,206,890 138,550 13,345,440 2,328,189 15,673,629
Miami, FL................ 8,948,658 1,266,600 10,215,258 1,537,039 11,752,297
Ocala, FL................ 6,882,908 288,900 7,171,808 891,376 8,063,184
Orlando, FL.............. 6,569,580 1,574,980 8,144,560 1,098,662 9,243,222
Orlando, FL.............. 2,204,352 6,568,123 8,772,475 1,366,497 10,138,972
Orlando, FL.............. 1,524,907 11,157,990 12,682,896 2,636,053 15,318,949
Orlando, FL.............. 10,251,049 106,666 10,357,715 1,806,570 12,164,285
Orlando, FL.............. 15,422,958 64,300 15,487,258 2,719,260 18,206,518
Panama City, FL.......... 6,802,665 114,470 6,917,134 1,097,320 8,014,454
Pensacola, FL............ 8,957,428 67,971 9,025,400 1,578,284 10,603,684
Pinellas Park, FL........ 6,623,817 64,282 6,688,100 1,166,470 7,854,570
Plantation, FL........... 6,814,063 2,870,076 9,684,140 1,389,053 11,073,192
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
Fresno, CA............... 243,683 1986 7/98
Irvine, CA............... 645,112 1987 7/98
La Palma, CA............. 663,975 1994 7/98
Mission Valley, CA....... -- N/A 7/98
Ontario, CA.............. 393,959 1998 7/98
Redding, CA.............. 415,884 1993 7/98
Sacramento, CA........... 1,016,081 1985 7/98
Sacramento, CA........... 554,283 1993 7/98
San Bernardino, CA....... 607,703 1983 7/98
San Buenaventura, CA..... 350,166 1988 7/98
San Diego, CA............ 313,182 1987 7/98
South San Francisco, CA.. 868,718 1987 7/98
Stockton, CA............. 663,142 1984 7/98
Valencia, CA............. -- N/A 7/98
Vista, CA................ 382,323 1987 7/98
Aurora, CO............... 569,752 1982 7/98
Colorado Springs, CO..... 356,561 1985 7/98
Colorado Springs, CO..... 399,121 1998 7/98
Denver, CO............... 662,488 1974 7/98
Denver, CO............... 384,813 1974 7/98
Denver, CO............... 455,271 1980 7/98
Denver, CO............... 739,350 1996 7/98
Denver, CO............... 473,587 1998 7/98
Grand Junction, CO....... 373,076 1997 7/98
Lakewood, CO............. 428,456 1998 7/98
Lewisville, CO........... 408,689 1997 7/98
Pueblo, CO............... 379,220 1998 7/98
Westminister, CO......... 510,338 1986 7/98
Westminister, CO......... 567,254 1986 7/98
Wheat Ridge, CO.......... 614,793 1985 7/98
Altamonte Springs, FL.... 423,637 1987 7/98
Brandon, FL.............. 428,857 1997 7/98
Clearwater, FL........... 400,693 1988 7/98
Coral Springs, FL........ 479,585 1994 7/98
Daytona Beach, FL........ 427,826 1991 7/98
Deerfield Beach, FL...... 377,300 1986 7/98
Fort Lauderdale, FL...... 647,185 1995 7/98
Fort Lauderdale, FL...... 542,136 1998 7/98
Fort Myers, FL........... 428,855 1984 7/98
Ft. Lauderdale, FL....... -- N/A 7/98
Gainesville, FL.......... 466,315 1989 7/98
Jacksonville, FL......... 373,074 1980 7/98
Jacksonville, FL......... 401,328 1986 7/98
Jacksonville, FL......... 420,096 1982 7/98
Jacksonville, FL......... 429,845 1997 7/98
Lake Mary, FL............ 426,126 1998 7/98
Lakeland, Fl, FL......... 426,148 1997 7/98
Miami, FL................ 733,375 1986 7/98
Miami, FL................ 482,551 1998 7/98
Ocala, FL................ 389,813 1998 7/98
Orlando, FL.............. 387,335 1998 7/98
Orlando, FL.............. 184,983 UC 7/98
Orlando, FL.............. 106,711 UC 7/98
Orlando, FL.............. 581,708 1987 7/98
Orlando, FL.............. 846,028 1994 7/98
Panama City, FL.......... 380,845 1997 7/98
Pensacola, FL............ 503,514 1985 7/98
Pinellas Park, FL........ 375,186 1985 7/98
Plantation, FL........... 300,806 1998 7/98
</TABLE>
140
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
St. Petersburg, FL....... 5,792,905 61,057 5,853,962 1,019,839 6,873,801
Tallahassee, FL.......... 13,048,829 66,228 13,115,057 2,300,296 15,415,353
Tallahassee, FL.......... 8,149,524 156,758 8,306,282 1,435,713 9,741,995
Tampa, FL................ 3,659,646 170,906 3,830,552 643,382 4,473,934
Tampa, FL................ 11,881,605 157,540 12,039,145 2,094,316 14,133,461
Tampa, FL................ 6,847,440 73,850 6,921,291 1,182,643 8,103,934
Alpharetta, GA........... 7,423,945 2 7,423,947 1,632,105 9,056,052
Atlanta, GA.............. 6,414,440 2,086,036 8,500,476 2,243,021 10,743,497
Atlanta, GA.............. 5,742,352 2,596,517 8,338,868 1,408,445 9,747,313
Augusta, GA.............. 4,852,929 124,110 4,977,039 853,961 5,831,000
Austell, GA.............. 4,373,863 82,791 4,456,655 769,420 5,226,075
College Park, GA......... 2,929,266 306,292 3,235,558 514,491 3,750,049
College Park, GA......... 3,110,554 121,525 3,232,080 546,483 3,778,563
Columbus, GA............. 6,123,710 121,645 6,245,355 1,078,216 7,323,571
Conyers, GA.............. 6,852,674 925,072 7,777,746 1,264,045 9,041,791
Lithonia, GA............. 3,625,380 61,202 3,686,582 637,335 4,323,917
Macon, GA................ 6,601,559 18,180 6,619,739 1,164,981 7,784,720
Marietta, GA............. 6,051,123 111,028 6,162,151 1,065,407 7,227,558
Norcross, GA............. 4,392,960 44,628 4,437,589 772,790 5,210,379
Norcross, GA............. 4,462,376 85,765 4,548,141 785,040 5,333,181
Savannah, GA............. 9,292,087 77,490 9,369,577 1,637,342 11,006,919
Savannah, GA............. 4,462,501 85,558 4,548,059 785,062 5,333,121
Tucker, GA............... 4,545,700 63,847 4,609,548 799,744 5,409,292
Arlington Heights, IL.... 8,371,126 121,607 8,492,734 1,474,819 9,967,553
Champaign, IL............ 2,645,580 146,626 2,792,205 447,686 3,239,891
Elk Grove Village, IL.... 8,987,067 111,471 9,098,538 1,583,515 10,682,053
Hoffman Estates, IL...... 9,254,248 110,249 9,364,497 1,630,664 10,995,161
Moline, IL............... 2,257,510 322,081 2,579,591 395,911 2,975,502
Oakbrook Terrace, IL..... 8,738,589 173,798 8,912,387 1,539,666 10,452,053
Schaumburg, IL........... 8,309,673 111,183 8,420,856 1,463,975 9,884,831
Indianapolis, IN......... 9,561,210 206,342 9,767,553 1,684,834 11,452,387
Indianapolis, IN......... 3,530,754 27,937 3,558,691 602,589 4,161,280
Merrillville, IN......... 3,323,615 294,729 3,618,344 574,980 4,193,324
Lenexa, KS............... 5,758,096 114,285 5,872,381 1,013,679 6,886,060
Wichita, KS.............. 3,479,512 2,076,874 5,556,387 -- 5,556,387
Lexington, KY............ 5,300,151 43,239 5,343,390 932,883 6,276,273
Alexandria, LA........... 6,814,270 (30,253) 6,784,017 995,042 7,779,059
Baton Rouge, LA.......... 9,845,427 43,685 9,889,113 1,734,990 11,624,103
Bossier City, LA......... 10,601,965 51,899 10,653,864 1,868,497 12,522,361
Gretna, LA............... 8,561,779 155,551 8,717,330 1,508,464 10,225,794
Kenner, LA............... 14,984,662 494,363 15,479,026 2,641,914 18,120,940
Lafayette, La, LA........ 7,540,154 118,296 7,658,451 1,328,177 8,986,628
Metairie, LA............. 10,786,292 221,985 11,008,277 -- 11,008,277
Metairie, LA............. 15,458,306 85,677 15,543,983 -- 15,543,983
Monroe, LA............... 5,384,339 54,137 5,438,476 947,739 6,386,215
New Orleans, LA.......... 4,354,349 84,849 4,439,198 765,976 5,205,174
New Orleans, LA.......... 7,135,565 77,396 7,212,961 1,256,779 8,469,740
New Orleans, LA.......... 5,311,430 8,767,675 14,079,104 1,219,068 15,298,172
Shreveport, LA........... 6,505,540 (36,005) 6,469,535 664,699 7,134,234
Slidell, LA.............. 6,451,551 92,597 6,544,148 1,136,071 7,680,219
Sulphur, LA.............. 9,120,039 65,526 9,185,565 1,606,980 10,792,545
Hazelwood, MO............ 2,238,554 45,043 2,283,598 394,764 2,678,362
St Louis, MO............. 9,461,134 (73,986) 9,387,148 867,193 10,254,341
Jackson, MS.............. 2,896,382 133,405 3,029,787 508,688 3,538,475
Jackson, MS.............. 4,212,283 75,412 4,287,695 709,949 4,997,644
Cary, NC................. 13,293,656 (41,495) 13,252,161 2,345,939 15,598,100
Cary, NC................. 8,730,560 (342,369) 8,388,190 1,651,813 10,040,003
Charlotte, NC............ 5,438,746 2,628,230 8,066,976 1,227,379 9,294,355
Charlotte, NC............ 6,860,195 135,843 6,996,038 1,208,184 8,204,222
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
St. Petersburg, FL....... 349,684 1987 7/98
Tallahassee, FL.......... 726,908 1979 7/98
Tallahassee, FL.......... 466,120 1986 7/98
Tampa, FL................ 230,430 1984 7/98
Tampa, FL................ 533,036 1983 7/98
Tampa, FL................ 342,589 1997 7/98
Alpharetta, GA........... 396,223 1997 7/98
Atlanta, GA.............. 344,517 1998 7/98
Atlanta, GA.............. 280,250 1998 7/98
Augusta, GA.............. 288,228 1985 7/98
Austell, GA.............. 263,270 1986 7/98
College Park, GA......... 216,293 1979 7/98
College Park, GA......... 168,936 1995 7/98
Columbus, GA............. 374,773 1980 7/98
Conyers, GA.............. 386,308 1998 7/98
Lithonia, GA............. 227,878 1985 7/98
Macon, GA................ 335,394 1996 7/98
Marietta, GA............. 354,286 1984 7/98
Norcross, GA............. 257,179 1986 7/98
Norcross, GA............. 276,294 1983 7/98
Savannah, GA............. 519,724 1982 7/98
Savannah, GA............. 239,027 1995 7/98
Tucker, GA............... 266,066 1987 7/98
Arlington Heights, IL.... 495,897 1989 7/98
Champaign, IL............ 233,384 1982 7/98
Elk Grove Village, IL.... 532,237 1985 7/98
Hoffman Estates, IL...... 538,552 1989 7/98
Moline, IL............... 326,767 1986 7/98
Oakbrook Terrace, IL..... 515,247 1984 7/98
Schaumburg, IL........... 484,225 1982 7/98
Indianapolis, IN......... 574,488 1980 7/98
Indianapolis, IN......... 425,318 1981 7/98
Merrillville, IN......... 251,203 1979 7/98
Lenexa, KS............... 477,116 1978 7/98
Wichita, KS.............. 251,420 1978 7/98
Lexington, KY............ 365,092 1982 7/98
Alexandria, LA........... 384,142 1997 7/98
Baton Rouge, LA.......... 560,737 1984 7/98
Bossier City, LA......... 599,284 1982 7/98
Gretna, LA............... 488,857 1985 7/98
Kenner, LA............... 846,861 1993 7/98
Lafayette, La, LA........ 446,076 1969 7/98
Metairie, LA............. 2,355,469 1967 7/98
Metairie, LA............. 2,376,564 1985 7/98
Monroe, LA............... 321,102 1984 7/98
New Orleans, LA.......... 265,909 1985 7/98
New Orleans, LA.......... 406,862 1985 7/98
New Orleans, LA.......... 228,162 UC 7/98
Shreveport, LA........... 357,297 1997 7/98
Slidell, LA.............. 384,782 1993 7/98
Sulphur, LA.............. 513,900 1985 7/98
Hazelwood, MO............ 263,153 1977 7/98
St Louis, MO............. 496,190 1997 7/98
Jackson, MS.............. 205,043 1974 7/98
Jackson, MS.............. 227,610 1993 7/98
Cary, NC................. 641,454 1996 7/98
Cary, NC................. 522,785 1998 7/98
Charlotte, NC............ 267,724 1998 7/98
Charlotte, NC............ 399,999 1985 7/98
</TABLE>
141
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charlotte, NC............ 4,462,651 33,953 4,496,604 783,722 5,280,326
Durham, NC............... 571,060 8,263,342 8,834,401 1,266,840 10,101,241
Greensboro, NC........... 81,508 8,189,753 8,271,261 1,251,024 9,522,285
Greensboro, NC........... -- -- -- -- --
Raleigh, NC.............. 1,333,662 7,671,820 9,005,482 1,292,037 10,297,519
Raleigh, NC.............. 9,240,392 162,677 9,403,069 1,484,478 10,887,547
Winston-Salem, NC........ 1,485,657 7,210,435 8,696,092 1,737,704 10,433,795
Omaha, NE................ 4,063,807 109,732 4,173,540 706,438 4,879,978
Albuquerque, NM.......... 6,979,226 60,069 7,039,295 1,229,190 8,268,485
Albuquerque, NM.......... 9,657,110 55,093 9,712,204 1,701,758 11,413,962
Albuquerque, NM.......... 7,419,168 83,352 7,502,521 1,306,827 8,809,348
Albuquerque, NM.......... 7,057,517 267,388 7,324,904 819,536 8,144,440
Farmington, NM........... 5,449,211 77,507 5,526,718 942,481 6,469,199
Las Cruces, NM........... 3,887,580 44,555 3,932,135 683,605 4,615,740
Santa Fe, NM............. 10,482,425 45,430 10,527,855 1,847,401 12,375,256
Las Vegas, NV............ 4,089,515 4,775,000 8,864,515 1,424,857 10,289,371
Las Vegas, NV............ -- 89,931 89,931 -- 89,931
Las Vegas, NV............ 10,831,428 2,808,228 13,639,657 1,899,819 15,539,476
Reno, NV................. 6,292,389 81,201 6,373,591 1,107,983 7,481,574
Columbus, OH............. 4,261,818 53,152 4,314,971 749,647 5,064,618
Del City, OK............. 5,994,389 58,025 6,052,414 1,055,395 7,107,809
Norman, OK............... 6,512,329 (15,499) 6,496,830 974,479 7,471,309
Oklahoma City, OK........ 2,420,269 5,010,173 7,430,442 1,337,311 8,767,753
Oklahoma City, OK........ 7,521,155 138,362 7,659,517 1,324,824 8,984,341
Oklahoma City, OK........ 12,707,607 128,192 12,835,799 2,240,080 15,075,879
Tulsa, OK................ 3,764,727 77,377 3,842,104 661,925 4,504,029
Tulsa, OK................ 4,816,485 85,823 4,902,308 847,530 5,749,838
Tulsa, OK................ 4,210,223 70,228 4,280,451 740,542 5,020,993
Moon Township, PA........ 5,617,668 110,630 5,728,298 988,897 6,717,195
Anderson, SC............. 3,482,009 43,231 3,525,240 612,034 4,137,274
Columbia, SC............. 3,225,225 225,938 3,451,163 566,719 4,017,882
Greensboro, SC........... 5,980,091 84,089 6,064,180 1,052,872 7,117,052
Greenville, SC........... 925,940 7,857,499 8,783,439 917,397 9,700,836
Myrtle Beach, SC......... 7,317,710 304,395 7,622,106 1,841,290 9,463,396
North Charleston, SC..... 5,307,416 93,629 5,401,045 934,165 6,335,210
Chattanooga, TN.......... 5,721,768 29,621 5,751,390 1,007,285 6,758,675
Kingsport, TN............ 5,113,764 (36,695) 5,077,069 889,325 5,966,394
Knoxville, TN............ 5,550,237 45,184 5,595,422 977,015 6,572,437
Knoxville, TN............ 3,878,194 49,042 3,927,237 681,949 4,609,186
Memphis, TN.............. 3,323,608 4,409,728 7,733,336 1,527,012 9,260,348
Memphis, TN.............. 5,745,873 69,629 5,815,502 1,011,539 6,827,041
Memphis, TN.............. 3,519,797 122,648 3,642,446 618,702 4,261,148
Memphis, TN.............. 6,051,153 137,112 6,188,265 1,065,412 7,253,677
Nashville-South, TN...... 8,235,038 54,980 8,290,019 1,450,804 9,740,823
Nashville-South, TN...... 4,992,812 102,430 5,095,242 878,646 5,973,888
Nashville-South, TN...... 8,741,098 89,156 8,830,254 1,540,108 10,370,362
Abilene, TX.............. 4,621,327 20,575 4,641,902 813,090 5,454,992
Addison, TX.............. 12,293,005 86,948 12,379,953 2,169,354 14,549,307
Amarillo, TX............. 6,732,642 123,601 6,856,243 1,185,675 8,041,918
Amarillo, TX............. 5,386,670 84,576 5,471,247 948,151 6,419,398
Arlington, TX............ 13,933,240 192,537 14,125,777 2,456,369 16,582,146
Arlington, TX............ 8,267,633 91,046 8,358,679 1,471,857 9,830,536
Austin, TX............... 3,327,541 4,768,939 8,096,480 3,031,086 11,127,565
Austin, TX............... 946,749 8,777,915 9,724,664 1,306,680 11,031,344
Austin, TX............... 9,775,256 73,232 9,848,488 1,722,589 11,571,077
Austin, TX............... 8,439,970 38,022 8,477,993 1,486,968 9,964,961
Austin, TX............... 10,532,391 120,260 10,652,652 1,856,219 12,508,871
Austin, TX............... 9,870,999 113,403 9,984,403 1,739,503 11,723,906
Austin, TX............... 11,881,356 135,674 12,017,030 2,094,272 14,111,302
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
Charlotte, NC............ 267,567 1986 7/98
Durham, NC............... 102,987 UC 7/98
Greensboro, NC........... 121,305 UC 7/98
Greensboro, NC........... -- N/A 7/98
Raleigh, NC.............. 210,719 UC 7/98
Raleigh, NC.............. 488,536 1997 7/98
Winston-Salem, NC........ 121,708 UC 7/98
Omaha, NE................ 291,981 1981 7/98
Albuquerque, NM.......... 405,059 1970 7/98
Albuquerque, NM.......... 543,620 1985 7/98
Albuquerque, NM.......... 423,382 1982 7/98
Albuquerque, NM.......... 343,416 1997 7/98
Farmington, NM........... 317,718 1983 7/98
Las Cruces, NM........... 238,970 1990 7/98
Santa Fe, NM............. 581,747 1986 7/98
Las Vegas, NV............ 265,019 UC 7/98
Las Vegas, NV............ -- Leased 7/98
Las Vegas, NV............ 700,308 1994 7/98
Reno, NV................. 369,585 1981 7/98
Columbus, OH............. 469,706 1980 7/98
Del City, OK............. 347,596 1985 7/98
Norman, OK............... 345,067 1997 7/98
Oklahoma City, OK........ 211,068 UC 7/98
Oklahoma City, OK........ 435,680 1979 7/98
Oklahoma City, OK........ 688,006 1996 7/98
Tulsa, OK................ 230,708 1974 7/98
Tulsa, OK................ 286,600 1985 7/98
Tulsa, OK................ 254,326 1990 7/98
Moon Township, PA........ 356,237 1985 7/98
Anderson, SC............. 183,532 1995 7/98
Columbia, SC............. 214,791 1980 7/98
Greensboro, SC........... 354,071 1981 7/98
Greenville, SC........... 183,473 UC 7/98
Myrtle Beach, SC......... 398,311 1996 7/98
North Charleston, SC..... 312,590 1981 7/98
Chattanooga, TN.......... 297,999 1995 7/98
Kingsport, TN............ 310,274 1995 7/98
Knoxville, TN............ 326,582 1986 7/98
Knoxville, TN............ 259,204 1995 7/98
Memphis, TN.............. 260,651 1998 7/98
Memphis, TN.............. 350,603 1979 7/98
Memphis, TN.............. 224,580 1983 7/98
Memphis, TN.............. 361,443 1986 7/98
Nashville-South, TN...... 476,186 1982 7/98
Nashville-South, TN...... 318,558 1979 7/98
Nashville-South, TN...... 497,798 1993 7/98
Abilene, TX.............. 272,869 1979 7/98
Addison, TX.............. 642,990 1996 7/98
Amarillo, TX............. 395,829 1983 7/98
Amarillo, TX............. 321,134 1986 7/98
Arlington, TX............ 839,376 1989 7/98
Arlington, TX............ 429,927 1997 7/98
Austin, TX............... 269,569 1998 7/98
Austin, TX............... 196,461 UC 7/98
Austin, TX............... 551,083 1983 7/98
Austin, TX............... 478,836 1972 7/98
Austin, TX............... 486,522 1975 7/98
Austin, TX............... 559,045 1977 7/98
Austin, TX............... 676,397 1993 7/98
</TABLE>
142
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Austin, TX............... 15,276,708 105,369 15,382,077 2,695,890 18,077,967
Balcones Heights, TX..... 133,941 12,073 146,014 -- 146,014
Baytown, TX.............. 5,344,949 73,069 5,418,018 940,788 6,358,806
Beaumont, TX............. 7,210,109 87,379 7,297,488 1,269,934 8,567,422
Bedford, TX.............. 4,794,865 20,812 4,815,677 843,697 5,659,374
Clute, TX................ 4,402,811 115,505 4,518,316 774,528 5,292,844
College Station, TX...... 11,461,417 118,696 11,580,113 2,020,165 13,600,278
Corpus Christi, TX....... 8,802,172 124,071 8,926,244 1,550,886 10,477,130
Corpus Christi, TX....... 5,521,350 123,730 5,645,080 971,918 6,616,998
Dallas, TX............... 5,551,202 77,442 5,628,645 977,185 6,605,830
Dallas, TX............... 7,819,121 (173,619) 7,645,502 1,328,907 8,974,409
Dallas, TX............... 8,557,544 (4,028,257) 4,529,287 1,117,153 5,646,440
Dallas, TX............... 4,737,976 34,182 4,772,158 833,675 5,605,833
Dallas, TX............... 7,045,322 36,995 7,082,317 1,240,854 8,323,171
Del Rio, TX.............. 2,774,995 74,420 2,849,415 487,267 3,336,682
Denton, TX............... 4,732,766 115,684 4,848,450 832,756 5,681,206
Eagle Pass, TX........... 6,068,832 73,302 6,142,135 1,068,532 7,210,667
El Paso, TX.............. 1,993,099 1,652,645 3,645,745 349,285 3,995,030
El Paso, TX.............. 6,435,249 78,217 6,513,467 1,133,194 7,646,661
El Paso, TX.............. 6,701,217 55,966 6,757,184 1,180,130 7,937,314
El Paso, TX.............. 6,166,588 43,352 6,209,940 1,085,783 7,295,723
Euless, TX............... 6,665,600 37,922 6,703,522 1,173,844 7,877,366
Farmers Branch, TX....... 7,087,609 65,929 7,153,538 1,248,316 8,401,854
Fort Stockton, TX........ 3,736,240 69,606 3,805,847 656,898 4,462,745
Fort Worth, TX........... 9,224,663 44,192 9,268,855 1,627,882 10,896,737
Fort Worth, TX........... 7,974,545 203,147 8,177,692 1,196,924 9,374,616
Galveston, TX............ 6,842,408 101,292 6,943,700 1,205,045 8,148,745
Garland, TX.............. 7,129,797 80,088 7,209,885 1,255,761 8,465,646
Georgetown, TX........... 4,808,723 53,390 4,862,114 846,160 5,708,274
Grand Prairie, TX........ 5,233,559 82,244 5,315,803 921,131 6,236,934
Harlingen, TX............ 7,120,695 97,585 7,218,281 1,254,155 8,472,436
Houston, TX.............. 1,608,274 8,251,371 9,859,645 1,510,466 11,370,111
Houston, TX.............. 8,821,421 116,590 8,938,011 1,554,283 10,492,294
Houston, TX.............. 4,420,603 45,360 4,465,963 636,698 5,102,660
Houston, TX.............. 5,890,076 57,905 5,947,981 1,036,987 6,984,968
Houston, TX.............. 6,273,192 135,274 6,408,466 1,104,595 7,513,061
Houston, TX.............. 6,642,552 98,531 6,741,083 1,169,777 7,910,860
Houston, TX.............. 10,463,623 34,313 10,497,936 1,768,135 12,266,072
Houston, TX.............. 6,018,910 59,445 6,078,356 1,059,722 7,138,078
Houston, TX.............. 2,274,304 24,625 2,298,929 398,909 2,697,838
Houston, TX.............. 3,695,447 52,304 3,747,751 649,699 4,397,450
Houston, TX.............. 6,076,965 67,477 6,144,443 1,069,967 7,214,410
Houston, TX.............. 4,067,389 117,421 4,184,810 715,336 4,900,146
Houston, TX.............. 7,007,505 63,688 7,071,194 1,234,180 8,305,374
Houston, TX.............. 7,426,052 (5,111) 7,420,940 873,698 8,294,639
Houston, TX.............. 12,152,069 469,511 12,621,579 2,755,165 15,376,744
Huntsville, TX........... 6,758,618 76,705 6,835,324 1,190,259 8,025,583
Irving, TX............... 8,641,754 55,213 8,696,967 1,522,577 10,219,544
Irving, TX............... 11,014,227 39,019 11,053,246 1,943,687 12,996,933
Killeen, TX.............. 5,932,179 70,674 6,002,853 1,044,191 7,047,044
La Marque, TX............ 2,595,000 (2,595,000) -- -- --
La Porte, TX............. 7,485,670 39,855 7,525,526 1,318,562 8,844,088
Laredo, TX............... 10,698,219 144,891 10,843,110 1,885,483 12,728,593
Lewisville, TX........... 6,832,961 49,217 6,882,178 1,203,378 8,085,556
Live Oak, TX............. 6,889,107 43,457 6,932,565 1,213,286 8,145,851
Longview, TX............. 5,944,128 70,885 6,015,013 1,046,525 7,061,538
Lubbock, TX.............. 7,098,710 136,570 7,235,281 1,250,275 8,485,556
Lubbock, TX.............. 5,815,970 294,968 6,110,938 1,023,909 7,134,847
Lufkin, TX............... 5,887,501 103,609 5,991,110 1,036,533 7,027,643
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
Austin, TX............... 734,345 1996 7/98
Balcones Heights, TX..... 11,101 1968 7/98
Baytown, TX.............. 314,523 1984 7/98
Beaumont, TX............. 416,835 1979 7/98
Bedford, TX.............. 300,096 1991 7/98
Clute, TX................ 275,331 1977 7/98
College Station, TX...... 652,547 1980 7/98
Corpus Christi, TX....... 514,409 1983 7/98
Corpus Christi, TX....... 332,038 1973 7/98
Dallas, TX............... 360,981 1971 7/98
Dallas, TX............... 425,609 1975 7/98
Dallas, TX............... 196,033 1974 7/98
Dallas, TX............... 271,785 1974 7/98
Dallas, TX............... 393,379 1978 7/98
Del Rio, TX.............. 180,702 1993 7/98
Denton, TX............... 284,617 1992 7/98
Eagle Pass, TX........... 354,268 1982 7/98
El Paso, TX.............. 216,561 1989 7/98
El Paso, TX.............. 372,962 1980 7/98
El Paso, TX.............. 390,190 1969 7/98
El Paso, TX.............. 359,162 1984 7/98
Euless, TX............... 388,011 1981 7/98
Farmers Branch, TX....... 398,019 1990 7/98
Fort Stockton, TX........ 218,308 1994 7/98
Fort Worth, TX........... 483,245 1996 7/98
Fort Worth, TX........... 462,427 1997 7/98
Galveston, TX............ 426,140 1988 7/98
Garland, TX.............. 406,273 1979 7/98
Georgetown, TX........... 271,355 1994 7/98
Grand Prairie, TX........ 306,514 1980 7/98
Harlingen, TX............ 418,796 1982 7/98
Houston, TX.............. 197,230 UC 7/98
Houston, TX.............. 525,930 1969 7/98
Houston, TX.............. 286,403 1973 7/98
Houston, TX.............. 348,366 1977 7/98
Houston, TX.............. 376,844 1978 7/98
Houston, TX.............. 390,919 1985 7/98
Houston, TX.............. 586,754 1986 7/98
Houston, TX.............. 351,954 1989 7/98
Houston, TX.............. 175,249 1989 7/98
Houston, TX.............. 239,177 1976 7/98
Houston, TX.............. 356,923 1977 7/98
Houston, TX.............. 250,886 1980 7/98
Houston, TX.............. 404,518 1981 7/98
Houston, TX.............. 389,806 1997 7/98
Houston, TX.............. 630,632 1998 7/98
Huntsville, TX........... 364,313 1996 7/98
Irving, TX............... 504,978 1974 7/98
Irving, TX............... 573,516 1996 7/98
Killeen, TX.............. 353,129 1976 7/98
La Marque, TX............ -- 1990 7/98
La Porte, TX............. 427,396 1985 7/98
Laredo, TX............... 627,109 1969 7/98
Lewisville, TX........... 392,460 1984 7/98
Live Oak, TX............. 402,860 1986 7/98
Longview, TX............. 345,454 1983 7/98
Lubbock, TX.............. 418,613 1976 7/98
Lubbock, TX.............. 368,289 1994 7/98
Lufkin, TX............... 346,704 1984 7/98
</TABLE>
143
<PAGE>
MEDITRUST CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
------------ --------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mesquite, TX............. -- -- -- 341,609 341,609
Midland, TX.............. 4,982,957 86,042 5,068,999 876,907 5,945,906
Nacogdoches, TX.......... 3,352,383 56,647 3,409,030 589,159 3,998,189
North Richland Hills,
TX..................... 5,707,616 29,392 5,737,008 1,004,788 6,741,796
Odessa, TX............... 6,327,946 120,578 6,448,525 1,114,258 7,562,783
Plano, TX................ 4,370,769 109,503 4,480,272 768,874 5,249,146
Plano, TX................ 9,439,404 (413,969) 9,025,435 1,269,573 10,295,008
Round Rock, TX........... 10,234,147 451,910 10,686,057 1,803,588 12,489,645
San Angelo, TX........... 5,962,114 94,641 6,056,755 1,049,699 7,106,454
San Antonio, TX.......... 20,288,264 143,342 20,431,606 3,577,844 24,009,450
San Antonio, TX.......... 9,913,036 102,287 10,015,323 1,746,921 11,762,244
San Antonio, TX.......... 6,526,296 89,931 6,616,227 1,149,261 7,765,488
San Antonio, TX.......... 9,172,066 177,812 9,349,878 1,616,162 10,966,040
San Antonio, TX.......... 5,697,351 42,166 5,739,517 1,002,977 6,742,494
San Antonio, TX.......... 5,627,889 112,035 5,739,924 990,719 6,730,643
San Antonio, TX.......... 10,806,800 88,800 10,895,600 1,904,644 12,800,244
San Antonio, TX.......... 12,794,370 68,621 12,862,992 2,255,392 15,118,384
San Antonio, TX.......... 3,284,488 106,098 3,390,586 577,177 3,967,763
San Antonio, TX.......... 5,311,012 44,966 5,355,978 934,799 6,290,777
San Antonio, TX.......... -- -- -- 1,463,775 1,463,775
San Marcos, TX........... 7,024,196 65,614 7,089,810 1,237,126 8,326,936
Shenandoah, TX........... 9,129,561 92,501 9,222,063 1,608,643 10,830,706
Shermann, TX............. 7,584,039 80,631 7,664,670 954,414 8,619,084
Stafford, TX............. 9,515,881 45,235 9,561,116 1,676,835 11,237,951
Temple, TX............... 4,846,042 23,742 4,869,785 852,745 5,722,530
Texarkana, TX............ 4,948,588 142,532 5,091,120 870,842 5,961,962
Texas City, TX........... 4,027,610 56,856 4,084,466 708,316 4,792,782
Tyler, TX................ 9,253,152 48,434 9,301,586 1,630,453 10,932,039
Victoria, TX............. 7,226,090 67,461 7,293,551 1,272,754 8,566,305
Waco, TX................. 6,803,919 46,219 6,850,139 1,178,004 8,028,143
White Settlement, TX..... 6,233,038 122,780 6,355,818 1,097,492 7,453,310
Wichita Falls, TX........ 5,020,159 45,817 5,065,976 883,472 5,949,448
Layton, UT............... 3,669,799 33,968 3,703,767 645,173 4,348,940
Midvale, UT.............. 5,822,347 331,598 6,153,945 1,023,352 7,177,297
Ogden, UT................ 8,909,631 (262,499) 8,647,133 791,871 9,439,004
Salt Lake City, UT....... -- -- -- 6,612,986 6,612,986
Salt Lake City, UT....... 8,538,608 33,086 8,571,695 1,530,439 10,102,134
Bristol, VA.............. 3,808,727 28,787 3,837,514 669,690 4,507,204
Hampton, VA.............. 4,507,663 70,269 4,577,932 793,032 5,370,964
Richmond, VA............. 3,173,648 50,057 3,223,705 557,617 3,781,322
Virginia Beach, VA....... 3,702,148 110,657 3,812,806 650,882 4,463,688
Kirkland, WA............. 11,147,010 173,318 11,320,328 1,951,151 13,271,480
Sea-Tac, WA.............. 7,647,560 210,681 7,858,241 1,332,999 9,191,240
Tacoma, WA............... 8,956,029 129,604 9,085,632 1,562,329 10,647,961
Cheyenne, WY............. 2,793,345 139,130 2,932,475 485,089 3,417,564
------------ --------------- ------------- --------------- ------------- ---------------
SUBTOTAL................. 2,124,922,447 133,027,441 2,257,949,888 390,457,965 2,648,407,853
------------ --------------- ------------- --------------- ------------- ---------------
GRAND TOTAL.............. $ 41,771,085 $ 3,368,629,040 $ 133,027,441 $ 3,501,656,481 $ 482,020,580 $ 3,983,677,061(2)
============ =============== ============= =============== ============= ===============
<CAPTION>
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
<S> <C> <C> <C>
Mesquite, TX............. -- N/A 7/98
Midland, TX.............. 306,998 1983 7/98
Nacogdoches, TX.......... 208,574 1984 7/98
North Richland Hills,
TX..................... 322,402 1993 7/98
Odessa, TX............... 369,364 1981 7/98
Plano, TX................ 264,648 1980 7/98
Plano, TX................ 508,715 1997 7/98
Round Rock, TX........... 608,050 1991 7/98
San Angelo, TX........... 371,829 1986 7/98
San Antonio, TX.......... 1,008,447 1968 7/98
San Antonio, TX.......... 1,317,340 1968 7/98
San Antonio, TX.......... 382,448 1970 7/98
San Antonio, TX.......... 544,168 1975 7/98
San Antonio, TX.......... 751,195 1975 7/98
San Antonio, TX.......... 337,583 1981 7/98
San Antonio, TX.......... 495,801 1982 7/98
San Antonio, TX.......... 721,959 1984 7/98
San Antonio, TX.......... 208,794 1974 7/98
San Antonio, TX.......... 320,040 1976 7/98
San Antonio, TX.......... -- N/A 7/98
San Marcos, TX........... 392,112 1995 7/98
Shenandoah, TX........... 513,430 1986 7/98
Shermann, TX............. 426,074 1997 7/98
Stafford, TX............. 545,162 1990 7/98
Temple, TX............... 281,504 1984 7/98
Texarkana, TX............ 303,806 1982 7/98
Texas City, TX........... 239,234 1978 7/98
Tyler, TX................ 517,292 1983 7/98
Victoria, TX............. 414,673 1984 7/98
Waco, TX................. 403,311 1971 7/98
White Settlement, TX..... 362,058 1980 7/98
Wichita Falls, TX........ 300,584 1973 7/98
Layton, UT............... 239,251 1988 7/98
Midvale, UT.............. 393,645 1978 7/98
Ogden, UT................ 437,321 1997 7/98
Salt Lake City, UT....... -- N/A 7/98
Salt Lake City, UT....... 434,583 1997 7/98
Bristol, VA.............. 219,179 1995 7/98
Hampton, VA.............. 277,346 1985 7/98
Richmond, VA............. 207,772 1987 7/98
Virginia Beach, VA....... 246,502 1984 7/98
Kirkland, WA............. 707,404 1986 7/98
Sea-Tac, WA.............. 634,674 1987 7/98
Tacoma, WA............... 714,868 1988 7/98
Cheyenne, WY............. 240,460 1981 7/98
-------------
SUBTOTAL................. 126,255,838
-------------
GRAND TOTAL.............. $ 287,343,104
=============
</TABLE>
144
<PAGE>
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(1) Gross amount at which land is carried at close of period also represents
initial cost to Realty.
(2) Cost for federal income tax purposes.
(3) Depreciation is calculated using a 40-year life.
(4) Real estate and accumulated depreciation reconciliations for the three years
ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
ACCUMULATED
REAL ESTATE DEPRECIATION
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
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(7).............. 4,488,215 184,410
Additions during the period:
Acquisitions.............................................. 129,492
Provision for depreciation................................ 125,714
Deductions:
Sale of Real Estate....................................... (614,232) (20,724)
Other..................................................... (19,798) (2,057)
---------- --------
Balance at close of year--December 31, 1999................. 3,983,677 287,343
Provision for impairment, 1998.............................. 47,918
Provision for impairment, 1999.............................. 42,378
Provision for impairment on assets sold..................... (6,701)
---------- --------
Balance per financial statements............................ $3,983,677 $370,938
========== ========
</TABLE>
(5) Real estate investments written down due to impairment.
(6) Real estate assets held for sale that were written down to fair value less
costs to sell.
(7) Includes real estate of $370,957 and accumulated depreciation of $4,172
included in net assets of discontinued operations.
145
<PAGE>
MEDITRUST CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PERIODIC
INTEREST FINAL MATURITY PAYMENT
DESCRIPTION (A) RATE DATE TERMS
- --------------- ---------- --------------- -----------------------------------------------------------
<S> <C> <C> <C>
Individual mortgages in excess of
3% of the total carrying amount:
7 long-term care facilities located 10.70% August 1, 2006 Monthly payments of principal and interest of $384,767,
in Missouri balloon payment of $38,544,000 due at maturity
18 long-term care facilities From 9.88% August 23, 2005 Monthly payments of principal and interest of $825,488,
located in Colorado, Florida, to 10.85% balloon payment of $80,961,000 due at maturity
Indiana, Kansas, Missouri,
Nebraska, North Carolina,
Tennessee and Washington
11 long-term care facilities 10.75% May 21, 2003 Monthly payments of principal and interest of $672,487,
located in Arizona, Colorado, balloon payment of $66,396,000 due at maturity
Florida, Indiana, Kansas and Utah
Mortgages individually less than 3%
of total carrying amount:
Long-term care facilities, 88 From 8.20% From January (D)
mortgages, face amounts ranging to 12.50% 2000 to March
from $525,000 to $29,540,679, 2012
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 From 8.83% From January (D)
mortgages, face amounts ranging to 10.90% 2000 to January
from $5,500,000 to $12,100,000, 2007
located in North Carolina, Ohio
and Utah
Alcohol and substance abuse 11.00% September 29, (D)
treatment facility, face amount 2006
of $33,300,000, located in New
York
Medical office buildings, 8 From 7.6% From March 2000 (D)
mortgages, face amounts ranging to 9.75% to October 2008
from $2,697,298 to $33,000,000,
located in Arizona, Florida,
Nevada and Tennessee
Assisted living facilities, 11 From 8.06% From September (D)
mortgages, face amounts ranging to 9.85% 2005 to June
from $3,387,878 to $26,450,000, 2012
located in Florida, Michigan,
Washington, Colorado, Idaho and
New Jersey
Land under development, 1 loan, 10.00% March 4, 2004 (D)
located in Florida
Other notes secured by real estate 10.00% (D)
in California
<CAPTION>
FACE CARRYING
AMOUNT OF AMOUNT OF
DESCRIPTION (A) MORTGAGES MORTGAGES (C)
- --------------- ----------- --------------
<S> <C> <C>
Individual mortgages in excess of
3% of the total carrying amount:
7 long-term care facilities located $41,385,000 $ 40,906,578
in Missouri
18 long-term care facilities 87,940,000 85,895,071
located in Colorado, Florida,
Indiana, Kansas, Missouri,
Nebraska, North Carolina,
Tennessee and Washington
11 long-term care facilities 80,373,000 69,228,899
located in Arizona, Colorado,
Florida, Indiana, Kansas and Utah
Mortgages individually less than 3%
of total carrying amount:
Long-term care facilities, 88 605,136,968(E)
mortgages, face amounts ranging
from $525,000 to $29,540,679,
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 20,715,133
mortgages, face amounts ranging
from $5,500,000 to $12,100,000,
located in North Carolina, Ohio
and Utah
Alcohol and substance abuse 31,967,488
treatment facility, face amount
of $33,300,000, located in New
York
Medical office buildings, 8 97,539,188(F)
mortgages, face amounts ranging
from $2,697,298 to $33,000,000,
located in Arizona, Florida,
Nevada and Tennessee
Assisted living facilities, 11 122,520,431
mortgages, face amounts ranging
from $3,387,878 to $26,450,000,
located in Florida, Michigan,
Washington, Colorado, Idaho and
New Jersey
Land under development, 1 loan, 14,625,394
located in Florida
Other notes secured by real estate 3,799,527
in California
--------------
$1,092,334,677(B)
==============
</TABLE>
- ----------------------------------
(A) Virtually all mortgage loans on real estate are first mortgage loans.
(B) The aggregate cost for federal income tax purposes.
(C) As of December 31, 1999, four mortgages are delinquent with principal and
interest payments as the operator has filed for protection under Chapter 11
of the U.S. Bankruptcy Code. These mortgages have been placed on non-accrual
status. No other mortgages are subject to delinquent principal or interest.
(D) Monthly payments of principal and interest normally payable at a level
amount, with a balloon payment at maturity.
(E) Includes a mortgage loan collateralized by a long-term care 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.
(F) Includes five mortgage loans collaterized by five medical office buildings
for which loan losses have been provided totaling approximately $13,223,000
based on management's assessment of the collectability of principal due as a
result of planned asset transactions.
146
<PAGE>
MEDITRUST CORPORATION
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1999
Reconciliation of carrying amount of mortgage loans for the three years
ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
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
Additions during period:
Construction loan advances.............................. 33,321
Non-cash increase....................................... 431
Deductions during period:
Collection of principal................................. (15,646)
Prepayment of mortgages................................. (120,973)
Mortgages sold.......................................... (21,423)
----------
Balance at December 31, 1999................................ 1,092,335
Allowance for loan losses................................... (32,415)
----------
Balance per financial statements............................ $1,059,920
==========
</TABLE>
147
<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 or have been disclosed in the notes to
consolidated financial statements, and therefore, have been omitted.
148
<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.
<TABLE>
<S> <C> <C>
MEDITRUST CORPORATION
By: /s/ LAURIE T. GERBER
----------------------------------------
Laurie T. Gerber
Chief Financial Officer and Treasurer
(and Principal Financial
and Accounting Officer)
Dated: February 29, 2000
</TABLE>
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
---- ----- ----
<C> <S> <C>
/s/ CLIVE D. BODE Chairman of the Board of Directors
- ---------------------------------- February 29, 2000
Clive D. Bode
/s/ WILLIAM G. BYRNES Chief Executive Officer
- ---------------------------------- (Principal Executive Officer) February 29, 2000
William G. Byrnes
/s/ EDWARD W. BROOKE Director
- ---------------------------------- February 29, 2000
Edward W. Brooke
/s/ JAMES P. CONN Director
- ---------------------------------- February 29, 2000
James P. Conn
/s/ JOHN C. CUSHMAN, III Director
- ---------------------------------- February 29, 2000
John C. Cushman, III
/s/ STEPHEN E. MERRILL Director
- ---------------------------------- February 29, 2000
Stephen E. Merrill
</TABLE>
149
<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.
<TABLE>
<S> <C> <C>
MEDITRUST OPERATING COMPANY
By: /s/ WILLIAM C. BAKER
----------------------------------------
William C. Baker
President
Dated: February 29, 2000
</TABLE>
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
---- ----- ----
<C> <S> <C>
/s/ CLIVE D. BODE Chairman of the Board of Directors
- ---------------------------------- February 29, 2000
Clive D. Bode
/s/ WILLIAM C. BAKER President and Director (Principal
- ---------------------------------- Executive, Financial and February 29, 2000
William C. Baker Accounting Officer)
/s/ EDWARD W. BROOKE Director
- ---------------------------------- February 29, 2000
Edward W. Brooke
/s/ WILLIAM G. BYRNES Director
- ---------------------------------- February 29, 2000
William G. Byrnes
/s/ STEPHEN E. MERRILL Director
- ---------------------------------- February 29, 2000
Stephen E. Merrill
</TABLE>
150
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE METHOD OF FILING
- --------------------- ---------------------------------------- ----------------------------------------
<C> <S> <C>
3.1 Amended and Restated Certificate of Filed herewith
Incorporation of Meditrust Corporation
filed with the Secretary of State of
Delaware on June 21, 1999
3.2 Amended and Restated Certificate of Filed herewith
Incorporation of Meditrust Operating
Company filed with the Secretary of
State of Delaware on June 21, 1999
3.3 Amended and Restated By-laws of Incorporated by reference to Exhibit 3.5
Meditrust Corporation to the Joint Registration Statement on
Form S-4 of Meditrust Corporation and
Meditrust Operating Company (File Nos.
333-47737 and 333-47737-01)
3.4 Amended and Restated By-laws of Incorporated by reference to Exhibit 3.6
Meditrust Operating Company to 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 Meditrust Corporation Amended and Incorporated by reference to Exhibit 4.1
Restated 1995 Share Award Plan to Joint Registration Statement on Form
S-8 of Meditrust Corporation and
Meditrust Operating Company (File Nos.
333-39771 and 333-39771-01
4.2 Meditrust Operating Company Amended and Incorporated by reference to Exhibit 4.2
Restated 1995 Share Award Plan to Joint Registration Statement on Form
S-8 of Meditrust Corporation and
Meditrust Operating Company (File Nos.
333-39771 and 333-39771-01)
4.3 Form of Fiscal Agency Agreement dated Incorporated by reference to Exhibit 4.7
November 15, 1993 between Meditrust and to Form 10-K of Meditrust for the fiscal
Fleet National Bank, as fiscal agent year ended December 31, 1993
4.4 Form of Indenture dated April 23, 1992 Incorporated by reference to Exhibit 4
between Meditrust and Fleet National to the Registration Statement on Form
Bank, as trustee S-3 of Meditrust (File No. 33-45979)
4.5 Form of 9% Convertible Debenture due Incorporated by reference to Exhibit 4.1
2002 to the Registration Statement on Form
S-3 of Meditrust (File No. 33-45979)
4.6 Form of Indenture, dated March 9, 1994 Incorporated by reference to Exhibit 4
between Meditrust and Shawmut Bank, as to the Registration Statement on Form
Trustee S-3 of Meditrust (File No. 33-50835)
4.7 Form of 7 1/2% Convertible Debenture due Incorporated by reference to Exhibit 4
2001 to the Registration Statement on Form
S-3 of Meditrust (File No. 33-50835)
</TABLE>
151
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE METHOD OF FILING
- --------------------- ---------------------------------------- ----------------------------------------
<C> <S> <C>
4.8 Form of First Supplemental Indenture Incorporated by reference to Exhibit 4.1
dated as of July 26, 1995, to Indenture to the Current Report on Form 8-K of
dated as of July 26, 1995 between Meditrust dated July 13, 1995
Meditrust and Fleet National Bank
4.9 Form of 8.54% Convertible Senior Note Incorporated by reference to Exhibit 4.1
due July 1, 2000 to the Current Report on Form 8-K of
Meditrust dated July 27, 1995
4.10 Form of 8.56% Convertible Senior Note Incorporated by reference to Exhibit 4.1
due July 1, 2002 to the Current Report on Form 8-K of
Meditrust dated July 27, 1995
4.11 Form of Second Supplemental Indenture Incorporated by reference to Exhibit 4.1
dated as of July 28, 1995, to Indenture to the Current Report on Form 8-K of
dated as of July 26, 1995 between Meditrust dated July 27, 1995
Meditrust and Fleet National Bank, as
Trustee
4.12 Form of Fixed Rate Senior Medium-term Incorporated by reference to Exhibit 4.3
Note to the Current Report on Form 8-K of
Meditrust dated August 8, 1995
4.13 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
4.14 Form of Third Supplemental Indenture Incorporated by reference to Exhibit 4.2
dated as of August 10, 1995, to to the Current Report on Form 8-K of
Indenture dated as of July 26, 1995 Meditrust dated August 8, 1995
between Meditrust and Fleet National
Bank
4.15 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
4.16 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
4.17 Form of Fourth Supplemental Indenture Incorporated by reference to Exhibit 4.1
dated as of September 5, 1996, to to the Current Report on Form 8-K of
Indenture dated as of July 26, 1995 Meditrust dated September 6, 1996
between Meditrust and Fleet National
Bank
4.18 Form of 7.82% Note due September 10, Incorporated by reference to Exhibit 4.1
2026 to the Current Report on Form 8-K of
Meditrust dated September 6, 1996
4.19 Form of Fifth Supplemental Indenture Incorporated by reference to Exhibit
dated as of August 12, 1997, to 4.25 to Joint Annual Report on Form 10-K
Indenture dated as of July 26, 1995 of The Meditrust Companies for the
between Meditrust and Fleet National fiscal year ended December 31, 1998
Bank (State Street Bank and Trust
Company, as Successor Trustee)
</TABLE>
152
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE METHOD OF FILING
- --------------------- ---------------------------------------- ----------------------------------------
<C> <S> <C>
4.20 Form of Remarketed Reset Note due August Incorporated by reference to Exhibit
15, 2002 4.26 to Joint Annual Report on Form 10-K
of The Meditrust Companies for the
fiscal year ended December 31, 1998
4.21 Form of Sixth Supplemental Indenture Incorporated by reference to Exhibit
dated as of August 12, 1997, to 4.27 to Joint Annual Report on Form 10-K
Indenture dated as of July 26, 1995 of The Meditrust Companies for the
between Meditrust and State Street Bank fiscal year ended December 31, 1998
and Trust Company
4.22 Form of 7% Notes due August 15, 2007 Incorporated by reference to Exhibit
4.28 to Joint Annual Report on Form 10-K
of The Meditrust Companies for the
fiscal year ended December 31, 1998
4.23 Form of Seventh Supplemental Indenture Incorporated by reference to Exhibit
dated August 12, 1997, to Indenture 4.29 to Joint Annual Report on Form 10-K
dated as of July 26, 1995 between of The Meditrust Companies for the
Meditrust and State Street Bank and fiscal year ended December 31, 1998
Trust Company
4.24 Form of 7.114% Note due August 15, 2011 Incorporated by reference to Exhibit
4.30 to Joint Annual Report on Form 10-K
of The Meditrust Companies for the
fiscal year ended December 31, 1998
4.25 Form of Deposit Agreement, among Incorporated by reference to Exhibit 4.3
Meditrust Corporation and State Street to Joint Current Report on Form 8-K of
Bank and Trust Company and all holders Meditrust Corporation and Meditrust
from time to time of Receipts for Operating Company, event date June 16,
Depositary Shares, including form of 1998
Depositary Receipts
10.1 Credit Agreement dated as of July 17, Incorporated by reference to Joint
1998 among Meditrust Corporation, Morgan Quarterly Report on Form 10-Q for the
Guaranty Trust Company of New York and Quarter ended June 30, 1998
the other Banks set forth therein
10.2 Amended and Restated Lease Agreement Incorporated by reference to Exhibit 2.2
between Mediplex of Queens, Inc. and to the Current Report on Form 8-K of
QPH, Inc. dated December 30, 1986 Meditrust dated January 13, 1987
10.3 Registration Rights Agreement, dated as Incorporated by reference to Exhibit
of January 3, 1998 by and among 10.3 to Joint Current Report on Form 8-K
Meditrust Corporation, Meditrust of Meditrust Corporation and Meditrust
Operating Company and certain other Operating Company, event date
parties signatory thereto January 8, 1998
10.4 Shareholders Agreement, dated as of Incorporated by reference to Exhibit
January 3, 1998, by and among Meditrust 10.2 to Joint Current Report of Form 8-K
Corporation, Meditrust Operating of Meditrust Corporation and Meditrust
Company, certain shareholders of La Operating Company, event date
Quinta Inns, Inc., and solely for January 8, 1998
purposes of Section 3.6 of such
Agreement, La Quinta Inns, Inc.
</TABLE>
153
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE METHOD OF FILING
- --------------------- ---------------------------------------- ----------------------------------------
<C> <S> <C>
10.5 First Amendment to Shareholders Incorporated by reference to Annex D-1
Agreement dated April 30, 1998, by and to the Joint Proxy Statement/Prospectus
among Meditrust Corporation, Meditrust on Form S-4/A of Meditrust Corporation
Operating Company and certain and Meditrust Operating Company (File
shareholders of La Quinta Inns, Inc., Nos. 333-47737 and 333-47737-01)
and solely for the purposes of Section
3.6 of such Agreement, La Quinta Inns,
Inc.
10.6 Amendment to Credit Agreement dated as Incorporated by reference to Exhibit
of November 23, 1998 among Meditrust 10.16 to Joint Annual Report on Form
Corporation, Morgan Guaranty Trust 10-K of The Meditrust Companies for the
Company of New York and the other Banks fiscal year ended December 31, 1998
set forth therein
10.7 Second Amendment to Credit Agreement Incorporated by reference to Exhibit
dated as of March 10, 1999 by and among 99.1 to Joint Quarterly Report on Form
Meditrust Corporation, Morgan Guaranty 10-Q for the Quarter ended March 31,
Trust Company of New York and the other 1999
Banks set forth therein
10.8 Employment Agreement dated as of January Incorporated by reference to Exhibit
1, 1999 by and between Meditrust 10.1 to Joint Quarterly Report on Form
Corporation and David F. Benson 10-Q for the Quarter ended March 31,
1999
10.9 Employment Agreement dated as of January Incorporated by reference to Exhibit
1, 1999 by and between Meditrust 10.2 to Joint Quarterly Report on Form
Corporation and Michael S. Benjamin 10-Q for the Quarter ended March 31,
1999
10.10 Employment Agreement dated as of January Incorporated by reference to Exhibit
1, 1999 by and between Meditrust 10.3 to Joint Quarterly Report on Form
Corporation and Michael F. Bushee 10-Q for the Quarter ended March 31,
1999
10.11 Employment Agreement dated as of January Incorporated by reference to Exhibit
1, 1999 by and between Meditrust 10.4 to Joint Quarterly Report on Form
Corporation and Laurie T. Gerber 10-Q for the Quarter ended March 31,
1999
10.12 Separation Agreement dated as of Incorporated by reference to Exhibit
May 10, 1999 by and among Meditrust 99.2 to Joint Current Report on Form 8-K
Corporation, Meditrust Operating of Meditrust Corporation and Meditrust
Company, Abraham D. Gosman and other Operating Company, event dated May 10,
parties thereto 1999
10.13 Termination and Severance Agreement Incorporated by reference to Exhibit
dated as of January 28, 2000 by and 99.2 to Joint Current Report on Form 8-K
among Meditrust Corporation, Meditrust of Meditrust Corporation and Meditrust
Operating Company, David F. Benson and Operating Company, event dated
other parties thereto January 28, 2000
11 Statement Regarding Computation of Per See financial statements
Share Earnings
21 Subsidiaries of the Registrant Filed herewith
23 Consent of PricewaterhouseCoopers L.L.P. Filed herewith
27.1 Financial Data Schedule Filed herewith
27.2 Financial Data Schedule Filed herewith
</TABLE>
154
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEDITRUST CORPORATION
Meditrust Corporation, a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The Corporation filed its original Certificate of Incorporation with
the Secretary of State of the State of Delaware on August 23, 1979 (the
"Original Certificate of Incorporation") under the name "Santa Anita Realty
Enterprises, Inc." The name of the Corporation was changed to Meditrust
Corporation on November 5, 1997, by way of amendment to the Original Certificate
of Incorporation. A Restated Certificate of Incorporation (the "Second
Certificate") was filed with the Secretary of State of the State of Delaware on
March 2, 1998 restating and integrating the Corporation's certificate of
incorporation as theretofore amended and supplemented.
2. This Amended and Restated Certificate of Incorporation (the
"Certificate") amends, restates and integrates the Corporation's Certificate of
Incorporation as heretofore amended and supplemented. The Certificate was duly
adopted by the Board of Directors of the Corporation in accordance with the
provisions of Sections 242 and 245 of the Delaware General Corporation Law, as
amended from time to time (the "DGCL"), and was duly adopted by the stockholders
of the Corporation in accordance with the applicable provisions of Sections 242
and 245 of the DGCL.
3. The text of the Second Certificate, as amended to date, is hereby
amended and restated in its entirety to provide as herein set forth in full:
FIRST. NAME. The name of the Corporation is Meditrust Corporation.
SECOND. REGISTERED OFFICE. The address of its registered office in the
State of Delaware is 1013 Centre Road, Suite 300 in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is
Corporation Service Company.
THIRD. PURPOSES. The nature of the business or purposes to be
conducted or promoted is:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware and to do all things and
exercise all powers, rights and privileges which a business corporation may now
or hereafter be organized or authorized to do or to exercise under the laws of
the State of Delaware.
FOURTH. CAPITALIZATION.
SECTION 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 561,000,000, of which 500,000,000
shares of the par value of $.10 each are to be a class designated Common Stock,
6,000,000 shares of the par value of $.10 each are to be of a class designated
Preferred Stock, 30,000,000 shares of the par value of $.10 each are to be of a
class designated Series Common Stock and 25,000,000 of the par value $.10 each
are to be of a class designated Excess Stock.
SECTION 2. The shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors of the Corporation, or any
duly authorized committee thereof, is hereby authorized to fix or authorize the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock and the number of shares constituting any such series and the
designation thereof, or all or any of them and such other rights specified by
the Board of Directors of the Corporation and not prohibited by law.
SECTION 3. The shares of Series Common Stock may be issued from time to
time in one or more series. The Board of Directors of the Corporation is hereby
authorized to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences of
any wholly unissued series of Series Common Stock and the number of shares
constituting any such series and the designation thereof, or all or any of them.
<PAGE>
SECTION 4. (a) Each holder of Common Stock, as such, shall be entitled
to one vote for each share of Common Stock held of record by such holder on all
matters on which stockholders generally are entitled to vote.
(b) Except as otherwise required by law, holders of a series of
Preferred Stock or Series Common Stock, as such, shall be entitled only to such
voting rights, if any, as shall expressly be granted thereto by this Certificate
of Incorporation (including any Certificate of Designation relating to such
series).
(c) Subject to applicable law and the rights, if any, of the holders of
any outstanding series of Preferred Stock or Series Common Stock or any class or
series of stock having a preference over or the right to participate with the
Common Stock with respect to the payment of dividends, dividends may be declared
and paid on the Common Stock at such times and in such amounts as the Board of
Directors of the Corporation in its discretion shall determine.
(d) Upon the dissolution, liquidation or winding up of the Corporation,
subject to the rights, if any, of the holders of any outstanding series of
Preferred Stock or Series Common Stock or any class or series of stock having a
preference over or the right to participate with the Common Stock with respect
to the distribution of assets of the Corporation upon such dissolution,
liquidation or winding up of the Corporation, the holders of the Common Stock,
as such, shall be entitled to receive the assets of the Corporation available
for distribution to its stockholders ratably in proportion to the number of
shares held by them.
SECTION 5. The terms and conditions applicable to shares of Excess
Stock are set forth in Article Thirteenth hereof.
FIFTH. [DELETED].
SIXTH. BY-LAWS. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors of the Corporation is expressly
authorized, without stockholder approval, to make, alter or repeal the by-laws
of the Corporation.
SEVENTH. RIGHT TO AMEND CERTIFICATE. The Corporation reserves the
right to amend, alter, change or repeal any provision contained in this
Certificate, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
EIGHTH. [DELETED].
NINTH:
PART 1. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS
1.1. HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to any
affirmative vote required by law or any other Article of this Certificate of
Incorporation, and except as otherwise expressly provided in Part 2 of this
Article Ninth:
(a) any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Stockholder or (ii) any other corporation (whether or
not itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested Stockholder;
or
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of any assets of the Corporation or any Subsidiary having an
aggregate Fair Market Value of $5,000,000 or more; or
(c) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market Value
of $5,000,000 or more, other than the issuance of securities by the Corporation
or any Subsidiary upon the conversion of convertible securities of the
Corporation or any Subsidiary into stock of the Corporation or any Subsidiary;
or
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<PAGE>
(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder; or
(e) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or consolidation
of the Corporation with any of its Subsidiaries or any other transaction
(whether or not with or into or otherwise involving an Interested Stockholder)
which has the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or convertible securities
of the Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder;
shall require the affirmative vote of the holders of at least (a) 80%
of the combined voting power of the then outstanding shares of stock of all
classes and series of the Corporation entitled to vote in the election of
directors (the "Voting Stock"), and (b) a majority of the combined voting power
of the then outstanding shares of Voting Stock held by persons who are
Disinterested Stockholders, provided, however, that the majority vote
requirement of this clause (b) shall not be applicable if the Business
Combination is approved by the affirmative vote of the holders of not less than
90% of combined voting power of the then outstanding shares of Voting Stock. The
foregoing affirmative vote requirements are hereinafter referred to as the
"Special Vote Requirement." The Special Vote Requirement shall be applicable
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
1.2. DEFINITION OF "BUSINESS COMBINATION." The term "Business
Combination" as used in this Article Ninth shall mean any transaction which is
referred to in any one or more of clauses (a) through (e) of Section 1.1.
PART 2. WHEN SPECIAL VOTE REQUIREMENT IS NOT APPLICABLE
The provisions of Part 1 of this Article Ninth shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by law and any other Article
of this Certificate of Incorporation, if all of the conditions specified in
either of the following Sections 2.1 and 2.2 are met:
2.1. APPROVAL BY CONTINUING DIRECTORS. The Business Combination shall
have been approved by a majority of the Continuing Directors.
2.2. PRICE AND PROCEDURAL REQUIREMENTS. All of the following
conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value, as of
the date of the consummation of the Business Combination, of consideration other
than cash to be received per share by holders of Common Stock in such Business
Combination shall be at least equal to the higher of (i) the highest price paid
for any share of Common Stock by any person who is an Interested Stockholder
within the two-year period immediately prior to the time of the first public
announcement of the proposed Business Combination (the "Announcement Date") or
in the transaction in which such person became an Interested Stockholder,
whichever price is the higher; or (ii) the Fair Market Value per share of the
Corporation's Common Stock on the Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder (the "Determination
Date"), whichever is higher. The price paid for any share of Common Stock shall
be the amount of cash plus the Fair Market Value of any other consideration to
be received therefor, determined at the time of payment thereof.
(b) The aggregate amount of the cash and the Fair Market Value, as of
the date of the consummation of the Business Combination, of consideration other
than cash to be received in such Business Combination by holders of securities
of the Corporation other than Common Stock shall be at least equal to the higher
of (i) if applicable, the highest preferential amount to which the holders of
such securities are entitled in the event of any voluntary liquidation,
dissolution or winding up of the Corporation, (ii) the highest price paid for
any of such securities by any person who is an Interested Stockholder within the
two-year period immediately prior to the Announcement Date or in the transaction
in which such person became an Interested Stockholder, whichever price is
higher, (iii) the Fair Market Value of such securities on the Announcement Date
or the Determination Date, whichever is higher, or (iv) if such securities are
convertible into or exchangeable for shares of Common Stock, the amount per
share of such Common Stock determined pursuant to the foregoing paragraph (a)
reduced by any amount payable by the holders of such
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<PAGE>
securities in accordance with the terms of such securities, per share, upon such
conversion or exchange, multiplied by the total number of shares of Common Stock
into which or for which such securities are convertible or exchangeable.
(c) The consideration to be received by holders of a particular class
of outstanding Voting Stock (including Common Stock) shall be in cash or in the
same forms the Interested Stockholder has previously paid for shares of such
class of Voting Stock. If the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration for such class of Voting Stock shall be either cash or the form of
consideration used to acquire the largest number of shares of such class of
Voting Stock previously acquired by it.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (i)
there shall have been (1) no reduction in the annual rate of dividends paid on
the Common Stock (except as necessary to reflect any subdivision of the Common
Stock), except as approved by a majority of the Continuing Directors, and (2) an
increase in such annual rate of dividends necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the Continuing Directors;
and (ii) such Interested Stockholder shall have not become the beneficial owner
of any additional shares of Voting Stock except as part of the transaction which
results in such Interested Stockholder becoming an Interested Stockholder.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided by the Corporation, whether in anticipation of
or in connection with such Business Combination or otherwise.
(f) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations) shall be mailed to all stockholders of
the Corporation at least 30 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is required to
be mailed pursuant to such Act or subsequent provisions).
PART 3. CERTAIN DEFINITIONS
For the purposes of this Article Ninth:
3.1. A "person" shall mean any individual, firm, corporation,
partnership, trust or other entity.
3.2. "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(a) is the beneficial owner, directly or indirectly, of more than 10%
of the combined voting power of the then outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the combined voting power of
the then outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period immediately prior
to the date in question beneficially owned by any Interested Stockholder, if
such assignment or succession shall have occurred in the course of a transaction
or series of transactions not involving a public offering within the meaning of
the Securities Act of 1933.
3.3. A person shall be a "beneficial owner" of any Voting Stock:
(a) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
4
<PAGE>
(b) which such person or any of its Affiliates or Associates has (i)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote or to direct the
vote pursuant to any agreement, arrangement or understanding; or
(c) which are beneficially owned, directly or indirectly, by any other
person with which such person or any of its Affiliates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of Voting Stock.
3.4. For the purposes of determining whether a person is an Interested
Stockholder pursuant to Section 3.2, the number of shares of Voting Stock deemed
to be outstanding shall include shares deemed owned through application of
Section 3.3 but shall not include any other shares of Voting Stock which may be
issuable to other persons pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
3.5. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on January 1, 1984.
3.6. "Subsidiary" means any corporation of which more than a majority
of any class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for purposes of the definition of
Interested Stockholder set forth in Section 3.2, the term "Subsidiary" shall
mean only a corporation of which a majority of each class of equity security is
owned by the Corporation, by a Subsidiary, or by the Corporation and one or more
Subsidiaries.
3.7. "Continuing Director" means any member of the Board of Directors
of the Corporation who is unaffiliated with, and not a nominee of, the
Interested Stockholder and was a member of the Board of Directors of the
Corporation prior to the time that the Interested Stockholder became an
Interested Stockholder and any successor of a Continuing Director who is
unaffiliated with, and not a nominee of, the Interested Stockholder and who is
recommended to succeed a Continuing Director by a majority of Continuing
Directors then on the Board of Directors of the Corporation.
3.8. "Disinterested Stockholder" means a holder of Voting Stock who is
not an Interested Stockholder or an Affiliate or Associate of an Interested
Stockholder and whose shares are not deemed owned by an Interested Stockholder
through application of Section 3.3.
3.9. "Fair Market Value" means: (a) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the date in
question of a share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape,
on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, the highest closing bid quotation with
respect to a share of such stock during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such quotations are
available, the Fair Market Value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in good faith; and
(b) in the case of stock of any class of securities not traded on any securities
exchange or in the over-the-counter market or in the case of property other than
cash or stock, the Fair Market Value of such securities or property on the date
in question as determined by a majority of the Continuing Directors in good
faith. If the stock is paired for purposes of trading with that of any other
corporation, the Fair Market Value of the paired stock shall be determined
pursuant to the pairing or other agreement which provides for the determination
of the relative values of the stock of the Corporation and the stock of such
other corporation, after determining the Fair Market Value of the paired stock
as set forth above.
3.10. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration to be received" as used in Sections 2.2(a),
(b) and (c) shall include the shares of Common Stock and/or the shares of any
other class of outstanding Voting Stock retained by the holders of such shares.
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PART 4. DIRECTORS' DUTY TO DETERMINE CERTAIN FACTS
The majority of the Continuing Directors of the Corporation shall have
the power and duty to determine for the purpose of this Article Ninth, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine the applicability of the various provisions of this Article Ninth,
including (A) whether a person is an Interested Stockholder, (B) the number of
shares of Voting Stock beneficially owned by any person, (C) whether a person is
an Affiliate or Associate of another, (D) whether the requirements of Section
2.2 have been met with respect to any Business Combination, and (E) whether the
assets which are the subject of any Business Combination have, or the
consideration to be received for the issuance or transfer of securities by the
Corporation or any Subsidiary in any Business Combination has, an aggregate Fair
Market Value of $5,000,000 or more; and the good faith determination of a
majority of the Continuing Directors shall be conclusive and binding for all
purposes of this Article Ninth.
PART 5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED STOCKHOLDERS
Nothing contained in this Article Ninth shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
PART 6. AMENDMENT, REPEAL, INCONSISTENT PROVISIONS
Notwithstanding any other provisions of law or of this Certificate of
Incorporation or the by-laws of the Corporation which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the holders
of any particular class or series of securities which may be required by law or
by this Certificate of Incorporation, any proposal to amend or repeal, or adopt
any provisions inconsistent with, this Article Ninth of this Certificate of
Incorporation shall require for approval the affirmative vote of at least (a)
80% of the combined voting power of the then outstanding Shares of Voting Stock
and (b) a majority of the combined voting power of the then outstanding shares
of Voting Stock held by persons who are Disinterested Stockholders, provided
that the majority vote requirement of this clause (b) shall not be applicable if
the proposal is approved by the affirmative vote of not less than 90% of the
combined voting power of the then outstanding shares of Voting Stock.
TENTH:
(a) The number of directors shall be as provided in the by-laws. The
Board of Directors of the Corporation shall be divided into three classes,
designated Class I, Class II and Class III, such classes to be as nearly equal
in number as possible and to have the number provided in the by-laws. At the
annual meeting of stockholders in 1986, Directors of Class I shall be elected to
hold office for a term expiring at the next succeeding annual meeting, Directors
of Class II shall be elected to hold office for a term expiring at the second
succeeding annual meeting, and Directors of Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting. Thereafter at
each annual meeting of stockholders, directors shall be chosen for a term of
three years to succeed those whose terms then expire and shall hold office until
the third following annual meeting of stockholders and until the election of
their respective successors. Any vacancy on the Board of Directors of the
Corporation, whether arising through death, resignation or removal of a director
or through an increase in the number of directors of any class, shall be filled
by a majority vote of all the remaining directors. The term of office of any
director elected to fill such a vacancy shall expire at the expiration of the
term of office of directors of the class in which the vacancy occurred.
Notwithstanding any other provision of this Article, and except as otherwise
required by law, whenever the holders of any one or more series of Preferred
Stock or other securities of the Corporation shall have the right, voting
separately as a class, to elect one or more directors of the Corporation, the
term of office, the filling of vacancies and other features of such
directorships shall be governed by the terms of this Certificate of
Incorporation applicable thereto, and unless the terms of this Certificate of
Incorporation expressly provide otherwise, such directorships shall be in
addition to the number of directors provided in the by-laws and such directors
shall not be classified pursuant to this Article.
(b) Any action required or permitted to be taken by holders of stock of
the Corporation must be taken at a meeting of such holders and may not be taken
by consent in writing. The by-laws of the Corporation may be amended by the
stockholders only by the affirmative vote of at least 80% of the voting power of
the Corporation. Notwithstanding any other provision of law or of this
Certificate of Incorporation or the by-laws of the Corporation which might
otherwise permit a lesser vote or no vote, but in addition to any affirmative
vote of the holders of any particular class or series of securities which may be
required by law or by this Certificate of Incorporation, any proposal
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to amend or repeal, or adopt any provisions inconsistent with, this Article
Tenth shall require for approval the affirmative vote of at least 80% of the
voting power of the Corporation.
ELEVENTH:
The Board of Directors of the Corporation shall base the response of
this Corporation to any proposed Business Combination on the evaluation of the
Board of Directors of the Corporation of what is in the best interest of this
Corporation. In evaluating what is in the best interest of this Corporation, the
Board of Directors of the Corporation shall consider:
(a) THE BEST INTEREST OF THE STOCKHOLDERS. For this purpose, the Board
shall consider among other factors, not only the consideration offered in the
proposed Business Combination in relation to the then current market price of
this Corporation's stock, but also in relation to the then current value of this
Corporation in a freely negotiated transaction and in relation to the then
current estimate of the Board of Directors of the Corporation of the future
value of this Corporation as an independent entity; and
(b) Such other factors as the Board of Directors of the Corporation
determines to be relevant, including, among other factors, the social, legal and
economic effects on the communities in which this Corporation and its
subsidiaries operate and are located.
TWELFTH:
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as director.
Any repeal or modification of this Article shall not result in any
liability for a director with respect to any action or omission occurring prior
to such repeal or modification.
THIRTEENTH:
Section 13.1 RESTRICTIONS ON OWNERSHIP AND TRANSFER OF EQUITY STOCK.
(a) DEFINITIONS. For purposes of this Article Thirteenth and Article
Fourteenth, the following terms shall have the meanings set forth below:
"Beneficial Ownership" shall mean, with respect to any Person,
ownership of shares of Equity Stock equal to the sum of (i) the shares of Equity
Stock directly or indirectly owned by such Person, (ii) the number of shares of
Equity Stock treated as owned directly or indirectly by such Person through the
application of the constructive ownership rules of Section 544 of the Internal
Revenue Code of 1986, as amended (the "Code"), as modified by Section
856(h)(1)(B) of the Code, and (iii) the number of shares of Equity Stock which
such Person is deemed to beneficially own pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided,
however, that for the purposes of calculating the foregoing, no share shall be
counted more than once. The terms "Beneficial Owner," "Beneficially Owns" and
"Beneficially Owned" shall have correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by
the Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section 13.2(d).
"Common Stock" shall mean the common stock, par value $.10 per share of
the Corporation.
"Constructive Ownership" shall mean ownership of shares of Equity Stock
by a Person who is or would be treated as a direct or indirect owner of such
shares of Equity Stock through the application of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
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"Equity Stock" shall mean the Common Stock and the Preferred Stock, par
value $.10 per share of the Corporation.
"Look-Through Entity" shall mean a Person that is either (i) a trust
described in Section 401(a) of the Code and exempt from tax under Section 501(a)
of the Code as modified by Section 856(h)(3) of the Code or (ii) registered
under the Investment Company Act of 1940.
"Look-Through Ownership Limit" shall mean, with respect to a class or
series of Equity Stock, 9.8% of the number of outstanding shares of such Equity
Stock.
"Market Price" on any date shall mean the average of the Closing Price
for the five consecutive Trading Days ending on such date. The "Closing Price"
on any date shall mean the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Equity Stock are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Equity Stock are listed or admitted to trading or, if the shares of Equity Stock
are not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the Nasdaq Stock
Market, Inc. or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if the shares of Equity
Stock are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker selected by the
Board of Directors of the Corporation making a market in the shares of Equity
Stock. In the case of Equity Stock that is paired, "Market Price" shall mean the
"Market Price" for paired shares multiplied by a fraction (expressed as a
percentage) determined by dividing the value for such Equity Stock most recently
determined under Section 14.2(c) by the value of a paired share most recently
determined under Section 14.2(c) (the "Valuation Percentage").
"Non-Transfer Event" shall mean an event (other than a purported
Transfer) that would (a) cause any Person (other than a Look-Through Entity) to
Beneficially Own or Constructively Own shares of Equity Stock in excess of the
Ownership Limit, (b) cause any Look-Through Entity to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Look-Through
Ownership Limit, (c) result in the capital stock of the Corporation being
beneficially owned (within the meaning of Section 856(a)(5) of the Code) by
fewer than 100 persons within the meaning of Section 856(a)(5) of the Code, (d)
result in the Corporation being "closely held" within the meaning of Section
856(h) of the Code, or (e) cause the Corporation to Constructively Own 10% or
more of the ownership interest in a tenant of the Corporation's or a
Subsidiary's real property within the meaning of Section 856(d)(2)(B) of the
Code. Non-Transfer Events include but are not limited to (i) the granting of any
option or entering into any agreement for the sale, transfer or other
disposition of shares of Equity Stock or (ii) the sale, transfer, assignment or
other disposition of interests in any Person or of any securities or rights
convertible into or exchangeable for shares of Equity Stock that results in
changes in Beneficial Ownership or Constructive Ownership of shares of Equity
Stock.
"Operating Company" shall mean Meditrust Operating Company.
"Operating Company Common Stock" shall mean the common stock, par value
$.10 per share of Operating Company.
"Operating Company Equity Stock" shall mean Operating Company Common
Stock and preferred stock of any designation, par value $.10 per share of
Operating Company.
"Ownership Limit" shall mean, with respect to any class or series of
Equity Stock, 9.25% of the number of outstanding shares of such class or series
of Equity Stock. For purposes of computing the percentage of shares of any class
or series of Equity Stock of the Corporation that is Beneficially Owned by any
Person, any shares of Equity Stock of the Corporation which are deemed to be
Beneficially Owned by such Person pursuant to Rule 13d-3 of the Exchange Act but
which are not outstanding shall be deemed to be outstanding.
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"Pairing Agreement" shall mean the Pairing Agreement, dated as of
December 20, 1979, by and between Santa Anita Realty Enterprises, Inc. (the
predecessor of the Corporation) and Santa Anita Operating Company (the
predecessor of Operating Company), as amended from time to time in accordance
with the provisions thereof.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 13.2(h).
"Person" shall mean (a) an individual or any corporation, partnership,
estate, trust, association, private foundation, joint stock company, limited
liability company or any other entity and (b) a "group" as that term is defined
for purposes of Rule 13d-5 of the Exchange Act.
"Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who is prevented from being or becoming the
owner of record title to shares of Equity Stock by the provisions of Section
13.2(a).
"Restriction Termination Date" shall mean the first day on which the
Board of Directors of the Corporation determines that it is no longer in the
best interests of the Corporation to attempt to, or continue to, qualify under
the Code as a real estate investment trust (a "REIT").
"Trading Day" shall mean a day on which the principal national
securities exchange on which shares of Equity Stock are listed or admitted to
trading is open for the transaction of business or, if shares of Equity Stock
are not listed or admitted to trading on any national securities exchange, any
day other than a Saturday, a Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law or executive order to
close.
"Transfer" (as a noun) shall mean any sale, transfer, gift, assignment,
devise or other disposition of shares of Equity Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise. "Transfer" (as a verb) shall have the correlative
meaning.
"Trust" shall mean any separate trust created and administered in
accordance with the terms of Section 13.2, for the exclusive benefit of any
Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner designated by the Corporation to act as
trustee of any Trust, or any successor trustee thereof. The Trustee shall be
designated by the Corporation and Operating Company in accordance with Article
Fourteenth.
(b) RESTRICTION ON OWNERSHIP AND TRANSFER.
(i) Except as provided in Section 13.1(d), until the
Restriction Termination Date, (i) no Person (other than a Look-Through Entity)
shall Beneficially Own or Constructively Own outstanding shares of Equity Stock
in excess of the Ownership Limit and no Look-Through Entity shall Beneficially
Own or Constructively Own outstanding shares of Equity Stock in excess of the
Look-Through Ownership Limit, (ii) any Transfer (whether or not the result of a
transaction entered into through the facilities of the New York Stock Exchange)
that, if effective, would result in any Person (other than a Look-Through
Entity) Beneficially Owning or Constructively Owning shares of Equity Stock in
excess of the Ownership Limit shall be void ab initio as to the Transfer of that
number of shares of Equity Stock which would be otherwise Beneficially Owned or
Constructively Owned by such Person in excess of the Ownership Limit and the
intended transferee shall acquire no rights in such shares of Equity Stock, and
(iii) any Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange) that, if effective, would
result in any Look-Through Entity Beneficially Owning or Constructively Owning
shares of Equity Stock in excess of the Look-Through Ownership Limit shall be
void ab initio as to the Transfer of that number of shares of Equity Stock which
would be otherwise Beneficially Owned or Constructively Owned by such
Look-Through Entity in excess of the Look- Through Ownership Limit and the
intended transferee shall acquire no rights in such shares of Equity Stock.
(ii) Until the Restriction Termination Date, any Transfer
(whether or not the result of a transaction entered into through the facilities
of the New York Stock Exchange) that, if effective, would result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code shall be void ab initio as to the
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Transfer of that number of shares of Equity Stock that would cause the
Corporation to be "closely held" within the meaning of Section 856(h) of the
Code, and the intended transferee shall acquire no rights in such shares of
Equity Stock.
(iii) Until the Restriction Termination Date, any Transfer
(whether or not the result of a transaction entered into through the facilities
of the New York Stock Exchange) of shares of Equity Stock that, if effective,
would cause the Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the real property of the Corporation or any direct or
indirect subsidiary (whether a corporation, partnership, limited liability
company or other entity) of the Corporation (a "Subsidiary"), within the meaning
of Section 856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer
of that number of shares of Equity Stock that would cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
real property of the Corporation or a Subsidiary within the meaning of Section
856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in
such shares of Equity Stock.
(iv) Until the Restriction Termination Date, any Transfer
(whether or not the result of a transaction entered into through the facilities
of the New York Stock Exchange) that, if effective, would result in the shares
of capital stock of the Corporation being beneficially owned (within the meaning
of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning
of Section 856(a)(5) of the Code shall be void ab initio and the intended
transferee shall acquire no rights in such shares of Equity Stock.
(c) OWNERS REQUIRED TO PROVIDE INFORMATION. Until the Restriction
Termination Date:
(i) Every Beneficial Owner or Constructive Owner of more than
5%, or such lower percentages as required pursuant to regulations under the
Code, of the outstanding shares of any class or series of Equity Stock of the
Corporation shall, within 30 days after January 1 of each year, provide to the
Corporation a written statement or affidavit stating the name and address of
such Beneficial Owner or Constructive Owner, the number of shares of Equity
Stock Beneficially Owned or Constructively Owned, and a description of how such
shares are held. Each such Beneficial Owner or Constructive Owner shall provide
to the Corporation such additional information as the Corporation may request to
ensure compliance with the restrictions in this Section 13.1.
(ii) Each Person who is a Beneficial Owner or Constructive
Owner of shares of Equity Stock and each Person (including the stockholder of
record) who is holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a written statement or
affidavit stating such information as the Corporation may request in order to
determine the Corporation's status as a REIT and to ensure compliance with the
Ownership Limit or the Look-Through Ownership Limit, as the case may be.
(d) EXCEPTION. The Board of Directors of the Corporation, upon receipt
of a ruling from the Internal Revenue Service or an opinion of counsel in each
case to the effect that the restrictions contained in subsections (b)(ii)
through (iv) of this Section 13.1 would not be violated, may exempt a Person
from the Ownership Limit or Look-Through Ownership Limit, provided that (A) the
Board of Directors of the Corporation obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
Person's Beneficial Ownership or Constructive Ownership of shares of Equity
Stock will (i) result in the capital stock of the Corporation being beneficially
owned (within the meaning of Section 856(a)(5) of the Code) by fewer than 100
persons within the meaning of Section 856(a)(5) of the Code, (ii) result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code or (iii) cause the Corporation to Constructively Own 10% or more of the
ownership interests in the real property of a tenant of the Corporation or a
Subsidiary within the meaning of Section 856(d)(2)(B) of the Code and (B) such
Person agrees in writing that any violation or attempted violation of the
Ownership Limit or Look-Through Ownership Limit will result in the conversion of
such shares into shares of Excess Stock pursuant to Section 13.2(a).
(e) NEW YORK STOCK EXCHANGE TRANSACTIONS. Notwithstanding any provision
contained herein to the contrary, nothing in this Certificate of Incorporation
shall preclude the settlement of any transaction entered into through the
facilities of the New York Stock Exchange.
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Section 13.2. EXCESS STOCK.
(a) CONVERSION INTO EXCESS STOCK.
(i) If, notwithstanding the other provisions contained in this
Article Thirteenth, prior to the Restriction Termination Date, there is a
purported Transfer or Non-Transfer Event such that any Person (other than a
Look-Through Entity) would either Beneficially Own or Constructively Own shares
of Equity Stock in excess of the Ownership Limit or such that any Person that is
a Look-Through Entity would either Beneficially Own or Constructively Own shares
of Equity Stock in excess of the Look-Through Ownership Limit, then, (i) except
as otherwise provided in Section 13.1(d), the purported transferee shall be
deemed to be a Prohibited Owner and shall acquire no right or interest (or, in
the case of a Non-Transfer Event, the Person holding record title to the shares
of Equity Stock Beneficially Owned or Constructively Owned by such Beneficial
Owner or Constructive Owner, shall cease to own any right or interest) in such
number of shares of Equity Stock which would cause such Beneficial Owner or
Constructive Owner to Beneficially Own or Constructively Own shares of Equity
Stock in excess of the Ownership Limit or the Look-Through Ownership Limit, as
the case may be, (ii) such number of shares of Equity Stock in excess of the
Ownership Limit or the Look- Through Ownership Limit, as the case may be,
(rounded up to the nearest whole share) shall be automatically converted into an
equal number of shares of Excess Stock and transferred to a Trust in accordance
with Section 13.2(d) and (iii) the Prohibited Owner shall submit such number of
shares of Equity Stock to the Corporation for registration in the name of the
Trustee of the Trust. Such conversion into Excess Stock and transfer to a Trust
shall be effective as of the close of trading on the Trading Day prior to the
date of the Transfer or Non-Transfer Event, as the case may be.
(ii) If, notwithstanding the other provisions contained in
this Article Thirteenth, prior to the Restriction Termination Date, there is a
purported Transfer or Non-Transfer Event that, if effective, would (i) result in
the capital stock of the Corporation being beneficially owned (within the
meaning of Section 856(a)(5) of the Code) by fewer than 100 persons within the
meaning of Section 856(a)(5) of the Code, (ii) result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code or (iii) cause
the Corporation to Constructively Own 10% or more of the ownership interest in a
tenant of the Corporation's or a Subsidiary's real property within the meaning
of Section 856(d)(2)(B) of the Code, then (x) the purported transferee shall be
deemed to be a Prohibited Owner and shall acquire no right or interest (or, in
the case of a Non-Transfer Event, the Person holding record title of the shares
of Equity Stock with respect to which such Non-Transfer Event occurred, shall be
deemed to be a Prohibited Owner and shall cease to own any right or interest) in
such number of shares of Equity Stock, the ownership of which by such purported
transferee or record holder would (A) result in the shares of capital stock of
the Corporation being beneficially owned (within the meaning of Section
856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section
856(a)(5) of the Code, (B) result in the Corporation being "closely held" within
the meaning of Section 856(h) of the Code or (C) cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's or a Subsidiary's real property within the meaning of Section
856(d)(2)(B) of the Code, (y) such number of shares of Equity Stock (rounded up
to the nearest whole share) shall be automatically converted into an equal
number of shares of Excess Stock and transferred to a Trust in accordance with
Section 13.2(d) and (z) the Prohibited Owner shall submit such number of shares
of Equity Stock to the Corporation for registration in the name of the Trustee
of the Trust. Such conversion into Excess Stock and transfer to a Trust shall be
effective as of the close of trading on the Trading Day prior to the date of the
Transfer or Non-Transfer Event, as the case may be.
(iii) Upon the occurrence of such a conversion of shares of
any class or series of Equity Stock into an equal number of shares of Excess
Stock, such shares of Equity Stock shall be automatically retired and canceled,
without any action required by the Board of Directors of the Corporation, and
shall thereupon be restored to the status of authorized but unissued shares of
the particular class or series of Equity Stock from which such Excess Stock was
converted and may be reissued by the Corporation as that particular class or
series of Equity Stock.
(iv) Upon the conversion into Excess Shares (pursuant to the
Certificate of Incorporation of Operating Company) of any shares of any class or
series of Operating Company stock that are paired with a class or series of
shares of Equity Stock, pursuant to Article Fourteenth, such shares of Equity
Stock shall likewise be converted into an equal number of shares of Excess Stock
and be paired with such converted shares of Operating Company, pursuant to
Article Fourteenth.
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(b) REMEDIES FOR BREACH. If the Corporation, or its designees, shall at
any time determine in good faith that a Transfer has taken place in violation of
Section 13.1(b) or that a Person intends to acquire or has attempted to acquire
Beneficial Ownership or Constructive Ownership of any shares of Equity Stock in
violation of Section 13.1(b), the Corporation shall take such action as it deems
advisable to refuse to give effect to or to prevent such Transfer or
acquisition, including, but not limited to, refusing to give effect to such
Transfer on the stock transfer books of the Corporation or instituting
proceedings to enjoin such Transfer or acquisition.
(c) NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts
to acquire shares of Equity Stock in violation of Section 13.1(b), or any Person
who owns shares of Equity Stock that were converted into shares of Excess Stock
and transferred to a Trust pursuant to subsections (a) and (d) of this Section
13.2, shall immediately give written notice to the Corporation of such event and
shall provide to the Corporation such other information as the Corporation may
request in order to determine the effect, if any, of such Transfer or Non-
Transfer Event, as the case may be, on the Corporation's status as a REIT.
(d) OWNERSHIP IN TRUST. Upon any Transfer or Non-Transfer Event that
results in Excess Stock pursuant to Section 13.2(a), such Excess Stock shall be
automatically transferred to a Trust to be held for the exclusive benefit of the
Beneficiary. The Corporation and the Operating Company shall name a Beneficiary
for each Trust. Any conversion of shares of Equity Stock into shares of Excess
Stock and transfer to a Trust shall be effective as of the close of trading on
the Trading Day prior to the date of the Transfer or Non-Transfer Event that
results in the conversion. Shares of Excess Stock so held in trust shall remain
issued and outstanding shares of stock of the Corporation.
(e) DIVIDEND RIGHTS. Each share of Excess Stock shall be entitled to
the same dividends and distributions (as to both timing and amount) as may be
declared by the Board of Directors of the Corporation as shares of the class or
series of Equity Stock from which such Excess Stock was converted. The Trustee,
as record holder of the shares of Excess Stock, shall be entitled to receive all
dividends and distributions and shall hold all such dividends or distributions
in trust for the benefit of the Beneficiary. The Prohibited Owner with respect
to such shares of Excess Stock shall repay to the Trust the amount of any
dividends or distributions received by it (i) that are attributable to any
shares of Equity Stock that have been converted into shares of Excess Stock and
(ii) the record date of which was on or after the date that such shares were
converted into shares of Excess Stock. The Corporation shall take all measures
that it determines reasonably necessary to recover the amount of any such
dividend or distribution paid to a Prohibited Owner, including, if necessary,
withholding any portion of future dividends or distributions payable on shares
of Equity Stock Beneficially Owned or Constructively Owned by the Person who,
but for the provisions of this Article Thirteenth, would Constructively Own or
Beneficially Own the shares of Equity Stock that were converted into shares of
Excess Stock; and, as soon as reasonably practicable following the Corporation's
receipt or withholding thereof, shall pay over to the Trust for the benefit of
the Beneficiary the dividends so received or withheld, as the case may be.
(f) RIGHTS UPON LIQUIDATION. In the event of any voluntary or
involuntary liquidation of, or winding up of, or any distribution of the assets
of, the Corporation, each holder of shares of Excess Stock shall be entitled to
receive, ratably with each other holder of shares of Equity Stock of the same
class or series from which the Equity Stock was converted, that portion of the
assets of the Corporation that is available for distribution to the holders of
such class or series of Equity Stock. The Trust shall distribute to the
Prohibited Owner the amounts received upon such liquidation, dissolution, or
winding up, or distribution; provided, however, that the Prohibited Owner shall
not be entitled to receive amounts in excess of, in the case of a purported
Transfer in which the Prohibited Owner gave value for shares of Equity Stock and
which Transfer resulted in the conversion of the shares into shares of Excess
Stock, the price per share, if any, such Prohibited Owner paid for the shares of
Equity Stock (which, in the case of Equity Stock that is paired, shall equal the
price per paired share multiplied by the most recent Valuation Percentage) and,
in the case of a Non- Transfer Event or Transfer in which the Prohibited Owner
did not give value for such shares (e.g., if the shares were received through a
gift or devise) and which Non-Transfer Event or Transfer, as the case may be,
resulted in the conversion of the shares into shares of Excess Stock, the price
per share equal to the Market Price on the date of such Non-Transfer Event or
Transfer. Any remaining amount in such Trust shall be distributed to the
Beneficiary.
(g) VOTING RIGHTS. Each share of Excess Stock shall entitle the holder
to the number of votes the holder would have, if such share of Excess Stock was
a share of Equity Stock of the same class or series from which such Excess Stock
was converted, on all matters submitted to a vote at any meeting of
stockholders. The holders of shares of Excess Stock converted from the same
class or series of Equity Stock shall vote together with the holders of such
Equity Stock as a single class on all such matters. The Trustee, as record
holder of the Excess Stock, shall be entitled
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to vote all shares of Excess Stock. Any vote by a Prohibited Owner as a
purported holder of shares of Equity Stock prior to the discovery by the
Corporation that the shares of Equity Stock have been converted into shares of
Excess Stock shall, subject to applicable law, be rescinded and shall be void ab
initio with respect to such shares of Excess Stock, and the Prohibited Owner
shall be deemed to have given, as of the close of trading on the Trading Day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the conversion of the shares of Equity Stock into shares of Excess Stock and
the transfer of such shares to a Trust pursuant to subsections (a) and (d) of
this Section 13.2, an irrevocable proxy to the Trustee to vote the shares of
Excess Stock in the manner in which the Trustee, in its sole and absolute
discretion, desires.
(h) DESIGNATION OF PERMITTED TRANSFEREE.
(i) The Trustee shall have the exclusive and absolute right to
designate one or more Permitted Transferees of any and all shares of Excess
Stock if the Corporation fails to exercise its option with respect to such
shares pursuant to Section 13.2(j) hereof within the time period set forth
therein. As soon as practicable, but in an orderly fashion so as not to
materially adversely affect the Market Price of the shares of Excess Stock, the
Trustee shall designate any one or more Persons as Permitted Transferees;
provided, however, that (i) the Permitted Transferee so designated purchases for
valuable consideration (whether in a public or private sale) the shares of
Excess Stock (which, in the case of paired Excess Stock, shall be determined
based on the Valuation Percentage) and (ii) the Permitted Transferee so
designated may acquire such shares of Excess Stock without violating any of the
restrictions set forth in Section 13.1(b) and without such acquisition resulting
in the conversion of the shares of Equity Stock so acquired into shares of
Excess Stock and the transfer of such shares to a Trust pursuant to subsections
(a) and (d) of this Section 13.2.
(ii) Upon the designation by the Trustee of a Permitted
Transferee in accordance with the provisions of this Section 13.2(h), the
Trustee shall cause to be transferred to the Permitted Transferee that number of
shares of Excess Stock acquired by the Permitted Transferee. Upon such transfer
of the shares of Excess Stock to the Permitted Transferee, such shares of Excess
Stock shall be automatically converted into an equal number of shares of Equity
Stock of the same class and series from which such Excess Stock was converted.
Upon the occurrence of such a conversion of shares of Excess Stock into an equal
number of shares of Equity Stock, such shares of Excess Stock shall be
automatically retired and canceled, without any action required by the Board of
Directors of the Corporation, and shall thereupon be restored to the status of
authorized but unissued shares of Excess Stock and may be reissued by the
Corporation as Excess Stock.
(iii) The Trustee shall (i) cause to be recorded on the stock
transfer books of the Corporation that the Permitted Transferee is the holder of
record of such number of shares of Equity Stock, and (ii) distribute to the
Beneficiary any and all amounts held with respect to the shares of Excess Stock
after making payment to the Prohibited Owner pursuant to Section 13.2(i).
(iv) If the Transfer of shares of Excess Stock to a purported
Permitted Transferee shall violate any of the transfer restrictions set forth in
Section 13.1(b), such Transfer shall be void ab initio as to that number of
shares of Excess Stock that cause the violation of any such restriction when
such shares are converted into shares of Equity Stock (as described in
subsection (h)(ii) above) and the purported Permitted Transferee shall be deemed
to be a Prohibited Owner and shall acquire no rights in such shares of Excess
Stock or Equity Stock. Such shares of Equity Stock shall be automatically
reconverted into Excess Stock and transferred to the Trust from which they were
originally Transferred. Such conversion and transfer to the Trust shall be
effective as of the close of trading on the Trading Day prior to the date of the
Transfer to the purported Permitted Transferee and the provisions of this
Article Thirteenth shall apply to such shares, including, without limitation,
the provisions of subsections (h) through (j) of this Section 13.2 with respect
to any future Transfer of such shares by the Trust.
(i) COMPENSATION TO RECORD HOLDER OF SHARES OF EQUITY STOCK THAT ARE
CONVERTED INTO SHARES OF EXCESS STOCK. Any Prohibited Owner shall be entitled
(following discovery of the shares of Excess Stock and subsequent
designation of the Permitted Transferee in accordance with Section 13.2(h) or
following the acceptance of the offer to purchase such shares in accordance with
Section 13.2(j) to receive from the Trustee following the sale or other
disposition of such shares of Excess Stock the lesser of (i)(a) in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of Equity
Stock and which Transfer resulted in the conversion of such shares into shares
of Excess Stock, the price per share, if any, such Prohibited Owner paid for the
shares of Equity Stock (which, in the case of paired Excess Stock, shall be
determined based on the Valuation Percentage) and (b) in the case of a Non-
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Transfer Event or Transfer in which the Prohibited Owner did not give value
for such shares (e.g., if the shares were received through a gift or devise) and
which Non-Transfer Event or Transfer, as the case may be, resulted in the
conversion of such shares into shares of Excess Stock, the price per share equal
to the Market Price on the date of such Non-Transfer Event or Transfer or (ii)
the price per share (which, in the case of paired Excess Stock, shall be
determined based on the Valuation Percentage) received by the Trustee from the
sale or other disposition of such shares of Excess Stock in accordance with this
Section 13.2(i) or Section 13.2(j). Any amounts received by the Trustee in
respect of such shares of Excess Stock and in excess of such amounts to be paid
the Prohibited Owner pursuant to this Section 13.2(i) shall be distributed to
the Beneficiary in accordance with the provisions of Section 13.2(h). Each
Beneficiary and Prohibited Owner shall waive any and all claims that it may have
against the Trustee and the Trust arising out of the disposition of shares of
Excess Stock, except for claims arising out of the gross negligence or willful
misconduct of, or any failure to make payments in accordance with this Section
13.2 by, such Trustee or the Corporation.
(j) PURCHASE RIGHT IN EXCESS STOCK. Shares of Excess Stock
shall be deemed to have been offered for sale to the Corporation or its
designee, at a price per share equal to the lesser of (i) the price per share
(which, in the case of paired Excess Stock, shall be determined based on the
Valuation Percentage) in the transaction that created such shares of Excess
Stock (or, in the case of devise, gift or Non-Transfer Event, the Market Price
at the time of such devise, gift or Non-Transfer Event) or (ii) the Market Price
on the date the Corporation, or its designee, accepts such offer. The
Corporation shall have the right to accept such offer for a period of 90 days
following the later of (a) the date of the Non- Transfer Event or purported
Transfer which results in such shares of Excess Stock or (b) the date on which
the Corporation determines in good faith that a Transfer or Non-Transfer Event
resulting in shares of Excess Stock previously has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 13.2(c).
Section 13.3. REMEDIES NOT LIMITED. Nothing contained in this Article
Thirteenth shall limit the authority of the Corporation to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of its stockholders by preservation of the Corporation's status as a
REIT and to ensure compliance with the requirements of Article Fourteenth and
Section 13.1.
Section 13.4. AMBIGUITY. In the case of an ambiguity in the application
of any of the provisions of this Article Thirteenth, including any definition
contained in Section 13.1(a), the Board of Directors of the Corporation shall
have the power to determine the application of the provisions of this Article
Thirteenth with respect to any situation based on the facts known to it.
Section 13.5. LEGEND. Each certificate for shares of Equity Stock
shall bear the following legend:
"The shares of Meditrust Corporation and Meditrust Operating Company
represented by this combined certificate are subject to restrictions in the
respective Certificates of Incorporation of each company which prohibit (a) any
Person (other than a Look-Through Entity) (as such terms are defined in the
respective Certificates of Incorporation of each company) from Beneficially
Owning or Constructively Owning (as these terms are defined in the respective
Certificates of Incorporation of each company) in excess of 9.25% of the number
of outstanding shares of any class or series of Equity Stock (as that term is
defined in the respective Certificates of Incorporation of each company), (b)
any Look-Through Entity from Beneficially Owning or Constructively Owning in
excess of 9.8% of the number of outstanding shares of any class or series of
Equity Stock, (c) any Person from acquiring or maintaining any ownership
interest in the stock of either company that is inconsistent with (i) the
requirements of the Internal Revenue Code of 1986, as amended, pertaining to
real estate investment trusts or (ii) Article Thirteenth of the respective
Certificates of Incorporation of each company and (d) any transfer of shares of
any class or series of Equity Stock of either company that are paired pursuant
to Article Fourteenth of the respective Certificates of Incorporation of each
company, except in combination with an equal number of shares of the other
company in accordance with the respective Certificates of Incorporation of each
company, copies of which are on file with the transfer agent named on the face
hereof, and the holder of this certificate by his acceptance hereof consents to
be bound by such restrictions.
Meditrust Corporation and Meditrust Operating Company will furnish
without charge to each stockholder who so requests a copy of the relevant
provisions of the respective Certificates of Incorporation of each company and a
copy of the provisions setting forth the designations, preferences, privileges
and rights of each class of stock or series thereof that each company is
authorized to issue and the qualifications, limitations and restrictions of such
preferences and/or
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rights. Any such request may be addressed to the Secretary of either company or
to the transfer agent named on the face hereof."
Section 13.6 SEVERABILITY. Each provision of this Article Thirteenth
shall be severable and an adverse determination as to any such provision shall
be in no way affect the validity of any other provision.
FOURTEENTH:
Section 14.1 TRANSFER OF SHARES. Until the restrictions and limitations
set forth in this Article Fourteenth shall have been terminated in the manner
hereinafter provided:
(a) Except as provided herein, no shares of Equity Stock shall be
transferable, and they shall not be transferred on the books of the Corporation,
unless (i) a simultaneous transfer is made by the same transferor to the same
transferee, or (ii) such transferor has previously arranged with Operating
Company for the transfer to the transferee, of the same number of shares of
Operating Company Equity Stock, except that Operating Company may transfer
shares of Equity Stock acquired by it from the Corporation to a person to whom
Operating Company simultaneously issues the same number of shares of Operating
Company Equity Stock.
(b) Except as provided herein, each certificate evidencing ownership of
shares of Equity Stock shall be deemed to evidence, in addition, the same number
of shares of Operating Company Equity Stock.
(c) Notwithstanding the foregoing, any shares of Equity Stock issued
after the date of the filing of this Certificate, which are issued on an
unpaired basis by the Corporation pursuant to the terms of Section 14.7 of this
Certificate may be transferred without compliance with Section 14.1(a) or
Section 14.3 and may be evidenced solely by a certificate which is not deemed to
evidence a like number of shares of Operating Company Equity Stock as required
by Section 14.1(b).
Section 14.2 ISSUANCE OF SHARES. Until such time as the pairing of the
outstanding shares of Common Stock and the outstanding shares of Operating
Company Common Stock in accordance with this Article Fourteenth (the "Pairing"
and each paired share a "Paired Share") shall have been terminated in the manner
herein provided:
(a) Except as provided herein, the Corporation shall not issue or agree
to issue any shares of Equity Stock to any person except Operating Company
unless effective provision has been made for the simultaneous issuance or
transfer to the same person of the same number of shares of Operating Company
Equity Stock and for the pairing of such shares of the Corporation and Operating
Company and unless the Corporation and Operating Company have agreed on the
manner and basis of allocating the consideration to be received upon such
issuance between the Corporation and Operating Company or, if allocation of such
consideration between them is not practicable, on the payment by one company to
the other of cash or other consideration in lieu thereof. Any such allocation or
payment shall be based on the respective fair market values of Equity Stock and
Operating Company Equity Stock.
(b) As desired from time to time, but not less often than once each
calendar year, the Corporation and Operating Company shall jointly arrange for
the determination of the fair market value as of a date specified by the
Corporation and Operating Company (the "valuation date") of the shares of
Operating Company Common Stock outstanding on the valuation date. The amount so
determined (the "fair market value of the Operating Company Shares") shall
thereafter be used in all calculations pursuant to this Section 14.2 until a new
determination is made. The fair market value of each share of Common Stock shall
be determined by subtracting the fair market value of one Operating Company
Common Stock from the average of the closing sale prices of a Paired Share over
the principal exchange on which the Paired Shares are listed, or if not listed,
then the average of the last bid prices in the over-the-counter market during
the ten business days prior to any date of determination of the fair market
value of Common Stock.
Section 14.3 STOCK CERTIFICATES; TRANSFER AGENTS AND REGISTRARS. Until
such time as the Pairing shall have been terminated in the manner herein
provided, except in the case of shares of Equity Stock issued to Operating
Company or Equity Stock issued pursuant to Section 14.7, each certificate which
is issued evidencing shares of Equity Stock shall be printed "back-to-back" with
a certificate evidencing the same number of Operating Company Equity Stock,
shall bear a conspicuous legend (on the face thereof) referring to the
restrictions on the transfer of the shares evidenced thereby
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contained in this Certificate and the by-laws of the Corporation, and shall be
in a form which satisfies the requirements of the laws of Delaware and which has
been approved by the Board of Directors of the Corporation.
Section 14.4 STOCK DIVIDENDS, RECLASSIFICATIONS, ETC. Until such time
as the Pairing shall have been terminated in the manner herein provided, the
Corporation shall not declare or pay any stock dividend consisting in whole or
in part of Equity Stock, issue any rights or warrants to purchase any shares of
Stock, or subdivide, combine or otherwise reclassify the shares of Equity Stock,
unless Operating Company simultaneously takes the same or equivalent action with
respect to the Operating Company Equity Stock, to the end that the outstanding
shares of Equity Stock and Operating Company Equity Stock will at all times be
effectively paired on a one-for-one basis as contemplated herein.
Section 14.5 SHARES IN EXCESS OF THE OWNERSHIP LIMIT OR IN VIOLATION OF
THE TRANSFER RESTRICTIONS; DESIGNATION OF TRUSTEE AND BENEFICIARIES. Until such
time as the Board of Directors of the Corporation determines that it is no
longer in the best interests of the Corporation to attempt to, or continue to,
qualify under the Code, as a REIT:
(a) Upon the conversion of a share of any class or series of Equity
Stock of the Corporation into a share of Excess Stock of the Corporation in
accordance with the provisions of Article Thirteenth, if such share of Equity
Stock was paired prior to its conversion into Excess Stock, the corresponding
paired share of that same class or series of Equity Stock of Operating Company
shall be simultaneously converted into a share of Excess Stock of Operating
Company; such shares of Excess Stock of the Corporation and Operating Company
shall be paired and shall be simultaneously transferred to a trust established
by the Corporation and Operating Company for such purpose (a "Trust").
(b) Upon the conversion of a share of Excess Stock of the Corporation
into a share of Equity Stock of the Corporation of the same class or series from
which such Excess Stock was converted in accordance with the provisions of
Article Thirteenth, if such share of Excess Stock was paired prior to its
conversion from Equity Stock into Excess Stock, the corresponding paired share
of Excess Stock of Operating Company shall be simultaneously converted into a
share of Equity Stock of Operating Company of the same class or series from
which such Excess Stock was converted and such shares of Equity Stock shall be
paired.
(c) With respect to an offer made by the Trust to the Corporation to
purchase shares of Excess Stock from a Trust pursuant to Article Thirteenth, in
the case of shares of Excess Stock that are paired, the Corporation shall accept
such offer with respect to its shares of Excess Stock without the agreement of
Operating Company to accept such offer with respect to the corresponding paired
shares of its Excess Stock.
(d) The Trustee of each Trust shall be designated by mutual agreement
of the Board of Directors of the Corporation and the Board of Directors of
Operating Company.
(e) The Beneficiary with respect to each Trust shall be designated by
mutual agreement of the Board of Directors of the Corporation and the Board of
Directors of Operating Company.
(f) At such time that the Board of Directors of the Corporation no
longer deems it in the best interests of the Corporation to attempt to, or
continue to, qualify under the Code as a REIT, it shall notify the Board of
Directors of Operating Company in writing of such determination and the
Ownership Limit and the Transfer Restrictions shall cease to have effect, as
provided in Article Thirteenth.
Section 14.7 UNPAIRED SHARES.
(a) Shares of capital stock of any class or series, irrespective of
whether such shares are convertible into Paired Shares, may be issued by the
Corporation to any person without effective provision for the simultaneous
issuance or transfer to the same person of the same number of shares of that
same class or series of capital stock of Operating Company and without effective
provision for the pairing of such shares of capital stock of the Corporation and
Operating Company, as the Board of Directors of the Corporation shall in its
sole discretion determine (any such shares of capital stock of any class or
series issued by the Corporation pursuant to this Section 14.7 are referred to
herein as "Unpaired Shares").
(b) Unpaired Shares may be transferred on the books of the Corporation
without a simultaneous transfer to the same transferee of any shares of any
other class or series of capital stock of Operating Company.
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Section 14.8 MERGER, SALE OF ASSETS, ETC. Commencing at the Effective
Time and continuing until such time as the Pairing shall have been terminated in
the manner provided herein, the Corporation will not be a party to any merger,
consolidation, sale of assets, liquidation or other form or reorganization
purchase to which shares of Equity Stock are converted, redeemed, exchanged or
otherwise changed unless Operating Company is also a party to such transaction.
Section 14.9 WAIVER AND TERMINATION. The Board of Directors of the
Corporation is hereby authorized to waive, repeal or make inapplicable the
restrictions and limitations set forth in this Article Fourteenth in its
entirety or in any provision of this Article Fourteenth.
Section 14.10 SEVERABILITY. Each provision of this Article Fourteenth
shall be severable and an adverse determination as to any provision shall in no
way affect the validity of any other provision.
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CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES AND RIGHTS
OF
JUNIOR PARTICIPATING PREFERRED STOCK
I. DESIGNATION AND AMOUNT
The shares of such series shall be designated as "Junior Participating
Preferred Stock" (the "Junior Preferred Stock") and the number of shares
constituting the Junior Preferred Stock shall be 200,000. Such number of shares
may be increased or decreased by resolution of the Board of Directors of the
Corporation; provided, that no decrease shall reduce the number of shares of
Junior Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Junior
Preferred Stock.
II. DIVIDENDS AND DISTRIBUTIONS
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Junior
Preferred Stock with respect to dividends, the holders of shares of Junior
Preferred Stock, in preference to the holders of Common Stock, par value $.10
per share (the "Common Stock"), of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Junior Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Junior Preferred Stock. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Junior Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Junior Preferred Stock as provided in paragraph (A) of this Section immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Junior
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Junior Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Junior Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share
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basis among all such shares at the time outstanding. The Board of Directors of
the Corporation may fix a record date for the determination of holders of shares
of Junior Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
III. VOTING RIGHTS
The holders of shares of Junior Preferred Stock shall have the
following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Junior Preferred Stock shall entitle the holder thereof to 100 votes on
all matters submitted to a vote of the stockholders of the Corporation.
(B) Except as otherwise provided herein, in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Junior Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, in the Corporation's Certificate of
Incorporation or as otherwise provided by law, holders of Junior Preferred Stock
shall have no voting rights.
IV. CERTAIN RESTRICTIONS
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Junior Preferred Stock as provided in Section II are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Junior Preferred Stock outstanding shall have been
paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Junior Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Junior Preferred Stock, except dividends paid ratably on the Junior
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Junior
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such junior stock in
exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Junior Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Junior Preferred Stock, or any shares of stock ranking on
a parity with the Junior Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors of the Corporation) to all holders of such shares
upon such terms as the Board of Directors of the Corporation, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section IV
purchase or otherwise acquire such shares at such time and in such manner.
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V. REACQUIRED SHARES
Any shares of Junior Preferred Stock purchased or otherwise acquired by
the Corporation in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued as
part of a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Certificate of Incorporation,
in any other Certificate of Designations creating a series of Preferred Stock or
any similar stock or as otherwise required by law.
VI. LIQUIDATION, DISSOLUTION OR WINDING UP
Upon any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Junior Preferred Stock unless, prior thereto, the holders of shares of Junior
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Junior
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Junior Preferred Stock, except distributions made ratably on the Junior
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Junior Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
VII. CONSOLIDATION, MERGER, ETC.
In case the Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case each share of Junior Preferred Stock shall at
the same time be similarly exchanged or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Junior
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
VIII. REDEMPTION
The shares of Junior Preferred Stock shall not be redeemable.
IX. RANK
The Junior Preferred Stock shall rank, with respect to the payment of
dividends and the distribution of assets, junior to all series of any other
class of the Corporation's Preferred Stock.
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X. AMENDMENT
The Certificate of Incorporation of the Corporation shall not be
amended in any manner which would alter or change the powers, preferences or
special rights of the Junior Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Junior Preferred Stock, voting together as a single
series.
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CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES AND
RIGHTS OF SERIES A NON-VOTING CONVERTIBLE COMMON STOCK
1. DESIGNATION AND AMOUNT. There shall be a series of undesignated
Series Common Stock of the Corporation designated as "Series A Non-Voting
Convertible Common Stock" and the number of shares constituting such series
shall be ten million (10,000,000). The number of shares designated as shares of
Series A Non-Voting Convertible Common Stock may be increased or decreased by
the Board of Directors of the Corporation without a vote of stockholders. Except
as otherwise expressly provided herein, all shares of Series A Non-Voting
Convertible Common Stock shall be identical to shares of Common Stock (as
defined in Article FOURTH of the Certificate of Incorporation of the
Corporation, as amended (the "Certificate of Incorporation")) and shall entitle
the holders thereof to the same rights and privileges.
2. VOTING. The holders of Series A Non-Voting Convertible Common Stock
shall not have any right to vote, except as required under applicable law and,
except as required by law, the holders of Common Stock and Series A Non-Voting
Convertible Common Stock shall vote together as a single class on all matters as
to which holders of Series A Non-Voting Convertible Common Stock are entitled to
vote as set forth herein. Except as required by law or as set forth herein, the
holders of Series A Non-Voting Convertible Common Stock (to the extent permitted
by this Section 2), Common Stock (to the extent permitted by the Certificate of
Incorporation), Preferred Stock (to the extent permitted by the Certificate of
Incorporation) and Series Common Stock (to the extent permitted by the
Certificate of Incorporation) shall vote together as a single class on all
matters submitted to the stockholders for a vote.
3. DIVIDENDS. Subject to applicable law, the holders of Series A
Non-Voting Convertible Common Stock shall be entitled to receive such dividends
out of funds legally available therefor at such times and in such amounts as the
Board of Directors of the Corporation may determine in its sole discretion shall
be paid with respect to the Common Stock, with each share of Common Stock and
each share of Series A Non-Voting Convertible Common Stock sharing
share-for-share in such dividends (with each share of Series A Non-Voting
Convertible Common Stock being equal to the number of shares of Common Stock
into which it would then be convertible on the record date for such dividend)
except that if dividends are declared which are payable in shares of Common
Stock or Series A Non-Voting Convertible Common Stock, dividends shall be
declared which are payable at the equivalent rate in both classes of stock and
the dividends payable in shares of Common Stock shall be payable to the holders
of that class of stock and the dividends payable in shares of Series A
Non-Voting Convertible Common Stock shall be payable to the holders of that
class of stock.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary
(a "Liquidation Event"), after the payment or provision for payment of all debts
and liabilities of the Corporation and all preferential amounts to which the
holders of Preferred Stock or Series Common Stock, if any, are entitled with
respect to the distribution of assets in liquidation, the holders of Series A
NonVoting Convertible Common Stock shall be entitled to share ratably with the
holders of Common Stock (with each share of Series A Non-Voting Convertible
Common Stock being equal to the number of shares of Common Stock into which it
would then be convertible on the effective date of such Liquidation Event) in
the remaining assets of the Corporation available for distribution.
5. CONVERSION OF SERIES A NON-VOTING CONVERTIBLE COMMON STOCK.
(a) AUTOMATIC CONVERSION. Each share of Series A Non-Voting
Convertible Common Stock shall be automatically converted, without the payment
of any additional consideration, into fully paid and non-assessable shares of
Common Stock at the rate of one share of Common Stock for each share of Series A
Non-Voting Convertible Common Stock so converted (the "Series A Non-Voting
Conversion Rate") as of the date (the "Conversion Date") that is the earlier to
occur of (i) the next Business Day (as defined below) following the date on
which the shareholders of the Corporation and of Operating Company shall have
approved the merger transaction (the "Merger") among La Quinta Inns, Inc. ("La
Quinta"), Operating Company and the Corporation, and (ii) the date of any
termination of the Agreement and Plan of Merger dated as of January 3, 1998 and
among La Quinta, Operating Company and the Corporation relating to the Merger in
accordance with the terms thereof. As used herein, the term "Business Day" means
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.
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(b) PROCEDURE FOR CONVERSION. As of the Conversion Date, all
outstanding shares of Series A Non-Voting Convertible Common Stock shall be
converted automatically without any further action by the holders of Series A
Non-Voting Convertible Common Stock and whether or not the certificates
representing such shares of Series A Non-Voting Convertible Common Stock are
surrendered to the Corporation or its transfer agent. On the Conversion Date,
all rights with respect to the Series A Non-Voting Convertible Common Stock so
converted shall terminate, except any of the rights of the holders thereof, in
accordance with the procedures herein, to receive certificates for the number of
shares of Common Stock into which such Series A Non-Voting Convertible Common
Stock has been converted. The Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable on the Conversion
Date unless certificates evidencing such shares of the Series A Non-Voting
Convertible Common Stock being converted, duly assigned or endorsed for transfer
to the Corporation (or accompanied by duly executed stock powers relating
thereto), are surrendered at the principal executive office of the Corporation
(or the offices of the transfer agent for the Series A Non-Voting Convertible
Common Stock or such office or offices of an agent for conversion as may from
time to time be designated by notice to the holders of the Series A Non-Voting
Convertible Common Stock by the Corporation), together with written notice by
the holder of such Series A Non-Voting Convertible Common Stock stating the name
or names (with addresses) and denominations in which the certificate or
certificates for Common Stock shall be issued and shall include instructions for
delivery thereof. Upon such surrender of a certificate representing Series A
Non-Voting Convertible Common Stock following its automatic conversion, the
Corporation shall issue and send by hand delivery, by courier or by first class
mail (postage prepaid) to the holder thereof or to such holder's designee, at
the address designated by such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled upon
conversion. In the event that there shall have been surrendered a certificate or
certificates representing Series A Non-Voting Convertible Common Stock, only
part of which are to be converted, the Corporation shall issue and send to such
holder or such holder's designee, in the manner set forth in the preceding
sentence, a new certificate or certificates representing the number of shares of
Series A Non-Voting Convertible Common Stock which shall not have been
converted. If the certificate or certificates for Common Stock are to be issued
in a name other than the name of the registered holder of the Series A
Non-Voting Convertible Common Stock surrendered for conversion, the Corporation
shall not be obligated to issue or deliver any certificate unless and until the
holder of the Series A NonVoting Convertible Common Stock surrendered has paid
to the Corporation the amount of any tax that may be payable in respect of any
transfer involved in such issuance or has established to the satisfaction of the
Corporation that such tax has been paid.
(c) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of Series A Non-Voting Convertible Common Stock such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of Series A Non-Voting
Convertible Common Stock.
6. ADJUSTMENTS.
(a) CHANGES IN COMMON STOCK. In the event the Corporation
shall (i) pay a dividend in or make a distribution in shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares, or (iv)
issue by reclassification of its shares of Common Stock any shares of the
Corporation, the Series A Non-Voting Conversion Rate in effect immediately prior
thereto shall be adjusted so that the holder of a share of Series A Non-Voting
Convertible Common Stock thereafter surrendered for conversion shall be entitled
to receive the number of shares of Common Stock which it would have owned or
have been entitled to receive after the happening of any of the events described
above had such share of Series A Non-Voting Convertible Common Stock been
converted on or immediately prior to the record date for such dividend or the
effective date of such subdivision, combination or reclassification, as the case
may be.
(b) CHANGES IN SERIES A NON-VOTING CONVERTIBLE COMMON STOCK.
In the event that the Corporation shall (i) pay a dividend in or make a
distribution in shares of its Series A Non-Voting Convertible Common Stock, (ii)
subdivide its outstanding shares of Series A Non-Voting Convertible Common
Stock, (iii) combine its outstanding shares of Series A Non-Voting Convertible
Common Stock into a smaller number of shares, or (iv) issue by reclassification
of its shares of Series A Non-Voting Convertible Common Stock any shares of the
Corporation, the Series A Non-Voting Conversion Rate in effect immediately prior
thereto shall be adjusted so that the holder of a share of Series A Non-Voting
Convertible Common Stock thereafter surrendered for conversion shall be entitled
to receive the number of shares of Common Stock which it would have owned or
have been entitled to receive after the happening
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of any of the events described above had such share of Series A Non-Voting
Convertible Common Stock been converted on or immediately prior to the record
date for such dividend or the effective date of such subdivision, combination or
reclassification, as the case may be.
(c) GENERAL. An adjustment made pursuant to this Section 6
shall become effective immediately after the record date (in the case of a
dividend or distribution in shares of capital stock) and shall become effective
immediately after the effective date (in the case of a subdivision, combination
or reclassification). No adjustment in accordance with this Section 6 shall be
required unless such adjustment would require an increase or decrease in any
conversion rate of at least 0.1%; provided, however, that any adjustments which
by reason of this clause are not required to be made shall be carried forward
and taken into account in any subsequent adjustment.
7. NOTICES. In the event that the Corporation provides any notice,
report or statement to the holders of Common Stock or Series A Non-Voting
Convertible Common Stock (in their capacity as such), the Corporation shall at
the same time provide a copy of any such notice, report or statement to each
record holder of outstanding Series A Non-Voting Convertible Common Stock.
8. STATUS OF ACQUIRED SHARES. Shares of Series A Non-Voting Convertible
Common Stock acquired by the Corporation (upon conversion or otherwise) will be
restored to the status of authorized but unissued shares of undesignated Series
Common Stock.
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MEDITRUST CORPORATION
CERTIFICATE OF THE POWERS, DESIGNATIONS
PREFERENCES AND RIGHTS OF THE
9% SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK
PAR VALUE $.10 PER SHARE
LIQUIDATION VALUE $250 PER SHARE
I.
(a) TITLE. The Series of Preferred Stock is hereby designated as the
"9% Series A Cumulative Redeemable Preferred Stock" (the "Series A Preferred
Stock").
(b) NUMBER. The number of authorized shares of Series A Preferred Stock
shall be 805,000.
(c) RANKING. In respect of rights to the payment of dividends and the
distribution of assets in the event of any liquidation, dissolution or winding
up of the Corporation, the Series A Preferred Stock shall rank (i) senior to the
Corporation's Common stock, par value $.10 per share (the "Common Stock"),
senior to the Corporation's Series A NonVoting Convertible Common Stock, par
value $.10 per share (the "Series A Common Stock"), senior to the Corporation's
Junior Participating Preferred Stock, par value $.10 per share (the "Junior
Preferred Stock"), and senior to any other class or series of capital stock of
the Corporation other than capital stock referred to in clauses (ii) and (iii)
of this sentence, (ii) on a parity with any class or series of capital stock of
the Corporation the terms of which specifically provide that such class or
series of capital stock ranks on a parity with the Series A Preferred Stock in
respect of rights to the payment of dividends and the distribution of assets in
the event of any liquidation, dissolution or winding up of the Corporation, and
(iii) junior to any class or series of capital stock of the Corporation the
terms of which specifically provide that such class or series of capital stock
ranks senior to the Series A Preferred Stock in respect of rights to the payment
of dividends and the distribution of assets in the event of any liquidation,
dissolution or winding up of the Corporation. The term "capital stock" does not
include convertible debt securities.
Without limitation to the provisions of the preceding paragraph, the
Series A Preferred Stock shall rank, in respect of rights to the payment of
dividends and the distribution of assets in the event of any liquidation,
dissolution or winding up of the Corporation, (a) senior to any shares of Excess
Stock (as defined below) issued upon conversion of any capital stock referred to
in clause (i) of the preceding paragraph, (b) on a parity with any shares of
Excess Stock issued upon conversion of any capital stock referred to in clause
(ii) of the preceding paragraph and (c) junior to any shares of Excess Stock
issued upon conversion of any capital stock referred to in clause (iii) of the
preceding paragraph.
(d) DIVIDENDS.
(i) Subject to the preferential rights of the holders of any
class or series of capital stock of the Corporation ranking prior to the Series
A Preferred Stock as to dividends, the holders of the then outstanding shares of
Series A Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors of the Corporation or any duly authorized committee
thereof (collectively, the "Board of Directors of the Corporation"), out of
funds legally available for the payment of dividends, cumulative cash dividends
at the rate of 9% per annum of the $250.00 per share liquidation preference of
the Series A Preferred Stock (equivalent to an annual rate of $22.50 per share).
Such dividends shall accrue daily, shall accrue and the cumulative from June 17,
1998 (the "Original Issue Date") and shall be payable quarterly in arrears in
cash on March 31, June 30, September 30 and December 31 (each, a "Dividend
Payment Date") of each year, commencing September 30, 1998; provided that if any
Dividend Payment Date is not a Business Day (as hereinafter defined), then the
dividend which would otherwise have been payable on such Dividend Payment Date
may be paid on the next succeeding Business Day with the same force and effect
as if paid on such Dividend Payment Date and no interest or additional dividends
or other sum shall accrue on the amount so payable for the period from and after
such Dividend Payment Date to such next succeeding Business Date. The period
from and including the Original Issue Date to but excluding the first Dividend
Payment Date, and each subsequent period from and including a Dividend Payment
Date to but excluding the next succeeding Dividend Payment Date, is hereinafter
called a "Dividend Period". Dividends shall be payable to holders of record as
they appear in the stock transfer books of the Corporation at the close of
business on the applicable record date (each, a "Record Date"), which shall be
the 15th day of the calendar month in which the applicable Dividend Payment Date
falls or such other date designated by the
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Board of Directors of the Corporation for the payment of dividends that is not
more than thirty (30) nor less than ten (10) days prior to such Dividend Payment
Date. The amount of any dividend payable for any Dividend Period, or portion
thereof, shall be computed on the basis of a 360-day year consisting of twelve
30-day months, it being understood that the amount of the dividend payable per
share of Series A Preferred Stock for each full Dividend Period shall be
computed by dividing the annual dividend rate of $22.50 per share by four (it
being further understood that the dividend payable on September 30, 1998 shall
be for more than a full Dividend Period). The dividends payable on any Dividend
Payment Date or any other date shall include dividends accrued to but excluding
such Dividend Payment Date or other date, as the case may be.
"Business Day" shall mean any day, other than a Saturday or Sunday,
that is not a day on which banking institutions in The City of New York are
authorized or required by law, regulation or executive order to close. All
references herein to "accrued and unpaid" dividends on the Series A Preferred
Stock (and all references of like import) shall include, unless otherwise
expressly stated or the context otherwise requires, accumulated dividends, if
any, on the Series A Preferred Stock; and all references herein to "accrued and
unpaid" dividends on any other class or series of capital stock of the
Corporation shall include, if (and only if) such class or series of capital
stock provides for cumulative dividends and unless otherwise expressly stated or
the context otherwise requires, accumulated dividends, if any, thereon.
(ii) If any shares of Series A Preferred Stock are
outstanding, no full dividends will be declared or paid or set apart for payment
on any capital stock of the Corporation of any other class or series ranking, as
to dividends, on a parity with or junior to the Series A Preferred Stock for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the Series A Preferred Stock for all past Dividend
Periods (including, without limitation, any Dividend Period terminating on the
date upon which the dividends on such other capital stock are declared or paid
or set apart for payment, as the case may be). When dividends are not paid in
full (or a sum sufficient for such full payment is not set apart therefor) upon
the Series A Preferred Stock and the shares of any other class or series of
capital stock of the Corporation ranking on a parity as to dividends with the
Series A Preferred Stock, all dividends declared upon the Series A Preferred
Stock and any other class or series of capital stock of the Corporation ranking
on a parity as to dividends with the Series A Preferred Stock shall be declared
pro rata so that the amount of dividends declared per share of Series A
Preferred Stock and such other class or series of capital stock of the
Corporation shall in all cases bear to each other the same ratio that accrued
and unpaid dividends per share on the shares of Series A Preferred Stock and
such other class or series of capital stock of the Corporation bear to each
other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Series A Preferred Stock for
all past Dividend Periods (including, without limitation, any Dividend Period
terminating on the applicable Subject (as defined below)), (A) no dividends
(other than in shares of, or options, warrants or rights to subscribe for or
purchase shares of, Common Stock or any other class or series of capital stock
of the Corporation ranking junior to the Series A Preferred Stock as to
dividends and as to the distribution of assets upon liquidation, dissolution and
winding up of the Corporation) shall be declared or paid or set apart for
payment or other distribution declared or made upon the Common Stock of the
Corporation or any other class or series of capital stock of the Corporation
ranking junior to or on a parity with the Series A Preferred Stock as to
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up of the Corporation, nor shall any shares of Common Stock of the
Corporation or shares of any other class or series of capital stock of the
Corporation ranking junior to or on a parity with the Series A Preferred Stock
as to dividends or as to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation be redeemed, purchased or otherwise
acquired for any consideration (or any monies paid to or made available for a
sinking fund for the redemption of any such shares of junior or parity stock) by
the Corporation (except by conversion into or exchange for shares of any other
class or series of capital stock of the Corporation ranking junior to the Series
A Preferred Stock as to dividends and as to the distribution of assets upon
liquidation, dissolution and winding up of the Corporation, except for the
purchase of capital stock of the Corporation pursuant to Section 7.5 of the
Corporation's by-laws (so long as such purchase is made in accordance with the
terms of such Section 7.5), and except for, if the Amendments (as hereinafter
defined) to the Certificate of Incorporation become effective in accordance with
the DGCL as contemplated by Section I(j) hereof, the purchase or conversion of
Excess Stock (as hereinafter defined) in accordance with the provisions of
Article Thirteenth (as hereinafter defined). As used in this paragraph, the term
"Subject Date" means any date on which any dividends shall be declared or paid
or set apart for payment or other distribution declared or made upon the Common
Stock of the
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Corporation or any other class or series of capital stock of the Corporation
ranking junior to on a parity with the Series A Preferred Stock as to dividends
or as to the distribution of assets upon liquidation, dissolution or winding up
of the Corporation or on which any shares of Common Stock of the Corporation or
any shares of any other class or series of capital stock of the Corporation
ranking junior to or on a parity with the Series A Preferred Stock as to
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up of the Corporation shall be redeemed, purchased or otherwise acquired
for any consideration (or any moneys paid to or made available for a sinking
fund for the redemption of any such shares of junior or parity stock) by the
Corporation.
(iii) No dividends on the Series A Preferred Stock shall be
declared by the Board of Directors of the Corporation or paid or set apart for
payment by the Corporation at such times as any agreement of the Corporation,
including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
Anything in the Certificate of Designation to the contrary
notwithstanding, dividends on the Series A Preferred Stock will accrue and be
cumulative from the Original Issue Date whether or not the Corporation has
earnings, whether or not there are funds legally available for the payment of
such dividends and whether or not such dividends are declared.
(iv) No interest, or sum of money in lieu of interest, shall
be payable in respect of any dividend or payments on the Series A Preferred
Stock which may be in arrears, and holders of the Series A Preferred Stock will
not be entitled to any dividends (within the meaning of the Code), whether
payable in cash, securities or other property, in excess of the full cumulative
dividends described herein.
(v) Any dividend payment made on the Series A Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to such shares.
(vi) If, for any taxable year, the Corporation elects to
designate as "capital gain dividends" (as defined in Section 857 of the Internal
Revenue Code of 1986, as amended (the "Code")), any portion (the "Capital Gains
Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes and series of the Corporation's
capital stock (the "Total Dividends"), then the portion of the Capital Gains
Amount that shall be allocable to the holders of the Series A Preferred Stock
shall be an amount equal to (A) the total Capital Gains Amount multiplied by (B)
a fraction (1) the numerator of which is equal to the total dividends (within
the meaning of the Code), paid or made available to the holders of the Series A
Preferred Stock for that year and (2) the denominator of which is the Total
Dividends for that year.
(e) LIQUIDATION PREFERENCE.
(i) Upon any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, then, before any distribution or payment shall
be made to the holders of any Common Stock of the Corporation or shares of any
other class or series of capital stock of the Corporation ranking junior to the
Series A Preferred Stock with respect to the distribution of assets upon
liquidation, dissolution or winding up of the Corporation, but subject to the
preferential rights of the holders of shares of any class or series of capital
stock of the Corporation ranking prior to the Series A Preferred Stock with
respect to such distribution of assets upon liquidation, dissolution or winding
up, the holders of the shares of Series A Preferred Stock then outstanding shall
be entitled to receive and be paid out of the assets of the Corporation legally
available for distribution to it stockholders liquidating distributions in cash
or property at its fair market value as determined by the Board of Directors of
the Corporation in the amount of $250.00 per share, plus an amount equal to all
accrued and unpaid dividends thereon to the date of payment.
(ii) After payment to the holders of the Series A Preferred
Stock of the full amount of the liquidating distributions (including accrued and
unpaid dividends) to which they are entitled, the holders of Series A Preferred
Stock, as such, shall have no right or claim to any of the remaining assets of
the Corporation.
(iii) If, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation
legally available therefor are insufficient to pay the full amount of
liquidating distributions on all outstanding shares of Series A Preferred
Stock and the full amount of the liquidating distributions
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<PAGE>
payable on all outstanding shares of any other classes or series of capital
stock of the Corporation ranking on a parity with the Series A Preferred
Stock with respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, then the holders of the Series
A Preferred Stock and all such other classes or series of capital stock will
share ratably in any such distribution of assets in proportion to the full
liquidating distributions (including, if applicable, accrued and unpaid
dividends) to which they would otherwise respectively be entitled.
(iv) If liquidating distributions shall have been made in full
to all holders of Series A Preferred Stock, the remaining assets of the
Corporation shall be distributed among the holders of any other classes or
series of capital stock of the Corporation ranking junior to the Series A
Preferred Stock as to the distribution of assets upon liquidation, dissolution
or winding up, according to their respective rights and preferences.
(v) For purposes of this Section I(e), neither the
consolidation or merger of the Corporation with or into any other corporation,
trust or other entity, nor the sale, lease or conveyance of all or substantially
all of the property or business of the Corporation, shall be deemed to
constitute a liquidation, dissolution or winding up of the Corporation.
(f) REDEMPTION.
(i) The Series A Preferred Stock is not redeemable prior to
June 17, 2003. However, the Company is entitled, irrespective of any provision
of this Certificate of Designation to the contrary, pursuant to Section 7.5 of
its by-laws, to call for purchase and purchase from the holders thereof shares
of Series A Preferred Stock on the terms and subject to the conditions set forth
in such Section 7.5.
(ii) On and after June 17, 2003, the Corporation may, at its
option, upon not less than thirty (30) nor more than sixty (60) days' prior
written notice to the holders of record of the Series A Preferred Stock, redeem
the Series A Preferred Stock, in whole or from time to time in part, for a cash
redemption price equal to $250.00 per share, together with (except as provided
in Section I(g)(vi) below) all accrued and unpaid dividends to the date fixed
for redemption (the "Redemption Price"). Any date fixed for the redemption of
shares of Series A Preferred Stock is hereinafter called a "Redemption Date".
(iii) The Redemption Price of the Series A Preferred Stock
(other than the portion thereof consisting of accrued and unpaid dividends)
shall be payable solely out of the proceeds received by the Corporation from the
sale of other capital stock of the Corporation and not from any other source.
For purposes of the preceding sentence, the term "capital stock" means any
equity securities (including Common Stock of the Corporation, series common
stock, par value $.10 per share ("Series Common Stock"), of the Corporation, and
any other series of Preferred Stock of the Corporation), shares, interest,
participations or other ownership interests (however designated), depositary
shares representing interests in any of the foregoing, and any rights (other
than debt securities convertible into or exchangeable for equity securities) or
options to purchase any of the foregoing.
(g) PROCEDURES FOR REDEMPTION; LIMITATIONS ON REDEMPTION.
(i) If fewer than all of the outstanding shares of Series A
Preferred Stock are to be redeemed at the option of the Corporation, the number
of shares to be redeemed will be determined by the Corporation and such shares
may be redeemed pro rata from the holders of record of such shares in proportion
to the number of such shares held by such holders (with adjustments to avoid
redemption of fractional shares or, if fractional shares are outstanding, with
such additional adjustments as the Corporation may elect in order to effect the
redemption of fractional shares) or by lot or any other equitable manner
determined by the Corporation (a) that will not give the Corporation the right
to purchase shares of Series A Preferred Stock pursuant to Section 7.5 of its
by-laws and (b) if the Amendments to the Certificate of Incorporation become
effective in accordance with the DGCL as contemplated by Section I(j) hereof,
that will not result in the conversion of any Series A Preferred Stock into
Excess Stock.
(ii) Notice of redemption will be given by publication in The
Wall Street Journal or, if such newspaper is not then being published, another
newspaper of general circulation in The City of New York, such publication to be
made once a week for two successive weeks commencing not less than thirty (30)
or more than sixty (60) days prior to the Redemption Date. Notice of any
redemption will also be mailed by or on behalf of the Corporation, first class
postage prepaid, not less than thirty (30) nor more than sixty (60) days prior
to the applicable
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Redemption Date, addressed to each holder of record of the Series A Preferred
Stock to be redeemed at the address set forth in the share transfer records of
the Corporation. In addition to any information required by law or by the
applicable rules of any exchange upon which Series A Preferred Stock may be
listed or admitted to trading, such notice shall state: (1) the Redemption Date;
(2) the Redemption Price; (3) the number of shares of Series A Preferred Stock
to be redeemed; (4) the place or places (which shall include a place in the
Borough of Manhattan, The City of New York) where certificates for such shares
are to be surrendered for payment of the Redemption Price; and (5) that
dividends on the shares of Series A Preferred Stock to be redeemed will cease to
accrue on such Redemption Date. If fewer than all of the outstanding shares of
Series A Preferred Stock are to be redeemed, the notice mailed to each holder of
shares to be redeemed shall also specify the number of Series A Preferred Stock
to be redeemed from such holder. No failure to give or defect in such notice or
defect in the mailing thereof shall affect the validity of the proceedings for
the redemption of any shares of Series A Preferred Stock except as to the holder
to whom notice was defective or not given.
(iii) If notice has been published and mailed in accordance
with Section I(g)(ii) above and provided that on or before the Redemption Date
specified in such notice all funds necessary for such redemption have been
irrevocably set aside by the Corporation, separate and apart from its other
funds, in trust for the benefit of the holders of the Series A Preferred Stock
so called for redemption, so as to be, and to continue to be, available
therefor, then, from and after the Redemption Date, dividends on the shares of
Series A Preferred Stock so called for redemption shall cease to accrue, such
shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as holders of such shares (except the right to receive the
Redemption Price) shall terminate. In the event any Redemption Date shall not be
a Business Day, then payment of the Redemption Price need not be made on such
Redemption Date but may be made on the next succeeding Business Day with the
same force and effect as if made on such Redemption Date and no interest,
additional dividends or other sum shall accrue on the amount payable for the
period from and after such Redemption Date to such next succeeding Business
Date.
(iv) Upon surrender, in accordance with such notice, of the
certificates for any shares of Series A Preferred Stock to be so redeemed
(properly endorsed or assigned for transfer, if the Corporation shall so require
and the notice shall so state), such shares of Series A Preferred Stock shall be
redeemed by the Corporation at the Redemption Price. In case fewer than all the
shares of Series A Preferred Stock represented by any such certificate are
redeemed, a new certificate or certificates shall be issued representing the
unredeemed shares of Series A Preferred Stock without cost to the holder
thereof.
(v) Any deposit of monies with a bank or trust company for the
purpose of redeeming Series A Preferred Stock shall be irrevocable and such
monies shall be held in trust for the benefit of the holders of Series A
Preferred Stock entitled thereto, except that (1) the Corporation shall be
entitled to receive from such bank or trust company the interest or other
earnings, if any, earned on the monies so deposited in trust; and (2) any
balance of the monies so deposited by the Corporation and unclaimed by the
holders of the Series A Preferred Stock entitled thereto at the expiration of
two years from the applicable Redemption Date shall be repaid, together with any
interest or other earnings earned thereon, to the Corporation and, after any
such repayment, the holders of the shares entitled to the funds so repaid to the
Corporation shall look only to the Corporation for payment without interest or
other earnings thereon.
(vi) Anything in this Certificate of Designation to the
contrary notwithstanding, the holders of record of shares of Series A Preferred
Stock at the close of business on a Record Date will be entitled to receive the
dividend payable with respect to such shares on the corresponding Dividend
Payment Date notwithstanding the redemption of such shares after such Record
Date and on or prior to such Dividend Payment Date or the Corporation's default
in the payment of the dividend due on such Dividend Payment Date, in which case
the amount payable upon redemption of such shares (including fractional shares)
of Series A Preferred Stock will not include such dividend (and the full amount
of the dividend payable for the applicable Dividend Period shall instead be paid
on such Dividend Payment Date to the holders of record on such Record Date as
aforesaid). Except as provided in this Section I(g)(vi) and except to the extent
that accrued and unpaid dividends are payable as part of the Redemption Price
pursuant to Section I(f)(ii), the Corporation will make no payment or allowance
for unpaid dividends, regardless of whether or not in arrears, on shares of
Series A Preferred Stock or Depositary Shares called for redemption.
(vii) Unless full cumulative dividends on all outstanding
shares of Series A Preferred Stock shall have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for all past Dividend Periods (including, without limitation,
any Dividend Period terminating on the date of the redemption of shares of
Series A Preferred Stock referred to below), no shares of Series A Preferred
Stock shall
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be redeemed unless all outstanding shares of Series A Preferred Stock are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
(a) the purchase or acquisition of Series A Preferred Stock pursuant to Section
7.5 of the by-laws of the Corporation (so long as such purchase is made in
accordance with the terms of such Section 7.5) or pursuant to a purchase or
exchange offer made on the same terms to the holders of all outstanding shares
of Series A Preferred Stock or (b) if the Amendments to the Certificate of
Incorporation become effective in accordance with the DGCL as contemplated by
Section I(j) hereof, the purchase or conversion of Excess Stock of the
Corporation in accordance with the provisions of Article Thirteenth. In
addition, unless full cumulative dividends on all outstanding shares of Series A
Preferred Stock have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for all past
Dividend Periods (including, without limitation, any Dividend Period terminating
on the date of the direct or indirect purchase or other acquisition of shares of
Series A Preferred Stock by the Corporation referred to below) the Corporation
shall not purchase or otherwise acquire, directly or indirectly, any shares of
Series A Preferred Stock (except by conversion into or exchange for capital
stock of the Corporation ranking junior to the Series A Preferred Stock as to
the payment of dividends and with respect to the distribution of assets upon
liquidation, dissolution and winding up of the Corporation); provided, however,
that the foregoing shall not prevent (a) the purchase or acquisition of Series A
Preferred Stock pursuant to Section 7.5 of the by-laws of the Corporation (so
long as such purchase is made in accordance with the terms of such Section 7.5)
or pursuant to a purchase or exchange offer made on the same terms to the
holders of all outstanding shares of Series A Preferred Stock or (b) if the
Amendments to the Certificate of Incorporation become effective in accordance
with the DGCL as contemplated by Section I(j) hereof, the purchase or conversion
of Excess Stock of the Corporation in accordance with the provisions of Article
Thirteenth.
(h) VOTING RIGHTS. Except as required by laws and as set forth below in
this Section I(h), the holders of the Series A Preferred Stock shall not have
any voting rights.
(i) Whenever dividends on any shares of Series A Preferred
Stock shall be in arrears for six or more Dividend Periods, whether or not such
Dividend Periods are consecutive, the number of directors then constituting the
Board of Directors of the Corporation shall be automatically increased by two
(if not already increased by two by reason of the election of directors by the
holders of any other class or series of capital stock of the Corporation upon
which like voting rights have been conferred and are exercisable and with which
the Series A Preferred Stock is entitled to vote as a class with respect to the
election of such two directors) and the holders of shares of Series A Preferred
Stock (voting separately as a class with all other classes or series of capital
stock of the Corporation upon which like voting rights have been conferred and
are exercisable and which are entitled to vote as a class with the Series A
Preferred Stock in the election of such two directors) will be entitled to vote
for the election of such two directors of the Corporation at a special meeting
called by an officer of the Corporation at the request of the holders of record
of at least 10% of the outstanding shares of Series A Preferred Stock or by
holders of any other class or series of capital stock of the Corporation upon
which like voting rights have been conferred and are exercisable and which is
entitled to vote as a class with the Series A Preferred Stock in the election of
such two directors (unless such request is received less than ninety (90) days
before the date fixed for the next annual or special meeting of stockholders, in
which case the vote for such two directors shall be held at the earlier of the
next such annual or special meeting of stockholders), and at each subsequent
annual meeting of stockholders until all dividends accumulated on the Series A
Preferred Stock for all past Dividend Periods and the then current Dividend
Period shall have been fully paid or declared and a sum sufficient for the
payment thereof set aside for payment, whereupon the right of the holders of
Series A Preferred Stock to elect such two directors shall cease and (unless
there are one or more other classes or series of capital stock of the
Corporation upon which like voting rights have been conferred and are
exercisable) the term of office of such directors previously so elected shall
terminate and the authorized number of directors of the Corporation shall
thereupon return to the number of authorized directors otherwise in effect, but
subject always to the same provisions for the reinstatement and divestment of
the right to elect such two additional directors in the case of any such future
dividend arrearage.
In the case of any such request for a special meeting (unless such
request is received less than ninety (90) days before the date fixed for the
next annual or special meeting of stockholders), such meeting shall be held on
the earliest practicable date at the place designated by the holders of capital
stock requesting such meeting or, if none, at a place
designated by the Secretary of the Corporation, upon notice similar to that
required for an annual meeting of stockholders. If such special meeting is not
called by an officer of the Corporation within thirty (30) days after such
request, then the holders of record of at least 10% of the outstanding shares of
Series A Preferred Stock may designate in writing a holder of Series A Preferred
Stock to call such meeting at the expense of the Corporation, and such meeting
may be called by the holder so designated upon notice similar to that required
for annual meetings of stockholders and
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shall be held at the place designated by the holder calling such meeting. The
holders of Series A Preferred Stock shall have access to the stock transfer
records of the Corporation for the purpose of causing a meeting of stockholders
to be called pursuant to the provisions of this paragraph.
The procedures in this Section I(h) for the calling of meetings and the
election of directors shall, to the extent permitted by law, supersede anything
inconsistent contained in the by-laws of the Corporation.
So long as any Series A Preferred Stock are outstanding, the number of
directors constituting the entire Board of Directors of the Corporation shall at
all times be such so that the exercise, by the holders of the Series A Preferred
Stock and the holders of any other classes or series of capital stock of the
Corporation upon which like voting rights have been conferred, of the right to
elect directors under the circumstances provided above will not contravene any
provision of the Corporation's Certificate of Incorporation or by-laws
restricting the number of directors which may constitute the entire Board of
Directors of the Corporation.
If at any time when the voting rights conferred upon the Series A
Preferred Stock pursuant to this Section I(h)(i) are exercisable any vacancy in
the office of a director elected pursuant to this Section I(h)(i) shall occur,
then such vacancy may be filled only by the remaining such director or by vote
of the holders of record of the outstanding Series A Preferred Stock and any
other classes or series of capital stock of the Corporation upon which like
voting rights have been conferred and are exercisable and which are entitled to
vote as a class with the Series A Preferred Stock in the election of directors
pursuant to this Section I(h)(i).
(ii) So long as any shares of Series A Preferred Stock remain
outstanding, the Corporation shall not, without the affirmative vote or consent
of the holders of at least two-thirds of the shares of Series A Preferred Stock
outstanding at the time, given in person or by proxy (with the Series A
Preferred Stock voting separately as a class), (A) authorize or create, or
increase the authorized or issued amount of, any class or series of capital
stock of the Corporation ranking prior to the Series A Preferred Stock with
respect to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up of the Corporation or reclassify any
authorized capital stock of the Corporation into such shares, or create,
authorize or issue any obligation or security convertible into, exchangeable or
exercisable for, or evidencing the right to purchase, any such shares, or (B)
amend, alter or repeal the provisions of the Certificate of Incorporation
(including, without limitation, the certificate of powers, designations,
preferences and rights of the Series A Preferred Stock (the "Certificate of
Designation")), whether by merger or consolidation (an "Event") or otherwise, so
as to materially and adversely affect any right, preference, privilege or voting
power of the Series A Preferred Stock or the holders thereof; provided, however,
with respect to the occurrence of any of the Events set forth in (B) above, so
long as the Series A Preferred Stock remains outstanding or is converted into
like securities of the surviving entity, in each case with the terms thereof
materially unchanged, taking into account that upon the occurrence of such an
Event the Corporation may not be the surviving entity, the occurrence of any
such Event shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of the Series A Preferred Stock or the
holders thereof; and provided, further, that the Amendments to the Certificate
of Incorporation shall not be deemed, with respect to the Series A Preferred
Stock, to be an amendment, alteration or repeal which materially and adversely
affects such rights, preferences, privileges or voting powers; and provided,
further, that any amendment to the Certificate of Incorporation to authorize any
increase in the amount of the authorized Excess Stock, Preferred Stock or Series
Common Stock or the creation or issuance of any other series of Preferred Stock
or any shares or series of Excess Stock or Series Common Stock, or any increase
in the amount of authorized or outstanding shares of Series A Preferred Stock or
any other series of Preferred Stock or any shares or series of Excess Stock or
Series Common Stock, in each case ranking on a parity with or junior to the
Series A Preferred Stock with respect to payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers. For purposes of this paragraph, the
filing in accordance with applicable law of a certificate of designations
setting forth the designations, preferences and relative, participating,
optional or other special rights of a class or series of capital stock of the
Corporation shall be deemed an amendment to the Certificate of Incorporation.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding Series A Preferred Stock shall have been
redeemed or called for redemption and sufficient funds shall have been deposited
in trust in accordance with the terms of Section I(g)(v) hereof to effect such
redemption.
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(iii) On each matter submitted to a vote of the holders of
Series A Preferred Stock, including any action by written consent, in accordance
with this Section I(h) or as otherwise required by law, each whole share of
Series A Preferred Stock shall be entitled to ten votes, each of which ten votes
may be directed separately by the holder thereof (or by any proxy or proxies of
such holder). With respect to each whole share of Series A Preferred Stock, the
holder thereof may designate up to ten proxies, with each such proxy having the
right to vote a whole number of votes (totaling ten per share of Series A
Preferred Stock). In the event that fractional shares of Series A Preferred
Stock are issued, then each such fractional share shall be entitled to a
proportionate number of votes and, if any such fractional share is entitled to
more than one vote, such votes may be directed separately and proxies may be
designated as in the case of whole shares of Series A Preferred Stock.
(i) CONVERSION. The Series A Preferred Stock is not convertible into or
exchangeable for any other property or securities of the Corporation, except
that, if the Amendments to the Certificate of Incorporation become effective in
accordance with the DGCL as contemplated by Section I(j) hereof, the Series A
Preferred Stock shall be convertible into Excess Stock on the terms and subject
to the conditions set forth in Article Thirteenth.
(j) RESTRICTIONS ON OWNERSHIP AND TRANSFER. In the event that the
Corporation shall purchase any shares of Series A Preferred Stock pursuant to
Section 7.5 of its by-laws, then the purchase price paid by the Corporation for
any such shares of Series A Preferred Stock shall be the price specified in its
by-laws plus accrued and unpaid dividends on such shares to the date of
purchase.
As set forth in the Joint Proxy Statement/Prospectus dated May 19, 1998
(the "Proxy Statement") of The Meditrust Companies and La Quinta Inns, Inc., the
Corporation is soliciting the vote of its stockholders in favor of amendments
(the "Amendments") to its Certificate of Incorporation which would (i) add a new
Article Thirteenth to such Certificate of Incorporation in the form set forth as
Annex E to the Proxy Statement ("Article Thirteenth") and (ii) authorize a new
class of capital stock of the Corporation to be known as Excess Stock ("Excess
Stock"). If the Amendments are approved and become effective in accordance with
the DGCL, then, from and after the date on which the Amendments shall have
become effective in accordance with the DGCL, the Series A Preferred Stock shall
be subject to all of the terms and provisions of Article Thirteenth and, without
limitation to the foregoing, shall be convertible into Excess Stock on the terms
and subject to the conditions, and shall be subject to the limitations on
ownership and transfer, set forth in Article Thirteenth.
(k) FRACTIONAL SHARES. Series A Preferred Stock may be issued in
fractional shares equal to 1/10th of a whole share of Series A Preferred Stock
and any integral multiple of 1/10th of a whole share of Series A Preferred
Stock.
(l) OFFICE OR AGENCY IN NEW YORK CITY. The Corporation will at all
times maintain an office or agency in the Borough of Manhattan, The City of New
York, where shares of Series A Preferred Stock may be surrendered for payment
(including upon redemption or repurchase, if any), registration of transfer or
exchange.
If any shares of Series A Preferred Stock are purchased by the
Corporation in accordance with Section 7.5 of its by-laws or if the Amendments
shall have become effective as contemplated by this Section I(j) and thereafter
any shares of Series A Preferred Stock are converted into Excess Stock and, in
either such case, if fewer than all the shares of Series A Preferred Stock
evidenced by any stock certificate are so purchased or converted, a new
certificate or certificates shall be issued representing the remaining shares of
Series A Preferred Stock evidenced by such certificate without cost to the
holder thereof.
II.
The Series A Preferred Stock shall have no preemptive rights.
III.
If any power, preference or relative, participating, optional and other
special right of the Series A Preferred Stock, or qualification or restriction
thereof, set forth in the Certificate of Designation is invalid, unlawful or
incapable of being enforced by reason of any rule of law or public policy, then,
to the extent permitted by law, all other powers, preferences and relative,
participating, optional and other special rights of the Series A Preferred Stock
and
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qualifications and restrictions thereof set forth in the Certificate of
Designation which can be given effect without the invalid, unlawful or
unenforceable powers, preferences or relative, participating, optional or other
special rights of the Series A Preferred Stock or the qualifications or
restriction thereof shall remain in full force and effect and shall not be
deemed dependent upon any other such powers, preferences or relative,
participating, optional or other special right of the Series A Preferred Stock
or qualifications or restrictions thereof unless so expressed herein.
[End of Text]
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I, Michael S. Benjamim, Secretary of the Corporation, for the purpose
of amending and restating the Corporation's Certificate of Incorporation
pursuant to the General Corporation Law of the State of Delaware, do execute
this certificate, hereby declaring and certifying that this is my act and deed
on behalf of the Corporation this 21st day of June, 1999.
By: /s/ MICHAEL S. BENJAMIN
Name: Michael S. Benjamin
Title: Secretary
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<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEDITRUST OPERATING COMPANY
Meditrust Operating Company, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The Corporation filed its original Certificate of Incorporation with
the Secretary of State of the State of Delaware on August 23, 1979 (the
"Original Certificate of Incorporation") under the name "Santa Anita Operating
Company". The name of the Corporation was changed to Meditrust Operating Company
on November 5, 1997, by way of amendment to the Original Certificate of
Incorporation. A Restated Certificate of Incorporation (the "Second
Certificate") was filed with the Secretary of State of the State of Delaware on
March 2, 1998 restating and integrating the Corporation's certificate of
incorporation as theretofore amended and supplemented.
2. This Amended and Restated Certificate of Incorporation (the
"Certificate") amends, restates and integrates the Corporation's Certificate of
Incorporation as heretofore amended and supplemented. The Certificate was duly
adopted by the Board of Directors of the Corporation in accordance with the
provisions of Sections 242 and 245 of the Delaware General Corporation Law, as
amended from time to time (the "DGCL"), and was duly adopted by the stockholders
of the Corporation in accordance with the applicable provisions of Sections 242
and 245 of the DGCL.
3. The text of the Second Certificate, as amended to date, shall at the
effective time of this Certificate read as follows:
FIRST. NAME. The name of the Corporation is Meditrust Operating
Company.
SECOND. REGISTERED OFFICE. The address of its registered office in
the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is Corporation
Service Company.
THIRD. PURPOSES. The nature of the business or purposes to be
conducted or promoted is:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware and to do all things and
exercise all powers, rights and privileges which a business corporation may now
or hereafter be organized or authorized to do or to exercise under the laws of
the State of Delaware.
FOURTH. CAPITALIZATION.
SECTION 1. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 561,000,000, of which 500,000,000
shares of the par value of $.10 each are to be a class designated Common Stock,
6,000,000 shares of the par value of $.10 each are to be of a class designated
Preferred Stock, 30,000,000 shares of the par value of $.10 each are to be of a
class designated Series Common Stock and 25,000,000 of the par value $.10 each
are to be of a class designated Excess Stock.
SECTION 2. The shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors of the Corporation, or any
duly authorized committee thereof, is hereby authorized to fix or authorize the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock and the number of shares constituting any such series and the
designation thereof, or all or any of them and such other rights specified by
the Board of Directors of the Corporation and not prohibited by law.
SECTION 3. The shares of Series Common Stock may be issued from time to
time in one or more series. The Board of Directors of the Corporation is hereby
authorized to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences of
any wholly unissued series of Series Common Stock and the number of shares
constituting any such series and the designation thereof, or all or any of them.
<PAGE>
SECTION 4. (a) Each holder of Common Stock, as such, shall be entitled
to one vote for each share of Common Stock held of record by such holder on all
matters on which stockholders generally are entitled to vote.
(b) Except as otherwise required by law, holders of a series of
Preferred Stock or Series Common Stock, as such, shall be entitled only to such
voting rights, if any, as shall expressly be granted thereto by this Certificate
of Incorporation (including any Certificate of Designation relating to such
series).
(c) Subject to applicable law and the rights, if any, of the holders of
any outstanding series of Preferred Stock or Series Common Stock or any class or
series of stock having a preference over or the right to participate with the
Common Stock with respect to the payment of dividends, dividends may be declared
and paid on the Common Stock at such times and in such amounts as the Board of
Directors of the Corporation in its discretion shall determine.
(d) Upon the dissolution, liquidation or winding up of the Corporation,
subject to the rights, if any, of the holders of any outstanding series of
Preferred Stock or Series Common Stock or any class or series of stock having a
preference over or the right to participate with the Common Stock with respect
to the distribution of assets of the Corporation upon such dissolution,
liquidation or winding up of the Corporation, the holders of the Common Stock,
as such, shall be entitled to receive the assets of the Corporation available
for distribution to its stockholders ratably in proportion to the number of
shares held by them.
SECTION 5. The terms and conditions applicable to shares of Excess
Stock are set forth in Article Thirteenth hereof.
FIFTH. [DELETED].
SIXTH. BY-LAWS. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors of the Corporation is expressly
authorized, without stockholder approval, to make, alter or repeal the by-laws
of the Corporation.
SEVENTH. RIGHT TO AMEND CERTIFICATE. The Corporation reserves the
right to amend, alter, change or repeal any provision contained in this
Certificate, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
EIGHTH. [DELETED].
NINTH:
PART 1. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS
1.1. HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to any
affirmative vote required by law or any other Article of this Certificate of
Incorporation, and except as otherwise expressly provided in Part 2 of this
Article Ninth:
(a) any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Stockholder or (ii) any other corporation (whether or
not itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested Stockholder;
or
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of any assets of the Corporation or any Subsidiary having an
aggregate Fair Market Value of $5,000,000 or more; or
(c) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market Value
of $5,000,000 or more, other than the issuance of securities by the Corporation
or any Subsidiary upon the conversion of convertible securities of the
Corporation or any Subsidiary into stock of the Corporation or any Subsidiary;
or
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(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder; or
(e) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or consolidation
of the Corporation with any of its Subsidiaries or any other transaction
(whether or not with or into or otherwise involving an Interested Stockholder)
which has the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class of equity or convertible securities
of the Corporation or any Subsidiary which is directly or indirectly owned by
any Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder;
shall require the affirmative vote of the holders of at least (a) 80%
of the combined voting power of the then outstanding shares of stock of all
classes and series of the Corporation entitled to vote in the election of
directors (the "Voting Stock"), and (b) a majority of the combined voting power
of the then outstanding shares of Voting Stock held by persons who are
Disinterested Stockholders, provided, however, that the majority vote
requirement of this clause (b) shall not be applicable if the Business
Combination is approved by the affirmative vote of the holders of not less than
90% of combined voting power of the then outstanding shares of Voting Stock. The
foregoing affirmative vote requirements are hereinafter referred to as the
"Special Vote Requirement." The Special Vote Requirement shall be applicable
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
1.2. DEFINITION OF "BUSINESS COMBINATION." The term "Business
Combination" as used in this Article Ninth shall mean any transaction which is
referred to in any one or more of clauses (a) through (e) of Section 1.1.
PART 2. WHEN SPECIAL VOTE REQUIREMENT IS NOT APPLICABLE
The provisions of Part 1 of this Article Ninth shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by law and any other Article
of this Certificate of Incorporation, if all of the conditions specified in
either of the following Sections 2.1 and 2.2 are met:
2.1. APPROVAL BY CONTINUING DIRECTORS. The Business Combination shall
have been approved by a majority of the Continuing Directors.
2.2. PRICE AND PROCEDURAL REQUIREMENTS. All of the following
conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value, as of
the date of the consummation of the Business Combination, of consideration other
than cash to be received per share by holders of Common Stock in such Business
Combination shall be at least equal to the higher of (i) the highest price paid
for any share of Common Stock by any person who is an Interested Stockholder
within the two-year period immediately prior to the time of the first public
announcement of the proposed Business Combination (the "Announcement Date") or
in the transaction in which such person became an Interested Stockholder,
whichever price is the higher; or (ii) the Fair Market Value per share of the
Corporation's Common Stock on the Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder (the "Determination
Date"), whichever is higher. The price paid for any share of Common Stock shall
be the amount of cash plus the Fair Market Value of any other consideration to
be received therefor, determined at the time of payment thereof.
(b) The aggregate amount of the cash and the Fair Market Value, as of
the date of the consummation of the Business Combination, of consideration other
than cash to be received in such Business Combination by holders of securities
of the Corporation other than Common Stock shall be at least equal to the higher
of (i) if applicable, the highest preferential amount to which the holders of
such securities are entitled in the event of any voluntary liquidation,
dissolution or winding up of the Corporation, (ii) the highest price paid for
any of such securities by any person who is an Interested Stockholder within the
two-year period immediately prior to the Announcement Date or in the transaction
in which such person became an Interested Stockholder, whichever price is
higher, (iii) the Fair Market Value of such securities on the Announcement Date
or the Determination Date, whichever is higher, or (iv) if such securities are
convertible into or exchangeable for shares of Common Stock, the amount per
share of such Common Stock determined pursuant to the foregoing paragraph (a)
reduced by any amount payable by the holders of such
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securities in accordance with the terms of such securities, per share, upon such
conversion or exchange, multiplied by the total number of shares of Common Stock
into which or for which such securities are convertible or exchangeable.
(c) The consideration to be received by holders of a particular class
of outstanding Voting Stock (including Common Stock) shall be in cash or in the
same forms the Interested Stockholder has previously paid for shares of such
class of Voting Stock. If the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration for such class of Voting Stock shall be either cash or the form of
consideration used to acquire the largest number of shares of such class of
Voting Stock previously acquired by it.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination: (i)
there shall have been (1) no reduction in the annual rate of dividends paid on
the Common Stock (except as necessary to reflect any subdivision of the Common
Stock), except as approved by a majority of the Continuing Directors, and (2) an
increase in such annual rate of dividends necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless the failure so to
increase such annual rate is approved by a majority of the Continuing Directors;
and (ii) such Interested Stockholder shall have not become the beneficial owner
of any additional shares of Voting Stock except as part of the transaction which
results in such Interested Stockholder becoming an Interested Stockholder.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided by the Corporation, whether in anticipation of
or in connection with such Business Combination or otherwise.
(f) A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities Exchange Act
of 1934 and the rules and regulations thereunder (or any subsequent provisions
replacing such Act, rules or regulations) shall be mailed to all stockholders of
the Corporation at least 30 days prior to the consummation of such Business
Combination (whether or not such proxy or information statement is required to
be mailed pursuant to such Act or subsequent provisions).
PART 3. CERTAIN DEFINITIONS
For the purposes of this Article Ninth:
3.1. A "person" shall mean any individual, firm, corporation,
partnership, trust or other entity.
3.2. "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(a) is the beneficial owner, directly or indirectly, of more than 10%
of the combined voting power of the then outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of 10% or more of the combined voting power of
the then outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period immediately prior
to the date in question beneficially owned by any Interested Stockholder, if
such assignment or succession shall have occurred in the course of a transaction
or series of transactions not involving a public offering within the meaning of
the Securities Act of 1933.
3.3. A person shall be a "beneficial owner" of any Voting Stock:
(a) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
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(b) which such person or any of its Affiliates or Associates has (i)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (ii) the right to vote or to direct the
vote pursuant to any agreement, arrangement or understanding; or
(c) which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of Voting Stock.
3.4. For the purposes of determining whether a person is an Interested
Stockholder pursuant to Section 3.2, the number of shares of Voting Stock deemed
to be outstanding shall include shares deemed owned through application of
Section 3.3 but shall not include any other shares of Voting Stock which may be
issuable to other persons pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
3.5. "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on January 1, 1984.
3.6. "Subsidiary" means any corporation of which more than a majority
of any class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for purposes of the definition of
Interested Stockholder set forth in Section 3.2, the term "Subsidiary" shall
mean only a corporation of which a majority of each class of equity security is
owned by the Corporation, by a Subsidiary, or by the Corporation and one or more
Subsidiaries.
3.7. "Continuing Director" means any member of the Board of Directors
of the Corporation who is unaffiliated with, and not a nominee of, the
Interested Stockholder and was a member of the Board of Directors of the
Corporation prior to the time that the Interested Stockholder became an
Interested Stockholder and any successor of a Continuing Director who is
unaffiliated with, and not a nominee of, the Interested Stockholder and who is
recommended to succeed a Continuing Director by a majority of Continuing
Directors then on the Board of Directors of the Corporation.
3.8. "Disinterested Stockholder" means a holder of Voting Stock who is
not an Interested Stockholder or an Affiliate or Associate of an Interested
Stockholder and whose shares are not deemed owned by an Interested Stockholder
through application of Section 3.3.
3.9. "Fair Market Value" means: (a) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the date in
question of a share of such stock on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape,
on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, the highest closing bid quotation with
respect to a share of such stock during the 30-day period preceding the date in
question on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system then in use, or if no such quotations are
available, the Fair Market Value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in good faith; and
(b) in the case of stock of any class of securities not traded on any securities
exchange or in the over-the-counter market or in the case of property other than
cash or stock, the Fair Market Value of such securities or property on the date
in question as determined by a majority of the Continuing Directors in good
faith. If the stock is paired for purposes of trading with that of any other
corporation, the Fair Market Value of the paired stock shall be determined
pursuant to the pairing or other agreement which provides for the determination
of the relative values of the stock of the Corporation and the stock of such
other corporation, after determining the Fair Market Value of the paired stock
as set forth above.
3.10. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration to be received" as used in Sections 2.2(a),
(b) and (c) shall include the shares of Common Stock and/or the shares of any
other class of outstanding Voting Stock retained by the holders of such shares.
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PART 4. DIRECTORS' DUTY TO DETERMINE CERTAIN FACTS
The majority of the Continuing Directors of the Corporation shall have
the power and duty to determine for the purpose of this Article Ninth, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine the applicability of the various provisions of this Article Ninth,
including (A) whether a person is an Interested Stockholder, (B) the number of
shares of Voting Stock beneficially owned by any person, (C) whether a person is
an Affiliate or Associate of another, (D) whether the requirements of Section
2.2 have been met with respect to any Business Combination, and (E) whether the
assets which are the subject of any Business Combination have, or the
consideration to be received for the issuance or transfer of securities by the
Corporation or any Subsidiary in any Business Combination has, an aggregate Fair
Market Value of $5,000,000 or more; and the good faith determination of a
majority of the Continuing Directors shall be conclusive and binding for all
purposes of this Article Ninth.
PART 5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED STOCKHOLDERS
Nothing contained in this Article Ninth shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
PART 6. AMENDMENT, REPEAL, INCONSISTENT PROVISIONS
Notwithstanding any other provisions of law or of this Certificate of
Incorporation or the by-laws of the Corporation which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the holders
of any particular class or series of securities which may be required by law or
by this Certificate of Incorporation, any proposal to amend or repeal, or adopt
any provisions inconsistent with, this Article Ninth of this Certificate of
Incorporation shall require for approval the affirmative vote of at least (a)
80% of the combined voting power of the then outstanding Shares of Voting Stock
and (b) a majority of the combined voting power of the then outstanding shares
of Voting Stock held by persons who are Disinterested Stockholders, provided
that the majority vote requirement of this clause (b) shall not be applicable if
the proposal is approved by the affirmative vote of not less than 90% of the
combined voting power of the then outstanding shares of Voting Stock.
TENTH:
(a) The number of directors shall be as provided in the by-laws. The
Board of Directors of the Corporation shall be divided into three classes,
designated Class I, Class II and Class III, such classes to be as nearly equal
in number as possible and to have the number provided in the by-laws. At the
annual meeting of stockholders in 1986, Directors of Class I shall be elected to
hold office for a term expiring at the next succeeding annual meeting, Directors
of Class II shall be elected to hold office for a term expiring at the second
succeeding annual meeting, and Directors of Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting. Thereafter at
each annual meeting of stockholders, directors shall be chosen for a term of
three years to succeed those whose terms then expire and shall hold office until
the third following annual meeting of stockholders and until the election of
their respective successors. Any vacancy on the Board of Directors of the
Corporation, whether arising through death, resignation or removal of a director
or through an increase in the number of directors of any class, shall be filled
by a majority vote of all the remaining directors. The term of office of any
director elected to fill such a vacancy shall expire at the expiration of the
term of office of directors of the class in which the vacancy occurred.
Notwithstanding any other provision of this Article, and except as otherwise
required by law, whenever the holders of any one or more series of Preferred
Stock or other securities of the Corporation shall have the right, voting
separately as a class, to elect one or more directors of the Corporation, the
term of office, the filling of vacancies and other features of such
directorships shall be governed by the terms of this Certificate of
Incorporation applicable thereto, and unless the terms of this Certificate of
Incorporation expressly provide otherwise, such directorships shall be in
addition to the number of directors provided in the by-laws and such directors
shall not be classified pursuant to this Article.
(b) Any action required or permitted to be taken by holders of stock of
the Corporation must be taken at a meeting of such holders and may not be taken
by consent in writing. The by-laws of the Corporation may be amended by the
stockholders only by the affirmative vote of at least 80% of the voting power of
the Corporation. Notwithstanding any other provision of law or of this
Certificate of Incorporation or the by-laws of the Corporation which might
otherwise permit a lesser vote or no vote, but in addition to any affirmative
vote of the holders of any particular class or series of securities which may be
required by law or by this Certificate of Incorporation, any proposal
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to amend or repeal, or adopt any provisions inconsistent with, this Article
Tenth shall require for approval the affirmative vote of at least 80% of the
voting power of the Corporation.
ELEVENTH:
The Board of Directors of the Corporation shall base the response of
this Corporation to any proposed Business Combination on the evaluation by the
Board of Directors of the Corporation of what is in the best interest of this
Corporation. In evaluating what is in the best interest of this Corporation, the
Board of Directors of the Corporation shall consider:
(a) THE BEST INTEREST OF THE STOCKHOLDERS. For this purpose, the Board
of Directors of the Corporation shall consider among other factors, not only the
consideration offered in the proposed Business Combination in relation to the
then current market price of this Corporation's stock, but also in relation to
the then current value of this Corporation in a freely negotiated transaction
and in relation to the then current estimate by the Board of Directors of the
future value of this Corporation as an independent entity; and
(b) Such other factors as the Board of Directors of the Corporation
determines to be relevant, including, among other factors, the social, legal and
economic effects on the communities in which this Corporation and its
subsidiaries operate and are located.
TWELFTH:
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as director.
Any repeal or modification of this Article shall not result in any
liability for a director with respect to any action or omission occurring prior
to such repeal or modification.
THIRTEENTH:
Section 13.1. RESTRICTIONS ON OWNERSHIP AND TRANSFER OF EQUITY STOCK.
(a) DEFINITIONS. For purposes of this Article Thirteenth and Article
Fourteenth the following terms shall have the meanings set forth below:
"Beneficial Ownership" shall mean, with respect to any Person,
ownership of shares of Equity Stock equal to the sum of (i) the shares of Equity
Stock directly or indirectly owned by such Person, (ii) the number of shares of
Equity Stock treated as owned directly or indirectly by such Person through the
application of the constructive ownership rules of Section 544 of the Internal
Revenue Code of 1986, as amended (the "Code"), as modified by Section
856(h)(1)(B) of the Code as if the Corporation were a real estate investment
trust (a "REIT") as defined in the Code, and (iii) the number of shares of
Equity Stock which such Person is deemed to beneficially own pursuant to Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); provided, however, that for the purposes of calculating the foregoing, no
share shall be counted more than once. The terms "Beneficial Owner,"
"Beneficially Owns" and "Beneficially Owned" shall have correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by
the Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section 13.2(d).
"Common Stock" shall mean the common stock, par value $.10 per share of
the Corporation.
"Constructive Ownership" shall mean ownership of shares of Equity Stock
by a Person who is or would be treated as a direct or indirect owner of such
shares of Equity Stock through the application of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
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"Equity Stock" shall mean the Common Stock, par value $.10 per share,
and the Preferred Stock, par value $.10 per share of the Corporation.
"Look-Through Entity" shall mean a Person that is either (i) a trust
described in Section 401(a) of the Code and exempt from tax under Section 501(a)
of the Code as modified by Section 856(h)(3) of the Code as if the Corporation
were a REIT or (ii) registered under the Investment Company Act of 1940.
"Look-Through Ownership Limit" shall mean, with respect to a class or
series of Equity Stock, 9.8% of the number of outstanding shares of such Equity
Stock.
"Market Price" on any date shall mean the average of the Closing Price
for the five consecutive Trading Days ending on such date. The "Closing Price"
on any date shall mean the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Equity Stock are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Equity Stock are listed or admitted to trading or, if the shares of Equity Stock
are not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the Nasdaq Stock
Market, Inc. or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if the shares of Equity
Stock are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker selected by the
Board of Directors of the Corporation making a market in the shares of Equity
Stock. In the case of Equity Stock that is paired, "Market Price" shall mean the
"Market Price" for paired shares multiplied by a fraction (expressed as a
percentage) determined by dividing the value for such Equity Stock most recently
determined under Section 14.2(c) by the value of a paired share most recently
determined under Section 14.2(c) (the "Valuation Percentage").
"Non-Transfer Event" shall mean an event (other than a purported
Transfer) that would (a) cause any Person (other than a Look-Through Entity) to
Beneficially Own or Constructively Own shares of Equity Stock in excess of the
Ownership Limit, (b) cause any Look-Through Entity to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Look-Through
Ownership Limit, (c) result in the capital stock of the Corporation being
beneficially owned (within the meaning of Section 856(a)(5) of the Code as if
the Corporation were a REIT) by fewer than 100 persons within the meaning of
Section 856(a)(5) of the Code as if the Corporation were a REIT, (d) result in
the Corporation being "closely held" within the meaning of Section 856(h) of the
Code as if the Corporation were a REIT, or (e) cause the Corporation to
Constructively Own 10% or more of the ownership interest in a tenant of the
Corporation's or a Subsidiary's real property within the meaning of Section
856(d)(2)(B) of the Code as if the Corporation were a REIT. Non-Transfer Events
include but are not limited to (i) the granting of any option or entering into
any agreement for the sale, transfer or other disposition of shares of Equity
Stock or (ii) the sale, transfer, assignment or other disposition of interests
in any Person or of any securities or rights convertible into or exchangeable
for shares of Equity Stock that results in changes in Beneficial Ownership or
Constructive Ownership of shares of Equity Stock.
"Ownership Limit" shall mean, with respect to any class or series of
Equity Stock, 9.25% of the number of outstanding shares of such class or series
of Equity Stock. For purposes of computing the percentage of shares of any class
or series of Equity Stock of the Corporation that is Beneficially Owned by any
Person, any shares of Equity Stock of the Corporation which are deemed to be
Beneficially Owned by such Person pursuant to Rule 13d-3 of the Exchange Act but
which are not outstanding shall be deemed to be outstanding.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 13.2(h).
"Person" shall mean (a) an individual or any corporation, partnership,
estate, trust, association, private foundation, joint stock company, limited
liability company or any other entity and (b) a "group" as that term is defined
for purposes of Rule 13d-5 of the Exchange Act.
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"Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who is prevented from being or becoming the
owner of record title to shares of Equity Stock by the provisions of Section
13.2(a).
"Realty" shall mean Meditrust Corporation, a Delaware corporation.
"Realty Common Stock" shall mean the common stock, par value $.10 per
share of Realty.
"Realty Equity Stock" shall mean Realty Common Stock and preferred
stock of any designation, par value $.10 per share of Realty.
"Restriction Termination Date" shall mean the first day on which the
Board of Directors of Realty determines that it is no longer in the best
interests of Realty to attempt to, or continue to, qualify under the Code as a
REIT.
"Trading Day" shall mean a day on which the principal national
securities exchange on which shares of Equity Stock are listed or admitted to
trading is open for the transaction of business or, if shares of Equity Stock
are not listed or admitted to trading on any national securities exchange, any
day other than a Saturday, a Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law or executive order to
close.
"Transfer" (as a noun) shall mean any sale, transfer, gift, assignment,
devise or other disposition of shares of Equity Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise. "Transfer" (as a verb) shall have the correlative
meaning.
"Trust" shall mean any separate trust created and administered in
accordance with the terms of Section 13.2, for the exclusive benefit of any
Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner designated by the Corporation to act as
trustee of any Trust, or any successor trustee thereof. The Trustee shall be
designated by the Corporation and Realty in accordance with Article Fourteenth.
(b) RESTRICTION ON OWNERSHIP AND TRANSFER.
(i) Except as provided in Section 13.1(d), until the
Restriction Termination Date, (i) no Person (other than a Look-Through Entity)
shall Beneficially Own or Constructively Own outstanding shares of Equity Stock
in excess of the Ownership Limit and no Look-Through Entity shall Beneficially
Own or Constructively Own outstanding shares of Equity Stock in excess of the
Look-Through Ownership Limit, (ii) any Transfer (whether or not the result of a
transaction entered into through the facilities of the New York Stock Exchange)
that, if effective, would result in any Person (other than a Look-Through
Entity) Beneficially Owning or Constructively Owning shares of Equity Stock in
excess of the Ownership Limit shall be void ab initio as to the Transfer of that
number of shares of Equity Stock which would be otherwise Beneficially Owned or
Constructively Owned by such Person in excess of the Ownership Limit and the
intended transferee shall acquire no rights in such shares of Equity Stock, and
(iii) any Transfer (whether or not the result of a transaction entered into
through the facilities of the New York Stock Exchange) that, if effective, would
result in any Look-Through Entity Beneficially Owning or Constructively Owning
shares of Equity Stock in excess of the Look-Through Ownership Limit shall be
void ab initio as to the Transfer of that number of shares of Equity Stock which
would be otherwise Beneficially Owned or Constructively Owned by such
Look-Through Entity in excess of the Look- Through Ownership Limit and the
intended transferee shall acquire no rights in such shares of Equity Stock.
(ii) Until the Restriction Termination Date, any Transfer
(whether or not the result of a transaction entered into through the facilities
of the New York Stock Exchange) that, if effective, would result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code if the Corporation were a REIT shall be void ab initio as to the Transfer
of that number of shares of Equity Stock that would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code as if the
Corporation were a REIT, and the intended transferee shall acquire no rights in
such shares of Equity Stock.
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(iii) Until the Restriction Termination Date, any Transfer
(whether or not the result of a transaction entered into through the facilities
of the New York Stock Exchange) of shares of Equity Stock that, if effective,
would cause the Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the real property of the Corporation or any direct or
indirect subsidiary (whether a corporation, partnership, limited liability
company or other entity) of the Corporation (a "Subsidiary"), within the meaning
of Section 856(d)(2)(B) of the Code as if the Corporation were a REIT, shall be
void ab initio as to the Transfer of that number of shares of Equity Stock that
would cause the Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the real property of the Corporation or a Subsidiary
within the meaning of Section 856(d)(2)(B) of the Code as if the Corporation
were a REIT, and the intended transferee shall acquire no rights in such shares
of Equity Stock.
(iv) Until the Restriction Termination Date, any Transfer
(whether or not the result of a transaction entered into through the facilities
of the New York Stock Exchange) that, if effective, would result in the shares
of capital stock of the Corporation being beneficially owned (within the meaning
of Section 856(a)(5) of the Code as if the Corporation were a REIT) by fewer
than 100 persons within the meaning of Section 856(a)(5) of the Code as if the
Corporation were a REIT shall be void ab initio and the intended transferee
shall acquire no rights in such shares of Equity Stock.
(c) OWNERS REQUIRED TO PROVIDE INFORMATION. Until the Restriction
Termination Date:
(i) Every Beneficial Owner or Constructive Owner of more than
5%, or such lower percentages as required pursuant to regulations under the Code
as if the Corporation were a REIT, of the outstanding shares of any class or
series of Equity Stock of the Corporation shall, within 30 days after January 1
of each year, provide to the Corporation a written statement or affidavit
stating the name and address of such Beneficial Owner or Constructive Owner, the
number of shares of Equity Stock Beneficially Owned or Constructively Owned, and
a description of how such shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Corporation such additional information
as the Corporation may request to ensure compliance with the restrictions in
this Section 13.1.
(ii) Each Person who is a Beneficial Owner or Constructive
Owner of shares of Equity Stock and each Person (including the stockholder of
record) who is holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a written statement or
affidavit stating such information as the Corporation may request in order to
determine the Corporation's status as a REIT (as if the Corporation were a REIT)
and to ensure compliance with the Ownership Limit or the Look-Through Ownership
Limit, as the case may be.
(d) EXCEPTION. The Board of Directors of the Corporation, upon receipt
of a ruling from the Internal Revenue Service or an opinion of counsel in each
case to the effect that the restrictions contained in subsections (b)(ii)
through (iv) of this Section 13.1 would not be violated, may exempt a Person
from the Ownership Limit or Look-Through Ownership Limit, provided that (A) the
Board of Directors of the Corporation obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that no
Person's Beneficial Ownership or Constructive Ownership of shares of Equity
Stock will (i) result in the capital stock of the Corporation being beneficially
owned (within the meaning of Section 856(a)(5) of the Code as if the Corporation
were a REIT) by fewer than 100 persons within the meaning of Section 856(a)(5)
of the Code as if the Corporation were a REIT, (ii) result in the Corporation
being "closely held" within the meaning of Section 856(h) of the Code as if the
Corporation were a REIT or (iii) cause the Corporation to Constructively Own 10%
or more of the ownership interests in the real property of a tenant of the
Corporation or a Subsidiary within the meaning of Section 856(d)(2)(B) of the
Code as if the Corporation were a REIT and (B) such Person agrees in writing
that any violation or attempted violation of the Ownership Limit or Look-Through
Ownership Limit will result in the conversion of such shares into shares of
Excess Stock pursuant to Section 13.2(a).
(e) NEW YORK STOCK EXCHANGE TRANSACTIONS. Notwithstanding any provision
contained herein to the contrary, nothing in this Certificate of Incorporation
shall preclude the settlement of any transaction entered into through the
facilities of the New York Stock Exchange.
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Section 13.2. EXCESS STOCK.
(a) CONVERSION INTO EXCESS STOCK.
(i) If, notwithstanding the other provisions contained in this
Article Thirteenth, prior to the Restriction Termination Date, there is a
purported Transfer or Non-Transfer Event such that any Person (other than a
Look-Through Entity) would either Beneficially Own or Constructively Own shares
of Equity Stock in excess of the Ownership Limit or such that any Person that is
a Look-Through Entity would either Beneficially Own or Constructively Own shares
of Equity Stock in excess of the Look-Through Ownership Limit, then, (i) except
as otherwise provided in Section 13.1(d), the purported transferee shall be
deemed to be a Prohibited Owner and shall acquire no right or interest (or, in
the case of a Non-Transfer Event, the Person holding record title to the shares
of Equity Stock Beneficially Owned or Constructively Owned by such Beneficial
Owner or Constructive Owner, shall cease to own any right or interest) in such
number of shares of Equity Stock which would cause such Beneficial Owner or
Constructive Owner to Beneficially Own or Constructively Own shares of Equity
Stock in excess of the Ownership Limit or the Look-Through Ownership Limit, as
the case may be, (ii) such number of shares of Equity Stock in excess of the
Ownership Limit or the Look- Through Ownership Limit, as the case may be,
(rounded up to the nearest whole share) shall be automatically converted into an
equal number of shares of Excess Stock and transferred to a Trust in accordance
with Section 13.2(d) and (iii) the Prohibited Owner shall submit such number of
shares of Equity Stock to the Corporation for registration in the name of the
Trustee of the Trust. Such conversion into Excess Stock and transfer to a Trust
shall be effective as of the close of trading on the Trading Day prior to the
date of the Transfer or Non- Transfer Event, as the case may be.
(ii) If, notwithstanding the other provisions contained in
this Article Thirteenth, prior to the Restriction Termination Date, there is a
purported Transfer or Non-Transfer Event that, if effective, would (i) result in
the capital stock of the Corporation being beneficially owned (within the
meaning of Section 856(a)(5) of the Code as if the Corporation were a REIT) by
fewer than 100 persons within the meaning of Section 856(a)(5) of the Code as if
the Corporation were a REIT, (ii) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code as if the Corporation were a
REIT or (iii) cause the Corporation to Constructively Own 10% or more of the
ownership interest in a tenant of the Corporation's or a Subsidiary's real
property within the meaning of Section 856(d)(2)(B) of the Code as if the
Corporation were a REIT, then (x) the purported transferee shall be deemed to be
a Prohibited Owner and shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the Person holding record title of the shares of Equity
Stock with respect to which such Non-Transfer Event occurred, shall be deemed to
be a Prohibited Owner and shall cease to own any right or interest) in such
number of shares of Equity Stock, the ownership of which by such purported
transferee or record holder would (A) result in the shares of capital stock of
the Corporation being beneficially owned (within the meaning of Section
856(a)(5) of the Code as if the Corporation were a REIT) by fewer than 100
persons within the meaning of Section 856(a)(5) of the Code as if the
Corporation were a REIT, (B) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code as if the Corporation were a
REIT or (C) cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's or a Subsidiary's real
property within the meaning of Section 856(d)(2)(B) of the Code as if the
Corporation were a REIT, (y) such number of shares of Equity Stock (rounded up
to the nearest whole share) shall be automatically converted into an equal
number of shares of Excess Stock and transferred to a Trust in accordance with
Section 13.2(d) and (z) the Prohibited Owner shall submit such number of shares
of Equity Stock to the Corporation for registration in the name of the Trustee
of the Trust. Such conversion into Excess Stock and transfer to a Trust shall be
effective as of the close of trading on the Trading Day prior to the date of the
Transfer or Non-Transfer Event, as the case may be.
(iii) Upon the occurrence of such a conversion of shares of
any class or series of Equity Stock into an equal number of shares of Excess
Stock, such shares of Equity Stock shall be automatically retired and canceled,
without any action required by the Board of Directors of the Corporation, and
shall thereupon be restored to the status of authorized but unissued shares of
the particular class or series of Equity Stock from which such Excess Stock was
converted and may be reissued by the Corporation as that particular class or
series of Equity Stock.
(iv) Upon the conversion into Excess Shares (pursuant to the
Certificate of Incorporation of Realty) of any shares of any class or series of
Realty stock that are paired with a class or series of shares of Equity Stock,
pursuant to Article Fourteenth, such shares of Equity Stock shall likewise be
converted into an equal number of shares of Excess Stock and be paired with such
converted shares of Realty, pursuant to Article Fourteenth.
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(b) REMEDIES FOR BREACH. If the Corporation, or its designees, shall at
any time determine in good faith that a Transfer has taken place in violation of
Section 13.1(b) or that a Person intends to acquire or has attempted to acquire
Beneficial Ownership or Constructive Ownership of any shares of Equity Stock in
violation of Section 13.1(b), the Corporation shall take such action as it deems
advisable to refuse to give effect to or to prevent such Transfer or
acquisition, including, but not limited to, refusing to give effect to such
Transfer on the stock transfer books of the Corporation or instituting
proceedings to enjoin such Transfer or acquisition.
(c) NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts
to acquire shares of Equity Stock in violation of Section 13.1(b), or any Person
who owns shares of Equity Stock that were converted into shares of Excess Stock
and transferred to a Trust pursuant to subsections (a) and (d) of this Section
13.2, shall immediately give written notice to the Corporation of such event and
shall provide to the Corporation such other information as the Corporation may
request in order to determine the effect, if any, of such Transfer or Non-
Transfer Event, as the case may be, on the Corporation's status as a REIT
(determined as if the Corporation were a REIT).
(d) OWNERSHIP IN TRUST. Upon any Transfer or Non-Transfer Event that
results in Excess Stock pursuant to Section 13.2(a), such Excess Stock shall be
automatically transferred to a Trust to be held for the exclusive benefit of the
Beneficiary. The Corporation and Realty shall name a Beneficiary for each Trust.
Any conversion of shares of Equity Stock into shares of Excess Stock and
transfer to a Trust shall be effective as of the close of trading on the Trading
Day prior to the date of the Transfer or Non-Transfer Event that results in the
conversion. Shares of Excess Stock so held in trust shall remain issued and
outstanding shares of stock of the Corporation.
(e) DIVIDEND RIGHTS. Each share of Excess Stock shall be entitled to
the same dividends and distributions (as to both timing and amount) as may be
declared by the Board of Directors of the Corporation as shares of the class or
series of Equity Stock from which such Excess Stock was converted. The Trustee,
as record holder of the shares of Excess Stock, shall be entitled to receive all
dividends and distributions and shall hold all such dividends or distributions
in trust for the benefit of the Beneficiary. The Prohibited Owner with respect
to such shares of Excess Stock shall repay to the Trust the amount of any
dividends or distributions received by it (i) that are attributable to any
shares of Equity Stock that have been converted into shares of Excess Stock and
(ii) the record date of which was on or after the date that such shares were
converted into shares of Excess Stock. The Corporation shall take all measures
that it determines reasonably necessary to recover the amount of any such
dividend or distribution paid to a Prohibited Owner, including, if necessary,
withholding any portion of future dividends or distributions payable on shares
of Equity Stock Beneficially Owned or Constructively Owned by the Person who,
but for the provisions of this Article Thirteenth, would Constructively Own or
Beneficially Own the shares of Equity Stock that were converted into shares of
Excess Stock; and, as soon as reasonably practicable following the Corporation's
receipt or withholding thereof, shall pay over to the Trust for the benefit of
the Beneficiary the dividends so received or withheld, as the case may be.
(f) RIGHTS UPON LIQUIDATION. In the event of any voluntary or
involuntary liquidation of, or winding up of, or any distribution of the assets
of, the Corporation, each holder of shares of Excess Stock shall be entitled to
receive, ratably with each other holder of shares of Equity Stock of the same
class or series from which the Equity Stock was converted, that portion of the
assets of the Corporation that is available for distribution to the holders of
such class or series of Equity Stock. The Trust shall distribute to the
Prohibited Owner the amounts received upon such liquidation, dissolution, or
winding up, or distribution; provided, however, that the Prohibited Owner shall
not be entitled to receive amounts in excess of, in the case of a purported
Transfer in which the Prohibited Owner gave value for shares of Equity Stock and
which Transfer resulted in the conversion of the shares into shares of Excess
Stock, the price per share, if any, such Prohibited Owner paid for the shares of
Equity Stock (which, in the case of Equity Stock that is paired, shall equal the
price per paired share multiplied by the most recent Valuation Percentage) and,
in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner
did not give value for such shares (e.g., if the shares were received through a
gift or devise) and which Non-Transfer Event or Transfer, as the case may be,
resulted in the conversion of the shares into shares of Excess Stock, the price
per share equal to the Market Price on the date of such Non-Transfer Event or
Transfer. Any remaining amount in such Trust shall be distributed to the
Beneficiary.
(g) VOTING RIGHTS. Each share of Excess Stock shall entitle the holder
to the number of votes the holder would have, if such share of Excess Stock was
a share of Equity Stock of the same class or series from which such Excess Stock
was converted, on all matters submitted to a vote at any meeting of
stockholders. The holders of shares of Excess Stock converted from the same
class or series of Equity Stock shall vote together with the holders of such
Equity Stock as a single class on all such matters. The Trustee, as record
holder of the Excess Stock, shall be entitled
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to vote all shares of Excess Stock. Any vote by a Prohibited Owner as a
purported holder of shares of Equity Stock prior to the discovery by the
Corporation that the shares of Equity Stock have been converted into shares of
Excess Stock shall, subject to applicable law, be rescinded and shall be void ab
initio with respect to such shares of Excess Stock, and the Prohibited Owner
shall be deemed to have given, as of the close of trading on the Trading Day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the conversion of the shares of Equity Stock into shares of Excess Stock and
the transfer of such shares to a Trust pursuant to subsections (a) and (d) of
this Section 13.2, an irrevocable proxy to the Trustee to vote the shares of
Excess Stock in the manner in which the Trustee, in its sole and absolute
discretion, desires.
(h) DESIGNATION OF PERMITTED TRANSFEREE.
(i) The Trustee shall have the exclusive and absolute right to
designate one or more Permitted Transferees of any and all shares of Excess
Stock if the Corporation fails to exercise its option with respect to such
shares pursuant to Section 13.2(j) hereof within the time period set forth
therein. As soon as practicable, but in an orderly fashion so as not to
materially adversely affect the Market Price of the shares of Excess Stock, the
Trustee shall designate any one or more Persons as Permitted Transferees;
provided, however, that (i) the Permitted Transferee so designated purchases for
valuable consideration (whether in a public or private sale) the shares of
Excess Stock (which, in the case of paired Excess Stock, shall be determined
based on the Valuation Percentage) and (ii) the Permitted Transferee so
designated may acquire such shares of Excess Stock without violating any of the
restrictions set forth in Section 13.1(b) and without such acquisition resulting
in the conversion of the shares of Equity Stock so acquired into shares of
Excess Stock and the transfer of such shares to a Trust pursuant to subsections
(a) and (d) of this Section 13.2.
(ii) Upon the designation by the Trustee of a Permitted
Transferee in accordance with the provisions of this Section 13.2(h), the
Trustee shall cause to be transferred to the Permitted Transferee that number of
shares of Excess Stock acquired by the Permitted Transferee. Upon such transfer
of the shares of Excess Stock to the Permitted Transferee, such shares of Excess
Stock shall be automatically converted into an equal number of shares of Equity
Stock of the same class and series from which such Excess Stock was converted.
Upon the occurrence of such a conversion of shares of Excess Stock into an equal
number of shares of Equity Stock, such shares of Excess Stock shall be
automatically retired and canceled, without any action required by the Board of
Directors of the Corporation, and shall thereupon be restored to the status of
authorized but unissued shares of Excess Stock and may be reissued by the
Corporation as Excess Stock.
(iii) The Trustee shall (i) cause to be recorded on the stock
transfer books of the Corporation that the Permitted Transferee is the holder of
record of such number of shares of Equity Stock, and (ii) distribute to the
Beneficiary any and all amounts held with respect to the shares of Excess Stock
after making payment to the Prohibited Owner pursuant to Section 13.2(i).
(iv) If the Transfer of shares of Excess Stock to a purported
Permitted Transferee shall violate any of the transfer restrictions set forth in
Section 13.1(b), such Transfer shall be void ab initio as to that number of
shares of Excess Stock that cause the violation of any such restriction when
such shares are converted into shares of Equity Stock (as described in
subsection (h)(ii) above) and the purported Permitted Transferee shall be deemed
to be a Prohibited Owner and shall acquire no rights in such shares of Excess
Stock or Equity Stock. Such shares of Equity Stock shall be automatically
reconverted into Excess Stock and transferred to the Trust from which they were
originally Transferred. Such conversion and transfer to the Trust shall be
effective as of the close of trading on the Trading Day prior to the date of the
Transfer to the purported Permitted Transferee and the provisions of this
Article Thirteenth shall apply to such shares, including, without limitation,
the provisions of subsections (h) through (j) of this Section 13.2 with respect
to any future Transfer of such shares by the Trust.
(i) COMPENSATION TO RECORD HOLDER OF SHARES OF EQUITY STOCK THAT
ARE CONVERTED INTO SHARES OF EXCESS STOCK. Any Prohibited Owner shall be
entitled (following discovery of the shares of Excess Stock and subsequent
designation of the Permitted Transferee in accordance with Section 13.2(h) or
following the acceptance of the offer to purchase such shares in accordance with
Section 13.2(j) to receive from the Trustee following the sale or other
disposition of such shares of Excess Stock the lesser of (i)(a) in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of Equity
Stock and which Transfer resulted in the conversion of such shares into shares
of Excess Stock, the price per share, if any, such Prohibited Owner paid for the
shares of Equity Stock (which, in the case of paired Excess Stock, shall be
determined based on the Valuation Percentage) and (b) in the case
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of a Non- Transfer Event or Transfer in which the Prohibited Owner did not give
value for such shares (e.g., if the shares were received through a gift or
devise) and which Non-Transfer Event or Transfer, as the case may be, resulted
in the conversion of such shares into shares of Excess Stock, the price per
share equal to the Market Price on the date of such Non-Transfer Event or
Transfer or (ii) the price per share (which, in the case of paired Excess Stock,
shall be determined based on the Valuation Percentage) received by the Trustee
from the sale or other disposition of such shares of Excess Stock in accordance
with this Section 13.2(i) or Section 13.2(j). Any amounts received by the
Trustee in respect of such shares of Excess Stock and in excess of such amounts
to be paid the Prohibited Owner pursuant to this Section 13.2(i) shall be
distributed to the Beneficiary in accordance with the provisions of Section
13.2(h). Each Beneficiary and Prohibited Owner shall waive any and all claims
that it may have against the Trustee and the Trust arising out of the
disposition of shares of Excess Stock, except for claims arising out of the
gross negligence or willful misconduct of, or any failure to make payments in
accordance with this Section 13.2 by, such Trustee or the Corporation.
(j) PURCHASE RIGHT IN EXCESS STOCK. Shares of Excess Stock shall be
deemed to have been offered for sale to the Corporation or its designee, at a
price per share equal to the lesser of (i) the price per share (which, in the
case of paired Excess Stock, shall be determined based on the Valuation
Percentage) in the transaction that created such shares of Excess Stock (or, in
the case of devise, gift or Non-Transfer Event, the Market Price at the time of
such devise, gift or Non-Transfer Event) or (ii) the Market Price on the date
the Corporation, or its designee, accepts such offer. The Corporation shall have
the right to accept such offer for a period of 90 days following the later of
(a) the date of the Non- Transfer Event or purported Transfer which results in
such shares of Excess Stock or (b) the date on which the Corporation determines
in good faith that a Transfer or Non-Transfer Event resulting in shares of
Excess Stock previously has occurred, if the Corporation does not receive a
notice of such Transfer or Non-Transfer Event pursuant to Section 13.2(c).
Section 13.3. REMEDIES NOT LIMITED. Nothing contained in this Article
Thirteenth shall limit the authority of the Corporation to take such other
action as it deems necessary or advisable to protect the Corporation and the
interests of its stockholders by preservation of the Realty's status as a REIT
and to ensure compliance with the requirements of Article Fourteenth and Section
13.1.
Section 13.4. AMBIGUITY. In the case of an ambiguity in the application
of any of the provisions of this Article Thirteenth, including any definition
contained in Section 13.1(a), the Board of Directors of the Corporation shall
have the power to determine the application of the provisions of this Article
Thirteenth with respect to any situation based on the facts known to it.
Section 13.5. LEGEND. Each certificate for shares of Equity Stock
shall bear the following legend:
"The shares of Meditrust Corporation and Meditrust Operating Company
represented by this combined certificate are subject to restrictions in the
respective Certificates of Incorporation of each company which prohibit (a) any
Person (other than a Look-Through Entity) (as such terms are defined in the
respective Certificates of Incorporation of each company) from Beneficially
Owning or Constructively Owning (as these terms are defined in the respective
Certificates of Incorporation of each company) in excess of 9.25% of the number
of outstanding shares of any class or series of Equity Stock (as that term is
defined in the respective Certificates of Incorporation of each company), (b)
any Look-Through Entity from Beneficially Owning or Constructively Owning in
excess of 9.8% of the number of outstanding shares of any class or series of
Equity Stock, (c) any Person from acquiring or maintaining any ownership
interest in the stock of either company that is inconsistent with (i) the
requirements of the Internal Revenue Code of 1986, as amended, pertaining to
real estate investment trusts or (ii) Article Thirteenth of the respective
Certificates of Incorporation of each company and (d) any transfer of shares of
any class or series of Equity Stock of either company that are paired pursuant
to Article Fourteenth of the respective Certificates of Incorporation of each
company, except in combination with an equal number of shares of the other
company in accordance with the respective Certificates of Incorporation of each
company, copies of which are on file with the transfer agent named on the face
hereof, and the holder of this certificate by his acceptance hereof consents to
be bound by such restrictions.
Meditrust Corporation and Meditrust Operating Company will furnish
without charge to each stockholder who so requests a copy of the relevant
provisions of the respective Certificates of Incorporation of each company, and
a copy of the provisions setting forth the designations, preferences, privileges
and rights of each class of stock or series thereof that each company is
authorized to issue and the qualifications, limitations and restrictions of such
preferences and/or
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rights. Any such request may be addressed to the Secretary of either company or
to the transfer agent named on the face hereof."
Section 13.6. SEVERABILITY. Each provision of this Article Thirteenth
shall be severable and an adverse determination as to any such provision shall
be in no way affect the validity of any other provision.
FOURTEENTH:
Section 14.1 TRANSFER OF SHARES. Until the restrictions and limitations
set forth in this Article Fourteenth shall have been terminated in the manner
hereinafter provided:
(a) Except as provided herein, no shares of Equity Stock shall be
transferable, and they shall not be transferred on the books of the Corporation,
unless (i) a simultaneous transfer is made by the same transferor to the same
transferee, or (ii) such transferor has previously arranged with Realty for the
transfer to the transferee, of the same number of shares of Realty Equity Stock,
except that the Corporation may transfer Equity Stock acquired by it from Realty
to a person to whom Realty simultaneously issues the same number of Equity
Stock.
(b) Each certificate evidencing ownership of shares of Realty Equity
Stock shall be deemed to evidence, in addition, the same number of shares of
Equity Stock.
(c) Notwithstanding the foregoing, any shares of Equity Stock issued
after the date of the filing of this Certificate, which are issued on an
unpaired basis by the Corporation pursuant to the terms of Section 14.7 of this
Certificate, may be transferred without compliance with Section 14.1(a) and may
be evidenced solely by a certificate which is not deemed to evidence a like
number of shares of Realty Equity Stock as required by Section 14.1(b).
Section 14.2 ISSUANCE OF SHARES. Until such time as the pairing of the
outstanding shares of Common Stock and the outstanding shares of Realty Common
Stock in accordance with this Article Fourteenth (the "Pairing" and each paired
share a "Paired Share") shall have been terminated in the manner herein
provided:
(a) Except as provided herein, the Corporation shall not issue or agree
to issue any shares of Equity Stock to any person except Realty unless effective
provision has been made for the simultaneous issuance or transfer to the same
person of the same number of shares of Realty Equity Stock and for the pairing
of such shares of the Corporation and Realty and unless the Corporation and
Realty have agreed on the manner and basis of allocating the consideration to be
received upon such issuance between the Corporation and Realty or, if allocation
of such consideration between them is not practicable, on the payment by one
company to the other of cash or other consideration in lieu thereof. Any such
allocation or payment shall be based on the respective fair market values of
Equity Stock and Realty Equity Stock.
(b) As desired from time to time, but not less often than once each
calendar year, the Corporation and Realty shall jointly arrange for the
determination of the fair market value as of a date specified by the Corporation
and Realty (the "valuation date") of the Common Stock outstanding on the
valuation date. The amount so determined (the "fair market value of the Common
Stock") shall thereafter be used in all calculations pursuant to this Section
14.2 until a new determination is made. The fair market value of each share of
Realty Common Stock shall be determined by subtracting the fair market value of
one share of Common Stock from the average of the closing sale prices of a
Paired Share over the principal exchange on which the Paired Shares are listed,
or if not listed, then the average of the last bid prices in the
over-the-counter market during the ten business days prior to any date of
determination of the fair market value of Realty Common Stock.
Section 14.3. STOCK CERTIFICATES; TRANSFER AGENTS AND REGISTRARS. Until
such time as the Pairing shall have been terminated in the manner herein
provided, except in the case of shares of Equity Stock issued to Realty or
Equity Stock issued pursuant to Section 14.7, each certificate which is issued
evidencing shares of Equity Stock shall be printed "back- to-back" with a
certificate evidencing the same number of Realty Equity Stock, shall bear a
conspicuous legend (on the face thereof) referring to the restrictions on the
transfer of the shares evidenced thereby contained in this Certificate and the
by-laws of the Corporation, and shall be in a form which satisfies the
requirements of the laws of Delaware and which has been approved by the Board of
Directors of the Corporation.
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Section 14.4. STOCK DIVIDENDS, RECLASSIFICATIONS, ETC. Until such time
as the Pairing shall have been terminated in the manner herein provided, the
Corporation shall not declare or pay any stock dividend consisting in whole or
in part of Equity Stock, issue any rights or warrants to purchase any shares of
Equity Stock, or subdivide, combine or otherwise reclassify the shares of Equity
Stock, unless Realty simultaneously takes the same or equivalent action with
respect to the Realty Equity Stock, to the end that the outstanding Equity Stock
and the outstanding shares of Realty Equity Stock will at all times be
effectively paired on a one-for-one basis as contemplated herein.
Section 14.5. SHARES IN EXCESS OF THE OWNERSHIP LIMIT OR IN VIOLATION
OF THE TRANSFER RESTRICTIONS; DESIGNATION OF TRUSTEE AND BENEFICIARIES. Until
such time as the Board of Directors of the Corporation determines that it is no
longer in the best interests of the Corporation to cooperate with Realty to
qualify under the Code as a REIT:
(a) Upon the conversion of a share of any class or series of Equity
Stock of the Corporation into a share of Excess Stock of the Corporation in
accordance with the provisions of Article Thirteenth, if such share of Equity
Stock was paired prior to its conversion into Excess Stock, the corresponding
paired share of that same class or series of Equity Stock of Realty shall be
simultaneously converted into a share of Excess Stock of Realty; such shares of
Excess Stock of Realty and the Corporation shall be paired and shall be
simultaneously transferred to a Trust.
(b) Upon the conversion of a share of Excess Stock of the Corporation
into a share of Equity Stock of the Corporation of the same class or series from
which such Excess Stock was converted in accordance with the provisions of
Article Thirteenth, if such share of Excess Stock was paired prior to its
conversion from Equity Stock into Excess Stock, the corresponding paired share
of Excess Stock of Realty shall be simultaneously converted into a share of
Equity Stock of Realty of the same class or series from which such Excess Stock
was converted and such shares of Equity Stock shall be paired.
(c) With respect to an offer made by a Trust pursuant to Article
Thirteenth to the Corporation to purchase shares of Excess Stock from a Trust
pursuant to Article Thirteenth, in the case of shares of Excess Stock that are
paired, the Corporation shall accept such offer with respect to its shares of
Excess Stock without the agreement of Realty to accept such offer with respect
to the corresponding paired shares of its Excess Stock.
(d) The Trustee of each Trust shall be designated by mutual agreement
of the Board of Directors of the Corporation and the Board of Directors of
Realty.
(e) The Beneficiary with respect to each Trust shall be designated by
mutual agreement of the Board of Directors of the Corporation and the Board of
Directors of Realty.
(f) At such time that the Board of Directors of Realty no longer deems
it in the best interests of Realty to attempt to, or continue to, qualify under
the Code as a REIT, the Ownership Limit and the Transfer Restrictions shall
cease to have effect, as provided in Article Thirteenth.
Section 14.7. UNPAIRED SHARES.
(a) Shares of capital stock of any class or series other than Common
Stock, irrespective of whether such shares are convertible into Paired Shares,
may be issued by the Corporation to any person without effective provision for
the simultaneous issuance or transfer to the same person of the same number of
shares of that same class or series of capital stock of Realty and without
effective provision for the pairing of such shares of capital stock of the
Corporation and Realty, as the Board of Directors of the Corporation shall in
its sole discretion determine (any such shares of capital stock of any class or
series issued by the Corporation pursuant to this Section 14.7 are referred to
herein as "Unpaired Shares").
(b) Unpaired Shares may be transferred on the books of the Corporation
without a simultaneous transfer to the same transferee of any shares of any
other class or series of capital stock of Realty.
Section 14.8. MERGER, SALE OF ASSETS, ETC. Until such time as the
Pairing shall have been terminated in the manner provided herein, the
Corporation will not be a party to any merger, consolidation, sale of assets,
liquidation or other form or reorganization pursuant to which shares of Common
Stock are converted, redeemed, exchanged or otherwise changed unless Realty is
also a party to such transaction.
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Section 14.9. WAIVER AND TERMINATION. The Board of Directors of the
Corporation is hereby authorized to waive, or repeal or make inapplicable the
restrictions and limitations set forth in this Article Fourteenth in its
entirety or in any provision of this Article Fourteenth.
Section 14.10. SEVERABILITY. Each provision of this Article Fourteenth
shall be severable and an adverse determination as to any provision shall in no
way affect the validity of any other provision.
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CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
JUNIOR PARTICIPATING PREFERRED STOCK
I. DESIGNATION AND AMOUNT
The shares of such series shall be designated as "Junior Participating
Preferred Stock" (the "Junior Preferred Stock") and the number of shares
constituting the Junior Preferred Stock shall be 200,000. Such number of shares
may be increased or decreased by resolution of the Board of Directors of the
Corporation; provided, that no decrease shall reduce the number of shares of
Junior Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Junior
Preferred Stock.
II. DIVIDENDS AND DISTRIBUTIONS
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Junior
Preferred Stock with respect to dividends, the holders of shares of Junior
Preferred Stock, in preference to the holders of Common Stock, par value $.10
per share (the "Common Stock"), of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of March, June, September
and December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Junior Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock (by reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Junior Preferred Stock. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders of shares of Junior Preferred Stock were entitled immediately prior to
such event under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Junior Preferred Stock as provided in paragraph (A) of this Section immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Junior
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Junior Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Junior Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors of the Corporation may fix a record date for
the determination of holders of shares of Junior Preferred Stock entitled to
receive payment of a dividend or
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distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
III. VOTING RIGHTS
The holders of shares of Junior Preferred Stock shall have the
following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Junior Preferred Stock shall entitle the holder thereof to 100 votes on
all matters submitted to a vote of the stockholders of the Corporation.
(B) Except as otherwise provided herein, in any other Certificate of
Designation creating a series of Preferred Stock or any similar stock, or by
law, the holders of shares of Junior Preferred Stock and the holders of shares
of Common Stock and any other capital stock of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C) Except as set forth herein, in the Corporation's Certificate of
Incorporation or as otherwise provided by law, holders of Junior Preferred Stock
shall have no voting rights.
IV. CERTAIN RESTRICTIONS
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Junior Preferred Stock as provided in Section II are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Junior Preferred Stock outstanding shall have been
paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Junior Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Junior
Preferred Stock, except dividends paid ratably on the Junior Preferred Stock and
all such parity stock on which dividends are payable or in arrears in proportion
to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Junior Preferred Stock, provided
that the Corporation may at any time redeem, purchase or otherwise acquire
shares of any such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Junior Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Junior Preferred Stock, or any shares of stock ranking on a parity
with the Junior Preferred Stock, except in accordance with a purchase offer made
in writing or by publication (as determined by the Board of Directors of the
Corporation) to all holders of such shares upon such terms as the Board of
Directors of the Corporation, after consideration of the respective annual
dividend rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section IV
purchase or otherwise acquire such shares at such time and in such manner.
V. REACQUIRED SHARES
Any shares of Junior Preferred Stock purchased or otherwise acquired by
the Corporation in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued as
part of a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Certificate of Incorporation,
19
<PAGE>
in any other Certificate of Designations creating a series of Preferred Stock or
any similar stock or as otherwise required by law.
VI. LIQUIDATION, DISSOLUTION OR WINDING UP
Upon any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Junior Preferred Stock unless, prior thereto, the holders of shares of Junior
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Junior
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Junior Preferred Stock, except distributions made ratably on the Junior
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Junior Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
VII. CONSOLIDATION, MERGER, ETC.
In case the Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case each share of Junior Preferred Stock shall at
the same time be similarly exchanged or changed into an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount of stock, securities, cash and/or any other property
(payable in kind), as the case may be, into which or for which each share of
Common Stock is changed or exchanged. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Junior
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
VIII. REDEMPTION
The shares of Junior Preferred Stock shall not be redeemable.
IX. RANK
The Junior Preferred Stock shall rank, with respect to the payment of
dividends and the distribution of assets, junior to all series of any other
class of the Corporation's Preferred Stock.
X. AMENDMENT
The Certificate of Incorporation of the Corporation shall not be
amended in any manner which would alter or change the powers, preferences or
special rights of the Junior Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Junior Preferred Stock, voting together as a single
series.
20
<PAGE>
CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES AND
RIGHTS OF SERIES A NON-VOTING CONVERTIBLE COMMON STOCK
1. DESIGNATION AND AMOUNT. There shall be a series of undesignated
Series Common Stock of the Corporation designated as "Series A Non-Voting
Convertible Common Stock" and the number of shares constituting such series
shall be ten million (10,000,000). The number of shares designated as shares of
Series A Non-Voting Convertible Common Stock may be increased or decreased by
the Board of Directors of the Corporation without a vote of stockholders. Except
as otherwise expressly provided herein, all shares of Series A Non-Voting
Convertible Common Stock shall be identical to shares of Common Stock (as
defined in Article FOURTH of the Certificate of Incorporation of the
Corporation, as amended (the "Certificate of Incorporation")) and shall entitle
the holders thereof to the same rights and privileges.
2. VOTING. The holders of Series A Non-Voting Convertible Common Stock
shall not have any right to vote, except as required under applicable law and,
except as required by law, the holders of Common Stock and Series A Non-Voting
Convertible Common Stock shall vote together as a single class on all matters as
to which holders of Series A Non-Voting Convertible Common Stock are entitled to
vote as set forth herein. Except as required by law or as set forth herein, the
holders of Series A Non-Voting Convertible Common Stock (to the extent permitted
by this Section 2), Common Stock (to the extent permitted by the Certificate of
Incorporation), Preferred Stock (to the extent permitted by the Certificate of
Incorporation) and Series Common Stock (to the extent permitted by the
Certificate of Incorporation) shall vote together as a single class on all
matters submitted to the stockholders for a vote.
3. DIVIDENDS. Subject to applicable law, the holders of Series A
Non-Voting Convertible Common Stock shall be entitled to receive such dividends
out of funds legally available therefor at such times and in such amounts as the
Board of Directors of the Corporation may determine in its sole discretion shall
be paid with respect to the Common Stock, with each share of Common Stock and
each share of Series A Non-Voting Convertible Common Stock sharing
share-for-share in such dividends (with each share of Series A Non-Voting
Convertible Common Stock being equal to the number of shares of Common Stock
into which it would then be convertible on the record date for such dividend)
except that if dividends are declared which are payable in shares of Common
Stock or Series A Non-Voting Convertible Common Stock, dividends shall be
declared which are payable at the equivalent rate in both classes of stock and
the dividends payable in shares of Common Stock shall be payable to the holders
of that class of stock and the dividends payable in shares of Series A
Non-Voting Convertible Common Stock shall be payable to the holders of that
class of stock.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary
(a "Liquidation Event"), after the payment or provision for payment of all debts
and liabilities of the Corporation and all preferential amounts to which the
holders of Preferred Stock or Series Common Stock, if any, are entitled with
respect to the distribution of assets in liquidation, the holders of Series A
NonVoting Convertible Common Stock shall be entitled to share ratably with the
holders of Common Stock (with each share of Series A Non-Voting Convertible
Common Stock being equal to the number of shares of Common Stock into which it
would then be convertible on the effective date of such Liquidation Event) in
the remaining assets of the Corporation available for distribution.
5. CONVERSION OF SERIES A NON-VOTING CONVERTIBLE COMMON STOCK.
(a) AUTOMATIC CONVERSION. Each share of Series A Non-Voting Convertible
Common Stock shall be automatically converted, without the payment of any
additional consideration, into fully paid and non-assessable shares of Common
Stock at the rate of one share of Common Stock for each share of Series A
Non-Voting Convertible Common Stock so converted (the "Series A Non-Voting
Conversion Rate") as of the date (the "Conversion Date") that is the earlier to
occur of (i) the next Business Day (as defined below) following the date on
which the shareholders of the Corporation and of Meditrust Corporation
("Meditrust Corporation") shall have approved the merger transaction (the
"Merger") among La Quinta Inns, Inc. ("La Quinta"), Meditrust Corporation and
the Corporation, and (ii) the date of any termination of the Agreement and Plan
of Merger dated as of January 3, 1998 and among La Quinta, Meditrust Corporation
and the Corporation relating to the Merger in accordance with the terms thereof.
As used herein, the term "Business Day" means 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.
21
<PAGE>
(b) PROCEDURE FOR CONVERSION. As of the Conversion Date, all
outstanding shares of Series A Non-Voting Convertible Common Stock shall be
converted automatically without any further action by the holders of Series A
NonVoting Convertible Common Stock and whether or not the certificates
representing such shares of Series A Non-Voting Convertible Common Stock are
surrendered to the Corporation or its transfer agent. On the Conversion Date,
all rights with respect to the Series A Non-Voting Convertible Common Stock so
converted shall terminate, except any of the rights of the holders thereof, in
accordance with the procedures herein, to receive certificates for the number of
shares of Common Stock into which such Series A Non-Voting Convertible Common
Stock has been converted. The Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable on the Conversion
Date unless certificates evidencing such shares of the Series A Non-Voting
Convertible Common Stock being converted, duly assigned or endorsed for transfer
to the Corporation (or accompanied by duly executed stock powers relating
thereto), are surrendered at the principal executive office of the Corporation
(or the offices of the transfer agent for the Series A Non-Voting Convertible
Common Stock or such office or offices of an agent for conversion as may from
time to time be designated by notice to the holders of the Series A Non-Voting
Convertible Common Stock by the Corporation), together with written notice by
the holder of such Series A Non-Voting Convertible Common Stock stating the name
or names (with addresses) and denominations in which the certificate or
certificates for Common Stock shall be issued and shall include instructions for
delivery thereof. Upon such surrender of a certificate representing Series A
Non-Voting Convertible Common Stock following its automatic conversion, the
Corporation shall issue and send by hand delivery, by courier or by first class
mail (postage prepaid) to the holder thereof or to such holder's designee, at
the address designated by such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled upon
conversion. In the event that there shall have been surrendered a certificate or
certificates representing Series A Non-Voting Convertible Common Stock, only
part of which are to be converted, the Corporation shall issue and send to such
holder or such holder's designee, in the manner set forth in the preceding
sentence, a new certificate or certificates representing the number of shares of
Series A Non-Voting Convertible Common Stock which shall not have been
converted. If the certificate or certificates for Common Stock are to be issued
in a name other than the name of the registered holder of the Series A
Non-Voting Convertible Common Stock surrendered for conversion, the Corporation
shall not be obligated to issue or deliver any certificate unless and until the
holder of the Series A NonVoting Convertible Common Stock surrendered has paid
to the Corporation the amount of any tax that may be payable in respect of any
transfer involved in such issuance or has established to the satisfaction of the
Corporation that such tax has been paid.
(c) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of Series A Non-Voting Convertible Common Stock such number of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Non-Voting Convertible Common
Stock.
6. ADJUSTMENTS.
(a) CHANGES IN COMMON STOCK. In the event the Corporation shall (i) pay
a dividend in or make a distribution in shares of Common Stock, (ii) subdivide
its outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares, or (iv) issue by reclassification
of its shares of Common Stock any shares of the Corporation, the Series A
Non-Voting Conversion Rate in effect immediately prior thereto shall be adjusted
so that the holder of a share of Series A Non-Voting Convertible Common Stock
thereafter surrendered for conversion shall be entitled to receive the number of
shares of Common Stock which it would have owned or have been entitled to
receive after the happening of any of the events described above had such share
of Series A Non-Voting Convertible Common Stock been converted on or immediately
prior to the record date for such dividend or the effective date of such
subdivision, combination or reclassification, as the case may be.
(b) CHANGES IN SERIES A NON-VOTING CONVERTIBLE COMMON STOCK. In the
event that the Corporation shall (i) pay a dividend in or make a distribution in
shares of its Series A Non-Voting Convertible Common Stock, (ii) subdivide its
outstanding shares of Series A Non-Voting Convertible Common Stock, (iii)
combine its outstanding shares of Series A Non-Voting Convertible Common Stock
into a smaller number of shares, or (iv) issue by reclassification of its shares
of Series A Non-Voting Convertible Common Stock any shares of the Corporation,
the Series A Non-Voting Conversion Rate in effect immediately prior thereto
shall be adjusted so that the holder of a share of Series A Non-Voting
Convertible Common Stock thereafter surrendered for conversion shall be entitled
to receive the number of shares of Common Stock which it would have owned or
have been entitled to receive after the happening 22
22
<PAGE>
of any of the events described above had such share of Series A Non-Voting
Convertible Common Stock been converted on or immediately prior to the record
date for such dividend or the effective date of such subdivision, combination or
reclassification, as the case may be.
(c) GENERAL. An adjustment made pursuant to this Section 6 shall become
effective immediately after the record date (in the case of a dividend or
distribution in shares of capital stock) and shall become effective immediately
after the effective date (in the case of a subdivision, combination or
reclassification). No adjustment in accordance with this Section 6 shall be
required unless such adjustment would require an increase or decrease in any
conversion rate of at least 0.1%; provided, however, that any adjustments which
by reason of this clause are not required to be made shall be carried forward
and taken into account in any subsequent adjustment.
7. NOTICES. In the event that the Corporation provides any notice,
report or statement to the holders of Common Stock or Series A Non-Voting
Convertible Common Stock (in their capacity as such), the Corporation shall at
the same time provide a copy of any such notice, report or statement to each
record holder of outstanding Series A Non-Voting Convertible Common Stock.
8. STATUS OF ACQUIRED SHARES. Shares of Series A Non-Voting Convertible
Common Stock acquired by the Corporation (upon conversion or otherwise) will be
restored to the status of authorized but unissued shares of undesignated Series
Common Stock.
[End of Text]
23
<PAGE>
I, William C. Baker, President of the Corporation, for the purpose of
amending and restating the Corporation's Certificate of Incorporation pursuant
to the General Corporation Law of the State of Delaware, do execute this
certificate, hereby declaring and certifying that this is my act and deed on
behalf of the Corporation this 21st day of June, 1999.
By: /s/ William C. Baker
Name: William C. Baker
Title: President
<PAGE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
REGISTRANT: MEDITRUST CORPORATION
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
State of
Name Incorporation
- ---- -------------
<S> <C>
Meditrust of California, Inc. Delaware
San Joaquin Healthcare Associates, L.P. Delaware
Meditrust Finance Corporation Delaware
Meditrust Financial Services Corporation Delaware
Meditrust of Bedford, Inc. Delaware
Meditrust of Kansas, Inc. Kansas
Meditrust Mortgage Investments, Inc. Delaware
Meditrust of the UK, Inc. Delaware
MT General LLC Delaware
MT Limited I LLC Delaware
T and F Properties, LP Delaware
MT-BR Limited Partnership Delaware
Atrium Properties, LP Delaware
Paramount Management Services, Inc. Delaware
Paramount Real Estate Services, Inc. Delaware
TeleMatrix, Inc. Florida
New Meditrust Company LLC Delaware
Meditrust Acquisition Company LLC Delaware
Meditrust of Massachusetts Massachusetts
Meditrust Healthcare Corporation Delaware
Meditrust Management Company Massachusetts
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
REGISTRANT: MEDITRUST CORPORATION
(Continued)
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
State of
Name Incorporation
- ---- -------------
<S> <C>
La Quinta Financial Corp. Texas
La Quinta Realty Corp. Texas
La Quinta Plaza, Inc. Texas
La Quinta Inns de Mexico S.A. de C.V. Mexico
La Quinta Investments, Inc. Delaware
LQ Investments I Texas
LQ Investments II Texas
LQ - LNL, L.P. Texas
LQ - East Irvine, J.V. California
LQ Baton Rouge, L.P. Texas
LQ Motor Inn Venture Austin No. 530 Texas
La Quinta San Antonio South J.V. Texas
La Quinta Denver Peoria Street Ltd. Texas
LQ - Big Apple Joint Venture Texas
LQI Acquisition Corporation Delaware
La Quinta Motor Inns, L.P. Delaware
La Quinta Development Partners, L.P. Delaware
LQM Operating Partners, L.P. Delaware
La Quinta Inns of Lubbock, Inc. Texas
La Quinta Inns of Puerto Rico, Inc. Delaware
Meditrust Hotel Group, Inc. Delaware
La Quinta - Wichita Kansas No. 532 Ltd. Texas
LQ West Bank Joint Venture - 1982 Texas
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
REGISTRANT: MEDITRUST OPERATING COMPANY
SUBSIDIARY CORPORATIONS
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
State of
Name Incorporation
- ---- -------------
<S> <C>
The La Quinta Company Delaware
La Quinta Inns, Inc. Delaware
MOC Holding Company Delaware
TeleMatrix Equipment, LLC Florida
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-57483, 333-39771, 333-39771-01) and on
Forms S-3 (File Nos. 333-485051, 33-50835, 33-45979, 333-40055-01) of
Meditrust Corporation and/or Meditrust Operating Company of our reports dated
February 2, 2000 relating to the financial statements and financial statement
schedules, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers, LLP
Boston, Massachusetts
February 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1999 and the Consolidated
Statement of Income for the year ended December 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,779
<SECURITIES> 0
<RECEIVABLES> 59,004
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,962,796
<DEPRECIATION> 370,085
<TOTAL-ASSETS> 5,375,049
<CURRENT-LIABILITIES> 0
<BONDS> 2,597,438
0
70
<COMMON> 3,601,226
<OTHER-SE> (949,654)
<TOTAL-LIABILITY-AND-EQUITY> 5,375,049
<SALES> 0
<TOTAL-REVENUES> 608,166
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,700
<INCOME-PRETAX> 89,914
<INCOME-TAX> 0
<INCOME-CONTINUING> 89,914
<DISCONTINUED> 40,216
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130,130
<EPS-BASIC> .79
<EPS-DILUTED> .79
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1999 and the Consolidated
Statement of Operations for the year ended December 31, 1999 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. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,441
<SECURITIES> 0
<RECEIVABLES> 20,038
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,122
<PP&E> 54,241
<DEPRECIATION> 2,572
<TOTAL-ASSETS> 160,814
<CURRENT-LIABILITIES> 107,105
<BONDS> 0
0
0
<COMMON> 118,916
<OTHER-SE> (59,764)
<TOTAL-LIABILITY-AND-EQUITY> 160,814
<SALES> 0
<TOTAL-REVENUES> 595,896
<CGS> 0
<TOTAL-COSTS> 279,265
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273
<INCOME-PRETAX> (30,502)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,502)
<DISCONTINUED> (9,803)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,305)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
</TABLE>
