-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IDIKCr/XZ2ZszNdbLakjC8xqU8grcXjo0fdUs/3zvg1AqZ1CvOjJV55ZG8QNHEak NXjMMheeQpAatqeDDMPpig== 0000950146-99-000685.txt : 19990409 0000950146-99-000685.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950146-99-000685 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDITRUST OPERATING CO CENTRAL INDEX KEY: 0000313749 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 953419438 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08132 FILM NUMBER: 99583967 BUSINESS ADDRESS: STREET 1: 197 FIRST AVE STREET 2: STE 100 CITY: NEEDHAM STATE: MA ZIP: 02194 BUSINESS PHONE: 7814336000 MAIL ADDRESS: STREET 1: MEDITRUST OPERATING CO STREET 2: 197 FIRST AVENUE SUITE 100 CITY: NEEDHAM STATE: MA ZIP: 02194 FORMER COMPANY: FORMER CONFORMED NAME: SANTA ANITA OPERATING CO DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDITRUST CORP CENTRAL INDEX KEY: 0000314661 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 953520818 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08131 FILM NUMBER: 99583968 BUSINESS ADDRESS: STREET 1: MEDITRUST CORP STREET 2: 197 FIRST AVE STE 100 CITY: NEEDHAM STATE: MA ZIP: 02194 BUSINESS PHONE: 7814336000 MAIL ADDRESS: STREET 1: MEDITRUST CORP STREET 2: 197 FIRST AVENUE SUITE 100 CITY: NEEDHAM STATE: MA ZIP: 02194 FORMER COMPANY: FORMER CONFORMED NAME: SANTA ANITA REALTY ENTERPRISES INC DATE OF NAME CHANGE: 19920703 10-K 1 MEDITRUST COMPANIES FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K [X] JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM _____________ TO _______________ Commission file number 0-9109 Commission file number 0-9110 MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY (Exact name of registrant as specified (Exact name of registrant as specified in its charter) in its charter) Delaware Delaware (State or other jurisdiction (State or other jurisdiction of of incorporation or organization) incorporation or organization) 95-3520818 95-3419438 (I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.) 197 First Avenue, Suite 300 197 First Avenue, Suite 100 Needham Heights, Needham Heights, Massachusetts 02194-9127 Massachusetts 02194-9127 (Address of principal executive (Address of principal executive offices including zip code) offices including zip code) (781) 433-6000 (781) 453-8062 (Registrant's telephone number, (Registrant's telephone number, including area code) including area code) Securities registered pursuant to Section 12(b) of the Act:
Title of each class and name of each exchange Title of each class and name of each exchange on which registered on which registered --------------------------------------------- --------------------------------------------- Common Stock $.10 Par Value, Common Stock $.10 Par Value, New York Stock Exchange New York Stock Exchange 9% Convertible Debentures due 2002, New York Stock Exchange 7-1/2% Convertible Debentures due 2001, New York Stock Exchange 7.375% Notes due 2000, New York Stock Exchange 7.6% Notes due 2001, New York Stock Exchange Cumulative Redeemable Preferred Stock represented by depository shares representing 1/10th of a share of Preferred Stock, New York Stock Exchange ---------------- Securities registered pursuant to Section 12(g) of the Act: None None
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ ] Aggregate market value of the paired voting stock of Meditrust Corporation and of Meditrust Operating Company held by non-affiliates as of December 31, 1998 was $2,258,552,000. The number of shares of common stock, par value $.10 per share, outstanding as of December 31, 1998 for Meditrust Corporation was 150,631,102 and Meditrust Operating Company was 149,325,725. The following documents are incorporated by reference into the indicated Part of this Form 10-K.
Document Part - - -------- ---- Definitive Proxy Statement for the June 25, 1999 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A III
================================================================================ Certain matters discussed herein constitute forward-looking statements within the meaning of the Federal securities laws. The Meditrust Companies (the "Companies"), consisting of Meditrust Corporation ("Realty") and Meditrust Operating Company ("Operating"), intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements, and are including this statement for purposes of complying with these safe harbor provisions. Although the Companies believe the forward-looking statements are based on reasonable assumptions, the Companies can give no assurance that their expectations will be attained. Actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, general economic and real estate conditions, the conditions of the capital markets at the time of the proposed spin-off of the healthcare division, the identification of satisfactory prospective buyers for the non-strategic assets and the availability of financing for such prospective buyers, the availability of equity and debt financing for the Companies' capital investment program, interest rates, competition for hotel services and healthcare facilities in a given market, the satisfaction of closing conditions to pending transactions described in this Joint Annual Report, the enactment of legislation further impacting the Companies' status as a paired share real estate investment trust ("REIT") or Realty's status as a REIT, unanticipated delays or expenses on the part of the Companies and their suppliers in achieving year 2000 compliance and other risks detailed from time to time in the filings of Realty and Operating with the Securities and Exchange Commission ("SEC"), including, without limitation, those risks described in the Section of this Joint Annual Report on Form 10-K entitled "Certain Factors You Should Consider" beginning on page 64 hereof. Item 1. Business THE MEDITRUST COMPANIES General The Meditrust Companies consists of two separate companies, Meditrust Corporation and Meditrust Operating Company, whose shares of common stock trade as a single unit (symbol MT) on the New York Stock Exchange (the "NYSE") under a stock pairing arrangement. Meditrust Corporation ("Realty") is a real estate investment trust ("REIT") and Meditrust Operating Company ("Operating") is a taxable corporation. Realty and Operating were each incorporated in the State of Delaware in 1979. As used herein, the terms "Realty" and "Operating" include wholly owned subsidiaries of Realty and Operating unless the context requires otherwise. References to "The Meditrust Companies" or "Companies" refer to Realty and Operating, collectively. This document constitutes the Joint Annual Report on Form 10-K for both Realty and Operating. The Meditrust Companies maintain an organizational structure called a "paired share structure" such that the shares of capital stock of both companies trade and are transferable as a single unit. A predecessor of Realty ("Meditrust's Predecessor") which was organized as a Massachusetts business trust and was known as "Meditrust", acquired the paired share structure in 1997 by acquiring, together with an affiliate of Meditrust's Predecessor, Santa Anita Realty Enterprises Inc. and Santa Anita Operating Company (collectively, the "Santa Anita Companies"). The Santa Anita Companies had operated under the paired share structure since 1979. The paired share structure permitted the shareholders of The Meditrust Companies to enjoy the economic benefits of owning a company that owns and leases real estate, namely Realty, and a company that operates a business that uses real estate, namely Operating. The benefits attributable to future use of the paired share structure have been limited, however, by Federal legislation, which is described in more detail in this Joint Annual Report, which was adopted in July 1998. Realty During 1998, Realty invested in real estate in three principal areas: healthcare related real property, lodging facilities, and golf properties. As a REIT, Realty is not permitted to operate the businesses conducted at or with the real estate that it owns, rather, Realty must lease its properties to the operators of the businesses. In the case of its healthcare related real properties, Realty (taking into account the activities of Meditrust's Predecessor) either leases facilities that it owns or invests in, or provides financing to, third-party operators principally of long-term care, retirement and assisted living facilities, rehabilitation hospitals and medical office buildings. In the case of its lodging facilities and golf 1 properties, Realty owns, maintains leasehold interest in or invests in real estate that it leases to Operating. As more fully described below, Operating operates the lodging and golf businesses conducted on the real estate that it leases from Realty. During 1998, Realty also owned and leased to Operating Santa Anita Park, a horse racing complex based in California, and invested in certain related real estate. The Santa Anita real estate assets, which were acquired at the time Meditrust's Predecessor acquired the paired share structure, were sold by The Meditrust Companies, together with the operations conducted thereon. Operating Operating operates the lodging and golf related real estate owned by Realty. Operating does not conduct any activities related to Realty's healthcare related real estate. The lodging portion of Operating's business is conducted under the La Quinta[RegTM] brand name and is presently headquartered in San Antonio, Texas. As more fully described below, the La Quinta[RegTM] brand name, lodging facilities and operations were acquired by The Meditrust Companies in July 1998. The golf portion of Operating's business is conducted by the Cobblestone Golf Group, which was acquired by The Meditrust Companies in May 1998, as more fully described below. Cobblestone is headquartered in San Diego, California. The Meditrust Companies have entered into an agreement to sell their subsidiaries which own the golf related real estate, together with the operations conducted thereon. This sale is expected to close on or prior to March 31, 1999. Operating also conducted the operating activities at Santa Anita Park until December 1998 when the Companies sold these activities, together with the Santa Anita real estate, to a third party. Divisions The Meditrust Companies conduct their businesses and make their investments through three principal divisions: healthcare related real estate, lodging and golf. As described above, Operating does not conduct any operations in the healthcare related real estate business. Rather, this division, which is headquartered in Needham, Massachusetts at the Companies' corporate headquarters, is conducted solely through Realty. The lodging and golf businesses, which are conducted through the La Quinta[RegTM] and Cobblestone divisions, consist of real estate assets owned by Realty and operations performed by Operating. Healthcare Related Real Estate--Realty owns, invests in and provides financing for 421 geographically dispersed healthcare facilities operated by nearly 30 different third-party operators. In addition, Realty manages 43 medical office buildings, including all the medical office buildings owned by Realty. As described below, during 1998 and into 1999, Realty has been selling its interests in certain non-strategic healthcare properties. Lodging--The Companies' lodging business is conducted under the La Quinta[RegTM] brand name. At March 26, 1999, the La Quinta[RegTM] division owns and operates an aggregate of 232 La Quinta[RegTM] Inns and 61 La Quinta[RegTM] Inns & Suites in 28 states with over 37,000 hotel rooms. La Quinta[RegTM] is a recognized brand name in the mid-priced lodging segment that appeals to many business travelers. Realty acquired La Quinta Inns, Inc. and its subsidiaries and its unincorporated partnership and joint venture entities (collectively, "La Quinta") on July 17, 1998 by merging La Quinta Inns, Inc. into Realty (the "La Quinta Merger"). Immediately prior to the La Quinta Merger, La Quinta transferred all of its assets other than its real estate and brand name assets to Operating to enable Operating to conduct the operating portion of La Quinta's business. La Quinta, which is a fully-integrated lodging company that focuses on the ownership, operation and development of mid-priced hotels in the western and southern regions of the United States, has continued to operate as an independent division from its headquarters in San Antonio, Texas. On March 16, 1999, the Companies' announced that as a component of the merger with the Meditrust Companies La Quinta's headquarters were being moved to Dallas, Texas. Golf--The Companies' golf business is conducted under the Cobblestone brandname. The Cobblestone division owns or leases and operates 43 golf course facilities in 6 states. Realty acquired Cobblestone Holdings, Inc. and its wholly owned subsidiary Cobblestone Golf Group, Inc. (together with its subsidiaries, "Cobblestone") by merging Cobblestone Holdings, Inc. into Realty on May 29, 1998 (the "Cobblestone Merger"). Immediately prior to the Cobblestone Merger, Cobblestone Golf Group, Inc. and its subsidiaries transferred all of their assets other than their real estate interests and the Cobblestone trade name to Operating to enable Operating to conduct the golf business at the golf course properties owned by Realty after the Cobblestone Merger. Realty also acquired additional golf properties prior to and after the Cobblestone Merger that are also operated by the Cobblestone Division. 2 As described more fully below, the Companies have entered into a definitive agreement to sell Cobblestone's golf course properties and operations for $393 million. Comprehensive Restructuring Plan The Meditrust Companies consummated the Cobblestone Merger and the La Quinta Merger on May 29, 1998 and July 17, 1998 respectively. On July 22, 1998, the President signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to continue to grow through the use of the paired share structure. While the Companies' use of the paired share structure in connection with the Cobblestone Merger and the La Quinta Merger were each "grandfathered" under the Reform Act, the ability to continue to use the paired share structure to acquire real estate and the operating businesses conducted with the real estate assets (included in the golf and lodging industries) has been substantially limited. In addition, during the summer of 1998, the debt and equity capital markets available to REITs generally, and healthcare and lodging REITs specifically, deteriorated, thus limiting the Companies' access to cost-efficient capital. The Companies began an analysis of the impact of the Reform Act, the Companies' limited ability to access the capital markets and the operating strategy of the Companies' existing businesses. This analysis included advice from outside professional advisors and presentations by management on the different alternatives available to the Companies. The analysis culminated in the development of a comprehensive restructuring plan (the "Plan") designed to strengthen the Companies' financial position and clarify its investment and operating strategy by focusing on the Companies' healthcare and lodging business segments. The Plan was announced on November 12, 1998 and included the following component parts: o Pursue the separation of the Companies' primary businesses, healthcare and lodging, by creating two separately traded publicly listed REITs. The Companies intend to spin off the healthcare financing business into a stand-alone REIT; o Continue to operate the Companies' healthcare and lodging businesses using the existing paired-share REIT structure until the healthcare spin-off takes place; o Sell more than $1 billion of non-strategic assets, including the portfolio of golf-related real estate and operating properties, the Santa Anita Racetrack and approximately $550 million of non-strategic healthcare properties; o Use the proceeds from these asset sales to achieve significant near-term debt reduction; o Settle fully the Companies' forward equity issuance transaction ("FEIT") with certain affiliates of Merrill Lynch & Co.; o Reduce capital investments to respond to current operating conditions in each industry; o Reset Realty's annual dividend to $1.84 per common share, an amount that Realty deems sustainable and comparable to the Companies' peer groups; During 1998 and in early 1999, the Companies made significant progress in implementing, and in some cases completing, significant components of the Plan. The following summarizes the status of the Plan by substantive component parts: o Completed the sale of $613 million of the $1 billion in planned asset sales, including: $436 million of non-strategic healthcare assets, the Santa Anita Racetrack and the related horse racing operation, the Companies' interest in the Santa Anita Fashion Mall and related land held for development and artwork originally acquired in the acquisition of the Santa Anita Companies; o Entered into letters of intent for the sale of an additional $155 million of healthcare assets. o Reduced the amount of its FEIT to $103 million as of December 31, 1998 ($89 million as of March 25, 1999) from the original $277 million. o Reduced the Companies' outstanding debt by $274 million. o Refocused the Companies' capital investment program to respond to industry trends by reducing planned healthcare investments to $100 million in 1999 and ceasing construction of any new hotels after completion of the 13 La Quinta[RegTM] Inns & Suites currently under development. 3 o Reduced Realty's annual dividend to $1.84 per common share. o Entered into a definitive agreement to sell Cobblestone Golf Group for $393,000,000 and an agreement with its lenders and Merrill Lynch to settle the FEIT. Recent Developments On February 11, 1999, The Meditrust Companies announced that they had entered into a definitive agreement to sell (the "Cobblestone Sale") the capital stock of the entities which comprise the Cobblestone golf division to Golf Acquisitions, L.L.C., an affiliate of ClubCorp, Inc. for an aggregate purchase price of $393 million, subject to adjustment for, among other things, the debt of Cobblestone. The Cobblestone Sale, which is subject to customary closing conditions, is expected to close on or prior to March 31, 1999. After the consummation of the Cobblestone Sale, The Meditrust Companies will no longer own, lease or operate golf course facilities and their activities will consist of owning and investing in healthcare related real estate and owning and operating lodging properties. On March 10, 1999, Realty executed an agreement with its senior lenders to amend its credit facility. The amendment, which is subject to the successful completion of the sale of Cobblestone, permits the Companies to pay a portion of the net cash sale proceeds from the sale of Cobblestone in further settlement of a portion of the FEIT. The amendment also provides for, among other things, deletion of limitations on certain healthcare investments and reducing the borrowing availability on the credit facility's revolving portion from $1,000,000,000 to $850,000,000. In addition, The Meditrust Companies also entered into an agreement with Merrill Lynch and certain of its affiliates to use the proceeds from the sale of Cobblestone in excess of $300 million to settle the FEITs. Merrill Lynch has agreed not to sell any shares of the existing FEIT until at least March 31, 1999 while the Companies complete the sale of Cobblestone. At March 25, 1999, the balance of the FEITs was approximately $89 million. For a discussion of certain factors that could impact the financial condition, results of operations and/or business of Realty or the successful implementation of the Plan and each of its component parts, you are encouraged to read the section entitled "Certain Factors You Should Consider" beginning on page 64 of this Joint Annual Report on Form 10-K. In addition, discussions of each of Realty's and Operating's individualized businesses commence on page 8 and 14, respectively of this Joint Annual Report on Form 10-K. Unless otherwise specified, information regarding the Companies' business is given as of December 31, 1998. Capital Raising Transactions Forward Equity Transaction On February 26, 1998, the Companies entered into transactions (the "Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and successor in interest, "MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par value $.10 per share from each of the Companies at a purchase price of $32.625 per share (collectively with the paired common shares the shares of Series A Non-voting Convertible Common Stock are convertible into, the "Notional Shares"). The Series A Non-Voting Convertible Common Stock converted on a one to one basis to paired common stock of the Companies on June 18, 1998. Total proceeds from the issuance were approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from the issuance were approximately $272,000,000, and were used by the Companies to repay existing indebtedness. The Companies and MLI also entered into a Purchase Price Adjustment Agreement under which the Companies would, within one year from the date of MLI's purchase, on a periodic basis, adjust the purchase price based on the market price of the paired common stock at the time of any interim or final adjustments, so as to provide MLI with a guaranteed return of LIBOR plus 75 basis points (the "Return"). The paired common shares issued receive the same dividend as the Companies' paired common stock; however, the difference between LIBOR plus 75 basis points and the dividend payments received by MLI will be included as an additional adjustment under the Purchase Price Adjustment Agreement. Such adjustments were to be effected by deliveries of additional 4 paired common shares to, or, receipts of paired common shares from, MLI. In the event that the market price for the paired shares is not high enough to provide MLI with the Return, the Companies would have to deliver additional paired shares to MLI, which would have a dilutive effect on the capital stock of the Companies. This dilutive effect increases significantly as the market price of the paired shares declines further below the original purchase price. Moreover, settlement of the FEIT transaction, whether at maturity or at an earlier date, may force the Companies to issue paired shares at a depressed price, which may heighten this dilutive effect on the capital stock of the Companies. Prior to the settlement, MLI shall hold any paired common shares delivered by the Companies under the Purchase Price Adjustment Agreement in a collateral account (the "Collateral Shares"). Under the adjustment mechanism, the Companies delivered approximately 9,700,000 Collateral Shares in 1998, all of which were returned to the Companies when the Companies settled in cash a portion of the adjustment transaction in December 1998. The FEIT has been accounted for as an equity transaction with the Notional Shares treated as outstanding from their date of issuance until the respective date of repurchase, if any, for both basic and diluted earnings per share purposes. For diluted earnings per share purposes, at the end of the quarterly period, the then outstanding Reference Amount (as defined herein) is divided by the quoted market price of a paired common share, and the excess, if applicable, of that number of paired common shares over the Notional Shares (the "Contingent Shares") is added to the denominator. Contingent Shares are included in the calculation of year to date diluted earnings per share weighted for the interim periods in which they were included in the computation of diluted earnings per share. The "Reference Amount" equals the Initial Reference Amount plus the Return and net of any cash distributions on the Notional Shares or any other cash paid or otherwise delivered to MLI under the FEIT. Payments that reduce the Reference Amount in effect satisfy all necessary conditions for physically settling that portion of the Reference Amount and are accounted for in a manner similar to treasury stock. Therefore, payments that reduce the Reference Amount are divided by the quoted market price of a paired common share on the date of payment. The calculated number is then multiplied by the fractional number of days in the period prior to the payment date and the resulting number of paired common shares is included in the calculation of diluted earnings per share for the period. On November 11, 1998, the Companies entered into an agreement with MLI to amend the FEIT. Under the agreement, Realty agreed to grant a mortgage on the Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the FEIT with cash generated in part from the sale of certain assets, including the Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the settlement agreement, not to sell any shares of the existing FEIT until February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152 million ($127 million of which was from the sale of certain assets including the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional Shares outstanding were reduced to approximately 6,865,000 paired common shares and there were no Contingent Shares issuable. On March 10, 1999, the Companies entered into an agreement with MLI and certain of its affiliates to use the proceeds from the sale of Cobblestone Golf Group in excess of $300 million to purchase all or a portion of the remaining Notional Shares. Merrill Lynch has agreed not to sell any shares of the remaining Notional Shares until March 31, 1999 while the Companies complete the sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference Amount is $89 million. Series A Preferred Stock On June 10, 1998, Realty issued 7,000,000 depositary shares. Each depositary share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds from this issuance of approximately $168,666,000 were used by Realty primarily to repay existing indebtedness. New Credit Agreement On July 17, 1998, Realty executed an agreement for an unsecured bank facility ("New Credit Agreement") for a total of $2,250,000,000 bearing interest at the lenders' prime rate plus .50% or LIBOR plus 1.375%. The facility is comprised of three tranches with term loans at various maturity dates between 5 July 17, 1999 and July 17, 2001 and a revolving tranche with availability of $1,000,000,000 maturing July 17, 2001. On November 23, 1998 Realty executed an agreement with its bank group to amend the New Credit Agreement. The amendment provided for Realty's delivery of cash in settlement of a portion of its FEIT, and the amendment of certain financial covenants to accommodate asset sales by Realty, to exclude the impact of non-recurring charges, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock also extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 was not consummated by February 1, 1999. On February 1, 1999 this increase went into effect. On March 10, 1999, Realty executed a second agreement with the bank group to further amend its New Credit Agreement. The second amendment, which is subject to the successful completion of the sale of Cobblestone, permits the Companies to pay a portion of the net cash sale proceeds from the sale of Cobblestone in further settlement of a portion of the FEIT. The second amendment also provides for, among other things, deletion of limitations on certain healthcare investments and reducing the borrowing availability on Tranche A to $850,000,000. Of the $1,000,000,000 revolving tranche, $353,000,000 was available at December 31, 1998, bearing interest at the Base rate (8.25%) or LIBOR plus 2.625% (7.98% at December 31, 1998). As of March 5, 1999, $244,000,000 was available on the revolving tranche. Shelf Registration Statement The Companies have an effective shelf registration statement on file with the Securities and Exchange Commission (the "SEC") under which the Companies may issue up to $1,825,000,000 of securities including common stock, preferred stock, debt, series common stock, convertible debt and warrants to purchase common stock, preferred stock, debt, series common stock and convertible debt. Realty believes that various sources of capital available over the next twelve months are adequate to finance pending acquisitions, mortgage financings and dividends. Over the next twelve months, as Realty identifies appropriate investment opportunities, Realty may raise additional capital through the sale of assets, common shares or preferred shares, the issuance of additional long-term debt or through a securitization transaction. Capital Requirements and Availability of Financing Realty's business is capital intensive, and it will have significant capital requirements in the future. Realty's leverage could affect its ability to obtain financing in the future or to undertake refinancings on terms and subject to conditions deemed acceptable by Realty. In the event that Realty's cash flow and working capital are not sufficient to fund Realty's expenditures or to service its indebtedness, it would be required to raise additional funds through the sale of additional equity securities, the refinancing of all or part of its indebtedness, the incurrence of additional permitted indebtedness or the sale of assets. There can be no assurance that any of these sources of funds would be available in amounts sufficient for Realty to meet its obligations. Moreover, even if Realty were able to meet its obligations, its leveraged capital structure could significantly limit its ability to finance its construction program and other capital expenditures, to compete effectively or to operate successfully under adverse economic conditions. Additionally, financial and operating restrictions contained in Realty's existing indebtedness may limit Realty's ability to secure additional financing, and may prevent Realty from engaging in transactions that might otherwise be beneficial to Realty and to holders of Realty's common stock. Realty's ability to satisfy its obligations will also be dependent upon its future performance, which is subject to prevailing economic conditions and financial, business and other factors beyond Realty's control. Short-Term Investments Realty invests its cash in certain short-term investments during interim periods between the receipt of revenues and distributions to shareholders. Cash not invested in facilities may be invested in interest-bearing bank accounts, certificates of deposit, short-term money-market securities, short-term United 6 States government securities, mortgage-backed securities guaranteed by the Government National Mortgage Association, mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration, mortgage loans, mortgage loan participations, and certain other similar investments. Realty's ability to make certain of these investments may be limited by tax considerations. Realty's return on these short-term investments may be more or less than its return on real estate investments. Borrowing Policies Realty may incur additional indebtedness when, in the opinion of the Directors, it is advisable. For short-term purposes, Realty may, from time to time, negotiate lines of credit, arrange for other short-term borrowings from banks or others or issue commercial paper. Realty may arrange for long-term borrowing from banks, insurance companies, public offerings or private placements to institutional investors. In addition, Realty may incur mortgage indebtedness on real estate which it has acquired through purchase, foreclosure or otherwise. When terms are deemed favorable, Realty may invest in properties subject to existing loans or mortgages. Realty also may obtain financing for unleveraged properties in which it has invested or may refinance properties acquired on a leveraged basis. There is no limitation on the number or amount of mortgages which may be placed on any one property, but overall restrictions on mortgage indebtedness are provided under documents pertaining to certain existing indebtedness. Legislative Developments On July 22, 1998, the President signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"). Included in the Reform Act is a freeze on the grandfathered status of paired share REITs such as the Companies. Under this legislation, the anti-pairing rules provided in the Code, apply to real property interests acquired after March 26, 1998 by the Companies, or by a subsidiary or partnership in which a ten percent or greater interest is owned by the Companies, unless (1) the real property interests are acquired pursuant to a written agreement that was binding on March 26, 1998 and at all times thereafter or (2) the acquisition of such real property interests was described in a public announcement or in a filing with the SEC on or before March 26, 1998. Under the Reform Act, the properties acquired in connection with the July 17, 1998 La Quinta Merger and in connection with the May 29, 1998 Cobblestone Merger generally are not subject to these anti-pairing rules. However, any property acquired by the Companies, La Quinta, or Cobblestone after March 26, 1998, other than property acquired pursuant to a written agreement that was binding on March 26, 1998 or described in a public announcement or in a filing with the SEC on or before March 26, 1998, is subject to the anti-pairing rules. Moreover, under the Reform Act any otherwise grandfathered property will become subject to the anti-pairing rules if a lease or renewal with respect to such property is determined to exceed an arm's length rate. In addition, the Reform Act also provides that a property held by the Companies that is not subject to the anti-pairing rules will become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (A) the undepreciated cost of the property (prior to the improvement) or (B) in the case of property acquired where there is a substituted basis (e.g., the properties acquired from La Quinta and Cobblestone), the fair market value of the property on the date it was acquired by the Companies. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect on December 31, 1999 and at all times thereafter. This restriction on property improvements applies to the properties acquired from La Quinta and Cobblestone, as well as all other properties owned by the Companies, and limits the ability of the Companies to improve or change the use of those properties after December 31, 1999. The Companies are considering various steps which they might take in order to minimize the effect of the Reform Act. As part of their restructuring plan announced in November 1998, the Companies intend to operate their healthcare and lodging business using the paired share structure until the healthcare spin-off takes place. Further, restructuring the operations of Realty and Operating to comply with the recent legislation may cause the Companies to incur substantial tax liabilities, to recognize an impairment loss on their goodwill asset or otherwise adversely affect the Companies. 7 REALTY General Realty is a self administered real estate investment trust which operates under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and is incorporated in the State of Delaware. During 1998, Realty invested primarily in (i) healthcare facilities located throughout the United States, (ii) an entity which invests in healthcare facilities in the United Kingdom, (iii) lodging properties located throughout the western and southern United States, and (iv) golf course properties located in the southern United States. As of December 31, 1998, Realty had investments in 765 facilities consisting of 421 healthcare facilities, 301 lodging properties and 43 golf courses. Thirty of these facilities are presently under construction and are expected to be completed during the next twelve months. Realty intends to continue to make and manage its investments (including the sale or disposition of property or other investments) and to operate (including through its business relationships with Operating) in a manner consistent with the requirements of the Code and the regulations thereunder in order to qualify as a REIT. As long as Realty complies with the Code and its regulations regarding REIT qualification requirements, Realty will not be taxed, except in limited circumstances, under the Federal income tax laws on that portion of its taxable income that it distributes to its shareholders. Realty has historically distributed, and intends to continue to distribute, substantially all of its real estate investment trust taxable income to its shareholders. Realty had a net increase in gross real estate investments of $2,645,236,000 during 1998 consisting of the following:
Transactions Increasing Transactions Decreasing Real Estate Portfolio Real Estate Portfolio - - ---------------------------------------------- ------------------------------------------- o Acquiring lodging properties in the La o Sale of non-strategic healthcare assets Quinta Merger o Acquiring golf courses in the Cobblestone o Sale of Santa Anita Racetrack and Santa Merger Anita Fashion Mall o Entering into sale/leaseback transactions o Repayment of principal on permanent with third-party operators of healthcare mortgage loans and development loans properties o Providing permanent mortgage loan and o Adjustments for real estate asset development loan financing to third-party impairments operators of healthcare properties
As described above, The Meditrust Companies announced a comprehensive restructuring plan on November 12, 1998 that is designed to clarify the Companies' investment and operating strategy by focusing on the healthcare and lodging business segments. As a result, prior to December 31, 1998, Realty sold its interest in a number of non-strategic real estate assets including the Santa Anita Racetrack, the Santa Anita Fashion Mall and related land held for development and approximately $436 million of non-strategic healthcare assets. In addition, Realty, together with Operating, has entered into a definitive agreement to sell all of its subsidiaries that have interests in golf course properties. Accordingly, Realty's business, once the sale of the Cobblestone golf entities is completed, will thereafter be focused on healthcare and lodging related real estate. Realty's principal executive offices are located at 197 First Avenue, Suite 300, Needham, Massachusetts 02494, and its telephone number is (781) 433-6000. For a discussion of certain factors that could impact the financial condition, results of operations and/or business of Realty or the successful implementation of the Plan and each of its component parts, you are encouraged to read the section entitled "Certain Factors You Should Consider" beginning on page 64 of this Joint Annual Report on Form 10-K. Healthcare Related Real Estate As of December 31, 1998, Realty had investments in 421 healthcare facilities including 221 long-term care facilities, 157 retirement and assisted living facilities, 34 medical office buildings, one acute 8 care hospital campus and eight other healthcare facilities. Of Realty's 421 healthcare facilities, 244 are directly owned by Realty. Third-party operators lease 220 of the healthcare facilities, 24 medical office buildings are leased to tenants of the facilities and 177 constitute investments through the provision of permanent mortgage loan or development loan financing. Realty generally invests in high-quality healthcare facilities that are managed by a diverse group of experienced third party operators. Realty achieves diversity in its healthcare property portfolio by investing in several different sectors of the healthcare industry and in different geographic regions and by providing financing to or leasing properties to a number of different third-party operators. Realty's healthcare properties are located in 38 states and are operated by 30 different operators. A private healthcare company and Sun Healthcare Group, Inc. operate approximately 38% of Realty's healthcare real estate investments. No other healthcare operator operates more than 10% of Realty's healthcare real estate investments. Investments Sale/Leaseback Transactions--During 1998, Realty acquired 15 assisted living facilities and 23 medical office buildings for an aggregate purchase price of $276,075,000. In addition, during 1998, Realty provided net funding of $54,467,000 for the construction of 17 assisted living facilities and $1,820,000 for the construction of an addition to one of Realty's existing long-term care facilities. Realty leases 220 of its healthcare investments to third-party operators. Substantially all of Realty's healthcare facilities which are the subject of sale-leaseback transactions are leased under triple net leases which are accounted for as operating leases and generally require that the third-party operator pay for all maintenance, repairs, insurance and taxes on the property. Realty generally earns fixed monthly rents, although in some circumstances Realty may also earn periodic additional rents. Generally, multiple leases with one operator are cross-collateralized and contain cross-default provisions tied to each of the operator's other leases with Realty. Permanent Mortgage Loan Financing--During 1998, Realty provided permanent mortgage loan financing of $76,260,000 for two long-term care facilities, one medical office building and for a 135 acre development stage property. Realty also provided $2,945,000 in additional construction loan financing to construct additions at facilities for which Realty already held a permanent mortgage on. The permanent mortgage financing provided by Realty generally consists of either construction or development loans made to a third-party operator to construct a new healthcare facility which are converted to a permanent mortgage loan or permanent mortgage loan financing that was put in place at the time the third-party operator bought or refinanced an existing healthcare facility. The permanent mortgage loans are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor. Development Loan Financing--During 1998, Realty provided new development funding of $33,061,000 to third-party operators for the construction of two long-term care facilities and one medical office building. Realty also provided $110,258,000 of development funding for ongoing construction at facilities for which development commenced prior to January 1, 1998. Generally, Realty provides development and construction financing with a view towards converting the financing into a permanent mortgage loan or acquiring the developed property and leasing it back to the third-party operator. Repayments and Other Transactions--During 1998, Realty received an aggregate of $407,241,000 of principal payments on permanent mortgage loans from third-party operators of healthcare facilities. Realty also received net proceeds of $320,135,000 from the sale of one long-term care facility, 32 assisted living facilities and nine rehabilitation facilities, which included certain assets sold in connection with the implementation of the Companies' comprehensive restructuring plan. In addition, Realty has also entered into letters of intent to sell additional healthcare assets at an aggregate gross purchase price of approximately $155 million. In the event Realty sells or otherwise disposes of any of its properties, Realty's Directors will determine whether and to what extent Realty will acquire additional properties or distribute the proceeds to the shareholders. Equity Investments--Between July 1996 and August 1998, Realty invested an aggregate of approximately $57,204,000 to purchase 26,606,000 shares of common stock, representing a 19.99% interest in, Nursing Home Properties plc ("NHP plc"), a property investment group that specializes in the financing, through sale/leaseback transactions, of nursing homes located in the United Kingdom. Realty 9 does not have the right to vote in excess of 9.99% of the shares of common stock of NHP plc. As of November 24, 1998, NHP plc had invested approximately L377,000,000 in 200 nursing homes with a total of approximately 10,800 beds. The facilities are leased to 24 different United Kingdom-based nursing home operators on terms and conditions similar to those contained in Realty's leases with its third-party operators. As of December 31, 1998, the market value of this investment was $66,591,080 and is included in Realty's and the Companies' financial statements. The resulting difference, $9,387,000, between the current market value and the aggregate cost of the NHP plc shares is included in shareholders' equity in Realty's and the Companies financial statements. Realty also has an investment consisting of 331,000 shares of capital stock and warrants to purchase an additional 1,008,000 shares of capital stock in Balanced Care Corporation, a healthcare operator. This investment has a market value of $8,688,000 at December 31, 1998 and is included in Realty's and the Companies' financial statements. The difference of $7,584,000 between the market value and the aggregate cost of the shares and the warrants is included in shareholders' equity in Realty's and the Companies' financial statements. Future Healthcare Investments--As part of the Plan, Realty has reduced its capital investment program to respond to changing industry conditions and demand for new healthcare facilities. Realty has historically invested in healthcare related facilities which have included long-term care facilities, rehabilitation hospitals, retirement and assisted living facilities, medical office buildings, alcohol and substance abuse treatment facilities, psychiatric hospitals, and other healthcare related facilities. Realty has also invested in other entities which invest in similar facilities abroad. These investments have been made primarily for the production of income. Realty will continue to make these types of investments, though the level of capital investment will be less than Realty's historical investment level. As part of Realty's capital plan, it may , however, continue to diversify its portfolio in order to minimize risks inherent in investing in healthcare related real estate industry by broadening its geographic base, providing financing to more operators, diversifying the type of healthcare and other facilities in its portfolio and diversifying the types of financing methods provided. In evaluating potential investments, Realty considers factors such as: (1) the current and anticipated cash flow and its adequacy to meet operational needs and other obligations and to provide a competitive market return on equity to Realty's shareholders; (2) the geographic area, type of property and demographic profile; (3) the location, construction quality, condition and design of the property; (4) the potential for capital appreciation, if any; (5) the growth and regulatory environment of the communities in which the properties are located; (6) occupancy and demand for similar healthcare or other facilities in the same or nearby communities; (7) for healthcare investments, an adequate mix of private and governmental-sponsored patients; (8) potential alternative uses of the facilities; and (9) prospects of liquidity through financing or refinancing. Management reviews and verifies market research for a significant amount of potential investments on behalf of Realty. Management also reviews the value of the property, the interest rates and debt service coverage requirements of any debt to be assumed and the anticipated sources of repayment for such debt. In the event Realty sells or otherwise disposes of any of its properties, Realty's Directors will determine whether and to what extent Realty will acquire additional properties or distribute the proceeds to the shareholders. Competition in Healthcare Industry For healthcare investments, Realty competes, primarily on the basis of knowledge of the industry, economics of the transaction and flexibility of financing structure, with real estate partnerships, other real estate investment trusts, banks and other investors generally in the acquisition, leasing and financing of healthcare related facilities. The operators of the facilities compete on a local and regional basis with other operators of comparable facilities. They compete with independent operators as well as companies managing multiple facilities, some of which are substantially larger and have greater resources than the operators 10 of the facilities. Some of these facilities are operated for profit while others are owned by governmental agencies or tax-exempt not-for-profit organizations. Government Regulation Realty recognizes a portion of revenue from percentage, supplemental and/or additional rent or interest. This revenue can be a contractual amount or be based on the healthcare facility operator's gross revenues, which, in most cases, is subject to changes in the reimbursement and licensure policies of federal, state and local governments. In addition, the acquisition of healthcare facilities is generally subject to state and local regulatory approval. Medicare, Medicaid, Blue Cross and Other Payors Certain of the third-party healthcare operators who lease facilities from Realty or who obtained loan financing from Realty receive payments for patient care from federal Medicare programs for elderly and disabled patients, state Medicaid programs for medically indigent and cash grant patients, private insurance carriers, employers and Blue Cross plans, health maintenance organizations, preferred provider organizations and directly from patients. Historically, Medicare payments for long-term care services, psychiatric care, and rehabilitative care were based on allowable costs plus a return on equity for proprietary facilities. On August 5, 1997, President Clinton signed into law the Balanced Budget Act ("BBA") which included among other things, sweeping changes to Medicare reimbursement for long-term care services. The new reimbursement system is intended to reduce the growth in Medicare spending by creating incentives for the lowest cost delivery of long-term care services. The prospective payment system ("PPS") is being implemented over a twelve month period (based upon each facility's year-end cost report) beginning July 1, 1998, with the majority of nursing homes converting to PPS on January 1, 1999. Reimbursement under the new PPS rates will be phased in over the next four years. PPS may result in reduced Medicare revenue for long-term care facilities with significant Medicare patient populations. Success under PPS is dependent on several factors, including the third-party operator's management team's effectiveness. Payments from state Medicaid programs for psychiatric care are based on reasonable costs or are at fixed rates. Long-term care facilities are generally paid by the various states' Medicaid programs at rates based upon cost reimbursement principles. Reimbursement rates are typically determined by the state from cost reports filed annually by each facility on a prospective or retrospective basis. Most Medicare and Medicaid payments are below retail rates. Payments from other payors are generally also below retail rates. Blue Cross payments in different states and areas are based on costs, negotiated rates or retail rates. Regulation of Healthcare Properties and Third-Party Operators Long-Term Care Facilities--Regulation of long-term care facilities is exercised primarily through the licensing of such facilities. The particular agency having regulatory authority and the license qualification standards vary from state to state and, in some instances, from locality to locality. Licensure standards are constantly under review and undergo periodic revision. Governmental authorities generally have the power to review the character, competence and community standing of the operator and the financial resources and adequacy of the facility, including its plant, equipment, personnel and standards of medical care. Long-term care facilities may be certified under the Medicare program and are normally eligible to qualify under state Medicaid programs, although not all participate in the Medicaid programs. Rehabilitation Hospitals--Rehabilitation hospitals are also subject to extensive federal, state and local legislation and regulation. Rehabilitation hospitals are subject to periodic inspections and licensure requirements. Inpatient rehabilitation facilities are cost-reimbursed, receiving the lower of reasonable costs or reasonable charges. Typically, the fiscal intermediary pays a set rate per day based on the prior year's costs for each facility. Annual cost reports are filed with the operator's fiscal intermediary and adjustments are made, if necessary. Medical Office Buildings--The individual physicians, groups of physicians and healthcare providers which occupy medical office buildings are subject to a variety of federal, state and local regulations 11 applicable to their specific areas of practice. Since medical office buildings may contain numerous types of medical services, a wide variety of regulations may apply. In addition, medical office buildings must comply with the requirements of municipal building codes, health codes and local fire departments. Acute Care Hospitals--Acute care hospitals are subject to extensive federal, state and local legislation and regulation relating to, among other things, the adequacy of medical care, equipment, personnel, hygiene, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Hospitals must maintain strict standards in order to obtain their state hospital licenses from a department of health or other applicable agency in each state. In granting and renewing licenses, the department of health considers, among other things, the physical buildings and equipment, the qualifications of the administrative personnel and nursing staff, the quality of care and continuing compliance with the laws and regulations relating to the operation of the facilities. State licensing of facilities is a prerequisite to certification under the Medicare and Medicaid programs. Various other licenses and permits also are required in order to dispense narcotics, operate pharmacies, handle radioactive materials and operate certain equipment. Hospital facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for their licensing and accreditation. Retirement and Assisted Living--Residential communities such as retirement and assisted living facilities are subject to varying degrees of regulation and licensing by local and state health and social service agencies, and other regulatory authorities specific to their location. Typically these regulations and licensing requirements relate to fire safety, sanitation, staff training, staffing levels and living accommodations, as well as requirements specific to certain health related services offered. Levels of service provided and corresponding regulation vary considerably from operator to operator as some are similar to long-term care facilities, while others fall into the relatively unregulated care of a retirement community. Alcohol and Substance Abuse Treatment Facilities--Alcohol and substance abuse treatment facilities must comply with the licensing requirements of federal, state and local health agencies and with the requirements of municipal building codes, health codes and local fire departments. In granting and renewing a facility's license, a state health agency considers, among other things, the physical buildings and equipment, the qualifications of the administrative personnel and healthcare staff, the quality of nursing and other services and the continuing compliance of such facility with the laws and regulations applicable to its operations. Psychiatric Hospitals--Psychiatric hospitals generally are subject to extensive federal, state and local legislation and regulation. Licensing for psychiatric hospitals is subject to periodic inspections regarding standards of medical care, equipment and hygiene. In addition, there are specific laws regulating civil commitment of patients and disclosure of information regarding patients being treated for chemical dependency. Many states have adopted a "patient's bill of rights" which sets forth standards, such as using the least restrictive treatment, allowing patient access to the telephone and mail, allowing the patient to see a lawyer and requiring the patient to be treated with dignity. Insurance reimbursement for psychiatric treatment generally is more limited than for general healthcare. Lodging Related Real Estate As of December 31, 1998, Realty had investments in 301 lodging facilities including 226 La Quinta[RegTM] Inns and 57 La Quinta[RegTM] Inns & Suites which are presently operating and wholly-owned by Realty, two presently operating La Quinta[RegTM] Inns which Realty owns 50% or more of, three lodging properties owned by Realty which are marketed under a brand name other than La Quinta[RegTM], and 13 La Quinta[RegTM] Inns & Suites under construction. Realty anticipates that these properties under construction will be completed by the end of the second quarter of 1999. These lodging facilities, which are located in 28 states and have an aggregate of 37,000 rooms in service, are leased by Realty (or the respective property owning subsidiary) to a subsidiary of Operating. A complete discussion of the lodging business and inventory is presented in Operating's portion of the Business section of this Joint Annual Report on Form 10-K. La Quinta Merger Realty acquired the real estate assets of La Quinta Inns, Inc. on July 17, 1998 by merging La Quinta Inns, Inc. with and into Realty. The real estate assets acquired consisted of 233 La Quinta[RegTM] Inns and 47 12 La Quinta[RegTM] Inns & Suites in service as of the date of the La Quinta Merger, and 23 La Quinta[RegTM] Inns & Suites under construction and additional land held for development. The properties in service at the time of the La Quinta Merger consisted of 280 lodging facilities, containing a total of approximately 36,000 rooms located in 28 states, concentrated in the western and southern regions of the United States. Substantially all of those properties were wholly-owned by La Quinta Inns, Inc. and were operated under the La Quinta[RegTM] Inns and La Quinta[RegTM] Inns & Suites brand names. Lodging Properties In Service Realty's portfolio of lodging properties consist principally of wholly-owned lodging facilities. Realty (including through its predecessor, La Quinta Inns, Inc.) has historically acquired either directly or with a development partner, real estate upon which to develop a lodging facility. Realty's hotel division generally identifies real estate that is located in well-traveled areas in order to offer the business traveler, which is La Quinta's principal customer type, convenient access to the facilities and services needed to conduct his or her job. Realty (including through its predecessor) develops and leases two types of lodging properties, La Quinta[RegTM] Inns and La Quinta[RegTM] Inns & Suites. La Quinta[RegTM] Inns consist of hotel properties with an average of 130 single rooms per property and are operated in the mid-priced lodging segment. La Quinta[RegTM] Inns & Suites consist of two room suites that contain additional room and on-site amenities and are operated at the high-end of the mid-priced segment. Lodging Properties in Development During 1998, Realty's lodging division completed construction of 24 new La Quinta[RegTM] Inns & Suites and has an additional 13 inns under construction to be completed by June 1999. Future Development Activities As part of the Plan, Realty will not commence any new construction of lodging facilities until market conditions will foster such new development and the capital markets are more appropriately accessible to finance any such new development. As of December 31, 1998 the 13 La Quinta[RegTM] Inns & Suites under construction will be completed by the end of the second quarter of 1999, although no new construction is planned or will be commenced in the near term. Instead, Realty's lodging division will evaluate and concentrate on lodging facilities in services in order to maximize the overall return from Realty's lodging portfolio. Once market conditions warrant and the capital markets are accessible at an acceptable cost to Realty, Realty intends to pursue development opportunities for lodging facilities, including La Quinta[RegTM] Inns and La Quinta[RegTM] Inns & Suites, when, as and if appropriate. Golf Related Real Estate As of December 31, 1998, Realty had investments in 43 golf courses, including 34 golf courses that it owns either directly or through subsidiaries and 9 golf courses that it leases from third parties. In addition, Realty is currently developing 2 additional golf courses in Texas. All of Realty's owned and leased golf course are leased or subleased, as the case may be, to a subsidiary of Operating. On February 11, 1999, Realty, together with Operating, announced that it had entered into a definitive agreement to sell the subsidiaries that own Realty's golf course properties, together with the operations conducted thereon, to Golf Acquisitions, L.L.C., an affiliate of ClubCorp., Inc. for an aggregate purchase price of approximately $393 million, subject to certain adjustments. The transaction, which is subject to customary closing conditions, is scheduled to close on or prior to, March 31, 1999. Upon completion of this transaction, Realty will no longer own interests, directly or indirectly, in any golf course properties. Cobblestone Merger Realty acquired the real estate assets of Cobblestone Holdings, Inc. and its subsidiaries on May 29, 1998 by merging Cobblestone Holdings, Inc. with and into Realty. The real estate assets acquired consisted of 25 golf courses, 19 of which were owned and 6 of which were leased. Cobblestone's properties were concentrated primarily in the southern United States. Additional Acquisitions of Golf Course Properties During, 1998, Realty, through its golf division, also acquired an additional 18 golf courses, 15 of which were owned and 3 of which were leased. These courses were principally located in the southeastern United States. 13 Lease of Golf Course Properties to Operating All of Realty's golf courses are either leased, in the case of its owned golf courses, or subleased, in the case of its leased golf courses, to a subsidiary of Operating. A discussion of the golf business and industry is presented in Operating's portion of the Business section of this Joint Annual Report on Form 10-K. Golf Properties in Development During 1998, Realty's golf division commenced construction of two new golf courses. In addition, one nine-hole course that was under construction at the beginning of 1998 was completed and put in service during 1998. Employees As of December 31, 1998, the operations of Realty were maintained by 83 employees. Realty has not experienced any significant labor problems and believes that its employee relations are good. Legal Proceedings Realty is, and is likely in the future to be, subject to certain types of litigation, including negligence and other tort claims. The costs and effects of such legal and administrative cases and proceedings (whether civil or criminal), settlements and investigations are indeterminate. The costs and effects of any such legal proceeding could be material to Realty's operations. For further discussion of these issues see Item 3, "Legal Proceedings". General Real Estate Investment Risks Realty's ownership of real property is substantial. Realty's investments are subject to varying degrees of risk generally incident to the ownership of real property. Real estate values and income from Realty's properties may be adversely affected by changes in national economic conditions, changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, changes in real estate tax rates and other operating expenses, adverse changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes and other natural disasters (which may result in uninsured losses), acts of war, adverse changes in zoning laws and other factors which are beyond the control of Realty. A significant portion of revenue for third party operators of Realty's Portfolio arises from government reimbursement of various healthcare services. Changes in reimbursement rates could adversely affect third-party operators' cash flow and calculating for operating expenses. Value and Liquidity of Real Estate Real estate investments are relatively illiquid. The ability of Realty to vary its portfolio in response to changes in economic and other conditions is limited. If Realty must sell an investment, there can be no assurance that Realty will be able to dispose of it in the time period it desires or that the sales price of any investment will recoup or exceed the amount of Realty's investment. Property Taxes Each of Realty's lodging facilities is subject to real property taxes. The real property taxes on the inns may increase or decrease as property tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, Realty's operations could be adversely affected. OPERATING General Operating is a Delaware corporation which operates the business conducted on Realty's lodging and golf related real estate. Operating does not operate any businesses conducted on, or related to, Realty's healthcare related real estate. As of December 31, 1998, Operating leased from Realty and 14 managed 299 lodging facilities and 43 golf courses. In addition, until it was sold on December 10, 1998, Operating also leased from Realty and operated the Santa Anita Racetrack, one of the United States' preeminent thoroughbred racetracks. Operating's activities are conducted primarily on real estate either leased or subleased from Realty. Operating neither leases real estate from, nor manages real estate on behalf of, any third-party. Rather, Operating's activities are currently principally intended to enhance the Companies' shareholders participation in the income produced by Realty. As described above, The Meditrust Companies announced a comprehensive restructuring plan on November 12, 1998 that is designed to clarify the Companies investment and operating strategy by focusing on the healthcare and lodging business segments. As a result, prior to December 31, 1998, Operating, together with Realty, sold the Santa Anita Racetrack and the Santa Anita horseracing operations. In addition, Operating, together with Realty, has entered into a definitive agreement to sell all of its subsidiaries that operate the businesses conducted on Realty's golf course properties. Accordingly, Operating's business, once the sale of the Cobblestone golf entities is completed, will thereafter be focused on the lodging business. Operating's principal executive offices are based at 197 First Avenue, Suite 300, Needham, Massachusetts 02494, and its telephone number is (781) 453-8062. For a discussion of certain factors that could impact the financial condition, results of operations and/or business of Operating or the successful implementation of the comprehensive restructuring plan and each of its component parts, you are encouraged to read the section entitled "Certain Factors You Should Consider" beginning on page 64 of this Joint Annual Report on Form 10-K. Lodging The lodging portion of Operating's business is conducted under the La Quinta[RegTM] brand name. La Quinta is one of the largest operators of hotels in the mid-priced segment of the lodging industry in the United States. La Quinta achieved an occupancy percentage of 67.0% and an average daily room rate ("ADR") of $59.29 for the period subsequent to the La Quinta Merger and an occupancy percentage of 68.7% and an ADR of $60.25 for the year ended December 31, 1998. La Quinta has Inns located in 28 states, concentrated in the western and southern United States. La Quinta operated Inns and Inn & Suites hotels with a combined total of approximately 37,000 rooms at the end of 1998. Product La Quinta[RegTM] Inns appeal to guests who desire high-quality rooms, convenient locations and attractive prices, but who do not require banquet and convention facilities, in-house restaurants, cocktail lounges or room service. By eliminating the costs of these management-intensive facilities and services, La Quinta believes it offers its customers exceptional value by providing rooms that are comparable in quality to full-service hotels at lower prices. The typical La Quinta Inn contains approximately 130 spacious, quiet and comfortably furnished guest rooms averaging 300 square feet in size. Guests at a La Quinta Inn are offered a wide range of amenities and services, such as its complimentary First Light[TM] breakfast program which includes cereal and fresh fruit, free unlimited local telephone calls, a swimming pool, same-day laundry and dry cleaning, fax services, 24-hour front desk message service and free parking. Room amenities include new 25 inch remote control televisions with expanded free television channel choices, movies-on-demand, interactive video games from Nintendo[RegTM], in room coffee makers and dataport telephones for computer connections. Additional amenities available at La Quinta Inn & Suites include two room suites with microwaves and refrigerators, fitness centers and courtyards with gazebos and spas. La Quinta guests typically have convenient access to food service at adjacent free-standing restaurants, including national chains such as Cracker Barrel, International House of Pancakes, Denny's and Perkins. Realty has an ownership interest in 120 of these adjacent buildings, which are generally leased to restaurant operators. La Quinta's strategy is to continue to operate as a high-quality provider in the mid-priced segment of the hotel industry, focusing on enhancing revenues, cash flow and profitability. Specifically, La Quinta's strategy centers upon: 15 Continued Focus on Mid-priced Segment--Hotels in this price category provide cost-conscious business travelers with high-quality rooms and convenient locations at a moderate price. Because La Quinta competes primarily in the mid-priced segment, management's attention is totally focused on meeting the needs of La Quinta's target customers. La Quinta Ownership and Management of Inns--In contrast to many of its competitors, La Quinta manages and has ownership interests through Operating and Realty in all of its inns. At March 26, 1999, Realty and Operating owned 100% of 290 La Quinta inns including 61 Inns & Suites, and 50% or more of an additional two inns. As a result, La Quinta believes it is able to achieve a higher level of consistency in both product quality and service than its competition. In addition, La Quinta's position as one of the few owner-operated chains enables La Quinta to offer new services, direct expansion, establish pricing strategy and to make other marketing decisions on a system-wide or local basis as conditions dictate, without consulting third-party owners, management companies or franchisees as required of most other lodging chains. La Quinta's management of the inns also enables it to control costs and allocate resources effectively to provide excellent value to the consumer. Operations Management of the La Quinta chain is coordinated from its headquarters in San Antonio, Texas. Centralized corporate services and functions include marketing, financing, accounting and reporting, purchasing, quality control, development, legal, reservations and training. Inn operations are currently organized into Eastern, Western and Central divisions with each division headed by a Divisional Vice President. Regional Managers report to the Divisional Vice Presidents and are each responsible for approximately 15 inns. Regional Managers are responsible for the service, cleanliness and profitability of the inns in their regions. Inn managers receive inn management training which includes an emphasis on service, cleanliness, cost controls, sales and basic repair skills. Because La Quinta's professionally trained managers are substantially relieved of responsibility for food service, they are able to devote their attention to assuring friendly guest service and quality facilities, consistent with chain-wide standards. At December 31, 1998, La Quinta employed approximately 8,000 persons, of whom approximately 90% were compensated on an hourly basis. Approximately 340 individuals were employed at the corporate headquarters and 7,660 were employed directly in inn operations. La Quinta's employees are not currently represented by labor unions. Management believes its ongoing labor relations are good. Customer Base and Marketing La Quinta's combination of consistent, high-quality accommodations and good value is attractive to business customers, who account for more than 70% of rooms rented. These core customers typically visit a given area several times a year, and include salespersons covering a specific territory, government and military personnel and technicians. La Quinta also targets both vacation travelers and senior citizens. For the convenience of these targeted customer groups, inns are generally located near suburban office parks, major traffic arteries or destination areas such as airports and convention centers. La Quinta has developed a strong following among its customers. An external industry survey shows La Quinta's heavy users are among the most loyal of the mid-priced segment. La Quinta focuses a number of its marketing programs on maintaining a high number of repeat customers. For example, La Quinta promotes a "Returns[RegTM] Club" offering members preferred status and rates at La Quinta inns, along with rewards for frequent stays. The Returns[RegTM] Club had approximately 360,000 members as of December 31, 1998. La Quinta focuses on reaching its target markets through advertising, direct sales, repeat traveler incentive programs and other marketing programs targeted at specific customer segments. It advertises through television, radio and print advertisements which focus on quality and value. La Quinta uses the same campaign concept throughout the country with minor modifications made to address regional 16 differences. La Quinta also uses billboard advertisements posted along major highways to advertise the existence and location of La Quinta inns or Inn & Suites hotels in the proximity. La Quinta markets directly to companies and other organizations through its direct sales force of over 90 sales representatives and managers. This sales force calls on companies which have a significant number of individuals traveling in the regions in which La Quinta operates and which are capable of producing a high volume of room nights. La Quinta provides a central reservation system, "teLQuik[RegTM]," which currently accounts for advance reservations for approximately 34% of room nights. The teLQuik[RegTM] system allows customers to make reservations by dialing 1-800-NUROOMS (1-800-687-6667) or 1-800-531-5900 toll free, or from reservations phones placed in all La Quinta inns. These phones enable guests to make their next night's reservation from their previous night's La Quinta inn. In addition, approximately 40% of room nights reflect advance reservations made directly with individual inns and forwarded to the central reservation system. In total, advance reservations account for approximately 74% of room nights. La Quinta operates two reservation centers with state-of-the-art technology in processing reservations as one virtual center. La Quinta, through its national sales managers, markets its reservation services to travel agents and corporate travel planners who may access teLQuik[RegTM] through five major airline reservation systems. Information regarding inn locations, services and amenities, as well as reservation capabilities and a virtual reality tour of the new Gold Medal rooms, is available on La Quinta's Travel Web site at http://www.laquinta.com. Competition Each La Quinta inn competes in its market area with numerous full service lodging brands, especially in the mid-priced segment, and with numerous other hotels, motels and other lodging establishments. Chains such as Hampton Inns, Fairfield Inns and Drury Inns are direct competitors of La Quinta. Other competitors include Holiday Inns, Ramada Inns, Red Roof Inns and Comfort Inns. There is no single competitor or group of competitors of La Quinta that is dominant in the lodging industry. Competitive factors in the industry include reasonableness of room rates, quality of accommodations, service level and convenience of locations. The profitability of inns operated by La Quinta is subject to general economic conditions, competition, the desirability of particular locations, the relationship between supply of and demand for hotel rooms and other factors. La Quinta generally operates inns in markets that contain numerous competitors, and the continued success of its inns will be dependent, in large part, upon the ability of these facilities to compete in such areas as reasonableness of room rates, quality of accommodations, service level and convenience of locations. There can be no assurance that demographic, geographic or other changes in markets will not adversely affect the convenience or desirability of the locations of La Quinta's inns. Furthermore, there can be no assurance that, in the markets in which La Quinta inns operate, competing hotels will not provide greater competition for guests than currently exists, and that new hotels will not enter such markets. The lodging industry in general, including La Quinta, may be adversely affected by national and regional economic conditions and government regulations. The demand for accommodations at a particular inn may be adversely affected by many factors including changes in travel and weather patterns, local and regional economic conditions and the degree of competition with other lodging establishments in the area. Seasonality The lodging industry is seasonal in nature. Generally, La Quinta's inn revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in the revenue, profit margins and net earnings of La Quinta. Supply and Demand In some years, construction of lodging facilities in the United States resulted in an excess supply of available rooms, and the oversupply had an adverse effect on occupancy levels and room rates in 17 the industry. Although the relationship between supply and demand has been favorable in recent years, the lodging industry may be adversely affected in the future by (i) an oversupply of available rooms, (ii) national and regional economic conditions, (iii) changes in travel patterns, (iv) taxes and government regulations which influence or determine wages, prices, interest rates, construction procedures and costs, and (v) the availability of credit. Employment and Other Governmental Regulation La Quinta's business is subject to extensive federal, state and local regulatory requirements, including building and zoning requirements, all of which can prevent, delay, make uneconomic or significantly increase the cost of constructing additional lodging facilities. In addition, La Quinta is subject to laws governing its relationship with employees, including minimum wage requirements, overtime pay, working conditions, work permit requirements and discrimination claims. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could adversely affect La Quinta. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. While La Quinta believes that its inns are substantially in compliance with these requirements, a determination that La Quinta is not in compliance with the ADA could result in the imposition of fines or an award of damages to private litigants. These and other initiatives could adversely affect La Quinta as well as the lodging industry in general. Employees La Quinta's future success will depend, in part, on its continuing ability to attract, retain and motivate highly qualified personnel, who are in great demand. Lodging Industry Operating Risks La Quinta is subject to all operating risks common to the lodging industry. These risks include, among other things, (i) competition for guests from other hotels, a number of which may have greater marketing and financial resources than La Quinta, (ii) increases in operating costs due to inflation and other factors, which increases may not have been offset in recent years, and may not be offset in the future, by increased room rates, (iii) dependence on business and commercial travelers and tourism, which business may fluctuate and be seasonal, (iv) increases in energy costs and other expenses of travel, which may deter travelers, and (v) adverse effects of general and local economic conditions. Construction La Quinta may from time to time experience shortages of materials or qualified tradespeople or volatile increases in the cost of certain construction materials, resulting in longer than normal construction and remodeling periods, loss of revenue and increased costs. La Quinta relies heavily on local contractors, who may be inadequately capitalized or understaffed. The inability or failure of one or more local contractors to perform may result in construction delays, increased cost and loss of revenue. Golf Course Operations As of December 31, 1998, Operating operated 43 golf courses in 7 states. Operating leases or subleases, as the case may be, these golf course properties from Realty. Operating directly manages these golf courses through its Cobblestone golf division, which is headquartered in San Diego, California. Cobblestone's individual golf course properties are locally managed, although regional managers, each of whom report to Cobblestone's senior management team, are responsible for oversight of a number of Cobblestone's golf course facilities. On February 11, 1999, Operating, together with Realty, announced that it had entered into a definitive agreement to sell the subsidiaries that conduct the golf businesses at the golf courses owned and leased by Realty, together with the golf course related real estate owned and/or leased by Realty, to Golf Acquisitions, L.L.C., an affiliate of ClubCorp., Inc. for an aggregate purchase price of approximately $393 million, subject to certain adjustments. The transaction, which is subject to customary closing conditions, is scheduled to close on or prior to, March 31, 1999. Upon completion of this transaction, Operating will no longer operate a golf course related business. 18 Income Tax Matters Operating pays ordinary corporate income taxes on its taxable income. Any income, net of taxes, will be available for retention in Operating's business or for distribution to shareholders as dividends. Any dividends distributed by Operating will be subject to tax at ordinary rates and generally will be eligible for the dividends received deduction for corporate shareholders to the extent of Operating's current or accumulated earnings and profits. However, there is no tax provision which requires Operating to distribute any of its after-tax earnings and Operating does not expect to pay cash dividends in the foreseeable future. Legal Proceedings Operating is, and is likely in the future to be, subject to certain types of litigation, including negligence and other tort claims. The costs and effects of such legal and administrative cases and proceedings (whether civil or criminal), settlements and investigations are indeterminate. The costs and effects of any such legal proceeding could be material to Operating's operations. For further discussion of these issues see Item 3, "Legal Proceedings". 19 Item 2. Properties The following table sets forth certain information as of December 31, 1998 regarding the Companies' healthcare, golf and hotel facilities:
Annual Purchase Base Rent Number Number Price See or of of or Mortgage References Interest Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3) - - ----------------------- ------------ ---------------- ------------------------ ------------ ----------------------- (dollars in thousands) (dollars in thousands) LONG-TERM CARE FACILITIES Alabama 1 230 $ 7,759 $ 941 Arkansas 1 94 8,392 881 Arizona 6 1,054 41,957 (4) 978 California 10 919 78,837 (5) 6,571 Colorado 15 1,432 70,484 (4) 6,957 Connecticut 14 1,980 109,779 (6) 13,547 Florida 17 2,111 120,154 (7) 14,133 Georgia 1 83 2,474 (4) 10,817 Idaho 4 808 43,113 (4) 2,159 Indiana 13 1,723 71,264 (8) 2,739 Kansas 3 379 8,440 (4) Kentucky 2 283 15,380 (9) 1,599 Massachusetts 31 4,785 318,573 (10) 33,583 Maryland 1 170 18,188 1,910 Michigan 4 458 23,044 (11) 2,658 Missouri 19 2,526 83,444 (12) 10,178 North Carolina 1 118 2,011 (4) Nebraska 3 413 12,564 (4) New Hampshire 7 642 46,598 3,657 New Jersey 8 1,423 123,841 (13) 12,743 New Mexico 1 206 12,763 (4) 1,162 Nevada 3 564 29,887 (4) 2,227 New York 5 512 51,044 (14) 900 Ohio 8 956 44,502 (15) 4,016 Pennsylvania 3 381 18,392 (16) 2,192 Rhode Island 2 332 14,936 (4) 1,519 South Carolina 1 88 3,907 (4) 389 Tennessee 10 1,321 45,855 (4) 2,387 Texas 5 660 40,375 (17) 3,284 Utah 2 240 7,902 (4) Washington 10 1,267 58,120 (18) 12,999 Wisconsin 1 119 13,888 1,035 West Virginia 7 615 29,406 (19) 2,906 Wyoming 2 312 14,527 (4) 1,720 -- ----- ---------- -------- TOTAL LONG TERM CARE 221 29,204 $1,591,800 $162,787 --- ------ ---------- --------
20
Annual Purchase Base Rent Number Number Price See or of of or Mortgage References Interest Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3) - - -------------------------- ------------ ---------------- ------------------------ ------------ ----------------------- (dollars in thousands) (dollars in thousands) ASSISTED LIVING Arkansas 5 255 $ 20,143 $ 1,986 Arizona 3 215 13,196 590 California 2 196 16,100 1,504 Colorado 1 62 5,273 (4) 459 Connecticut 1 115 12,718 622 Florida 24 1,790 167,004 (20) 14,167 Idaho 4 250 18,721 (21) 1,894 Kansas 5 144 7,925 903 Massachusetts 1 57 5,423 526 Maryland 1 110 2,814 81 Michigan 15 802 72,619 (22) 6,268 Minnesota 6 119 7,211 659 North Carolina 4 232 22,945 2,097 New York 2 180 10,490 863 Ohio 9 651 33,097 2,483 Oklahoma 2 59 3,335 174 Oregon 1 53 3,050 303 Pennsylvania 14 856 57,609 4,534 South Carolina 3 225 18,540 1,776 Tennessee 3 226 4,744 140 Texas 22 915 47,670 4,930 Virginia 3 239 8,111 500 Washington 4 339 18,827 (23) 1,821 Wisconsin 18 384 21,507 1,994 West Virginia 1 66 4,090 183 -- ----- --------- -------- TOTAL ASSISTED LIVING 154 8,540 $ 603,162 $ 51,457 --- ----- --------- -------- REHABILITATON HOSPITALS Kansas 1 80 $ 11,649 $ 752 --- ----- --------- -------- MEDICAL OFFICE BUILDINGS Arizona 2 $ 38,453 (24) $ 3,014 California 3 48,022 4,354 Florida 18 164,621 (25) 16,490 Massachusetts 2 1,850 268 New Jersey 2 44,055 (26) 4,092 Nevada 1 2,771 (27) 281 Tennessee 2 32,880 (4) 2,599 Texas 4 51,194 5,734 --- --------- -------- TOTAL MEDICAL OFFICE BUILDINGS 34 $ 383,846 $ 36,832 --- --------- -------- ACUTE CARE HOSPITAL Arizona 1 492 $ 65,650 $ 7,222 --- ----- --------- --------
21
Annual Purchase Base Rent Number Number Price See or of of or Mortgage References Interest Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3) - - -------------------------- ------------ ---------------- ------------------------ ------------ ----------------------- (dollars in thousands) (dollars in thousands) RETIREMENT LIVING FACILITIES North Carolina 1 190 $ 5,380 (4) $ 477 Ohio 1 104 6,624 (4) 644 Utah 1 287 8,921 (4) 986 - --- ---------- -------- TOTAL RETIREMENT LIVING 3 581 $ 20,925 $ 2,107 - --- ---------- -------- PSYCHIATRIC HOSPITALS AND ALCOHOL AND SUBSTANCE ABUSE California 1 61 $ 5,750 $ 719 Florida, New York and Oklahoma 5 524 32,345 (4) 3,575 Texas 1 99 4,689 400 - --- ---------- -------- TOTAL PSYCHIATRIC AND ALCOHOL AND SUBSTANCE ABUSE 7 684 $ 42,784 $ 4,694 - --- ---------- -------- TOTAL HEALTHCARE 421 39,581 $2,719,816 $265,851 --- ------ ---------- -------- GOLF COURSES Arizona 4 $ 33,636 $ 1,558 California 6 64,107 4,192 Florida 4 33,425 1,445 Georgia 4 33,247 1,323 North Carolina 6 39,101 2,102 Texas 16 142,964 8,238 Virginia 3 24,477 825 --- ---------- -------- TOTAL GOLF COURSES 43 $ 370,957 $ 19,683 --- ---------- -------- LAND UNDER DEVELOPMENT California $ 330 Florida 13,508 (4) 1,366 ---------- -------- TOTAL LAND UNDER DEVELOPMENT $ 13,838 $ 1,366 ---------- -------- OTHER California $ 5,273 (4) $ 710 ---------- -------- HOTELS Alabama 8 1,002 $ 60,636 Arkansas 5 603 30,486 (29) $ 8 Arizona 12 1,555 116,360 California 17 2,436 193,270 (29) 75 Colorado 15 1,868 155,986 Florida 34 4,502 336,359 Georgia 17 2,169 114,723 Illinois 7 913 57,557 Indiana 3 365 19,552
22
Annual Purchase Base Rent Number Number Price See or of of or Mortgage References Interest Location Facilities Beds/Rooms (1) Amount (2) Below Payment (3) - - ---------------------------- ------------ ---------------- ------------------------ ------------ ----------------------- (dollars in thousands) (dollars in thousands) Kansas 2 228 $ 10,790 (29) $ 30 Kentucky 1 129 6,251 Louisiana 15 2,058 153,007 (29) 197 Missouri 2 235 12,893 Mississippi 2 245 8,419 North Carolina 10 1,309 86,501 Nebraska 1 130 4,845 New Mexico 7 834 60,315 Nevada 4 625 31,550 (29) 365 Ohio 1 122 5,049 Oklahoma 8 963 61,664 Pennsylvania 1 128 6,653 South Carolina 6 713 37,080 Tennessee 11 1,402 76,648 Texas 102 13,212 856,687 (29) 54 Utah 4 467 37,369 Virginia 4 511 17,944 Washington 3 418 33,016 Wyoming 1 105 3,346 --- ------ ---------- -------- TOTAL HOTELS 303 39,247 $2,594,956 729 --- ------ ---------- -------- TOTAL ALL FACILITIES (28) 767 78,828 $5,704,840 $288,339 === ====== ========== ========
Other Healthcare Investments At various dates between July, 1996 and August 1998, Realty invested approximately $57,204,000 in exchange for 26,606,000 shares of common stock, representing 19.99% of NHP Plc, a property investment group that specializes in the financing, through sale and leaseback transactions, of nursing homes located in the United Kingdom. Realty does not have the right to vote more than 9.99% of the shares of NHP Plc. As of November 24, 1998, NHP Plc had invested or committed to invest approximately L377,000,000 in 200 nursing homes, totaling 10,841 beds. The facilities are leased to 24 nursing home operators in the United Kingdom with terms and conditions similar to those contained in Realty's leases. (1) Includes 39,581 total beds for healthcare facilities and 39,247 rooms for hotels. The La Quinta hotels have an average occupany of 67.0%. Based upon information provided by the operators of the healthcare facilities, the average occupancy of Realty's portfolio of operating healthcare facilities, including start-up facilities, for the nine months ended September 30, 1998, was as follows: 84% long-term care facilities, 50% rehabilitation hospitals, 76% alcohol and substance abuse treatment facilities, 68% assisted living, 92% retirement living facilities, and 57% acute care hospitals. Generally, average occupancy rates are determined by dividing the number of patient days in each period by the average number of licensed bed days during such period. (2) Represents purchase price or mortgage amount at December 31, 1998 for operating facilities and the funded loan amounts for facilities under construction. (3) The annual base rentals/interest payments under the healthcare leases or mortgages are generally projected to be approximately 9%-13% of the purchase price or mortgage amount, in accordance with the terms of the respective agreements. Base rent excludes additional and percentage rent and interest. Additional and percentage rent and interest for the year ended December 31, 1998 was an aggregate of $12,401,000 for all of the facilities. Additional and percentage rent and interest are calculated based upon a percentage of a facility's revenues over an agreed upon base amount or an automatic annual escalation. 23 (4) Permanent mortgage loans (5) Includes permanent mortgage loans of $52,278,000 (6) Includes permanent mortgage loans of $30,570,000 (7) Includes permanent mortgage loans of $45,374,000 and construction loans of $24,995,000 (8) Includes permanent mortgage loans of $63,937,000 (9) Includes permanent mortgage loans of $5,380,000 (10) Includes permanent mortgage loans of $148,897,000 (11) Includes permanent mortgage loans of $7,739,000 (12) Includes permanent mortgage loans of $74,646,000 (13) Includes permanent mortgage loans of $55,184,000 (14) Includes a permanent mortgage loan of $218,000 (15) Includes a construction loan of $7,035,000 (16) Includes a permanent mortgage loan of $6,860,000 (17) Includes permanent mortgage loans of $33,816,000 (18) Includes permanent mortgage loans of $52,259,000 (19) Includes a permanent mortgage loan of $12,206,000 (20) Includes permanent mortgage loans of $98,598,000 (21) Includes a permanent mortgage loan of $3,744,000 (22) Includes a permanent mortgage loan of $4,574,000 and construction loans of $4,558,000 (23) Includes a permanent mortgage loan of $3,365,000 (24) Includes a permanent mortgage loan of $30,123,000 (25) Includes permanent mortgage loans of $6,173,000 (26) Includes a construction loan of $20,298,000 (27) Includes a permanent mortgage loan of $2,771,000 (28) Investments by Realty in facilities operated by Life Care Centers of America, Inc., Sun Healthcare Group, Inc., and Alternative Living Services represented 12%, 8%, and 4%, respectively, of Realty's total portfolio as of December 31, 1998. (29) Represents annual base rent on ground operating leases. Long-Term Care Facilities. The long-term care facilities offer restorative, rehabilitative and custodial nursing care for patients not requiring more extensive and sophisticated treatment available at acute care hospitals. The facilities are designed to provide custodial care and to supplement hospital care and many have transfer agreements with one or more acute care hospitals. Assisted Living Facilities. The assisted living facility provides a combination of housing, supportive services, personalized assistance and healthcare designed to respond to individual needs for daily living and instrumental activities. Support services are generally available 24 hours a day to meet scheduled and unscheduled needs. Retirement Living Facilities. The retirement living facilities offer specially designed residential units for active and ambulatory elderly residents and provide various ancillary services. They may contain nursing facilities to provide a continuum of care. The retirement living facilities offer their residents an opportunity for an independent lifestyle with a range of social and health services. 24 Rehabilitation Hospitals. The rehabilitation hospitals provide treatment to restore physical, psycho-social, educational, vocational and economic usefulness and independence to disabled persons. Rehabilitation concentrates on physical disabilities and impairments and utilizes a coordinated multidisciplinary team approach to help patients attain measurable goals. Medical Office Buildings. Medical office building facilities contain individual physician, physician group and other healthcare provider offices for the administration and treatment of patients, usually in close proximity to the general service acute care hospital to which the physicians are affiliated. The types of services provided in a medical office building may include outpatient therapy, clinics, examination facilities and the provision of other medical services in a non-hospital setting. Acute Care Hospitals. Acute care hospitals provide services that include, among others, general surgery, internal medicine, obstetrics, emergency room care, radiology, diagnostic services, coronary care, pediatric services and psychiatric services. On an outpatient basis, the services include, among others, same day surgery, diagnostic radiology (e.g. magnetic resonance imaging, CT scanning, X-ray), rehabilitative therapy, clinical laboratory services, pharmaceutical services and psychiatric services. Alcohol and Substance Abuse Treatment Facilities. These facilities provide inpatient treatment for alcohol and substance abuse, including medical evaluation, detoxification and rehabilitation. Specialized programs offer treatment for adults, adolescents, families and chronic abusers. Psychiatric Hospitals. The psychiatric hospitals offer comprehensive, multidisciplinary adult, adolescent and substance abuse psychiatric programs. Patients are evaluated upon admission and an individualized treatment plan is developed. Elements of the treatment plan include individual, group and family therapy, activity therapy, educational programs and career and vocational planning. Golf Courses. These facilities include private country clubs, semi-private clubs and daily fee courses. Revenue is generated from the following sources -- initiation dues at private and semi-private golf courses, which are amortized over the expected life of the memberships, and from green fees, golf cart rentals, driving range fees, retail merchandise, food and beverage concessions and lodging fees. Lodging Properties. La Quinta inns appeal to guests who desire high-quality rooms, convenient locations and attractive prices, but who do not require banquet and convention facilities, in-house restaurants, cocktail lounges or room service. The new Inn & Suites hotels offer rooms designed to accommodate the needs of the guest irrespective of the purpose or length of the stay. The King Plus Extra rooms and deluxe two-room suites include features that may be desirable for longer stays. In addition, the Inn & Suites hotels offer fitness centers and courtyards with gazebos and spas. Typically, food service for La Quinta guests is provided by adjacent, free-standing restaurants. To maintain the overall quality of La Quinta's inns, each inn undergoes refurbishments and capital improvements as needed. Historically, refurbishing has been provided at intervals of between five and seven years, based on an annual review of the condition of each inn. La Quinta spent approximately $11,975,000 in capital improvements to existing inns during the period subsequent to the July 17, 1998 merger. La Quinta has made approximately $301,175,000 in investments in La Quinta Inns during the period 1995-1998. As a result of these expenditures, La Quinta believes it has been able to maintain a chainwide quality of rooms and common areas at its properties unmatched by any other national mid-priced hotel chain. LEASES Healthcare Facilities Generally, each healthcare facility (which includes the land, buildings, improvements, related easements, and rights and fixtures (the "Leased Properties") that is owned by Realty is leased pursuant to a long-term triple net lease (collectively, the "Leases") which typically contains terms as outlined below. Leased Properties usually do not include major movable equipment. The Leases generally have a fixed term of approximately 10 years and contain multiple renewal options. Some Leases are subject to earlier termination upon the occurrence of certain contingencies described in the Lease. 25 Realty's Leased Properties aggregated approximately $1,893,259,000 of gross real estate investments at December 31, 1998. The base rents range from approximately 7.56% to 13.75% per annum of Realty's equity investment in the Leased Properties. The base rents for the renewal periods are generally fixed rents for the initial renewal periods and market rates for later renewal periods. All Leases provide for either an automatic fixed annual rent escalation or additional variable rents in addition to the base rent, based on revenues exceeding specified base revenues. Realty typically also charges a lease commitment fee at the initiation of the sale/leaseback transaction. Each Lease is a triple net lease requiring the lessee to pay rent and all additional charges incurred in the operation of the Leased Property. The lessees are required to repair, rebuild and maintain the Leased Properties. The obligations under the Leases are generally guaranteed by the parent corporation of the lessee, if any, or affiliates or individual principals of the lessee. Some obligations are further backed by letters of credit, cash collateral or pledges of certificates of deposit from various financial institutions which may cover up to one full year's lease payments and which remain in effect until the expiration of a fixed time period or the fulfillment of certain performance criteria. Realty also obtains other credit enhancement devices similar to those it may obtain with respect to permanent mortgage loans. See "Permanent Mortgage Loans" for description. With respect to two of the facilities, Realty leases the land pursuant to ground leases and in turn subleases the land to the operator of the facility. Such subleases contain terms substantially similar to those found in the Leases. Hotel Facilities Generally, each hotel facility (including land, easements and rights, buildings, improvements, furniture, fixtures and equipment) that is owned by Realty is leased to the Operating Company pursuant to long-term lease arrangements. The lease agreements have fixed terms of 5 years. Realty's gross real estate investment in the leased hotel facilities aggregate approximately $2,575,251,000 at December 31, 1998. The base rents range from 3.53% to 19.27% per annum of Realty's equity investment in the leased hotel facilities. The hotel facility lease arrangements between Realty and Operating Company include quarterly base or minimum rents plus contingent or percentage rents based on quarterly gross revenue thresholds for each facility. Operating Company is required to pay rent and all operating expenses of the hotel facilities while Realty assumes costs attributable to real estate taxes and insurance. Operating Company is required to provide for all repairs, replacements and alterations to the leased facilities which are not considered capital additions or material structural work, as defined in the lease agreements. Realty will provide for all capital additions and material structural work. PERMANENT MORTGAGE LOANS Realty's permanent mortgage loan program is comprised of secured loans which are structured to provide Realty with interest income, additional interest based upon the revenue growth of the operating facility or a fixed rate increase, principal amortization and commitment fees. Virtually all of the approximately $1,216,625,000 of permanent mortgage loans at face value as of December 31, 1998 are first mortgage loans. The interest rates on Realty's investments in permanent mortgage loans for operating facilities range from approximately 7.6% to 12.5% per annum on the outstanding balances. The yield to Realty on permanent mortgage loans depends upon a number of factors, including the stated interest rate, average principal amount outstanding during the term of the loan, the amount of the commitment fee charged at the inception of the loan, the interest rate adjustments and the additional interest earned. The permanent mortgage loans for operating facilities made through December 31, 1998 are generally subject to 10-year terms with up to 20 to 30-year amortization schedules that provide for a balloon payment of the outstanding principal balance at the end of the tenth year. Some of the mortgages 26 include an interest adjustment in the fifth year which generally provides for interest to be charged at the greater of the current interest rate or 300 to 400 basis points over the five-year United States Treasury securities' yield at the time of adjustment. Realty generally requires a variety of additional forms of security and collateral beyond that which is provided by the lien of the mortgage. For example, Realty requires one or more of the following items: (a) a guaranty of the complete payment and performance of all obligations associated with each mortgage loan from the borrower's parent corporation, if any, other affiliates of the borrower and/or one or more of the individual principals controlling such borrower; (b) a collateral assignment from the borrower of the leases and the rents relating to the mortgaged property; (c) a collateral assignment from the borrower of all permits, licenses, approvals and contracts relating to the operation of the mortgaged property; (d) a pledge of all, or substantially all, of the equity interest held in the borrower; (e) cash collateral or a pledge of a certificate of deposit, for a negotiated dollar amount typically equal to three months to one year's principal and interest on the loan (which cash collateral or pledge of certificate of deposit typically remains in effect until the later to occur of (i) three years after the closing of the mortgage loan or (ii) the achievement by the facility of an agreed-upon cash flow debt coverage ratio for three consecutive fiscal quarters and, in the event that after the expiration of the letter of credit or pledge of certificate of deposit, the agreed-upon financial covenants are not maintained throughout the loan term, the borrower is often required to reinstate the cash collateral or pledge of certificate of deposit); (f) an agreement by any affiliate of the borrower or operator of the facility to subordinate all payments due to it from the borrower to all payments due to Realty under the mortgage loan; and (g) a security interest in all of the borrower's personal property, including, in some instances, the borrower's accounts receivable. In addition, the mortgage loans are generally cross-defaulted and cross-collateralized with any other mortgage loans, leases or other agreements between the borrower or any affiliate of the borrower and Realty. DEVELOPMENT INVESTMENTS AND LOANS Realty makes development investments or loans, which by their terms are, or convert into, sale/ leaseback transactions or permanent mortgage loans upon the completion of the facilities. Generally, the interest or yield rates on the outstanding balances of Realty's developments are up to 125-200 basis points over the prime rate of a specified financial institution. Realty also typically charges a commitment fee at the commencement of the project. The development period generally commences upon the funding of such investments or loans and terminates upon the earlier of the completion of development of the applicable facility or a specific date. This period is generally 12 to 18 months. During the development term, funds are advanced pursuant to draw requests in accordance with the terms and conditions of the applicable agreement which require a site visit prior to the advancement of funds. Monthly payments based on an interest or yield rate only, are made on the total amount of the investment or loan proceeds advanced during the development period. At December 31, 1998 Realty had outstanding development financing of $180,286,000 and was committed to providing additional financing of approximately $161,000,000, of which $119,000,000 relates to healthcare transactions. As with Realty's sale/leaseback transactions or permanent mortgage financing programs, the developments generally include a variety of additional forms of security and collateral. See "Leases" and "Permanent Mortgage Loans." During the development period, Realty generally requires additional security and collateral in the form of either payment and performance completion bonds or completion guarantees by either one, or a combination of, the lessee's or borrower's parent entity, other affiliates, or one or more of the individual principals.. As a further safeguard during the development period, Realty generally will retain a portion of the funding equal to 10% of the transaction amount until it has received satisfactory evidence that the project has been fully completed in accordance with the applicable plans and specifications and the period during which liens may be perfected with respect to any work performed, or labor or materials supplied, in connection with the construction of the project has expired. Realty also monitors the progress of the development of each project, the construction budget and the accuracy of the borrower's draw requests by having its own inspector perform on-site inspections of the project prior to the release of any requested funds. 27 ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of a release of such substances at a disposal treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Companies may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property. Item 3. Legal Proceedings A purported class action complaint that had been filed by Barbara J. Gignac in October 1996 in the Superior Court of Los Angeles County, California, naming as defendants the Companies, certain of their officers and directors and Colony Capital, Inc. was dismissed. On January 8, 1998 the Companies received notice that they were named as a defendant in an action entitled, Lynn Robbins v. William J. Razzouk, et al; Civil Action No. 98CI-00192 filed January 7, 1998 in the District Court of Bexar County, Texas and on January 20 , 1998 the Companies received notice that they were named as a defendant in an action entitled, Adele Brody v. William J. Razzouk, et al., Civil Action No. 98CI-00456 filed January 12,1998 in the District Court of Bexar County, Texas. The complaints which are almost identical (i) allege, in part, that La Quinta and its directors violated their fiduciary duty, duty of care and loyalty to La Quinta shareholders by entering into a merger agreement with the Companies without having first invited other bidders, and the Companies aided and abetted La Quinta and its directors in the alleged breaches, and (ii) seek injunctive relief enjoining the merger with La Quinta and compensatory damages. The parties negotiated and entered into an agreement in principle to settle the actions, dated on or about May 8, 1998 (the "Memorandum of Understanding"). The Memorandum of Understanding set forth the principal bases for the settlement, which included the issuance of a series of press releases prior to the meetings of the shareholders of the Companies and La Quinta to consider the La Quinta merger agreement, and the inclusion of a section in the joint proxy statement/prospectus prepared for the shareholder meetings which described the Forward Equity Issuance Transaction with MLI. The parties negotiated and entered into a Stipulation and Agreement of Compromise, Settlement and Release (the "Stipulation" or "Settlement"), dated on or about October 8, 1998. On October 8, 1998, the Texas Court entered an Order Re: Preliminary Approval ("Order") which, among other things, (i) preliminarily approved the Settlement; (ii) conditionally approved the Settlement Class; (iii) approved the Notice of Pendency and Settlement of Class Action for mailing to the Settlement Class; and (iv) scheduled a Settlement Hearing. On November 9, 1998, the Texas Court entered an amended Order which set the date for the Settlement Hearing to January 19, 1999. At the Settlement Hearing on January 19, 1999, a Final Judgement was entered, (i) finally approving the Settlement; (ii) declaring the Action and the Settlement Claims (as defined in the Stipulation) to be finally and fully compromised and settled; (iii) deeming the Representative Plaintiffs, the Settlement Class and the Settlement Class Members fully, finally and forever settled and releasing any and all Settled Claims against the Released Parties (as defined in the Stipulation); and (iv) dismissing the Action on the merits and with prejudice. Pursuant to the Settlement, La Quinta on February 22, 1999 paid the class plaintiffs attorney's fees totaling $700,000 which were awarded by the Texas court. 28 The Companies are also a party to a number of other claims and lawsuits arising out of the normal course of business; the Companies believe that none of these claims or pending lawsuits, either individually or in the aggregate, will have a material adverse affect on the Companies' business or on their consolidated financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None Item 4a. Executive Officers of the Registrants The following information relative to Realty's executive officers is given as of March 30, 1999:
Name Age Position with Realty - - --------------------- ----- ----------------------------------------------------- Thomas M. Taylor 56 Chairman David F. Benson 49 Chief Executive Officer, President and Director Michael F. Bushee 41 Chief Operating Officer Michael S. Benjamin 41 Senior Vice President, Secretary and General Counsel Laurie T. Gerber 41 Chief Financial Officer John G. Demeritt 39 Controller Stephen C. Mecke 36 Vice President of Acquisitions Debora A. Pfaff 35 Vice President of Operations Richard W. Pomroy 41 Vice President of Development
Thomas M. Taylor has been Acting Chairman of the Board of Realty since August 1998. Prior to that he was Chairman of the Board of La Quinta Inns, Inc. from 1994 to 1998, and President of Thomas M. Taylor & Co. (an investment consulting firm) since 1985, President of TMT-FW (a diversified investment firm) since September 1989. Mr. Taylor is also Director of Kirby Corporation, MacMillan Bloedel Limited, Moore Corporation, Agrium Inc., Loewen Group, Inc. and John Wiley & Sons, Inc., and Chairman of the Board of Encal Energy, Ltd. David F. Benson has been Acting Chief Executive Officer of Realty since August 1998, President of Realty since September 1991 and Treasurer since 1996. Prior to that, he was Treasurer of Realty from January 1986 to May 1992. He was Treasurer of Mediplex from January 1986 through June 1987. He was previously associated with Coopers & Lybrand, independent accountants, from 1979 to 1985. Mr. Benson is also a Trustee of Mid-Atlantic Realty Trust, a shopping center REIT, traded on the American Stock Exchange, a Director of Harborside Healthcare Corporation, a long-term care company, and a Director of Nursing Home Properties, Plc, a UK company specializing in the purchase and leasing of purpose-built nursing homes. Michael F. Bushee has been Chief Operating Officer of Realty since September 1994. He was Senior Vice President of Operations of Realty from November 1993 through August 1994, Vice President from December 1989 to October 1993, Director of Development from January 1988 to December 1989 and has been associated with Realty since April 1987. He was previously associated with The Stop & Shop Companies, Inc., a retailer of food products and general merchandise, for three years and Wolf & Company, P.C., independent accountants, for four years. Michael S. Benjamin has been Senior Vice President, Secretary and General Counsel of Realty since October 1993. He was Vice President, Secretary and General Counsel from May 1992 to October 1993, Secretary and General Counsel from December 1990 to May 1992 and Assistant Counsel to Realty from November 1989 to December 1990. His previous association was with the law firm of Brown, Rudnick, Freed & Gesmer, from 1983 to 1989. Laurie T. Gerber, a Certified Public Accountant, joined Realty in December 1996 as Chief Financial Officer. Prior to joining Realty, she was a partner in the accounting firm of Coopers & Lybrand, L.L.P., where she worked for 14 years. John G. Demeritt, a Certified Public Accountant, has been Controller of Realty since October 1995. Prior to that, he was Corporate Controller of CMG Information Services, Inc., an information service provider, from 1994 to 1995. He was Vice President of Finance and Treasurer of Salem Sportswear 29 Corporation, a manufacturer and marketer of licensed sports apparel, from June 1991 to November 1993. He was Controller of Scitex America Corporation, a manufacturer and distributor of electronic prepress equipment, from August 1986 to June 1991, and was previously associated with Laventhol & Horwath, independent accountants, from 1983 to 1986. Stephen C. Mecke has been Vice President of Acquisitions since October 1995 and has been Realty's Director of Acquisitions since June 1992. He was previously the Manager of Underwriting at Continental Realty Credit Inc., a commercial mortgage company, from October 1988 to June 1992. Debora A. Pfaff has been Vice President of Operations since October 1995 and has been Realty's Director of Operations since September 1992. Ms. Pfaff was previously a Senior Manager with KPMG Peat Marwick where she worked from 1985 to 1992. Richard W. Pomroy has been Vice President of Development since October 1997 and has been Director of Development since 1994. Prior to joining Realty, he was a project manager responsible for the management and development of construction projects at Continuum Care Corporation, an operator of nursing homes, subacute healthcare centers, and rehabilitation facilities. Mr. Pomroy began his career in the real estate industry as an architectural project manager, and gained additional property management experience as senior project manager, and later as vice president of construction, for several Boston area general contracting firms. The following information relative to Operating and Lodging executive officers is given as of March 30, 1999:
Name Age Position with Operating - - ---------------------- ----- ------------------------------------------------------- Thomas M. Taylor 56 Chairman William C. Baker 66 President Lodging: Ezzat S. Coutry 54 Chief Executive Officer, La Quinta Inns John F. Schmutz 51 Senior Vice President and General Counsel William S. McCalmont 43 Senior Vice President and Chief Financial Officer Steven T. Schultz 52 Executive Vice President and Chief Development Officer Thomas J. Chevins 42 Senior Vice President Vito Stellato 46 Senior Vice President Thomas Hall 51 Senior Vice President-Operations
Thomas M. Taylor has been Acting Chairman of the Board of Operating since August 1998. Prior to that he was Chairman of the Board of La Quinta Inns, Inc. from 1994 to 1998, and President of Thomas M. Taylor & Co. (an investment consulting firm) since 1985, President of TMT-FW (a diversified investment firm) since September 1989. Mr. Taylor is also Director of Kirby Corporation, MacMillan Bloedel Limited, Moore Corporation, Agrium Inc., Loewen Group, Inc. and John Wiley & Sons, Inc., and Chairman of the Board of Encal Energy, Ltd. William C. Baker has been the President of Operating since August 1998 and a Director of Operating since November 1997. Prior to such date, he served as Chairman of the Board of Santa Anita Realty Enterprises, Inc., and Chairman of the Board and Chief Executive Officer of Santa Anita Operating Company from August 1996 through the completion of the Santa Anita Mergers and as a Director from 1991 through the completion of the Santa Anita Mergers. Mr. Baker was Chief Executive Officer of Santa Anita Realty Enterprises from April 1996 to August 1996. Mr. Baker was the President of Red Robin International, Inc. (restaurant company) from 1993 to 1995, a private investor from 1988 to 1992 and Chairman of the Board and Chief Executive Officer of Del Taco, Inc. (restaurant franchises) from 1976 to 1988. He has also served as Chairman of the Board of Coast Newport Properties (real estate brokers) since 1991. Mr. Baker is a Director of Callaway Golf Company (golf equipment) and Public Storage, Inc. (REIT) Ezzat S. Coutry has been Chief Executive Officer of Lodging since July 1998. Prior to that he was Executive Vice President and Chief Operating Officer of La Quinta Inns, Inc. since November 1996. He 30 served as Regional Vice President of the Midwest Region for Marriott Hotels, Resorts & Suites from July 1990 to October 1996. He served as Senior Vice President of Sales for Marriott Hotels, Resorts & Suites from July 1989 to June 1990 and Senior Vice President of Rooms Operations for Marriott Hotels, Resorts & Suites from January 1989 to June 1989. John F. Schmutz has been Senior Vice President and General Counsel of Lodging since July 1998. Prior to that he was Vice President-General Counsel and Secretary of La Quinta Inns, Inc. since June 1992. He served as Vice President-General Counsel of Sbarro, Inc. from May 1991 to June 1992. He served as Vice President-Legal of Hardee's Food Systems, Inc. from April 1983 to May 1991. William S. McCalmont has been Senior Vice President and Chief Financial Officer of Lodging since July 1998. Prior to that he was Senior Vice President and Chief Financial Officer of La Quinta Inns, Inc. since October 1997. He served as Senior Vice President and Chief Financial Officer of FelCor Suite Hotels from July 1996 to October 1997. He served as Vice President-Treasurer of Harrah's Entertainment from June 1995 to July 1996. He served as Vice President-Treasurer of The Promus Companies from November 1991 to June 1995. Steven T. Schultz has been Executive Vice President and Chief Development Officer of Lodging since July 1998. Prior to that he was Executive Vice President and Chief Development Officer of La Quinta Inns, Inc. since December 1997. He served as Senior Vice President-Development of La Quinta Inns, Inc. from June 1992 to December 1997. He served as Senior Vice President-Development of Embassy Suites from October 1986 to June 1992. Thomas J. Chevins is the Senior Vice President - Marketing of Lodging since January, 1999. Prior to joining La Quinta, he was Regional Vice President, Sales and Marketing for Marriott Lodging, Midwest Region. He also served as Regional Director of Sales and Marketing in Marriott's Midwest region. Vito Stellato is the Senior Vice President - Human Resources of Lodging since December of 1998. Prior to that, he was Vice President of Human Resources for Harrah's Entertainment, Inc. at their Las Vegas and New Orleans properties. He was Vice President of Human Resources for Embassy Suites Hotels and has also held positions with Holiday Inns and U.S. Office of Personnel Management. Thomas Hall is the Senior Vice President-Operations of Lodging since December 1998. Prior to that he held various Senior Executive positions with Harrah's Entertainment, Inc. Prior to Harrah's he held senior level positions within Promus Companies as Vice President Operations for Embassy Suites' Eastern Region and Vice President Operations for Hampton Inns Inc. 31 PART II Item 5a. Market for Registrants' Common Equity and Related Stockholder Matters Paired Shares of Common Stock Market Information. The Companies' Shares are paired and trade together on the New York Stock Exchange under the symbol MT. The following table sets forth, for the periods shown, the high and low sales prices for the Shares (as reported on the New York Stock Exchange Composite Tape) as adjusted for the Mergers:
1998 1997 - - --------------------------------------- ------------------------------------- Quarter High Low Quarter High Low - - ----------- ----------- ----------- --------- ----------- ----------- First $ 36.75 $ 29.19 First $ 33.81 $ 30.48 Second $ 31.56 $ 25.13 Second $ 33.19 $ 29.54 Third $ 27.50 $ 13.69 Third $ 34.54 $ 31.21 Fourth $ 18.94 $ 11.81 Fourth $ 39.00 $ 34.59
Holders. There were approximately 14,396 holders of record of the Companies' Shares as of March 9, 1999. Included in the number of shareholders of record are Shares held in "nominee" or "street" name. Dividends. Realty has declared the following distributions on the Shares during its two most recent fiscal years. The 1997 distributions have been adjusted for the exchange of Shares pursuant to the Mergers. Pursuant to Internal Revenue Code Section 857 (b) (3) (C), for the year ended December 31, 1998, Realty designates the following cash distributions to holders of Shares as capital gains dividends, in the amounts set forth below:
Common Shares CUSIP 58501T306 25% 20% Non-taxable Date Date of Per Share Ordinary Capital Capital Return of Declared Record Pay Date Amount Income Gain Gain Capital - - ---------------- ----------- ----------- ------------- ------------- ------------- ------------- ------------ 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% ========= ========== ========== ========== ==========
Pursuant to Internal Revenue Code Section 857 (b) (3) (C), for the year ended December 31, 1997, Realty designates the following cash distributions to holders of Shares as dividends in the amounts set forth below:
Common Shares CUSIP 58501T306 Non-taxable Date Date of Per Share Ordinary Return of Declared Record Pay Date Amount Income Capital - - ---------------- ----------- ----------- ----------- ----------- ------------ 10-Jan-97 31-Jan-97 14-Feb-97 $ 0.5888 $ 0.4023 $ 0.1865 8-Apr-97 30-Apr-97 15-May-97 0.5930 0.4052 0.1878 8-Jul-97 31-Jul-97 15-Aug-97 0.5971 0.4080 0.1891 7-Oct-97 31-Oct-97 14-Nov-97 0.6013 0.4109 0.1904 -------- -------- -------- Total $ 2.3802 $ 1.6264 $ 0.7538 ======== ======== ======== Percentage 100% 68.33 % 31.67 % ======== ======== ========
32 Realty intends to distribute to its shareholders on a quarterly basis a majority of cash flow from operating activities available for distribution. Cash flow from operating activities available for distribution to shareholders of Realty will be derived primarily from the rental payments and interest payments derived from its real estate investments. All distributions will be made by Realty at the discretion of the Board of Directors and will depend on the earnings of Realty, its financial condition and such other factors as the Directors deem relevant. The distribution of $0.88361 per share represented a special distribution that was made to the holders of stock of Realty in order to comply with the requirements that Realty distribute the profits and earnings it inherited from LaQuinta when it acquired LaQuinta on July 17, 1998. In order to qualify for the beneficial tax treatment accorded to real estate investment trusts by Sections 856 to 860 of the Internal Revenue Code, Realty is required to make distributions to holders of its Shares of at least 95% of its "real estate investment trust taxable income". Series A Preferred Stock Market Information. On June 10, 1998, Realty issued 7,000,000 depositary shares (the "Series A Depositary Shares"). Each Series A Depositary Share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of $.10 per share ("Series A Preferred Stock"). Net proceeds from this issuance of approximately $168,666,000 were used by Realty primarily to repay existing indebtedness.
1998 - - -------------------------------------- Quarter High Low - - ---------- ----------- ----------- First -- -- Second $ 25.25 $ 25.00 Third $ 25.38 $ 19.13 Fourth $ 23.00 $ 19.00
Holders. There were approximately 209 holders of record of Realty's Series A Depositary Shares as of March 9, 1999. Included in the number of holders of record are Series A Depositary Shares held in "nominee" or "street" name. Dividends. Realty has declared the following distributions on its Series A Preferred Stock (adjusted to reflect amounts per Series A Depositary Share) during 1998 and no distributions during 1997 as the Series A Preferred Stock was issued during 1998. Pursuant to Internal Revenue Code Section 857 (b)(3)(C), for the year ended December 31, 1998, Realty designates the following cash distributions to its holders of Series A Depositary Shares as capital gains dividends, in the amount set forth below:
Preferred Shares CUSIP 58501T405 25% 20% Date Date of Per Share Ordinary Capital Capital Declared Record Pay Date Amount Income Gain Gain - - ----------------- ----------- ----------- -------------- -------------- -------------- -------------- 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% ========== ========== ========== ==========
33 Item 6. Selected Financial Information The following data sets forth certain financial information for the Companies, Realty, and Operating Company. This information is based and should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this joint annual report.
For the Combined Meditrust Companies 1998 1997 1996 1995 1994 (In thousands except per share data) ------------- ----------- ----------- ----------- ----------- Operating Data: Revenue ................................ $ 639,377 $289,038 $254,024 $209,369 $172,993 ---------- -------- -------- -------- -------- Expenses: Hotel operations ...................... 125,246 Depreciation and amortization ......... 87,228 26,838 21,651 16,620 15,615 Amortization of goodwill .............. 13,265 2,349 1,556 1,556 1,556 Interest expense ...................... 178,458 87,412 64,216 64,163 67,479 Rental property operating expenses ............................. 15,638 210 General and administrative expenses 21,436 10,257 8,625 7,058 7,883 Other ................................. 111,215 (Income) Loss from unconsolidated joint venture ......... (906) 10 Gain on sale of assets and securities, net ...................... (48,483) ---------- -------- -------- -------- -------- Total expenses ..................... 503,097 127,076 96,048 89,397 92,533 ---------- -------- -------- -------- -------- Income (Loss) from continuing operations before benefit of income taxes .......................... 136,280 161,962 157,976 119,972 80,460 Income tax benefit ..................... 4,800 ---------- -------- -------- -------- -------- Income (Loss) from continuing operations ............................ 141,080 161,962 157,976 119,972 80,460 Discontinued operations, net ........... (294,227) 450 ---------- -------- -------- -------- -------- Net income (loss) before extraordinary item .................... (153,147) 162,412 157,976 119,972 80,460 Loss on prepayment of debt ............. 33,454 ---------- -------- -------- -------- -------- Net income (loss) ...................... (153,147) 162,412 157,976 86,518 80,460 Preferred stock dividends .............. (8,444) ---------- -------- -------- -------- -------- Net income (loss) available to Paired Common shareholders ................... $ (161,591) $162,412 $157,976 $ 86,518 $ 80,460 ========== ======== ======== ======== ========
34 For the Combined Meditrust Companies
1998 1997 1996 1995 1994 (In thousands except per share data) --------------- -------------- -------------- -------------- -------------- Per Share Data: Basic earnings (loss) per Paired Common Share: Income (Loss) from continuing operations ............................... $ 1.17 $ 2.13 $ 2.21 $ 2.10 $ 1.90 Discontinued operations, net .............. (2.44) 0.01 -- -- ------------ ---------- ---------- ---------- ---------- Net income (loss) before extraordinary item ....................... (1.27) 2.14 2.21 2.10 1.90 Loss on prepayment of debt ................ ( 0.59) -- ------------ ---------- ---------- ---------- ---------- Net income (loss) ......................... (1.27) 2.14 2.21 1.51 1.90 Preferred stock dividends ................. (0.07) ------------ ---------- ---------- ---------- ---------- Net income (loss) available to Paired Common shareholders ...................... $ (1.34) $ 2.14 $ 2.21 $ 1.51 $ 1.90 ============ ========== ========== ========== ========== Diluted earnings (loss) per Paired Common Share: Income (Loss) from continuing operations ............................... $ 1.12 $ 2.12 $ 2.20 $ 2.09 $ 1.89 Discontinued operations, net .............. (2.35) ------------ ---------- ---------- ---------- ---------- Net income (loss) before extraordinary item ....................... (1.23) 2.12 2.20 2.09 1.89 Loss on prepayment of debt ................ ( 0.58) -- ------------ ---------- ---------- ---------- ---------- Net income (loss) ......................... (1.23) 2.12 2.20 1.51 1.89 Preferred stock dividends ................. (0.06) ------------ ---------- ---------- ---------- ---------- Net income (loss) available to Paired Common shareholders ...................... $ (1.29) $ 2.12 $ 2.20 $ 1.51 $ 1.89 ============ ========== ========== ========== ========== Weighted average shares outstanding: Basic ..................................... 120,515 76,070 71,445 57,152 42,433 ------------ ---------- ---------- ---------- ---------- Diluted ................................... 125,508 76,524 71,751 57,457 42,564 ------------ ---------- ---------- ---------- ---------- Distributions paid ........................ $ 3.34 $ 2.38 $ 2.31 $ 2.25 $ 2.18 ------------ ---------- ---------- ---------- ---------- Cash Flow Data: Cash provided by operating activities ............................... $ 176,171 $ 184,412 $ 188,551 $ 149,997 $ 100,819 Cash used in investing activities ......... (1,104,060) (571,325) (437,150) (310,135) (284,996) Cash provided by financing activities 1,189,613 387,919 247,077 164,449 207,808 December 31, ---------------------------------------------------------------------------- (In thousands) 1998 1997 1996 1995 1994 ------------- ---------- ---------- ---------- ---------- Balance Sheet Data: Real estate investments, net .............. $ 5,086,736 $2,935,772 $2,188,078 $1,777,798 $1,484,229 Total assets .............................. 6,459,551 3,280,283 2,316,875 1,891,852 1,595,130 Indebtedness .............................. 3,301,722 1,377,438 858,760 762,291 765,752 Total liabilities ......................... 3,508,623 1,454,544 931,934 830,097 824,983 Total shareholders' equity ................ 2,950,928 1,825,739 1,384,941 1,061,755 770,147
35 For Meditrust Corporation
1998 1997 1996 1995 1994 (In thousands except per share data) ------------- ------------- ------------- ------------- ------------- Operating Data: Revenue ................................ $ 518,872 $ 289,119 $ 254,024 $ 209,369 $ 172,993 ---------- --------- --------- --------- --------- Expenses: Hotel operations ...................... 1,063 Depreciation and amortization ......... 84,327 26,838 21,651 16,620 15,615 Amortization of goodwill .............. 12,505 2,214 1,556 1,556 1,556 Interest expense ...................... 178,374 87,412 64,216 64,163 67,479 Rental property operating expenses ............................. 15,638 210 General and administrative expenses ............................. 19,371 10,111 8,625 7,058 7,883 Other ................................. 96,052 (Income) Loss from unconsolidated joint venture ......... (906) 10 Gain on sale of assets and securities, net ...................... (48,483) ---------- --------- --------- --------- --------- Total expenses ..................... 357,941 126,795 96,048 89,397 92,533 ---------- --------- --------- --------- --------- Income (Loss) from continuing operations before benefit of income taxes .......................... 160,931 162,324 157,976 119,972 80,460 Income tax benefit ..................... Income (Loss) from continuing operations ............................ 160,931 162,324 157,976 119,972 80,460 ---------- --------- --------- --------- --------- Discontinued operations, net ........... (295,875) 688 ---------- --------- --------- --------- --------- Net income (loss) before extraordinary item .................... (134,944) 163,012 157,976 119,972 80,460 Loss on prepayment of debt ............. 33,454 ---------- --------- --------- --------- --------- Net income (loss) ...................... (134,944) 163,012 157,976 86,518 80,460 Preferred stock dividends .............. (8,444) ---------- --------- --------- --------- --------- Net income (loss) available to Paired Common shareholders ................... $ (143,388) $ 163,012 $ 157,976 $ 86,518 $ 80,460 ========== ========= ========= ========= ========= Per Share Data: Basic earnings (loss) per Paired Common Share: Income (Loss) from continuing operations ............................ $ 1.32 $ 2.13 $ 2.21 $ 2.10 $ 1.90 Discontinued operations, net ........... ( 2.43) 0.01 -- -- -- ---------- --------- --------- --------- --------- Net income (loss) before extraordinary item .................... ( 1.11) 2.14 2.21 2.10 1.90 Loss on prepayment of debt ............. -- -- 0.59 -- ---------- --------- --------- --------- --------- Net income (loss) ...................... ( 1.11) 2.14 2.21 1.51 1.90 Preferred stock dividends .............. ( 0.07) -- -- -- -- ---------- --------- --------- --------- --------- Net income (loss) available to Paired Common shareholders ................... $ (1.18) $ 2.14 $ 2.21 $ 1.51 $ 1.90 ========== ========= ========= ========= =========
36 For Meditrust Corporation
1998 1997 1996 1995 1994 (In thousands except per share data) --------------- ------------- ------------- ------------- ------------- Diluted earnings (loss) per Paired Common Share: Income (Loss) from continuing operations ............................... $ 1.27 $ 2.11 $ 2.20 $ 2.09 $ 1.89 Discontinued operations, net .............. ( 2.33) 0.01 ------------ ---------- ---------- ---------- ---------- Net income (loss) before extraordinary item ....................... ( 1.06) 2.12 2.20 2.09 1.89 Loss on prepayment of debt ................ 0.58 -- ------------ ---------- ---------- ---------- ---------- Net income (loss) ......................... ( 1.06) 2.12 2.20 1.51 1.89 Preferred stock dividends ................. ( 0.07) ------------ ---------- ---------- ---------- ---------- Net income (loss) available to Paired Common shareholders ...................... $ (1.13) $ 2.12 $ 2.20 $ 1.51 $ 1.89 ============ ========== ========== ========== ========== Weighted average shares outstanding: Basic ..................................... 121,820 76,274 71,445 57,152 42,433 ------------ ---------- ---------- ---------- ---------- Diluted ................................... 126,813 77,007 71,751 57,457 42,564 ------------ ---------- ---------- ---------- ---------- Distributions paid ........................ $ 3.34 $ 2.38 $ 2.31 $ 2.25 $ 2.18 ------------ ---------- ---------- ---------- ---------- Cash Flow Data: Cash provided by operating activities ............................... $ 187,606 $ 185,195 $ 188,551 $ 149,997 $ 100,819 Cash used in investing activities ......... (1,128,412) (580,560) (437,150) (310,135) (284,996) Cash provided by financing activities 1,209,441 376,698 247,077 164,449 207,808 December 31, ---------------------------------------------------------------------------------- (In thousands) 1998 1997 1996 1995 1994 ------------- ---------- ---------- ---------- ---------- Balance Sheet Data: Real estate investments, net .............. $ 5,067,217 $2,935,772 $2,188,078 $1,777,798 $1,484,229 Total assets .............................. 6,320,985 3,215,928 2,316,875 1,891,852 1,595,130 Indebtedness .............................. 3,301,722 1,377,438 858,760 762,291 765,752 Total liabilities ......................... 3,447,632 1,423,688 931,934 830,097 824,983 Total shareholders' equity ................ 2,873,353 1,792,240 1,384,941 1,061,755 770,147
37 For Meditrust Operating Company
Year Initial Period Ended Ended December 31, December 31, 1998 1997 -------------- --------------- (In thousands, except per share data) Operating Data: Revenue ................................................................ $ 253,249 $ 48 Expenses: Hotel operations ...................................................... 124,183 Depreciation and amortization ......................................... 2,901 Amortization of goodwill .............................................. 760 135 Interest expense ...................................................... 796 129 General and administrative expenses ................................... 2,065 146 Royalty to Meditrust Corporation ...................................... 6,326 Rent to Meditrust Corporation ......................................... 125,706 Other ................................................................. 15,163 ---------- --------- Total expenses ......................................................... 277,900 410 ---------- --------- Loss from continuing operations before benefit of income taxes ......... (24,651) (362) Income tax benefit ..................................................... (4,800) ---------- --------- Loss from continuing operations ........................................ (19,851) (362) Discontinued operations ................................................ 1,648 (238) ---------- --------- Net loss ............................................................... $ (18,203) $ (600) ========== ========= Per Share Data: Basic earnings (loss) per common share: Loss from continuing operations ........................................ $ (0.16) $ (0.01) Discontinued operations, net ........................................... 0.01 -- ---------- --------- Net loss ............................................................... $ (0.15) $ (0.01) ========== ========= Diluted earnings (loss) per common share: Loss from continuing operations ........................................ $ (0.16) $ (0.01) Discontinued operations, net ........................................... 0.01 -- ---------- --------- Net loss ............................................................... $ (0.15) $ (0.01) ========== ========= Weighted average shares outstanding Basic .................................................................. 120,515 82,490 Diluted ................................................................ 120,515 82,490 Cash Flow Data: Cash used in operating activities ...................................... $ 11,435 $ 783 Cash provided by (used in) investing activities ........................ 24,352 (34,427) Cash provided by (used in) financing activities ........................ (19,828) 54,883 December 31, ------------------------------- (In thousands) 1998 1997 ------------ --------- Balance Sheet Data: Total assets ........................................................... $ 198,190 $ 120,426 Total liabilities ...................................................... 119,683 63,338 Total shareholders' equity ............................................. 78,507 57,088
38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Certain matters discussed herein constitute forward-looking statements within the meaning of the Federal securities laws. The Meditrust Companies (the "Companies"), consisting of Meditrust Corporation ("Realty") and Meditrust Operating Company ("Operating"), intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements, and are including this statement for purposes of complying with these safe harbor provisions. Although the Companies believe the forward-looking statements are based on reasonable assumptions, the Companies can give no assurance that their expectations will be attained. Actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, general economic and real estate conditions, the conditions of the capital markets at the time of the proposed spin-off of the healthcare division, the identification of satisfactory prospective buyers for the non-strategic assets and the availability of financing for such prospective buyers, the availability of equity and debt financing for the Companies' capital investment program, interest rates, competition for hotel services and healthcare facilities in a given market, the satisfaction of closing conditions to pending transactions described in this Joint Annual Report, the enactment of legislation further impacting the Companies' status as a paired share real estate investment trust ("REIT") or Realty's status as a REIT, unanticipated delays or expenses on the part of the Companies and their suppliers in achieving year 2000 compliance and other risks detailed from time to time in the filings of Realty and Operating with the Securities and Exchange Commission ("SEC"), including, without limitation, those risks described in the Section of this Joint Annual Report on Form 10-K entitled "Certain Factors You Should Consider" beginning on page 66 hereof. Overview The basis of presentation includes Management's Discussion and Analysis of Financial Condition and Results of Operations for the combined and separate SEC registrants. Management of the Companies believes that the combined presentation is most beneficial to the reader. However, it should be noted that combined results of operations for the year ended December 31, 1997 are principally related to the activity of Realty, as Operating commenced operations on October 3, 1997. On November 5, 1997, Meditrust merged with Santa Anita Realty Enterprises, Inc., with Santa Anita Realty Enterprises, Inc. as the surviving corporation, and Meditrust Acquisition Company merged with Santa Anita Operating Company, with Santa Anita Operating Company as the surviving corporation (hereafter referred to as the "Santa Anita Merger" or "Santa Anita Mergers"). Upon completion of the Santa Anita Mergers, Santa Anita Realty Enterprises, Inc. changed its corporate name to "Meditrust Corporation" and Santa Anita Operating Company changed its corporate name to "Meditrust Operating Company." The Santa Anita Mergers were accounted for as reverse acquisitions whereby Meditrust and Meditrust Acquisition Company were treated as the acquirers for accounting purposes. Accordingly, the financial history is that of Meditrust and Meditrust Acquisition Company prior to the Santa Anita Mergers. For the year ended December 31, 1996, all share and per share amounts have been retroactively adjusted to reflect the 1.2016 exchange of shares of beneficial interest for paired common shares of the Companies. After completing the Santa Anita Merger, the Companies began pursuing a strategy of diversifying into additional new businesses. Implementation of this strategy included the evaluation of numerous potential acquisition targets. On January 3, and January 11, 1998, Realty entered into definitive merger agreements for La Quinta Inns, Inc. and its wholly owned subsidiaries and its unincorporated partnership and joint venture (collectively "La Quinta" and "La Quinta Merger") and Cobblestone Holdings, Inc. and its wholly owned subsidiary (collectively "Cobblestone" and "Cobblestone Merger"), respectively. In February 1998, legislation was proposed which limited the ability of the Companies to utilize the paired share structure. Accordingly, the Companies began a process of evaluating its healthcare portfolio and ceased any further evaluation of potential merger candidates. The Companies consummated the Cobblestone Merger and the La Quinta Merger on May 29, 1998 and July 17, 1998 respectively. On July 22, 1998, President William J. Clinton signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits the Companies' 39 ability to grow through use of the paired share structure. While the Companies' use of the paired share structure in connection with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under the Reform Act, the ability to use the paired share structure to acquire additional real estate and operating businesses conducted with the real estate assets (including the golf and lodging industries) was substantially limited. In addition, during the summer of 1998, the debt and equity capital markets available to REITs deteriorated, thus limiting the Companies' access to cost-efficient capital. The Companies began an analysis of the impact of the Reform Act, the Companies' limited ability to access the capital markets, and the operating strategy of the Companies' existing businesses. This analysis included advice from outside professional advisors and presentations by management on the different alternatives available to the Companies. The analysis culminated in the development of a comprehensive restructuring plan (the "Plan") designed to strengthen the Companies' financial position and clarify its investment and operating strategy by focusing on the healthcare and lodging business segments. The Plan was announced on November 12, 1998 and included the following components: o Pursue the separation of the Companies' primary businesses, healthcare and lodging, by creating two separately traded publicly listed REITs. The Companies intend to spin off the healthcare financing business into a stand-alone REIT; o Continue to operate the Companies' healthcare and lodging businesses using the existing paired share REIT structure until the healthcare spin-off takes place; o Sell more than $1 billion of non-strategic assets, including the portfolio of golf-related real estate and operating properties ("Cobblestone Golf Group"), the Santa Anita Racetrack and approximately $550 million of non-strategic healthcare properties; o Use the proceeds from these asset sales to achieve significant near-term debt reduction; o Settle fully the Companies' forward equity issuance transaction ("FEIT") with Merrill Lynch; o Reduce capital investments to reflect the current operating condition in each industry; o Reset Realty's annual dividend to $1.84 per common share, an amount that Realty deems sustainable and comparable to its peer groups: During 1998 and in early 1999, the Companies made significant progress in implementing, and in some cases completing, significant components of the Plan. The following summarizes the status of the Plan by substantial components: o Completed the sale of $613 million of $1 billion in planned asset sales, including: $436 million of non-strategic healthcare assets, the Santa Anita Racetrack and the related horseracing operation, its interest in the Santa Anita Fashion Mall and related land held for development and artwork originally acquired in the acquisition of the Santa Anita Companies; o Entered into letters of intent for the sale of an additional $155 million of healthcare assets. o Reduced the amount of the FEIT to $103 million as of December 31, 1998 ($89 million as of March 25, 1999) from the original $277 million. o Reduced the Companies' outstanding debt by $274 million. o Refocused the Companies' capital investment program to respond to industry trends by reducing planned healthcare investments to $100 million in 1999 and ceasing construction of any new hotels after completion of the 13 La Quinta Inn & Suites currently under development. o Reduced Realty's annual dividend to $1.84 per common share. o Entered into a definitive agreement to sell Cobblestone Golf Group for $393,000,000 and an agreement with its lenders and Merrill Lynch to settle the FEIT. As part of the comprehensive restructuring plan, the Companies classified golf and horseracing activities as discontinued operations for financial reporting purposes. Accordingly, management's 40 discussion and analysis of the results of operations are focused on the Companies primary businesses, healthcare and lodging. The Meditrust Companies--Combined Results of Operations Year ended December 31, 1998 vs. Year ended December 31, 1997 Revenue for the year ended December 31, 1998 was $639,377,000 compared to $289,038,000 for the year ended December 31, 1997, an increase of $350,339,000. Revenue growth was primarily attributable to the addition of hotel operating revenue of $258,423,000 and increased rental and interest income of $55,929,000 as a result of additional real estate investments made over the last year net of the affect of mortgage repayments and asset sales. Other non-recurring income for the year ended December 31, 1998 of $35,987,000 included prepayment and lease breakage fees arising from early mortgage repayments and asset sales. Hotel operating revenue includes the post-acquisition period from July 17, 1998 through December 31, 1998. Hotel operating revenue generally are measured as a function of the average daily rate ("ADR") and occupancy. The ADR for the period July 17, 1998 through December 31, 1998 increased to $59.29 as compared to ADR in the second half of 1997 of $56.69, an increase of $2.60 or 4.6%. Occupancy percentage decreased 1.8 percentage points to 67.0% from 68.8% for the same periods. Revenue per available room (RevPAR), which is a product of the occupancy percentage and ADR, increased 1.6% in the 1998 post-merger period over the second half of 1997. For the year ended December 31, 1998, total recurring operating expenses increased by $151,853,000. This increase was primarily attributable to the addition of operating expenses from hotel operations of $125,246,000. Hotel operating expenses include costs associated with the operation such as salaries and wages, utilities, repair and maintenance, credit card discounts and room supplies as well as corporate expenses, such as the costs of general management, office rent, training and field supervision of hotel managers and other marketing and administrative expenses. During the year ended December 31, 1998, rental property operating expenses were $15,638,000, $8,439,000 of which is related to the lodging segment and $7,199,000 of which is related to the healthcare business. Rental property operating expenses for the year ended December 31, 1998 related to the healthcare business increased by $6,989,000 compared to the year ended December 31, 1997. The increase arose primarily from expenses related to the management and operation of medical office buildings that were purchased in 1998. Rental property operating costs attributed to the lodging segment which were incurred during the post acquisition period from July 17, 1998 through December 31, 1998, principally consist of property taxes on hotel facilities. General and administrative expenses increased by $11,179,000 primarily due to a higher level of operating costs associated with the management and activity of the portfolio and as a result of the mergers. The Companies consider contribution from each primary business in evaluating performance. Contribution includes revenue from each business, excluding non-recurring or unusual income, less operating expenses, rental property operating expenses and general and administrative expenses. The combined contribution of the healthcare and lodging businesses was $441,070,000 for the year ended December 31, 1998 and $278,571,000 for the healthcare business for the year ended December 31, 1997. The healthcare contribution for the year ended December 31, 1998 was $316,332,000 compared to $278,571,000 for the year ended December 31, 1997. The increase is primarily due to increased rental and interest income as a result of real estate investments made over the last year, net of the effect of mortgage repayments and asset sales. These increases were partially offset by a higher level of operating costs associated with the management and activity of the portfolio, and from expenses related to management of medical office buildings that were purchased in 1998. The lodging contribution for the post-merger period of July 17, 1998 through December 31, 1998 was $124,738,000 or 48% of lodging revenues during the same period, compared to 47% for the second half of 1997. This improvement is reflective of a greater number of Inn & Suites hotels which generally operate at higher margins than La Quinta Inns and a continuing focus on cost controls and reduced corporate overhead. Interest expense increased by $91,046,000 due to increases in debt outstanding resulting from additional real estate investments made over the past year and the acquisitions of La Quinta and 41 Cobblestone. Depreciation and amortization increased by $71,306,000 which was primarily a result of increased real estate investments and amortization of goodwill from the La Quinta Merger completed on July 17, 1998 and the Santa Anita Merger completed in 1997. Goodwill associated with the Santa Anita Merger primarily relates to the value of the paired-share structure and, due to the permanent nature of the structure, is being amortized over a 40 year period. Accordingly, the goodwill recorded as part of the Santa Anita Merger is expected to remain even though the Santa Anita Racetrack was sold in 1998, as long as the Companies continue to utilize the paired share structure. Asset Sales During the year ended December 31, 1998, Realty realized gains on the sale of real estate assets of $52,642,000. Sale of healthcare properties, pursuant to the comprehensive restructuring plan accounted for $52,096,000 of the total and included one long-term care facility, 32 assisted living facilities and nine rehabilitation facilities. Realty also sold a 50% interest in a joint venture holding a fashion mall, as well as the land where the fashion mall is located, that resulted in a net gain of $546,000. Realty also sold securities resulting in a loss of $4,159,000. Other Expenses During the three months ended March 31, 1998, the Companies pursued a strategy of diversifying into new business lines including lodging and golf. Consistent with this strategy, Realty commenced a reevaluation of its intentions with respect to certain existing healthcare real estate facilities and other assets. This process included review of the valuation of facilities in the portfolio, including those with deteriorating performance, and other assets and receivables that were unrelated to its historical primary business. As a result of this on-going analysis Realty identified assets which would be held for sale and recorded provisions to adjust the carrying value of certain facilities, other assets and receivables and a valuation reserve for certain mortgage loans receivable. Following the quarter ended March 31, 1998 one facility was sold and certain other assets and receivables were written off. On July 22, 1998, the President signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to continue to grow through use of the paired share structure. While the Companies' use of the paired share structure in connection with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under the Reform Act, the ability to continue to use the paired share structure to acquire additional real estate and operating businesses conducted with the real estate assets (including the golf and lodging industries) was substantially limited. In addition, during the summer of 1998, the debt and equity capital markets available to REITs deteriorated, thus limiting the Companies' access to cost-efficient capital. As a result of these events, the Companies commenced a strategic evaluation of their business which included an extensive review of their healthcare properties and mortgage loan portfolio, an analysis of the impact of the Reform Act, the Companies' limited ability to access the capital markets, and the operating strategy of the Companies' existing businesses. The analysis culminated in the development of a comprehensive restructuring plan, which was announced on November 12, 1998, which included the sale of approximately $550 million of non-strategic healthcare assets. Based upon the analysis described above, other expenses were recorded for the year ended December 31, 1998, as follows: Asset related: (In thousands) Provision for assets held for sale ...................................... $33,218 Provision for real estate assets ........................................ 14,700 Provision for loss on real estate mortgage and loans receivable ......... 16,036 Provision for loss on working capital and other receivables ............. 16,400 ------- Subtotal ................................................................ 80,354
42 (In thousands) Comprehensive restructuring plan: Employee severance ..................................... 7,149 Write-off of capitalized pre-development costs ......... 8,720 External consulting fees ............................... 11,882 -------- Subtotal ............................................... 27,751 Other Costs of transactions not consummated .................. 3,110 -------- Total .................................................. $111,215 ========
As a result of continued deteriorating performance at five healthcare facilities, management committed to a plan to sell these facilities as soon as practicable. As of December 31, 1998, Realty had recorded a provision, net of one facility that was sold prior to the end of the year, of $33,218,000 to reduce the carrying value of these facilities to estimated fair value less expected costs of sale. Management expects that the remaining assets will be disposed of during 1999. As part of the review of the healthcare portfolio, management identified four properties where recent events or changes in circumstances, including physical plant and licensure issues, indicated that the carrying value of the assets may not be recoverable. Management determined that the estimated undiscounted future cash flows for these assets was below the carrying value and, accordingly, Realty reduced the carrying value of these assets by $14,700,000 to estimated fair value. Management also identified one mortgage loan collateralized by a rehabilitation facility where continued eroding margins and an expiring guarantee indicated that the Companies will likely not be able to collect all amounts due according to the contractual terms of the loan agreement. Accordingly, the Companies provided a loan loss for this asset of approximately $8,000,000. In addition, Realty has also provided for the establishment of an additional $8,036,000 mortgage loan valuation reserve primarily in response to the implementation of new government reimbursement regulations impacting many of its third-party operators during the second half of 1998. Realty also held working capital and other receivables that were unrelated to its historical primary business of healthcare financing. Management determined that certain of these accounts were uncollectible and protracted collection efforts for these assets would be an inefficient use of its resources and therefore recorded provisions of approximately $16,400,000 and then wrote off these assets. Pursuant to its comprehensive restructuring plan, the Companies announced plans to refocus their capital investment program by reducing healthcare investments and ceasing development of any new hotels other than the completion of those La Quinta[RegTM] Inns and Suites currently under construction. Accordingly, the Companies recorded non recurring costs of $8,720,000 for the write-off of certain previously capitalized costs associated with lodging development, and $7,149,000 for severance related costs attributable to workforce reductions of 87 employees at the Companies' lodging and healthcare divisions. The Companies have also recorded $11,882,000 in costs incurred for various consultants engaged to assist in the development and implementation of the comprehensive restructuring plan. The Companies also incurred approximately $3,110,000 in costs related to the evaluation of certain acquisition targets, which the Companies are no longer pursuing. Discontinued operations During the latter part of 1997 and the first half of 1998, the Companies pursued a strategy of diversifying into new businesses including horseracing, golf and lodging. During the third quarter of 1998, the Companies reassessed these business segments. In addition, a review of investment and operating strategies for the Companies was initiated. As a result, on November 11, 1998, the Companies approved a comprehensive restructuring plan including the disposal of the horseracing and golf segments as well as the sale of certain healthcare and other non-strategic assets. 43 Accordingly, the Companies have classified approximately $10,721,000 of income from the horseracing and golf segments as discontinued during the year ended December 31, 1998, and $450,000 of income from the horseracing segment during the year ended December 31, 1997. The horseracing segment was sold on December 10, 1998, resulting in a net loss on disposal of $67,913,000. The Companies have also recorded a provision for loss on disposal, based upon the estimated proceeds to be realized upon sale, of the Cobblestone Golf Group, of approximately $237,035,000. Subsequent to the end of 1998, The Companies entered into a definitive agreement to sell the Cobblestone Golf Group for $393,000,000 and expect the transaction to close in early 1999 which should not change the estimated loss on disposal presented herein. Net Loss The resulting net loss available for common shareholders, after deducting preferred share dividends, for the year ended December 31, 1998, was $161,591,000 compared to net income of $162,412,000 for the year ended December 31, 1997. The net loss per paired common share for the year ended December 31, 1998 was $1.34 compared to net income per paired common share of $2.14 for the year ended December 31, 1997. The per paired common share amount decreased primarily due to the provisions for impairment and discontinued operations, loss on sale of assets and restructuring charges, and additional paired common shares being issued to consummate mergers. In connection with the Cobblestone and La Quinta mergers, 8,177,000 and 43,280,000 additional paired common shares are now outstanding, respectively. Year ended December 31, 1997 vs. Year ended December 31, 1996 Revenues and expenses for the years ended December 31, 1997 and 1996 are principally related to healthcare related real estate activities. Revenue for the year ended December 31, 1997 was $289,038,000 compared to $254,024,000 for the year ended December 31, 1996, an increase of $35,014,000 or 14%. Revenue growth was primarily attributed to increased rental income of $28,749,000 and increased interest income of $6,265,000. These increases resulted from additional real estate investments in healthcare facilities made over the last twelve months. For the year ended December 31, 1997, total expenses increased by $31,028,000. Interest expense increased by $23,196,000 due to increases in debt outstanding resulting from additional real estate investments made over the past twelve months. This increase was partially offset by lower interest rates compared to 1996. Depreciation and amortization increased by $5,187,000, as a result of increased real estate investments and associated debt issuance costs. General and administrative and other expenses increased by $1,852,000 principally due to a higher level of operating costs associated with portfolio growth. Amortization of goodwill increased by $793,000 as a result of amortization of the excess purchase price over the fair value of assets acquired in the Santa Anita Merger. Goodwill associated with the Santa Anita Merger primarily relates to the value of the paired-share structure and, due to the permanent nature of the structure, is being amortized over a 40 year period. Accordingly, the goodwill recorded as part of the Santa Anita Merger is expected to remain even though the Santa Anita Racetrack was sold in 1998, as long as the Companies continue to utilize the paired share structure. On November 11, 1998, the Companies approved a comprehensive restructuring plan including the disposal of the horseracing segment. Accordingly, the Companies have classified approximately $450,000 of income from the horseracing segment as discontinued during the year ended December 31, 1997. Prior to 1997, the Companies were not engaged in horseracing. Net income for the year ended December 31, 1997 was $162,412,000 compared to $157,976,000 for the year ended December 31, 1996, an increase of $4,436,000 or 3%. Net income per paired common share decreased to $2.14 for the year ended December 31, 1997 compared to $2.21 for the year ended December 31, 1996, a decrease of $.07 or 3%. The per share decrease was primarily due to dilution caused by the Santa Anita Merger. Per share amounts have been restated to reflect the exchange of 44 Meditrust Shares of Beneficial Interest for paired common shares of the Companies pursuant to the Santa Anita Merger. The Meditrust Companies -- Combined Liquidity and Capital Resources Cash flows from operating activities The principal source of cash to be used to fund the Companies' future operating expenses, interest expense, recurring capital expenditures and distribution payments will be cash flow provided by operating activities. The Companies' anticipate that cash flow provided by operating activities will provide the necessary funds on a short and long-term basis to meet operating cash requirements including all distributions to shareholders. Cash flows from investing and financing activities The Companies provide funding for new investments and costs associated with the restructuring through a combination of long-term and short-term financing including, both debt and equity, as well as the sale of assets. The Companies obtain long-term financing through the issuance of shares, long-term unsecured notes, convertible debentures and the assumption of mortgage notes. The Companies obtain short-term financing through the use of bank lines of credit, which are replaced with long-term financing as appropriate. From time to time, the Companies may utilize interest rate caps or swaps to attempt to hedge interest rate volatility. It is the Companies' objective to match mortgage and lease terms with the terms of their borrowings. The Companies attempt to maintain an appropriate spread between their borrowing costs and the rate of return on their investments. When development loans convert to sale/ leaseback transactions or permanent mortgage loans, the base rent or interest rate, as appropriate, is fixed at the time of such conversion. There is, however, no assurance that the Companies will satisfactorily achieve, if at all, the objectives set forth in this paragraph. On February 26, 1998, the Companies entered into transactions (the "Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and successor in interest, "MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par value $.10 per share from each of the Companies at a purchase price of $32.625 per share (collectively with the paired common shares the shares of Series A non-voting convertible common stock are convertible into, the "Notional Shares"). The Series A Non-Voting Convertible Common Stock converted on a one to one basis to paired common stock of the Companies on June 18, 1998. Total proceeds from the issuance were approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from the issuance were approximately $272,000,000, and were used by the Companies to repay existing indebtedness. The Companies and MLI also entered into a Purchase Price Adjustment Agreement under which the Companies would, within one year from the date of MLI's purchase, on a periodic basis, adjust the purchase price based on the market price of the paired common stock at the time of any interim or final adjustments, so as to provide MLI with a guaranteed return of LIBOR plus 75 basis points (the "Return"). The paired common shares issued receive the same dividend as the Companies' paired common stock; however, the difference between LIBOR plus 75 basis points and the dividend payments received by MLI will be included as an additional adjustment under the Purchase Price Adjustment Agreement. Such adjustments were to be effected by deliveries of additional paired common shares to, or, receipts of paired common shares from, MLI. In the event that the market price for the paired shares is not high enough to provide MLI with the Return, the Companies would have to deliver additional paired shares to MLI, which would have a dilutive effect on the capital stock of the Companies. This dilutive effect increases significantly as the market price of the paired shares declines further below the original purchase price. Moreover, settlement of the FEIT transaction, whether at maturity or at an earlier date, may force the Companies to issue paired shares at a depressed price, which may heighten this dilutive effect on the capital stock of the Companies. Prior to the settlement, MLI shall hold any paired common shares delivered by the Companies under the Purchase Price Adjustment Agreement in a collateral account (the "Collateral Shares"). Under the adjustment mechanism, the Companies delivered approximately 9,700,000 Collateral Shares in 1998, all of which were returned to the Companies when the Companies settled in cash a portion of the adjustment transaction in December 1998. The FEIT has been accounted for as an equity transaction with the Notional Shares treated as outstanding from their date of issuance until the respective date of repurchase, if any, for both basic and 45 diluted earnings per share purposes. For diluted earnings per share purposes, at the end of the quarterly period, the then outstanding Reference Amount (as defined herein) is divided by the quoted market price of a paired common share, and the excess, if applicable, of that number of paired common shares over the Notional Shares (the "Contingent Shares") is added to the denominator. Contingent shares are included in the calculation of year to date diluted earnings per share weighted for the interim periods in which they were included in the computation of diluted earnings per share. The "Reference Amount" equals the Initial Reference Amount plus the Return and net of any cash distributions on the Notional Shares or any other cash paid or otherwise delivered to MLI under the FEIT. Payments that reduce the Reference Amount in effect satisfy all necessary conditions for physically settling that portion of the Reference Amount and are accounted for in a manner similar to treasury stock. Therefore, payments that reduce the Reference Amount are divided by the quoted market price of a paired common share on the date of payment. The calculated number is then multiplied by the fractional number of days in the period prior to the payment date and the resulting number of paired common shares is included in the calculation of diluted earnings per share for the period. On November 11, 1998, the Companies entered into an agreement with MLI to amend the FEIT. Under the agreement, Realty agreed to grant a mortgage of the Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the FEIT with cash generated in part from the sale of certain assets, including the Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the settlement agreement, not to sell any shares of the existing FEIT until February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152 million ($127 million of which was from the sale of certain assets including the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional Shares outstanding were reduced to approximately 6,865,000 paired common shares and there were no Contingent Shares issuable. On March 10, 1999, the Companies entered into an agreement with MLI and certain of its affiliates to use the proceeds from the sale of Cobblestone Golf Group in excess of $300 million to purchase all or a portion of the remaining Notional Shares. Merrill Lynch has agreed not to sell any shares of the remaining Notional Shares until March 31, 1999 while the Companies complete the sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference Amount was $89 million. On May 29, 1998, Realty completed its merger with Cobblestone and each share of common stock of Cobblestone was converted into the right to receive 3.867 paired common shares and each share of preferred stock of Cobblestone was converted into the right to receive .2953 paired common shares. The total number of paired common shares issued in connection with the Cobblestone Merger was approximately 8,177,000, with an aggregate market value of approximately $230,000,000 plus the issuance of approximately 452,000 options valued at $10,863,000. In addition, Realty advanced monies in order for Cobblestone to satisfy approximately $170,000,000 of Cobblestone's debt and associated costs. The total consideration paid in connection with the Cobblestone Merger was approximately $455,467,000. The excess of the purchase price, including costs of the Cobblestone Merger, over the fair value of the net assets acquired approximated $152,031,000 and is being amortized over 20 years. On June 10, 1998, Realty issued 7,000,000 depositary shares. Each depositary share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds from this issuance of approximately $168,666,000 were used by Realty primarily to repay existing indebtedness. On July 17, 1998, Realty completed its merger with La Quinta and each share of common stock of La Quinta was converted into the right to receive 0.736 paired common shares, reduced by the amount to be received in an earnings and profits distribution. Approximately 43,280,000 paired common shares, with an aggregate market value of approximately $1,172,636,000, and approximately $956,054,000 in cash were exchanged in order to consummate the La Quinta Merger. In addition, $851,479,000 of La Quinta's debt and associated costs were assumed. Accordingly, the operations of La Quinta are included in the combined and consolidated financial statements since consummation of the La Quinta Merger. The total consideration paid in connection with the La Quinta Merger was approximately $2,980,169,000. 46 The excess of the purchase price, including costs of the La Quinta Merger, over the fair value of the net assets acquired approximated $301,977,000, and is being amortized over 20 years. On July 17, 1998, Realty executed an agreement for an unsecured bank facility ("New Credit Agreement") for a total of $2,250,000,000 bearing interest at the lenders' prime rate plus .50% or LIBOR plus 1.375%. The facility is comprised of three tranches with term loans at various maturity dates between July 17, 1999 and July 17, 2001 and a revolving tranche with a total commitment of $1,000,000,000 maturing July 17, 2001. On November 23, 1998, Realty reached an agreement with its bank group to amend its New Credit Agreement. The amendment provided for Realty's cash repayment of a portion of its FEIT and the amendment of certain financial covenants to accommodate asset sales, to exclude the impact of non-recurring charges, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock will also extend on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 had not been issued by February 1, 1999. On February 1, 1999 this increase went into effect. On November 11, 1998 the Boards of Directors of Realty and Operating approved a comprehensive restructuring plan. Significant components of the restructuring plan include the sale of Cobblestone Golf Group, the Santa Anita Racetrack, and certain healthcare properties. In conjunction with this plan, the assets related to horseracing operations at the Santa Anita Racetrack, as well as adjacent land, were sold on December 10, 1998 for $126,000,000. Additionally, a 50% ownership in a joint venture holding a fashion mall, as well as the land on which the fashion mall is located, were sold for $40,000,000. Also in response to the plan, healthcare assets were sold in the fourth quarter for $314,645,000 and mortgage investments of $122,645,000 were repaid. On February 11, 1999, the Companies signed a definitive agreement to sell the Cobblestone Golf Group real estate and operations for aggregate consideration, including assumed debt, of approximately $393,000,000. The transaction is expected to close by the end of the first quarter of 1999. Also, the Companies have entered into letters of intent for the sale of an additional $155,000,000 of healthcare assets. As of December 31, 1998, the Companies' gross real estate investments totaled approximately $5,333,883,000 consisting of 221 long-term care facilities, 157 retirement and assisted living facilities, 34 medical office buildings, one acute care hospital campus, eight other healthcare facilities and 303 hotel facilities. As of December 31, 1998, the Companies' outstanding commitments for additional financing totaled approximately $161,000,000 for the completion of 11 assisted living facilities, five long-term care facilities, one medical office building and 13 hotel facilities currently under construction and additions to existing facilities in the portfolio. On March 10, 1999, Realty reached a second agreement with its bank group to amend its New Credit Agreement. The second amendment, which is effective upon the successful completion of the sale of Cobblestone Golf Group, provides for a portion of the sale proceeds to be applied to the FEIT. The second amendment also provides for, among other things, eliminating certain limits on healthcare investments and lowering the commitment on the revolving tranche to $850,000,000. Of the $1,000,000,000 revolving tranche commitment, $353,000,000 was available at December 31, 1998, at Realty's option of the base rate (8.25%) or LIBOR plus 2.625% (7.98% at December 31, 1998). As of March 15, 1999, $244,000,000 of the revolving tranche commitment was available. On August 17, 1998, Realty redeemed $100,000,000 of Remarketed Reset Notes due August 15, 2002 at par value. On September 11, 1998, Realty redeemed $120,000,000 of 9-1/4% Senior Subordinated Notes due 2003 at 103.46% of par. Realty's credit facility was used to finance both redemptions. The Companies had shareholders' equity of $2,950,928,000 and debt constituted 53% of the Companies' total capitalization as of December 31, 1998. On January 14, 1999, Realty declared a common dividend of $0.46 per share payable on February 16, 1999 to common shareholders of record on January 29, 1999. This dividend relates to the quarter ended December 31, 1998. 47 On March 5, 1999, Realty declared a dividend of $.5625 per depository share on its 9% Series A Cumulative Redeemable Preferred Stock to shareholders of record on March 15, 1999. This dividend will be paid on March 31, 1999. The Companies have an effective shelf registration statement on file with the SEC under which the Companies may issue $1,825,000,000 of securities including paired common shares, preferred shares, debt, series common stock, convertible debt and warrants to purchase shares, preferred shares, debt, series common stock and convertible debt. The Companies believe that their various sources of capital are adequate to finance their operations as well as their existing commitments, including the acquisition and/or mortgage financing of certain healthcare facilities, the completion of the La Quinta Inn & Suites currently under development and repayment of the debt maturing during 1999. Combined funds from operations Combined Funds from Operations of the Companies was $277 million and $192 million for the years ended December 31, 1998 and 1997, respectively. Management considers Funds from Operations to be a key external measurement of REIT performance. Funds from Operations represents net income or loss available to common shareholders (computed in accordance with generally accepted accounting principles), excluding real estate related depreciation, amortization of goodwill and certain intangible assets, gains and losses from the sale of assets and non-recurring income and expenses. For 1998, non-recurring income primarily consists of gains attributable to the prepayment of loans and lease breakage fees, while non-recurring expenses include charges related to the sale of discontinued operations, asset impairments and comprehensive restructuring costs. Funds from Operations should not be considered an alternative to net income or other measurements under generally acceptable accounting principals as an indicator of operating performance or to cash flows from operating, investing, or financing activities as a measure of liquidity. Funds from Operations does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. The following reconciliation of net income and loss available to common shareholders to Funds from Operations illustrates the difference between the two measures of operating performance for the years ended December 31, 1998 and 1997. Certain reconciling items include amounts reclassified from income from operations of discontinued operations and, accordingly, do not necessarily agree to revenue and expense captions in the Companies' financial statements.
Year ended December 31, 1998 1997 (In thousands) -------------- ----------- Net income (loss) available to common shareholders ............... $ (161,591) $162,412 Depreciation of real estate and intangible amortization ......... 106,272 29,099 Provision for loss on sale of discontinued operations ........... 237,809 Other capital gains and losses .................................. 19,562 Other income .................................................... (35,987) Other expenses .................................................. 111,215 ---------- -------- Funds from Operations ............................................ $ 277,280 $191,511 ---------- -------- Weighted average paired common shares outstanding: Basic ............................................................ 120,515 71,445 ---------- -------- Diluted .......................................................... 125,508 71,751 ---------- --------
Realty--Results of Operations Year ended December 31, 1998 vs. Year ended December 31, 1997 Revenue for the year ended December 31, 1998 was $518,872,000 compared to $289,119,000 for the year ended December 31, 1997, an increase of $229,753,000. Revenue growth was primarily 48 attributable to the addition of rent and royalty income and interest of $132,744,000 and other income of $5,781,000 from Operating, related to hotel facilities acquired in the La Quinta Merger. Revenue growth also arose from increased rental and interest income of $55,370,000 due to additional real estate investments made over the last year, net of the effect of mortgage prepayments and asset sales. Other non-recurring income for the year ended December 31, 1998 of $35,987,000 included prepayment and lease breakage fees resulting from early mortgage repayments and asset sales. For the year ended December 31, 1998, total recurring expenses increased by $183,577,000. Interest expense increased $90,962,000 due to increases in debt outstanding resulting from additional real estate investments made over the past year and the acquisitions of La Quinta and Cobblestone. Depreciation and amortization increased by $67,780,000 which was primarily a result of increased real estate investments and amortization of goodwill from the La Quinta acquisition completed on July 17, 1998 and the Santa Anita Merger completed in 1997. Goodwill associated with the Santa Anita Merger primarily relates to the value of the paired-share structure and, due to the permanent nature of the structure, is being amortized over a 40 year period. Accordingly, the goodwill recorded as part of the Santa Anita Merger is expected to remain even though the Santa Anita Racetrack was sold in 1998, as long as the Companies continue to utilize the paired share structure. General and administrative and other expenses increased by $8,344,000 primarily due to a higher level of operating costs associated with the management and activity of the portfolio and as a result of the La Quinta Merger. Rental and hotel property operating expenses increased by $16,491,000 primarily due to property taxes incurred at hotel facilities and expenses related to the management and operation of medical office buildings that were purchased in 1998. Asset Sales During the year ended December 31, 1998, Realty realized gains on sale of assets of $52,642,000. Sale of healthcare properties, pursuant to the comprehensive restructuring plan accounted for $52,906,000 of the total and included one long-term care facility, 32 assisted living facilities and nine rehabilitation facilities. Realty also sold its 50% interest in a joint venture holding a fashion mall, as well as the land where the fashion mall is located, that resulted in a net gain of $546,000. Realty also sold securities resulting in a loss of $4,159,000. Other expenses During the three months ended March 31, 1998, the Companies pursued a strategy of diversifying into new business lines including lodging and golf. Consistent with this strategy, Realty commenced a reevaluation of its intentions with respect to certain existing healthcare real estate facilities and other assets. This process included review of the valuation of facilities in the portfolio, including those with deteriorating performance, and other assets and receivables that were unrelated to its historical primary business. As a result of this on-going analysis Realty identified assets which would be held for sale and recorded provisions to adjust the carrying value of certain facilities, other assets and receivables and a valuation reserve for certain mortgage loans receivable. Following the quarter ended March 31, 1998 one facility was sold and certain other assets and receivables were written off. On July 22, 1998, the President signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to continue to grow through use of the paired share structure. While the Companies' use of the paired share structure in connection with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under the Reform Act, the ability to continue to use the paired share structure to acquire additional real estate and operating businesses conducted with the real estate assets (including the golf and lodging industries) was substantially limited. In addition, during the summer of 1998, the debt and equity capital markets available to REITs deteriorated, thus limiting the Companies' access to cost-efficient capital. As a result of these events, the Companies commenced a strategic evaluation of their business which included an extensive review of their healthcare properties and mortgage loan portfolio, an analysis of the impact of the Reform Act, the Companies' limited ability to access the capital markets, and the operating strategy of the Companies' existing businesses. The analysis culminated in the 49 development of a comprehensive restructuring plan, which was announced on November 12, 1998, which included the sale of approximately $550 million of non-strategic healthcare assets. Based upon the analysis described above, other expenses were recorded on the books of Realty for the year ended December 31, 1998, as follows: Asset related: (In thousands) Provision for assets held for sale ...................................... $33,218 Provision for real estate assets ........................................ 14,700 Provision for loss on real estate mortgage and loans receivable ......... 16,036 Provision for loss on working capital and other receivables ............. 16,400 ------- Subtotal ................................................................ 80,354 Comprehensive restructuring plan: Employee severance ....................................................... 706 External consulting fees ................................................. 11,882 ------- Subtotal ................................................................ 12,588 Other Costs of transactions not consummated ................................... 3,110 ------- Total ................................................................... $96,052 =======
As a result of continued deteriorating performance at five healthcare facilities, management committed to a plan to sell these facilities as soon as practicable. As of December 31, 1998, Realty had recorded a provision, net of one facility that was sold prior to the end of the year, of $33,218,000 to reduce the carrying value of these facilities to estimated fair value less expected costs of sale. Management expects that the remaining assets will be disposed of during 1999. As part of the review of the healthcare portfolio, management identified four properties where recent events or changes in circumstances, including physical plant and licensure issues, indicated that the carrying value of the assets may not be recoverable. Management determined that the estimated undiscounted future cash flows for these assets was below the carrying value and, accordingly, Realty reduced the carrying value of these assets by $14,700,000 to estimated fair value. Management also identified one mortgage loan collateralized by a rehabilitation facility where continued eroding margins and an expiring guarantee indicated that the Companies will likely not be able to collect all amounts due according to the contractual terms of the loan agreement. Accordingly, the Companies provided a loan loss for this asset of approximately $8,000,000. In addition, Realty has also provided for the establishment of an additional $8,036,000 mortgage loan valuation allowance primarily in response to the implementation of new government reimbursement regulations impacting many of its operators during the second half of 1998. Realty also held working capital and other receivables that were unrelated to its historical primary business of healthcare financing. Management determined that certain of these accounts were uncollectible and protracted collection efforts for these assets would be an inefficient use of its resources and therefore recorded provisions of approximately $16,400,000 and then wrote off these assets. Pursuant to its comprehensive restructuring plan, the Companies announced plans to refocus their capital investment program by reducing new healthcare investments for 1999 and ceasing development of any hotels other than the completion of those Inns and Suites currently under construction. Accordingly, Realty recorded non-recurring costs of $12,588,000 during 1998. These costs included severance attributable to workforce reductions of approximately 11 employees, primarily from Realty property management, marketing and acquisition departments of $706,000. In addition, Realty recorded $11,882,000 in costs associated incurred for various consultants engaged to assist in the development and implementation of the comprehensive restructuring plan. Realty also incurred $3,110,000 in costs related to the evaluation of certain acquisition targets, which Realty is no longer pursuing. 50 Discontinued operations During the latter part of 1997 and the first half of 1998, the Companies pursued a strategy of diversifying into new businesses including horseracing, golf and lodging. During the third quarter of 1998, the Companies reassessed these business segments. In addition, a review of investment and operating strategies for the Companies was initiated. As a result, on November 11, 1998, the Companies approved a comprehensive restructuring plan including the disposal of the horseracing and golf segments as well as the sale of certain healthcare and other non-strategic assets. Accordingly, Realty has classified approximately $14,635,000 of income from the horseracing and golf segments as discontinued during the year ended December 31, 1998 and $688,000 of income from the horseracing segment during the year ended December 31, 1997. The horseracing segment was sold on December 10, 1998, resulting in a net loss on disposal of $82,953,000. Realty also recorded a provision for loss on disposal of approximately $227,557,000, based upon the estimated proceeds to be realized upon sale, of the golf-related assets. Subsequent to the end of 1998, The Companies entered into a definitive agreement to sell the Cobblestone Golf Group for $393,000,000 and expect the transaction to close in early 1999 which should not change the estimated loss on disposal presented herein. Net Loss The resulting net loss available for common shareholders, after deducting preferred share dividends, for the year ended December 31, 1998, was $143,388,000 compared to net income of $163,012,000 for the year ended December 31, 1997. The net loss available per common share for the year ended December 31, 1998 was $1.18 compared to net income per common share of $2.14 for the year ended December 31, 1997. The per common share amount decreased primarily due to the provisions for impairment and discontinued operations, loss on sale of assets and restructuring charges, and additional common shares being issued to consummate mergers. In connection with the Cobblestone and La Quinta mergers, 8,177,000 and 43,280,000 additional paired common shares are now outstanding, respectively. Year ended December 31, 1997 vs. Year ended December 31, 1996 Revenue for the year ended December 31, 1997 was $289,119,000 compared to $254,024,000 for the year ended December 31, 1996, an increase of $35,095,000 or 14%. Revenue growth was primarily attributed to increased rental income of $28,749,000 and increased interest income of $6,346,000. These increases resulted primarily from additional real estate investments made over the last twelve months. For the year ended December 31, 1997, total expenses increased by $30,747,000. Interest expense increased by $23,196,000 due to increases in debt outstanding resulting from additional real estate investments made over the past twelve months. This increase was partially offset by lower interest rates compared to 1996. Depreciation and amortization increased by $5,187,000, as a result of increased real estate investments and associated debt issuance costs. General and administrative and other expenses increased by $1,706,000 principally due to a higher level of operating costs associated with portfolio growth. Amortization of goodwill increased by $658,000 as a result of amortization of the excess purchase price over the fair value of assets acquired in the Santa Anita Merger. Goodwill associated with the Santa Anita Merger primarily relates to the value of the paired-share structure and, due to the permanent nature of the structure, is being amortized over a 40 year period. Accordingly, the goodwill recorded as part of the Santa Anita Merger is expected to remain even though the Santa Anita Racetrack was sold in 1998, as long as the Companies continue to utilize the paired share structure. On November 11, 1998, the Companies approved a comprehensive restructuring plan including the disposal of the horseracing segment. Accordingly, Realty has classified approximately $688,000 of income from the horseracing segment as discontinued during the year ended December 31, 1997. Prior to 1997, The Companies were not engaged in horseracing Net income for the year ended December 31, 1997 was $163,012,000 compared to $157,976,000 for the year ended December 31, 1996, an increase of $5,036,000 or 3%. Net income per common share 51 decreased to $2.14 for the year ended December 31, 1997 compared to $2.21 for the year ended December 31, 1996, a decrease of $.07 or 3%. The per common share decrease was primarily due to dilution caused by the Santa Anita Merger. Per share amounts have been restated to reflect the exchange of Meditrust Shares of Beneficial Interest for paired common shares of the Companies pursuant to the Santa Anita Merger. Realty--Liquidity and Capital Resources Cash flows from operating activities The principal source of cash to be used to fund Realty's future operating expenses, interest expense, recurring capital expenditures and distribution payments will be cash flow provided by operating activities. Realty anticipates that cash flow provided by operating activities will provide the necessary funds on a short and long-term basis to meet operating cash requirements including all distributions to shareholders. Cash flows from investing and financing activities Realty provides funding for new investments and costs associated with the restructuring through a combination of long-term and short-term financing including, both debt and equity, as well as the sale of assets. Realty obtains long-term financing through the issuance of shares, long-term unsecured notes, convertible debentures and the assumption of mortgage notes. Realty obtains short-term financing through the use of bank lines of credit, which are replaced with long-term financing as appropriate. From time to time, Realty may utilize interest rate caps or swaps to attempt to hedge interest rate volatility. It is Realty's objective to match mortgage and lease terms with the terms of their borrowings. Realty attempts to maintain an appropriate spread between its borrowing costs and the rate of return on its investments. When development loans convert to sale/leaseback transactions or permanent mortgage loans, the base rent or interest rate, as appropriate, is fixed at the time of such conversion. There is, however, no assurance that Realty will satisfactorily achieve, if at all, the objectives set forth in this paragraph. On February 26, 1998, the Companies entered into transactions (the "Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and successor in interest, "MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par value $.10 per share from each of the Companies at a purchase price of $32.625 per share (collectively with the paired common shares the shares of Series A non-voting convertible common stock are convertible into, the "Notional Shares"). The Series A Non-Voting Convertible Common Stock converted on a one to one basis to paired common stock of the Companies on June 18, 1998. Total proceeds from the issuance were approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from the issuance were approximately $272,000,000, and were used by the Companies to repay existing indebtedness. The Companies and MLI also entered into a Purchase Price Adjustment Agreement under which the Companies would, within one year from the date of MLI's purchase, on a periodic basis, adjust the purchase price based on the market price of the paired common stock at the time of any interim or final adjustments, so as to provide MLI with a guaranteed return of LIBOR plus 75 basis points (the "Return"). The paired common shares issued receive the same dividend as the Companies' paired common stock; however, the difference between LIBOR plus 75 basis points and the dividend payments received by MLI will be included as an additional adjustment under the Purchase Price Adjustment Agreement. Such adjustments were to be effected by deliveries of additional paired common shares to, or, receipts of paired common shares from, MLI. In the event that the market price for the paired shares is not high enough to provide MLI with the Return, the Companies would have to deliver additional paired shares to MLI, which would have a dilutive effect on the capital stock of the Companies. This dilutive effect increases significantly as the market price of the paired shares declines further below the original purchase price. Moreover, settlement of the FEIT transaction, whether at maturity or at an earlier date, may force the Companies to issue paired shares at a depressed price, which may heighten this dilutive effect on the capital stock of the Companies. Prior to the settlement, MLI shall hold any paired common shares delivered by the Companies under the Purchase Price Adjustment Agreement in a collateral account (the "Collateral Shares"). Under the adjustment mechanism, the Companies delivered approximately 9,700,000 Collateral Shares in 1998, all of which were returned 52 to the Companies when the Companies settled in cash a portion of the adjustment transaction in December 1998. The FEIT has been accounted for as an equity transaction with the Notional Shares treated as outstanding from their date of issuance until the respective date of repurchase, if any, for both basic and diluted earnings per share purposes. For diluted earnings per share purposes, at the end of the quarterly period, the then outstanding Reference Amount (as defined herein) is divided by the quoted market price of a paired common share, and the excess, if applicable, of that number of paired common shares over the Notional Shares (the "Contingent Shares") is added to the denominator. Contingent shares are included in the calculation of year to date diluted earnings per share weighted for the interim periods in which they were included in the computation of diluted earnings per share. The "Reference Amount" equals the Initial Reference Amount plus the Return and net of any cash distributions on the Notional Shares or any other cash paid or otherwise delivered to MLI under the FEIT. Payments that reduce the Reference Amount in effect satisfy all necessary conditions for physically settling that portion of the Reference Amount and are accounted for in a manner similar to treasury stock. Therefore, payments that reduce the Reference Amount are divided by the quoted market price of a paired common share on the date of payment. The calculated number is then multiplied by the fractional number of days in the period prior to the payment date and the resulting number of paired common shares is included in the calculation of diluted earnings per share for the period. On November 11, 1998, the Companies entered into an agreement with MLI to amend the FEIT. Under the agreement, Realty agreed to grant a mortgage on the Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the FEIT with cash generated in part from the sale of certain assets, including the Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the settlement agreement, not to sell any shares of the existing FEIT until February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152 million ($127 million of which was from the sale of certain assets including the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional Shares outstanding were reduced to approximately 6,865,000 paired common shares and there were no Contingent Shares issuable. On March 10, 1999, the Companies entered into an agreement with MLI and certain of its affiliates to use the proceeds from the sale of Cobblestone Golf Group in excess of $300 million to purchase all or a portion of the remaining Notional Shares. Merrill Lynch has agreed not to sell any shares of the remaining Notional Shares until March 31, 1999 while the Companies complete the sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference Amount was $89 million. On May 29, 1998, Realty completed its merger with Cobblestone and each share of common stock of Cobblestone was converted into the right to receive 3.867 paired common shares and each share of preferred stock of Cobblestone was converted into the right to receive .2953 paired common shares. The total number of paired common shares issued in connection with the Cobblestone Merger was approximately 8,177,000, with an aggregate market value of approximately $230,000,000 plus the issuance of approximately 452,000 options valued at $10,863,000. In addition, Realty advanced monies in order for Cobblestone to satisfy approximately $170,000,000 of Cobblestone's debt and associated costs. The total consideration paid in connection with the Cobblestone Merger was approximately $455,467,000. The excess of the purchase price, including costs of the Cobblestone Merger, over the fair value of the net assets acquired approximated $152,031,000 and is being amortized over 20 years. On June 10, 1998, Realty issued 7,000,000 depositary shares. Each depositary share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds from this issuance of approximately $168,666,000 were used by Realty primarily to repay existing indebtedness. On July 17, 1998, Realty completed its merger with La Quinta and each share of common stock of La Quinta was converted into the right to receive 0.736 paired common shares, reduced by the amount to be received in an earnings and profits distribution. Approximately 43,280,000 paired common shares, with an aggregate market value of approximately $1,172,636,000, and approximately $956,054,000 were 53 exchanged in order to consummate the La Quinta Merger. In addition, $851,479,000 of La Quinta's debt and associated costs were assumed. Accordingly, the operations of La Quinta are included in the combined and consolidated financial statements since consummation of the La Quinta Merger. The total consideration paid in connection with the La Quinta Merger was approximately $2,980,169,000. The excess of the purchase price, including costs of the La Quinta Merger, over the fair value of the net assets acquired approximated $301,977,000, and is being amortized over 20 years. On July 17, 1998, Realty executed an agreement for an unsecured bank facility ("New Credit Agreement") for a total of $2,250,000,000 bearing interest at the lenders' prime rate plus .50% or LIBOR plus 1.375%. The facility is comprised of three tranches with term loans at various maturity dates between July 17, 1999 and July 17, 2001 and a revolving tranche with a total commitment of $1,000,000,000 maturing July 17, 2001. On November 23, 1998, Realty reached an agreement with its bank group to amend its New Credit Agreement. The amendment provided for Realty's cash repayment of a portion of its FEIT and the amendment of certain financial covenants to accommodate asset sales, to exclude the impact of non-recurring charges, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock will also extend on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 had not been issued by February 1, 1999. On February 1, 1999 this increase went into effect. On November 11, 1998 the Boards of Directors of Realty and Operating approved a comprehensive restructuring plan. Significant components of the restructuring plan include the sale of Cobblestone Golf Group, the Santa Anita Racetrack, and certain healthcare properties. In conjunction with this plan, the assets related to horseracing operations at the Santa Anita Racetrack, as well as adjacent land, were sold on December 10, 1998 for $126,000,000. Additionally, a 50% ownership in a joint venture holding a fashion mall, as well as the land on which the fashion mall is located, were sold for $40,000,000. Also in response to the plan, healthcare assets were sold in the fourth quarter for $314,645,000 and mortgage investments of $122,645,000 were repaid. On February 11, 1999, the Companies signed a definitive agreement to sell the Cobblestone Golf Group real estate and operations for aggregate consideration, including assumed debt, of approximately $393,000,000. The transaction is expected to close by the end of the first quarter of 1999. Also, the Companies have entered into letters of intent for the sale of an additional $155,000,000 of healthcare assets. As of December 31, 1998, Realty's gross real estate investments totaled approximately $5,314,178,000 consisting of 221 long-term care facilities, 157 retirement and assisted living facilities, 34 medical office buildings, one acute care hospital campus, eight other healthcare facilities and 288 hotel facilities in service with 13 more under construction. As of December 31, 1998, Realty's outstanding commitments for additional financing totaled approximately $161,000,000 for the completion of 11 assisted living facilities, five long-term care facilities, one medical office building and 13 hotel facilities currently under construction and additions to existing facilities in the portfolio. On March 10, 1999, Realty reached a second agreement with its bank group to amend its New Credit Agreement. The second amendment, which is effective upon the successful completion of the sale of Cobblestone Golf Group, provides for a portion of the sale proceeds to be applied to the FEIT. The second amendment also provides for, among other things upon the sale of Cobblestone Golf Group, elimination of limitations on certain healthcare investments and lowering the commitment on the revolving tranche to $850,000,000. Of the $1,000,000,000 revolving tranche commitment, $353,000,000 was available at December 31, 1998, at Realty's option of the base rate (8.25%) or LIBOR plus 2.625% (7.98% at December 31, 1998). As of March 15, 1999, $244,000,000 of the revolving tranche commitment was available. On August 17, 1998, Realty redeemed $100,000,000 of Remarketed Reset Notes due August 15, 2002 at par value. On September 11, 1998, Realty redeemed $120,000,000 of 91/4% Senior Subordinated Notes due 2003 at 103.46% of par. Realty's credit facility was used to finance both redemptions. 54 Realty had shareholders' equity of $2,873,353,000 and debt constituted 53% of the Companies' total capitalization as of December 31, 1998. On January 14, 1999, Realty declared a common dividend of $0.46 per share payable on February 16, 1999 to common shareholders of record on January 29, 1999. This dividend relates to the quarter ended December 31, 1998. On March 5, 1999, Realty declared a dividend of $.5625 per depository share on its 9% Series A Cumulative Redeemable Preferred Stock to shareholders of record on March 15, 1999. This dividend will be paid on March 31, 1999. The Companies have an effective shelf registration statement on file with the SEC under which the Companies may issue $1,825,000,000 of securities including paired common shares, preferred shares, debt, series common stock, convertible debt and warrants to purchase shares, preferred shares, debt, series common stock and convertible debt. Realty believes that various sources of capital are adequate to finance operations as well as existing commitments, including the acquisition and/or mortgage financing of certain healthcare facilities, the completion of the La Quinta Inn & Suites currently under development and repayment of the debt maturing during 1999. Operating--Results of Operations Year Ended December 31, 1998 vs. Year Ended December 31, 1997 Operating derived its revenue primarily from hotel operations during the post-acquisition period from July 17, 1998 through December 31, 1998. Hotel revenues for this period were $252,642,000. Approximately $241,868,000 or 96% of hotel revenues were derived from room rentals. Hotel operating revenues generally are measured as a function of the ADR and occupancy percentage. The ADR for the period July 17, 1998 through December 31, 1998 increased to $59.29 as compared to ADR in the second half of 1997 of $56.69, an increase of $2.60 or 4.6%. Occupancy percentage decreased 1.8 percentage points to 67.0% from 68.8% for the same periods. RevPAR, which is a product of the occupancy percentage and ADR, increased 1.6% in the 1998 post-merger period over the second half of 1997. Other sources of hotel revenues during the post merger period included guest services revenue of approximately $5,699,000 derived from charges to guests for long distance service, fax use and laundry service. Commission revenue of approximately $1,271,000 was earned on phone, movie and vending services. At the merger date, La Quinta operated 280 hotels (including 233 Inns and 47 Inn & Suites) with approximately 36,000 rooms. During the post-merger period, 10 new Inn & Suites were opened adding over 1,400 rooms. Interest and other income was $607,000 for the year ended December 31, 1998 compared to $48,000 for the year ended December 31, 1997. Prior to July 17, 1998, Operating derived its revenue from horseracing and golf course operations, which are now classified as discontinued operations (see below) and thus are not included in revenue in 1998 or 1997. For the year ended December 31, 1998, total recurring expenses were $262,737,000. Expenses were primarily attributable to hotel operating expenses, interest, rent and royalties paid to Realty. Hotel operating costs of $124,183,000 were incurred during the La Quinta post-merger period from July 17, 1998 to December 31, 1998. Salaries, wages and related costs, represent approximately 41.3% of operating expenses. Other major categories of lodging operating expense include utilities, supplies, advertising and administrative costs. Interest, royalty and rent expenses paid to Realty of $132,744,000 were also incurred during the post-merger period. General and administrative and other expenses were $2,149,000, which arose from unallocated overhead expenses related to the management of Operating's businesses during 1998. Depreciation and amortization expense increased to $3,661,000, which was primarily related to depreciation of furniture and fixtures and other intangible assets acquired in the La Quinta Merger and a full year of amortization of goodwill, which resulted from the excess purchase price over the fair value of assets acquired in the Santa Anita Merger. 55 Goodwill associated with the Santa Anita Merger primarily relates to the value of the paired-share structure and, due to the permanent nature of the structure, is being amortized over a 40 year period. Accordingly, the goodwill recorded as part of the Santa Anita Merger is expected to remain even though the Santa Anita Racetrack was sold in 1998, as long as the Companies continue to utilize the paired share structure. Other Expenses: On July 22, 1998, the President signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to continue to grow through use of the paired share structure. While the Companies' use of the paired share structure in connection with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under the Reform Act, the ability to continue to use the paired share structure to acquire additional real estate and operating businesses conducted with the real estate assets (including the golf and lodging industries) was substantially limited. In addition, during the summer of 1998, the debt and equity capital markets available to REITs deteriorated, thus limiting the Companies' access to cost-efficient capital. As a result of these events, the Companies' began an analysis of the impact of the Reform Act, the Companies' limited ability to access the capital markets, and the operating strategy of the Companies' existing businesses. The analysis culminated in the development of a comprehensive restructuring plan, which was announced on November 12, 1998, designed to strengthen the Companies' financial position and clarify its investment and operating strategy by focusing on the healthcare and lodging business segments. Other expenses, which arose from the comprehensive restructuring plan, that were recorded on the books of Operating for the year ended December 31, 1998, are as follows: Comprehensive restructuring plan: (In thousands) Employee severance ..................................... $ 6,443 Write-off of capitalized pre-development costs ......... 8,720 ------- Total .................................................. $15,163 -------
Pursuant to the comprehensive restructuring plan, Operating incurred approximately $15,163,000 of non-recurring costs during 1998. These costs included the write-off of certain costs associated with discontinuing lodging development of $8,720,000 and severance of $6,443,000 attributable to workforce reductions of approximately 76 employees, primarily from the Operating's construction, marketing and acquisition departments. Discontinued operations During the latter part of 1997 and the first half of 1998, the Companies pursued a strategy of diversifying into new businesses including horseracing, golf and lodging. During the third quarter of 1998, the Companies reassessed these business segments. In addition, a review of investment and operating strategies for the Companies was initiated. As a result, on November 11, 1998, the Companies approved a comprehensive restructuring plan including the disposal of the horseracing and golf segments as well as the sale of certain healthcare and other non-strategic assets. Accordingly, Operating has classified approximately $3,914,000 of losses from the horseracing and golf segments as discontinued during the year ended December 31, 1998 and $238,000 of income from the horseracing segment during the year ended December 31, 1997. The horseracing segment was sold on December 10, 1998, resulting in a net gain on disposal of $15,040,000. Operating has also recorded a provision for loss on disposal, based upon the estimated proceeds to be realized upon sale, of the golf-related assets and operations, of approximately $9,478,000. Subsequent to the end of 1998, The Companies entered into a definitive agreement to sell Cobblestone Golf Group for $393,000,000 and expect the transaction to close in early 1999 which should not result in a change in the estimated loss on disposal provided herein. Net Loss The resulting net loss available for common shareholders for the year ended December 31, 1998, was $18,203,000 compared $600,000 for the year ended December 31, 1997. The net loss per common 56 share for the year ended December 31, 1998 was $0.15 compared to $0.01 for the year ended December 31, 1997. The per common share amount decreased primarily due to the comprehensive restructuring charges, and additional common shares being issued to consummate mergers. In connection with the Cobblestone and La Quinta mergers, 8,177,000 and 43,280,000 additional common shares are now outstanding, respectively. Operating--Liquidity and Capital Resources Cash flows from operating activities The principal source of cash to be used to fund Operating's future operating expenses and recurring capital expenditures will be cash flow provided by operating activities. Operating anticipates that cash flow provided by operating activities will provide the necessary funds on a short and long-term basis to meet operating cash requirements. Cash flows from investing and financing activities Operating provides funding for costs associated with the restructuring through a combination of long-term and short-term financing including, both debt and equity, as well as the sale of assets. Operating obtains long-term financing through the issuance of common shares and unsecured notes. Operating obtains short-term financing through borrowings from Realty. There is, however, no assurance that the Companies will satisfactorily achieve, if at all, the objectives set forth in this paragraph. On February 26, 1998, the Companies entered into transactions (the "Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and successor in interest, "MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par value $.10 per share from each of the Companies at a purchase price of $32.625 per share (collectively with the paired common shares the shares of Series A non-voting convertible common stock are convertible into, the "Notional Shares"). The Series A Non-Voting Convertible Common Stock converted on a one to one basis to paired common stock of the Companies on June 18, 1998. Total proceeds from the issuance were approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from the issuance were approximately $272,000,000, and were used by the Companies to repay existing indebtedness. The Companies and MLI also entered into a Purchase Price Adjustment Agreement under which the Companies would, within one year from the date of MLI's purchase, on a periodic basis, adjust the purchase price based on the market price of the paired common stock at the time of any interim or final adjustments, so as to provide MLI with a guaranteed return of LIBOR plus 75 basis points (the "Return"). The paired common shares issued receive the same dividend as the Companies' paired common stock; however, the difference between LIBOR plus 75 basis points and the dividend payments received by MLI will be included as an additional adjustments under the Purchase Price Adjustment Agreement. Such adjustments were to be effected by deliveries of additional paired common shares to, or, receipts of paired common shares from, MLI. In the event that the market price for the paired shares is not high enough to provide MLI with the Return, the Companies would have to deliver additional paired shares to MLI, which would have a dilutive effect on the capital stock of the Companies. This dilutive effect increases significantly as the market price of the paired shares declines further below the original purchase price. Moreover, settlement of the FEIT transaction, whether at maturity or at an earlier date, may force the Companies to issue paired shares at a depressed price, which may heighten this dilutive effect on the capital stock of the Companies. Prior to the settlement, MLI shall hold any paired common shares delivered by the Companies under the Purchase Price Adjustment Agreement in a collateral account (the "Collateral Shares"). Under the adjustment mechanism, the Companies delivered approximately 9,700,000 Collateral Shares in 1998, all of which were returned to the Companies when the Companies settled in cash a portion of the adjustment transaction in December 1998. The FEIT has been accounted for as an equity transaction with the Notional Shares treated as outstanding from their date of issuance until the respective date of repurchase, if any, for both basic and diluted earnings per share purposes. For diluted earnings per share purposes, at the end of the quarterly period, the then outstanding Reference Amount (as defined herein) is divided by the quoted market price of a paired common share, and the excess, if applicable, of that number of paired common shares over 57 the Notional Shares (the "Contingent Shares") is added to the denominator. Contingent shares are included in the calculation of year to date diluted earnings per share weighted for the interim periods in which they were included in the computation of diluted earnings per share. The "Reference Amount" equals the Initial Reference Amount plus the Return and net of any cash distributions on the Notional Shares or any other cash paid or otherwise delivered to MLI under the FEIT. Payments that reduce the Reference Amount in effect satisfy all necessary conditions for physically settling that portion of the Reference Amount and are accounted for in a manner similar to a treasury transaction. Therefore, payments that reduce the Reference Amount are divided by the quoted market price of a paired common share on the date of payment. The calculated number is then multiplied by the fractional number of days in the period prior to the payment date and the resulting number of paired common shares is included in the calculation of diluted earnings per share for the period. On November 11, 1998, the Companies entered into an agreement with MLI to amend the FEIT. Under the agreement, Realty agreed to grant a mortgage on the Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the FEIT with cash generated in part from the sale of certain assets, including the Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the settlement agreement, not to sell any shares of the existing FEIT until February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152 million ($127 million of which was from the sale of certain assets including the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional Shares outstanding were reduced to approximately 6,865,000 paired common shares and there were no Contingent Shares issuable. On March 10, 1999, the Companies entered into an agreement with MLI and certain of its affiliates to use the proceeds from the sale of Cobblestone Golf Group in excess of $300 million to purchase all or a portion of the remaining Notional Shares. Merrill Lynch has agreed not to sell any shares of the remaining Notional Shares until March 31, 1999 while the Companies complete the sale of Cobblestone Golf Group. At March 25, 1999, the balance of the Reference Amount is $89 million. On May 29, 1998, Realty completed its merger with Cobblestone and each share of common stock of Cobblestone was converted into the right to receive 3.867 paired common shares and each share of preferred stock of Cobblestone was converted into the right to receive .2953 paired common shares. The total number of paired common shares issued in connection with the Cobblestone Merger was approximately 8,177,000, with an aggregate market value of approximately $230,000,000 plus the issuance of approximately 452,000 options valued at $10,863,000. In addition, Realty advanced monies in order for Cobblestone to satisfy approximately $170,000,000 of Cobblestone's debt and associated costs. The total consideration paid in connection with the Cobblestone Merger was approximately $455,467,000. The excess of the purchase price, including costs of the Cobblestone Merger, over the fair value of the net assets acquired approximated $152,031,000 and is being amortized over 20 years. On June 10, 1998, Realty issued 7,000,000 depositary shares. Each depositary share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of $.10 per share. Net proceeds from this issuance of approximately $168,666,000 were used by Realty primarily to repay existing indebtedness. On July 17, 1998, Realty completed its merger with La Quinta and each share of common stock of La Quinta was converted into the right to receive 0.736 paired common shares, reduced by the amount to be received in an earnings and profits distribution. Approximately 43,280,000 paired common shares, with an aggregate market value of approximately $1,172,636,000, and approximately $956,054,000 were exchanged in order to consummate the La Quinta Merger. In addition, $851,479,000 of La Quinta's debt and associated costs were assumed. Accordingly, the operations of La Quinta are included in the combined and consolidated financial statements since consummation of the La Quinta Merger. The total consideration paid in connection with the La Quinta Merger was approximately $2,980,169,000. The excess of the purchase price, including costs of the La Quinta Merger, over the fair value of the net assets acquired approximated $301,977,000, and is being amortized over 20 years. On November 11, 1998 the Boards of Directors of Realty and Operating approved a comprehensive restructuring plan. Significant components of the restructuring plan include the sale of Cobblestone Golf 58 Group, the Santa Anita Racetrack, and certain healthcare properties. In conjunction with this plan, the assets related to horseracing operations at the Santa Anita Racetrack, as well as adjacent land, were sold on December 10, 1998 for $126,000,000. Additionally, a 50% ownership in a joint venture holding a fashion mall, as well as the land on which the fashion mall is located, were sold for $40,000,000. Also in response to the plan, healthcare assets were sold in the fourth quarter for $314,645,000 and mortgage investments of $122,645,000 were repaid. On February 11, 1999, the Companies signed a definitive agreement to sell the Cobblestone Golf Group real estate and operations for aggregate consideration, including assumed debt, of approximately $393,000,000. The transaction is expected to close by the end of the first quarter of 1999. Also, the Companies have entered into letters of intent for the sale of an additional $155,000,000 of healthcare assets. Operating had shareholders' equity of $78,507,000 as of December 31, 1998. The Companies have an effective shelf registration statement on file with the SEC under which the Companies may issue $1,825,000,000 of securities including shares, preferred stock, debt, series common stock, convertible debt and warrants to purchase shares, preferred shares, debt, series common stock and convertible debt. Operating believes that various sources of capital available over the next twelve months are adequate to finance operations as well as pending acquisitions. Over the next twelve months, as Operating identifies appropriate operating or investment opportunities, Operating may raise additional capital through the sale of shares, series common stock or preferred stock, or through the issuance of long-term debt. Recent Legislative Developments On July 22, 1998, the President of the United States signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"). Included in the Reform Act is a freeze on the grandfathered status of paired share REITs such as the Companies. Under this legislation, the anti- pairing rules provided in the Internal Revenue Code of 1986, as amended (the "Code"), apply to real property interests acquired after March 26, 1998 by the Companies, or by a subsidiary or partnership in which a ten percent or greater interest is owned by the Companies, unless (1) the real property interests are acquired pursuant to a written agreement that was binding on March 26, 1998 and at all times thereafter or (2) the acquisition of such real property interests was described in a public announcement or in a filing with the SEC on or before March 26, 1998. Under the Reform Act, the properties acquired in connection with the July 17, 1998 La Quinta Merger and in connection with the May 29, 1998 Cobblestone Merger generally are not subject to these anti-pairing rules. However, any property acquired by the Companies after March 26, 1998, other than property acquired pursuant to a written agreement that was binding on March 26, 1998 or described in a public announcement or in a filing with the SEC on or before March 26, 1998, is subject to the anti-pairing rules. Moreover, under the Reform Act any otherwise grandfathered property will become subject to the anti-pairing rules if a lease or renewal with respect to such property is determined to exceed an arm's length rate. In addition, the Reform Act also provides that a property held by the Companies that is not subject to the anti-pairing rules will become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (A) the undepreciated cost of the property (prior to the improvement) or (B) in the case of property acquired where there is a substituted basis (e.g., the properties acquired from La Quinta and Cobblestone), the fair market value of the property on the date it was acquired by the Companies. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect on December 31, 1999 and at all times thereafter. This restriction on property improvements applies to the properties acquired from La Quinta and Cobblestone, as well as all other properties owned by the Companies, and limits the ability of the Companies to improve or change the use of those properties after December 31, 1999. The Companies are considering various steps which they might take in order to minimize the effect of the Reform Act. In its Fiscal Year 2000 Budget released on February 1, 1999, the Clinton Administration proposed legislation that could significantly affect the use of taxable subsidiaries by The Meditrust Companies. 59 Under the proposed legislation, a REIT would be prohibited from owning more than 10 percent by vote or value of the securities of an issuer, other than qualified REIT subsidiaries or a new category of subsidiaries termed "taxable REIT subsidiaries." Under the Administration proposal, stock in taxable REIT subsidiaries could not exceed 15 percent of a REIT's assets, and of this 15 percent amount, no more than 5 percent of the REIT's assets could consist of stock of subsidiaries that provide services to the REIT's tenants. In contrast, the current law 10 percent ownership limitation is on a vote rather than a vote or value basis, and the total value of interests in taxable subsidiaries is limited only by the overall limitation of non-real estate assets to 25 percent of a REIT's total assets. The Administration proposal would also eliminate all interest deductions to a taxable REIT subsidiary on debt funded directly or indirectly by the REIT and would impose a 100 percent excise tax on excess payments to ensure arm's length (1) pricing for services provided to REIT tenants and (2) allocation of shared expenses between the REIT and the taxable REIT subsidiary. As proposed, the legislation would be effective after the date of enactment but would apply to existing arrangements, and it could limit the ability of The Meditrust Companies to acquire and operate through taxable subsidiaries non-grandfathered property subject to the anti-pairing rules. It is unclear whether, or in what form, this proposed legislation will be enacted. Restructuring the operations of Realty and Operating to comply with the recent legislation may cause the Companies to incur substantial tax liabilities, to recognize an impairment loss on their goodwill asset or otherwise adversely affect the Companies. Other Events On November 11, 1998, the Boards of Directors of Realty and Operating unanimously approved a comprehensive restructuring plan designed to strengthen the Companies' financial position and clarify their investment and operating strategy by focusing on the healthcare and lodging business segments. The comprehensive plan includes pursuing the separation of its primary businesses, healthcare and lodging, by creating two separately-listed, publicly-traded REITs to be accomplished by a spin-off of the healthcare financing business into a stand-alone REIT during the latter part of 1999. The plan contemplates continuation of operation of the healthcare and lodging businesses using the existing paired-share structure until the healthcare spin-off takes place. The plan also contemplates that the Companies will sell over $1,000,000,000 of non-strategic assets, including the Cobblestone Golf Group, the Santa Anita Racetrack and approximately $550,000,000 of non-strategic healthcare properties. Proceeds from the sales of these assets will be used to achieve significant near-term debt reduction. During the fourth quarter, the Companies made significant progress towards achieving these goals. On December 10, 1998, the Santa Anita Racetrack was sold for $126,000,000. Additionally, healthcare assets were sold for $314,645,000, mortgage investments of $122,645,000 were repaid, and a 50% interest in a joint venture which holds a fashion mall, as well as the land on which the fashion mall is located, was sold for $40,000,000. On February 11, 1999, the Companies signed a definitive agreement to sell the Cobblestone Golf Group real estate and operations for aggregate consideration, including assumed debt of approximately $393,000,000. The transaction is expected to close by the end of the first quarter of 1999. Also, the Companies have entered into letters of intent for the sale of an additional $155,000,000 of healthcare assets. The comprehensive restructuring plan also includes goals related to reducing capital investments to reflect current industry operating conditions and resetting the annual dividend amount to $1.84 per paired common share, an amount that is considered sustainable and represents a comparable payout ratio to that of its peer groups. On November 11, 1998, the Companies entered into an agreement with MLI and certain of its affiliates to settle the FEIT. Under the agreement, Realty agreed to grant a mortgage of the Santa Anita Racetrack to Merrill Lynch and repay Merrill Lynch approximately 50% of the FEIT in cash generated in part from the sale of certain assets. It is anticipated that the remaining FEIT will be discharged from the proceeds of the sale of equity securities of the Companies which, if offered publicly will be offered pursuant to a prospectus. Merrill Lynch agreed, subject to the terms of the settlement agreement, not to sell any shares of the existing FEIT until February 28, 1999 while the Companies complete the sale of equity securities and certain assets. 60 On August 3, 1998, Abraham D. Gosman resigned his position as Director and Chairman of the Boards of Directors of the Companies and Chief Executive Officer and Treasurer of Operating. In connection with his resignation, Mr. Gosman is seeking severance payments and the Companies are evaluating whether certain severance or other payments should be made to Mr. Gosman. As part of this evaluation, the Companies are considering the applicability of Mr. Gosman's employment contract and whether such severance or other payments are appropriate. The results of the Companies' evaluation are currently uncertain and depending upon the results of this evaluation and the results of ongoing discussions with Mr. Gosman, Mr. Gosman may initiate litigation against the Companies. The ultimate outcome of this matter is not predictable and management is not able to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome. It is possible that an unfavorable outcome of this matter could have a material adverse effect on the Companies' results of operations in a particular quarter or annual period. However, the Companies believe any such claim, even if materially adverse to the Companies' results of operations, should not have a material adverse effect on the Companies' financial position. Newly Issued Accounting Standards Financial Accounting Standards Board Statement No. 133 ("SFAS 133"): "Accounting for Derivative Instruments and Hedging Activities" is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, although early application is encouraged. SFAS 133 requires that all derivative investments be recorded in the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or comprehensive income depending on whether a derivative is designated as part of a hedge transaction, and if it is the type of hedge transactions. The Companies anticipate that due to its limited use of derivative instruments the adoption of SFAS 133 implementation will not have a material effect on the financial statements. Year 2000 The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. This "Year 2000 problem" is due to the fact that many existing computer programs and embedded chip technology systems were developed using only the last two digits to indicate a year. Thus, such systems may not have the capability of recognizing a year that begins with "20" as opposed to "19." As a consequence, these systems could fail altogether, or produce erroneous results. The Companies' State of Readiness. The Companies have developed a five-phase plan to address their Year 2000 issues (their "Year 2000 Plan"). The five phases are: (i) Awareness, (ii) Assessment, (iii) Remediation, (iv) Testing and (v) Implementation. Awareness. The Companies have implemented a program to insure the relevant employees are aware of the Year 2000 issue and have collected information from such employees regarding systems that might be affected. Management has assembled a Year 2000 Steering Committee to determine and assess the risks of the Year 2000 issue, plan and implement necessary upgrades or changes to make the Companies Year 2000 compliant or institute mitigating actions to minimize those risks and oversee the Companies' progress with respect to the implementation of their Year 2000 Plan. Assessment. The Companies have substantially completed an assessment of their internally and externally developed computer information systems. Operating is in the process of obtaining written verification from vendors to the effect that externally developed computer information systems acquired from such vendors correctly distinguish dates before the Year 2000. Operating expects to obtain such verifications, or a commitment from the relevant vendors to provide a solution, by no later than the second quarter of 1999. In addition, the Companies have engaged outside consultants to review the plan and assessment. Realty is in the process of obtaining written verification from its externally developed general ledger information system and payroll service provider to ensure that the system correctly distinguishes dates before the Year 2000. The Companies are currently evaluating and assessing their other electronic systems that include embedded technology, such as telecommunications, security, HVAC, elevator, fire and safety systems, 61 and expect that the assessment will be completed by the second quarter of 1999. The Companies are aware that such systems contain embedded chips that are often difficult to identify and test and may require complete replacement because they cannot be repaired. Failure of the Companies to identify or remediate any embedded chips (either on an individual or aggregate basis) on which significant business operations depend, such as phone systems, could have a material adverse impact on the Companies' business, financial condition and results of operations. To the extent such issues impact property level systems the Companies may be required to fund capital expenditures for upgraded equipment and software if necessary. In addition to the Companies' systems and those of its vendors and suppliers, there exist others that could have a material impact on the Companies' businesses if not Year 2000 compliant. Such systems could affect airline operations and other segments of the lodging and travel industries. These systems are outside of the Companies' control and their compliance is not verifiable by the Companies. The Companies' primary financial service providers are its primary bank, credit card and payroll processors each of which will be required to provide written verification to the Companies that they will be Year 2000 compliant. For the foregoing reasons, the Companies do not believe that there is a significant risk related to the failure of vendors or third-party service providers to prepare for the Year 2000; however, the costs and timing of third-party Year 2000 compliance is not within the Companies' control and no assurances can be given with respect to the cost or timing of such efforts or the potential effects of any failure to comply. Remediation. Operating's primary uses of software systems are the hotel reservation and front desk system, accounting, payroll and human resources software. Upgrades to the hotel reservation system to address some Year 2000 compliance issues were installed and implemented during the fourth quarter of 1997 through the second quarter of 1998. Testing of various airline interfaces with the hotel reservation system was completed by December 1998. Operating plans to implement a new hotel front desk system by the end of 1999, for which it has assurance that it is Year 2000 compliant. Operating is in the process of testing Year 2000 compliant releases of existing accounting, payroll and human resource systems. Implementation of these Year 2000 compliant upgrades is expected by the end of the second quarter of 1999. In addition, Operating has engaged outside consultants to assist in this process with respect to certain Year 2000 compliance efforts. Operating has received written verification from the vendors of accounting and payroll and human resource systems that the general releases currently available are Year 2000 compliant. Testing. To attempt to confirm that their computer systems are Year 2000 compliant, the Companies expect to perform limited testing of their computer information systems and their other computer systems that do not relate to information technology but include embedded technology; however, unless Year 2000 issues arise in the course of their limited testing, the Companies will rely on the written verification received from each vendor of their computer systems that the relevant system is Year 2000 compliant. Nevertheless, there can be no assurance that the computer systems on which the Companies' business relies will correctly distinguish dates before the Year 2000 from dates in and after the Year 2000. Any such failures could have a material adverse effect on the Companies' business, financial condition and results of operations. The Companies currently anticipate that testing will commence no later than the first quarter of 1999 and expect that their testing will be complete by the end of the third quarter of 1999. Implementation. The Companies have begun implementation of Year 2000 compliant software and software upgrades and expect to have them completed by December, 1999. Costs to Address the Companies' Year 2000 Issues. Based on current information from their review to date, the Companies budgeted $1,100,000 for the cost of repairing, updating and replacing their standard computer information systems. The Companies anticipate that the primary cost of Year 2000 compliance will be the cost of consultants and payroll and related expenses. The Companies currently expect that the installation of above mentioned upgrades and software will cost approximately $1,100,000, and as of the end of fiscal year 1998, the Companies have spent approximately $200,000 in connection therewith. In addition, the Companies expect that they will spend approximately $200,000 to address other Year 2000 related issues, including upgrades of certain systems with embedded technology. Because the Companies' Year 2000 assessment is ongoing and additional funds may be required as a result of future findings, the Companies are not currently able to estimate the final aggregate 62 cost of addressing the Year 2000 issue. While these efforts will involve additional costs, the Companies believe, based on available information, that these costs will not have a material adverse effect on their business, financial condition or results of operations. The Companies expect to fund the costs of addressing the Year 2000 issue from cash flows resulting from operations. While the Companies believe that they will be Year 2000 compliant by December 31, 1999, if these efforts are not completed on time, or if the costs associated with updating or replacing the Companies' computer systems exceed the Companies' estimates, the Year 2000 issue could have a material adverse effect on the Companies' business, financial condition and results of operations. Risks Presented by Year 2000 Issues. The Companies are still in the process of evaluating potential disruptions or complications that might result from Year 2000 related problems; however, at this time the Companies have not identified any specific business functions that will suffer material disruption as a result of Year 2000 related events. It is possible, however, that the Companies may identify business functions in the future that are specifically at risk of Year 2000 disruption. The absence of any such determination at this point represents only the Companies' current status of evaluating potential Year 2000 related problems and facts presently known to the Companies, and should not be construed to mean that there is no risk of Year 2000 related disruption. Moreover, due to the unique and pervasive nature of the Year 2000 issue, it is impracticable to anticipate each of the wide variety of Year 2000 events, particularly outside of the Companies, that might arise in a worst case scenario which might have a material adverse impact on the Companies' business, financial condition and results of operations. The Companies' Contingency Plans. The Companies intend to develop contingency plans for significant business risks that might result from Year 2000 related events. Because the Companies have not identified any specific business function that will be materially at risk of significant Year 2000 related disruptions, and because a full assessment of the Companies risk from potential Year 2000 failures is still in process, the Companies have not yet developed detailed contingency plans specific to Year 2000 problems. Development of these contingency plans is currently scheduled to occur by the second quarter of 1999 and as otherwise appropriate. As a part of their contingency planning, the Companies are analyzing the most reasonably likely worst-case scenario that could result from Year 2000-related failures. Failures by third parties to achieve Year 2000 compliance might result in short-term disruptions in travel patterns, and potential temporary disruptions in the supply of utility, telecommunications and financial services, most likely regional or local in scope. These events could cause temporary disruptions in the operations of hotel properties, and/or lead travelers to postpone travel, or to cancel travel plans, thereby affecting lodging patterns and occupancy. The preceding "Year 2000 readiness disclosure" contains various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent the Companies' beliefs or expectations regarding future events. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources; the ability to identify and remediate all date sensitive lines of computer code or to replace embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Year 2000 problems. Seasonality The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. In addition, opening of new construction hotels and/or timing of hotel acquisitions may cause variation of revenue from quarter to quarter. 63 CERTAIN FACTORS YOU SHOULD CONSIDER Presented below are certain factors that you should consider with respect to investing in the Companies' securities. With respect to investing in the Companies' securities, you should be aware that there are various risks, including those described below, which may materially impact your investment in the Companies securities or may in the future, and, in some cases, already do, materially affect us and our business, financial condition and results of operations. You should consider carefully these risk factors with respect to investing in our securities. This section includes or refers to certain forward-looking statements; you should read the explanation of the qualifications and limitations on such forward-looking statements discussed on page 71. Tax Risks Related to Real Estate Investment Trusts Dependence on Qualification as a REIT; General. Realty operates and intends to operate in the future so as to qualify as a real estate investment trust for federal income tax purposes. However, there is no assurance that Realty has satisfied the requirements for REIT qualification in the past or will qualify as a REIT in the future. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for which there are only limited judicial or administrative interpretations. The complexity of these provisions is greater in the case of a paired share REIT such as Realty. Qualification as a REIT also involves the determination of various factual matters and circumstances not entirely within Realty's control. In addition, Realty's ability to qualify as a REIT is dependent upon its continued exemption from the anti-pairing rules of Section 269B(a)(3) of the Code, which would ordinarily prevent Realty from qualifying as a REIT. Subject to the discussion below of recent legislation, the "grandfathering" rules governing Section 269B generally provide, however, that Section 269B(a)(3) does not apply to a paired share REIT if the REIT and its paired operating company were paired on June 30, 1983. On June 30, 1983, Realty (which was then known as Santa Anita Realty Enterprises, Inc. ("Santa Anita Realty")) was paired with the Operating Company (which was then known as Santa Anita Operating Company ("SAOC," and together with Santa Anita Realty, "Santa Anita")). There are, however, no judicial or administrative authorities interpreting this "grandfathering" rule. Moreover, if for any reason Realty failed to qualify as a REIT in 1983, the benefit of the "grandfathering" rule would not be available to Realty, in which case Realty would not qualify as a REIT for any taxable year from and after 1983. Failure of Realty to qualify as a REIT would have a material adverse effect on the Companies and their ability to make distributions to their shareholders and to pay amounts due on their indebtedness. Legislation, as well as regulations, administrative interpretations or court decisions, also could change the tax law with respect to Realty's qualification as a REIT and the federal income tax consequence of such qualification. See "--Recent Legislation May Curb Use of Paired Share Structure" below. Such legislation, regulations or administrative interpretations or court decisions could have a material adverse effect on the Companies and their ability to make distributions to shareholders and to pay amounts due on their indebtedness. In addition, this legislation prevents the Companies from growing as originally intended at the time of the Santa Anita Mergers (as defined below). If Realty were to fail to qualify as a REIT, it would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at corporate rates. Failure to qualify as a REIT would result in additional tax liability to Realty for the year or years involved. In addition, the failure to qualify as a REIT would also constitute a default under certain debt obligations of Realty, which would generally allow the holders thereof to demand the immediate repayment of such indebtedness, which could have a material adverse effect on the Companies and their ability to make distributions to shareholders and to pay amounts due on their indebtedness. Recent Legislation Curbs Use of Paired Share Structure. On July 22, 1998, the President signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"). Included in the Reform Act is a freeze on the grandfathered status of paired share REITs such as the Companies. Under this legislation, the anti-pairing rules provided in the Code apply to real property interests acquired after March 26, 1998 by the Companies, or by a subsidiary or partnership in which a ten percent or greater interest is owned by the Companies, unless (1) the real property interests are acquired pursuant to a 64 written agreement that was binding on March 26, 1998 and at all times thereafter or (2) the acquisition of such real property interests was described in a public announcement or in a filing with the SEC on or before March 26, 1998. The restrictions on the activities of a grandfathered REIT provided in the Reform Act may in the future make it impractical or undesirable for the Companies to continue to maintain their paired share structure. Restructuring the operations of Realty and Operating to comply with the rules provided by the Reform Act could cause the Companies to incur tax liabilities, to recognize an impairment loss on their goodwill assets, or otherwise materially adversely affect the Companies and their ability to make distributions to shareholders and to pay amounts due on their indebtedness. Adverse Effects of REIT Minimum Distribution Requirements. In order to qualify as a REIT Realty is generally required each year to distribute to its shareholders at least 95% of its taxable income (excluding any net capital gain). In addition, if Realty were to dispose of assets acquired in certain acquisitions during the ten-year period following the acquisition, Realty would be required to distribute at least 95% of the amount of any "built-in gain" attributable to such assets that Realty recognizes in the disposition, less the amount of any tax paid with respect to such recognized built-in gain. Realty generally is subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of its undistributed income from prior years. Risks Related to the Implementation and Effects of the Comprehensive Restructuring Plan We believe that the successful implementation of the comprehensive restructuring plan, which includes pursuing the separation of the Companies' healthcare and lodging businesses, is in the best long-term interests of the Companies and their stockholders. However, there are a number of potentially negative or adverse factors that you should be aware of in connection with both the implementation of the comprehensive restructuring plan, as well as the effects of the comprehensive restructuring plan. Implementation. The comprehensive restructuring plan involves a number of component parts that require a substantial commitment of our resources to implement. In order to successfully implement each part of the comprehensive restructuring plan, a significant amount of the available time and effort of the management of The Meditrust Companies must be utilized. For example, each transaction involving the sale of a non-strategic asset requires that the personnel who oversee that asset or group of assets not only continue to operate or monitor that asset consistent with past practice, but also that they prepare it for sale, meet with potential buyers, negotiate, and/or assist in the negotiation with the ultimate buyer. In addition, The Meditrust Companies have expended, and will continue to expend significant financial resources to implement the comprehensive restructuring plan. Each transaction of the type described above generally involves the payment of fees and expenses of outside professionals, including investment bankers, attorneys, independent accountants and consultants. Our ability to successfully implement the comprehensive restructuring plan is also impacted by external factors, such as: (i) the performance of the economy generally and real estate markets in particular, (ii) the ability of The Meditrust Companies to access the capital markets, (iii) changes in applicable law and (iv) the identification of satisfactory buyers of non-strategic assets. After the spin-off, each of the lodging and health care business segments will need to separately access the capital markets to the extent that additional capital is required. However, we can not be certain that the capital markets, will be amenable to the spin-off and the creation of the two distinct, separately traded entities. In addition, changes in the capital markets, which are beyond our control, may materially impact our ability to successfully implement the spin-off, as well as other component parts of the comprehensive restructuring plan. Effects: The structure of The Meditrust Companies will be significantly altered from our structure today and from our structure six months ago. Today, each holder of paired shares of The Meditrust Companies owns interests in a combined business which owns and invests in health care properties, owns and operates lodging properties and owns and operates golf related properties. Until recently, The Meditrust Companies also owned and operated a horse racing facility and related property. After completion of the comprehensive restructuring plan, and assuming a shareholder continues to hold the 65 securities issued to the shareholders in the spin-off, shareholders will own an equity interest in a lodging business and in a separate health care financing business. The lodging business and the health care financing business will be operated independently, they will be financed separately and their securities will be traded independently on the New York Stock Exchange. A shareholder will no longer hold an interest in either the horse racing or golfing businesses as these businesses have been, or will be sold. On February 11, 1999, the Companies entered into a definitive agreement to sell the subsidiaries that conduct the golf businesses at the golf courses owned and leased by Realty together with the golf course related real estate owned and/or leased by Realty, to Golf Acquisitions, L.L.C., an affiliate of ClubCorp., Inc. The transaction, which is subject to customary closing conditions, is scheduled to close on or prior to March 31, 1999. In addition, the health care financing business will be somewhat smaller than it has been historically, as certain non-strategic assets, most of which relate to the health care business, have been sold and the funding of new health care investments has been reduced as part of our reduction of capital expenditures. Substantial Leverage Risks Realty has substantial leverage. In that regard, on July 17, 1998, Realty entered into the Credit Agreement, which provides Realty with up to $2.25 billion in credit facilities. The degree of leverage of Realty could have important consequences to investors, including the following: (i) Realty's ability to obtain additional financing may be impaired, both currently and in the future; (ii) a substantial portion of Realty's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to Realty for other purposes; (iii) as described below, certain of Realty's borrowings are and will continue to be at variable rates of interest, which will expose Realty to the risk of increased interest rates; (iv) Realty may be substantially more leveraged than certain of its competitors, which may place Realty at a competitive disadvantage; and (v) Realty's substantial degree of leverage may limit its flexibility to adjust to changing market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions or its business. The foregoing risks associated with the debt obligations of the Companies may adversely affect the market price of securities issued by the Companies and may inhibit the ability of the Companies to raise capital in both the public and private markets. Health Care Industry Risks Operating Risks. One of Realty's primary businesses is that of buying, selling, financing and leasing health care related properties. The risks of this business include, among other things: competition for tenants; competition from other health care financing providers, a number of which may have greater marketing, financial and other resources and experience than Realty; changes in government regulation of health care; changes in the availability and cost of insurance coverage; increases in operating costs due to inflation and other factors; changes in interest rates; the availability of financing; and adverse effects of general and local economic conditions. Concentration of Company Operators in Long-term Care Industry. The long-term care businesses of the third-party operators of Realty's health care related real estate, and the health care industry generally, are subject to extensive federal, state and local regulation governing the licensing and conduct of operations at health care facilities, certain capital expenditures, the quality of services provided, the manner in which the services are provided, financial and other arrangements between health care providers and reimbursement for services rendered. The failure of any third-party operator to comply with such laws, requirements and regulations could adversely affect its ability to operate the facility or facilities and could adversely affect such operator's ability to make payments to Realty, thereby adversely affecting the Companies. Concentration of Credit Risks; Reliance on Major Operators. As of December 31, 1998, long-term care facilities comprised 28% of Realty's real estate investments and Realty's investments in facilities of its two largest health care operators totaled approximately 20% of Realty's total real estate investments. Such a concentration in specific types of facilities, as well as in these operators, could have a material adverse effect on the Companies. 66 Realty's third-party operators manage long-term care facilities on each of Realty's properties. The financial position of Realty may be adversely affected by financial difficulties experienced by any of such operators, or any other major operator of Realty, including a bankruptcy, insolvency or general downturn in the business of any such operator, or in the event any such operator does not renew its leases as they expire and Realty can not lease these facilities to other operators on comparable terms. Government Regulation May Increase. The health care industry is subject to changing political, economic, regulatory and demographic influences that may affect the operations of health care facilities and providers. During the past several years, the health care industry has been subject to changes in government regulation of, among other things, reimbursement rates and certain capital expenditures. Some elected officials have announced that they intend to examine certain aspects of the United States health care system including proposals which may further increase governmental involvement in health care. For example, the President and Congress have in the past, and may in the future, propose health care reforms which could impose additional regulations on Realty and its operators (including Operating) or limit the amounts that operators may charge for services. Realty's operators of its health care facilities are and will continue to be subject to varying degrees of regulation and licensing by health or social service agencies and other regulatory authorities in the various states and localities in which they operate or in which they will operate. Health Care Reform. The Balanced Budget Act of 1997, which was signed by the President on August 5, 1997 (the "1997 Act"), enacted significant changes to the Medicare and Medicaid programs designed to modernize payment and health care delivery systems while achieving substantial budgetary savings. In seeking to limit Medicare reimbursement for long term care services, the 1997 Act mandated the establishment of a prospective payment system for skilled nursing facilities to replace the current cost-based reimbursement system. The cost-based system reimburses skilled nursing facilities for reasonable direct and indirect allowable costs incurred in providing "routine services" as well as capital costs and ancillary costs, subject to limits fixed for the particular geographic area served by the skilled nursing facility. Under the prospective payment system, skilled nursing facilities will be paid a federal per diem rate for covered services. The per diem payment will cover routine service, ancillary, and capital-related costs. The prospective payment system will be phased in over a four year period beginning on or after July 1, 1998. Under provisions of the 1997 Act, states will be provided additional flexibility in managing their Medicaid program. Among other things, the 1997 Act repealed a federal law's payment standard, which had required states to pay "reasonable and adequate" payments to cover the costs of efficiently and economically operated hospitals, nursing facilities and certain intermediate care facilities. These health care reforms may reduce reimbursement to levels that are insufficient to cover the cost of providing patient care, which could adversely affect the revenues of Realty's third-party borrowers and lessees and thereby adversely affect those borrowers' and lessees' abilities to make their loan or lease payments to Realty. Failure of the borrowers or lessees to make their loan or lease payments would have a direct and material adverse impact on the Companies. Reliance on Third-Party Payors; Availability of Reimbursement. The cost of many of the services offered by the current operators of Realty's health care facilities are reimbursed or paid for by third-party payors such as Medicare and Medicaid programs for elderly, low income and disabled patients and state Medicaid programs for managed care organizations. No assurance can be given that third-party reimbursement for Realty's operators will continue to be available or when reimbursement will be offered or that reimbursement rates will not be reduced. The increase in the number of providers contracting to provide per person fixed cost health care to a patient population has increased pressure on third-party payors to lower costs. A significant portion of the revenue from the third-party operators who lease or receive financing from Realty is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid. These programs are highly regulated and subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. In recent years, there have been fundamental changes in the Medicare program which have resulted in reduced levels of payment for a substantial portion of health care services. Moreover, health care facilities have experienced increasing pressures from private payers 67 such as health maintenance organizations attempting to control health care costs. Reimbursement from private payers has in many cases effectively been reduced to levels approaching those of government payers. Concern regarding health care costs may result in significant reductions in payment to health care facilities, and there can be no assurance that future payment rates from either governmental or private health care plans will be sufficient to cover cost increases in providing services to patients. In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could adversely affect revenues from the third-party operators who lease or receive financing from Realty and thereby adversely affect those entities' ability to make their lease or loan payments to Realty. Failure of these entities to make their lease or loan payments would have a direct and material adverse impact on the Company. Fraud and Abuse Enforcement. In the past several years, due to rising health care costs, there has been an increased emphasis on detecting and eliminating fraud and abuse in the Medicare and Medicaid programs. Payment of any remuneration to induce the referral of Medicare and Medicaid patients is generally prohibited by federal and state statutes. Both federal and state self-referral statutes severely restrict the ability of physicians to refer patients to entities in which they have a financial interest. The 1997 Act provided the federal government with expanded enforcement powers to combat waste, fraud and abuse in the delivery of health care services. In addition, the Office of Inspector General and the Health Care Financing Administration now have increased investigation and enforcement activity of fraud and abuse, specifically targeting nursing homes, home health providers and medical equipment suppliers. Failure to comply with the foregoing fraud and abuse laws or government program integrity regulations may result in sanctions including the loss of licensure or eligibility to participate in reimbursement programs (including Medicare and Medicaid), asset forfeitures and civil and criminal penalties. It is anticipated that the trend toward increased investigation and informant activity in the area of fraud and abuse, as well as self-referral, will continue in future years. In the event that any borrower or lessee were to be found in violation of the applicable laws regarding fraud, abuse or self-referral, that borrower's or lessee's license or certification to participate in government reimbursement programs could be jeopardized, or that borrower or lessee could be subject to civil and criminal fines and penalties. Either of these occurrences could have a material adverse affect on the Companies by adversely affecting the borrower's or lessee's ability to make debt or lease payments to Realty. The foregoing factors could adversely affect the ability of the operators of Realty's health care facilities to generate revenues and make payments to Realty. This, in turn, could materially adversely affect the Companies and their ability to make distributions to shareholders and to pay amounts due on their indebtedness. Lodging Industry Risks The Companies, through their acquisition of La Quinta, have made a significant investment in hotels and related lodging facilities. La Quinta is operated by a subsidiary of Operating and its real estate assets are owned by Realty or a subsidiary of Realty. Competition. The results of operations of La Quinta hotels are subject to general economic conditions, competition, the desirability of particular locations, the relationship between supply of and demand for hotel rooms and other factors. La Quinta hotels generally operate in markets that contain numerous competitors, including wide range of lodging facilities offering full-service, limited-service and all-suite lodging options to the public. The continued success of La Quinta's hotels will be dependent, in large part, upon their ability to compete in such areas as reasonableness of room rates, quality of accommodations, name recognition, service level and convenience of locations. Additionally, an increasing supply of hotel rooms in La Quinta's market segment and recent consolidations in the lodging industry generally resulting in the creation of several large, multi-branded hotel chains with diversified operations may adversely impact La Quinta's financial condition, results of operations and business. No assurance can be given that demographic, geographic or other changes in markets will not adversely 68 affect the convenience or desirability of the locations of La Quinta's hotels. Furthermore, no assurance can be given that, in the markets in which La Quinta's hotels operate, competing hotels will not provide greater competition for guests than currently exists, and that new hotels will not enter such markets. Geographic Concentration. La Quinta's hotels are concentrated in the western and southern regions of the United States. As a result, La Quinta is sensitive to economic and competitive conditions in those regions. Extensive Employment and Other Governmental Regulations. The hotel business is subject to extensive federal, state and local regulatory requirements, including building and zoning requirements, all of which can prevent, delay, make uneconomical or significantly increase the cost of developing additional lodging facilities. In addition, La Quinta's hotels and Operating are subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions, work permit requirements and discrimination claims. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could adversely affect the Companies. Fluctuations in Operating Results. The lodging industry may be adversely affected by, among other things, changes in economic conditions, changes in local market conditions, oversupply of hotel space, a reduction in demand for hotel space in specific areas, changes in travel patterns, weather conditions, changes in governmental regulations that influence or determine wages, prices or construction costs, changes in interest rates, the availability of financing for operating or capital needs, and changes in real estate tax rates and other operating expenses. Room supply and demand historically have been sensitive to shifts in gross domestic product growth, which has resulted in cyclical changes in average daily room and occupancy rates. Due in part to the strong correlation between the lodging industry's performance and economic conditions, the lodging industry is subject to cyclical changes in revenues. In that regard, there can be no assurance that the recent strength in the lodging industry generally, or in the segment of the industry in which La Quinta operates, will not decline in the future. Furthermore, the lodging industry is seasonal in nature, with revenues typically higher in summer periods than in winter periods. Construction. If Realty resumes La Quinta's historical strategy of growing through new construction, Realty may from time to time experience shortages of materials or qualified tradespeople or volatile increases in the cost of certain construction materials or labor, resulting in longer than normal construction and remodeling periods, loss of revenue and increased costs. Realty will rely heavily on local contractors, who may be inadequately capitalized or understaffed. The inability or failure of one or more local contractors to perform may result in construction or remodeling delays, increased cost and loss of revenue. The foregoing factors could adversely affect La Quinta's operations which, in turn, could materially adversely affect the Companies and their ability to make distributions to shareholders and to pay amounts due on their indebtedness. Real Estate Investment Risks General Risks. Realty's investments will be subject to the risks inherent in owning real estate. The underlying value of Realty's real estate investments and the Companies' results of operations and ability to make distributions to their shareholders and pay amounts due on their indebtedness will depend on the ability of the lessees, the operators and Operating to operate Realty's properties in a manner sufficient to maintain or increase revenues and to generate sufficient revenues in excess of operating expenses to make rent payments under their leases or loan payments in respect of their loans from Realty. Results of operations of Realty's properties may also be adversely affected by, among other things: o changes in national economic conditions, changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics; o changes in interest rates and in the availability, cost and terms of financing; o the impact of present or future environmental legislation and compliance with environmental laws and other regulatory requirements; o the ongoing need for capital improvements, particularly in older structures; 69 o changes in real estate tax rates and assessments and other operating expenses; o adverse changes in governmental rules and fiscal policies; o adverse changes in zoning and other land use laws; and o civil unrest, earthquakes and other natural disasters (which may result in uninsured losses) and other factors which are beyond its control. Dependence on Rental Income from Real Property. Realty's cash flow, results of operations and value of its assets would be adversely affected if a significant number of third-party operators of the Realty's properties fail to meet their lease obligations. The bankruptcy or insolvency of a major operator may have an adverse effect on a property. At any time, an operator also may seek protection under the bankruptcy laws, which could result in rejection and termination of such operator's lease and thereby cause a reduction in the cash flow of the property. If an operator rejects its lease, the owner's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. Generally, the amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one year's lease payments or 150% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments). Environmental Matters. The obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation, may affect the operating costs of Realty and Operating. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on or under the property. Environmental laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances and whether or not such substances originated from the property. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect Realty's ability to borrow by using such real property as collateral. Persons who arrange for the transportation, disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of hazardous or toxic substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. Certain environmental laws and common law principles could be used to impose liability for releases of hazardous materials, including asbestos-containing materials or "ACMs", into the environment. In addition, third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released ACMs or other hazardous materials. Environmental laws may also impose restrictions on the use or transfer of property, and these restrictions may require expenditures. In connection with the ownership and operation of any of Realty's properties, Realty, Operating and the other lessees or operators of these properties may be liable for any such costs. The cost of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could materially adversely affect the Companies and their ability to make distributions to shareholders and to pay amounts due on their indebtedness. Compliance with the ADA May Affect Expected Distributions to the Companies' Shareholders. Under the Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that Realty or Operating is not in compliance with the ADA could result in the imposition of fines and/or an award of damages to private litigants. If Realty or Operating were required to make modifications to comply with the ADA, there could be a material adverse effect on the Companies and their ability to make distributions to shareholders and to pay amounts due on their indebtedness. Uninsured and Underinsured Losses. Each of Realty's leases and mortgage loans typically specifies that comprehensive insurance is to be maintained on each of the applicable properties, including liability, fire and extended coverage. Leases and loan documents for new investments (including those leased to Operating) typically contain similar provisions. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods, that may be uninsurable or not economically insurable. Realty will use its discretion in determining amounts, coverage 70 limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on the investments of Realty and Operating at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of the lost investment and also may result in certain losses being totally uninsured. Inflation, changes in building codes, zoning or other land use ordinances, environmental considerations, lender imposed restrictions and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds, if any, received by Realty or Operating might not be adequate to restore its economic position with respect to such property. Real Estate Financing Risks Financing and Maturities. Realty is subject to the normal risks associated with debt and preferred stock financing, including the risk that Realty's cash flow will be insufficient to meet required payments of principal and interest and dividends, the risk that indebtedness on its properties, or unsecured indebtedness, will not be able to be renewed, repaid or refinanced when due or that the terms of any renewal or refinancing will not be as favorable as the terms of such indebtedness. If Realty were unable to refinance the indebtedness on acceptable terms, or at all, Realty might be forced to dispose of one or more of its properties on disadvantageous terms, which might result in losses to Realty, which losses could have a material adverse effect on Realty and its ability to make distributions to shareholders and to pay amounts due on its indebtedness. Furthermore, if a property is mortgaged to secure payment of indebtedness and Realty is unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of revenues and asset value to Realty. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering Realty's ability to meet the REIT distribution requirements of the Code. Risk of Rising Interest Rates. Realty has incurred and expects in the future to incur indebtedness which bears interest at variable rates. Accordingly, increases in interest rates would increase Realty's interest costs (to the extent that the related indebtedness was not protected by interest rate protection arrangements), which could have a material adverse effect on Realty and its ability to make distributions to shareholders and to pay amounts due on its indebtedness or cause Realty to be in default under certain debt instruments (including its Debt Securities). In addition, an increase in market interest rates may lead holders of the Shares to demand a higher yield on their Shares from distributions by the Companies, which could adversely affect the market price for the Shares and could also adversely affect the market price of any Preferred Stock issued by either of the Companies. Cautionary Statements Concerning Forward-Looking Statements Any statements included in this Joint Annual Report on Form 10-K that are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements contained or incorporated by reference herein or in the accompanying Prospectus Supplement should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates" or "anticipates" or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans, intentions or anticipated or projected events, results or conditions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. Such forward-looking statements include statements with respect to (i) the declaration or payment of distributions by the Companies, (ii) the ownership, management and operation of hotels, golf courses, health care related facilities, race tracks and other properties, including the integration of the acquisitions effected or proposed by the Companies, (iii) potential acquisitions or dispositions of properties, assets or other public or private companies by the Companies, (iv) the policies of the Companies, Cobblestone and La Quinta regarding investments, acquisitions, dispositions, financings, conflicts of interest and other matters, (v) the qualification of Realty and Realty's Predecessor as a REIT under the Code and the "grandfathering" rules under Section 269B of the Code, (vi) the health care, real estate, golf and lodging industries and real estate markets in general, (vii) the availability of debt and equity financing, (viii) interest rates, (ix) general economic conditions, (x) supply and customer demand, (xi) trends affecting the Companies', Cobblestone's and La Quinta's financial condition or results 71 of operations, (xii) the effect of acquisitions (including the Cobblestone and La Quinta acquisitions) on results of operations (including funds from operations, margins, and cash flow), financial condition (including market capitalization) and financial flexibility, (xiii) the anticipated performance of the Companies and of acquired properties and businesses, including, without limitation, statements regarding anticipated revenues, cash flows, funds from operations, EBITDA, operating or profit margins and sensitivity to economic downturns or anticipated growth or improvements in any of the foregoing, (xiv) conditions or prospects in the lodging and other industries, including anticipated growth or profitability, and the sensitivity of certain segments of those industries to economic downturns, (xv) the ability of the Companies and of acquired properties and businesses to grow (including La Quinta's ability to renovate hotels and open new hotels as planned), and (xvi) Realty's funds from operations payout ratio after giving effect to anticipated acquisitions. Shareholders are cautioned that, while forward-looking statements reflect the respective Companies' good faith beliefs, they are not guarantees of future performance and they involve known and unknown risks and uncertainties and there can be no assurance that the events, results or conditions reflected in such forward-looking statements will occur. Actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained in this Joint Annual Report on Form 10-K, including, without limitation, the information set forth in "Certain Factors You Should Consider," identifies important factors that could cause such differences. The Companies undertake no obligations to publicly release the results of any revisions to these forward-looking statements that may reflect any future events or circumstances. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The table below provides information about the Companies' derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For fixed rate debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For variable rate debt obligations, the table presents principal cash flows by expected maturity date and contracted interest rates as of the report date. For the interest rate swap the table presents notional amount and interest rate by the expected (contractual) maturity date. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. The variable interest rate represents the contractual LIBOR rate as of the reporting date.
- - ---------------------------------------------------------------------------------------------------------------------------- There- Face Fair (In thousands) 1999 2000 2001 2002 2003 after Value Value - - ---------------------------------------------------------------------------------------------------------------------------- Debt Obligations - - ---------------------------------------------------------------------------------------------------------------------------- Long Term Debt: - - ---------------------------------------------------------------------------------------------------------------------------- Fixed Rate 28,785 219,422 248,639 92,659 207,301 686,676 1,483,482 1,454,784 - - ---------------------------------------------------------------------------------------------------------------------------- Average interest rate 7.547% 7.569% 7.644% 7.770% 7.354% 7.367% 7.470% - - ---------------------------------------------------------------------------------------------------------------------------- Variable rate 750,000 1,108,000 1,858,000 1,839,162 - - ---------------------------------------------------------------------------------------------------------------------------- Average interest rate 7.980% 7.980% 7.980% - - ---------------------------------------------------------------------------------------------------------------------------- Interest rate derivatives - - ---------------------------------------------------------------------------------------------------------------------------- Interest rate swap: - - ---------------------------------------------------------------------------------------------------------------------------- Notional amount 500,000 250,000 500,000 1,250,000 11,323 - - ---------------------------------------------------------------------------------------------------------------------------- Pay rate 5.680% 5.685% 5.700% 5.689% - - ---------------------------------------------------------------------------------------------------------------------------- Receive rate (a) (a) (a) (a) - - ----------------------------------------------------------------------------------------------------------------------------
(a) The Receive rate is based on LIBOR rates at the time of each borrowing. Realty All indebtedness, including notes payable, convertible debentures, bank notes payable and bonds and mortgages payable are liabilities on Realty. See quantitative and qualitative disclosures about the Companies' market risk above. Operating Operating is a guarantor of all of the obligations of Realty under the New Credit Agreement. 72 Item 8. Financial Statements and Supplementary Data THE MEDITRUST COMPANIES COMBINED CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------- 1998 1997 (In thousands, except per share amounts) ------------- ------------- Assets Real estate investments, net .................................... $5,086,736 $2,935,772 Cash and cash equivalents ....................................... 305,456 43,732 Fees, interest and other receivables ............................ 54,712 23,650 Goodwill, net ................................................... 486,051 194,893 Net assets of discontinued operations ........................... 305,416 -- Other assets, net ............................................... 221,180 82,236 ---------- ---------- Total assets ................................................... $6,459,551 $3,280,283 ========== ========== Liabilities and Shareholders' Equity Indebtedness: Notes payable, net .............................................. $1,155,837 $ 900,594 Convertible debentures, net ..................................... 185,013 234,000 Bank notes payable, net ......................................... 1,831,336 179,527 Bonds and mortgages payable, net ................................ 129,536 63,317 ---------- ---------- Total indebtedness ............................................. 3,301,722 1,377,438 Accounts payable, accrued expenses and other liabilities ......... 206,901 77,106 ---------- ---------- Total liabilities .............................................. 3,508,623 1,454,544 ========== ========== Commitments and contingencies .................................... -- -- Shareholders' equity: Meditrust Corporation Series A Preferred Stock, $.10 par value; 6,000 shares authorized; 700 shares issued and outstanding in 1998; stated liquidation preference of $250 per share ......... 70 -- Paired Common Stock, $.20 combined par value; 270,000 shares authorized; 149,326 and 88,128 paired shares issued and outstanding in 1998 and 1997, respectively .................... 29,865 17,626 Additional paid-in-capital ...................................... 3,891,987 1,997,517 Treasury stock at cost, 1,635 paired shares in 1998 ............. (163,326) -- Unearned compensation ........................................... (6,718) -- Accumulated other comprehensive income .......................... 16,971 3,569 Distributions in excess of earnings ............................. (817,921) (192,973) ---------- ---------- Total shareholders' equity ...................................... 2,950,928 1,825,739 ---------- ---------- Total liabilities and shareholders' equity ..................... $6,459,551 $3,280,283 ========== ==========
The accompanying notes are an integral part of these financial statements 73 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, --------------------------------------------- 1998 1997 1996 (In thousands, except per share amounts) ------------- ------------- ------------- Revenue: Rental .............................................. $ 191,874 $ 137,868 $ 109,119 Interest ............................................ 153,093 151,170 144,905 Hotel ............................................... 258,423 -- -- Other ............................................... 35,987 -- -- ---------- --------- --------- 639,377 289,038 254,024 ---------- --------- --------- Expenses: Interest ............................................ 178,458 87,412 64,216 Depreciation and amortization ....................... 87,228 26,838 21,651 Amortization of goodwill ............................ 13,265 2,349 1,556 General and administrative .......................... 21,436 10,257 8,625 Hotel operations .................................... 125,246 -- -- Rental property operations .......................... 15,638 210 -- Loss on sale of securities .......................... 4,159 -- -- Gain on sale of assets .............................. (52,642) -- -- Income from unconsolidated joint venture ............ (906) 10 -- Other ............................................... 111,215 -- -- ---------- --------- --------- 503,097 127,076 96,048 ---------- --------- --------- Income from continuing operations before benefit for income taxes ........................................ 136,280 161,962 157,976 Income tax benefit ................................... (4,800) -- -- ---------- --------- --------- Income from continuing operations .................... 141,080 161,962 157,976 Discontinued operations: Income from operations, net ......................... 10,721 450 -- Loss on disposal of Santa Anita, net ................ (67,913) -- -- Provision for loss on disposition of Cobblestone Golf Group, net .......................................... (237,035) -- -- ---------- --------- --------- Net income (loss) .................................... (153,147) 162,412 157,976 Preferred stock dividends ............................ (8,444) -- -- ---------- --------- --------- Net income (loss) available to Paired Common shareholders ................................. $ (161,591) $ 162,412 $ 157,976 ========== ========= ========= Basic earnings per Paired Common Share: Income from continuing operations ................... $ 1.10 $ 2.13 $ 2.21 Discontinued operations ............................. (2.44) .01 -- ---------- --------- --------- Net income (loss) ................................... $ (1.34) $ 2.14 $ 2.21 ========== ========= ========= Diluted earnings per Paired Common Share: Income from continuing operations ................... $ 1.06 $ 2.12 $ 2.20 Discontinued operations ............................. (2.35) -- -- ---------- --------- --------- Net income (loss) ................................... $ (1.29) $ 2.12 $ 2.20 ========== ========= =========
The accompanying notes are an integral part of these financial statements 74 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Shares of Beneficial Interest or Paired Common Shares ------------------------ Additional Preferred Paid-in Treasury Shares Amount Stock Capital Stock (In thousands) -------- --------------- ----------- ------------ ---------- Balance, December 31, 1995 61,494 $ 1,192,612 Proceeds from issuance of shares of beneficial interest, net of offering costs of $16,316 ............... 11,055 296,484 Issuance of shares of beneficial interest for: Conversion of debentures, net of unamortized issue costs of $259 ................. 644 15,707 Employee compensation and stock options ............. 524 13,123 Distributions paid .............. Net income for the year ended December 31, 1996 Change in market value of equity investment in excess of cost ................. ------ --------- ----------- ----------- ----------- Balance, December 31, 1996 73,717 1,517,926 Distribution of MAC shares to Meditrust shareholders ......... 43,662 Effect of merger with The Santa Anita Companies .......... 12,366 (1,544,370) $1,939,426 Issuance of Paired Common Shares for: Conversion of debentures, net of unamortized issue costs of $168 ................. 1,589 318 47,675 Accumulated Other Distributions Unearned Comprehensive in Excess of Comprehensive Compensation Income Earnings Total Income (loss) (In thousands) -------------- --------------- -------------- ------------- -------------- Balance, December 31, 1995 $ (130,857) $1,061,755 Proceeds from issuance of shares of beneficial interest, net of offering costs of $16,316 ............... 296,484 Issuance of shares of beneficial interest for: Conversion of debentures, net of unamortized issue costs of $259 ................. 15,707 Employee compensation and stock options ............. 13,123 Distributions paid .............. (162,632) (162,632) Net income for the year ended December 31, 1996 157,976 157,976 $157,976 Change in market value of equity investment in excess of cost ................. $2,528 2,528 2,528 -------------- ------ ---------- ---------- -------- Balance, December 31, 1996 2,528 (135,513) 1,384,941 $160,504 ======== Distribution of MAC shares to Meditrust shareholders ......... (43,662) Effect of merger with The Santa Anita Companies .......... 395,056 Issuance of Paired Common Shares for: Conversion of debentures, net of unamortized issue costs of $168 ................. 47,993
75
Shares of Beneficial Interest or Paired Common Shares ----------------- Additional Preferred Paid-in Treasury Shares Amount Stock Capital Stock (In thousands) -------- -------- ----------- ------------ -------------- Employee compensation and stock options ............ 456 90 10,416 Distributions paid ............. Net income for the year ended December 31, 1997 Change in market value of equity investment in excess of cost ................ Balance, December 31, 1997 88,128 17,626 1,997,517 ------ ------ --------- --------- ----------- Proceeds from issuance of Paired Common Shares, net of offering costs of $5,874 ........................ 8,500 1,700 269,738 Proceeds from issuance of Preferred Stock, net of offering costs of $6,334 ...... $70 168,596 Purchase of treasury stock ..... $(163,326) Effect of merger with Cobblestone ................... 8,177 1,636 239,510 Effect of merger with La Quinta ........................ 43,280 8,656 1,163,980 Issuance of restricted stock grants ........................ 315 63 7,026 Issuance of Paired Common Shares for: Conversion of debentures, net of unamortized issue costs of $1 ................... 284 56 7,110 Employee compensation and stock options ............. 642 128 5,348 Dividends ...................... Property dividend .............. 33,162 Net loss for the year ended December 31, 1998 ............. Accumulated Other Distributions Unearned Comprehensive in Excess of Comprehensive Compensation Income Earnings Total Income (loss) (In thousands) -------------- --------------- -------------- ------------- -------------- Employee compensation and stock options ............ 10,506 Distributions paid ............. (176,210) (176,210) Net income for the year ended December 31, 1997 162,412 162,412 $ 162,412 Change in market value of equity investment in excess of cost ................ 1,041 1,041 1,041 ----- -------- -------- ---------- Balance, December 31, 1997 3,569 (192,973) 1,825,739 $ 163,453 ========== Proceeds from issuance of Paired Common Shares, net of offering costs of $5,874 ........................ 271,438 Proceeds from issuance of Preferred Stock, net of offering costs of $6,334 ...... 168,666 Purchase of treasury stock ..... (163,326) Effect of merger with Cobblestone ................... 241,146 Effect of merger with La Quinta ........................ 1,172,636 Issuance of restricted stock grants ........................ $(6,718) 371 Issuance of Paired Common Shares for: Conversion of debentures, net of unamortized issue costs of $1 ................... 7,166 Employee compensation and stock options ............. 5,476 Dividends ...................... (438,639) (438,639) Property dividend .............. (33,162) Net loss for the year ended December 31, 1998 ............. (153,147) (153,147) $ (153,147)
76
Shares of Beneficial Interest or Paired Common Shares -------------------- Additional Preferred Paid-in Treasury Shares Amount Stock Capital Stock (In thousands) --------- ---------- ----------- ------------ -------------- Change in market value of equity investments in excess of cost ............... ------- ------- --- ---------- ---------- Balance, December 31, 1998 149,326 $29,865 $70 $3,891,987 $ (163,326) ======= ======= === ========== ========== Accumulated Other Distributions Unearned Comprehensive in Excess of Comprehensive Compensation Income Earnings Total Income (loss) (In thousands) -------------- --------------- -------------- ------------- -------------- Change in market value of equity investments in excess of cost ............... 13,402 13,402 13,402 -------- ------- ---------- ---------- ---------- Balance, December 31, 1998 $ (6,718) $16,971 $ (817,921) $2,950,928 $ (139,745) ======== ======= ========== ========== ==========
The accompanying notes are an integral part of these financial statements 77 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, ---------------------------------------------- 1998 1997 1996 (In thousands) -------------- ------------- ------------- Cash Flows from Operating Activities: Net income (loss) ...................................................... $ (153,147) $ 162,412 $ 157,976 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation of real estate ........................................... 90,446 26,750 21,269 Goodwill amortization ................................................. 15,826 2,349 1,557 Loss on sale of assets ................................................ 19,430 -- -- Shares issued for compensation ........................................ 438 1,994 2,039 Equity in income of joint venture, net of dividends received .......... 544 -- -- Other depreciation, amortization and other items, net ................. 19,777 1,538 1,211 Other non cash expenses ............................................... 326,064 -- -- ------------ ---------- ---------- Cash Flows from Operating Activities Available for Distribution ......... 319,378 195,043 184,052 Net change in other assets and liabilities of discontinued operations ............................................................. (18,331) -- -- Net change in other assets and liabilities .............................. (124,876) (10,631) 4,499 ------------ ---------- ---------- Net cash provided by operating activities ........................... 176,171 184,412 188,551 ------------ ---------- ---------- Cash Flows from Financing Activities: Proceeds from issuance of paired common and Realty preferred stock ................................................................. 456,713 -- 312,800 Purchase of treasury stock ............................................. (163,326) -- -- Proceeds from borrowings on bank notes payable ......................... 2,445,000 1,078,000 476,000 Repayment of bank notes payable ........................................ (767,000) (512,015) (370,000) Repayment of notes payable ............................................. (220,000) -- -- Equity offering and debt issuance costs ................................ (47,393) (5,896) (19,235) Repayment of convertible debentures .................................... (43,152) -- -- Principal payments on bonds and mortgages payable ...................... (37,625) (5,098) (940) Dividends/distributions to shareholders ................................ (438,639) (176,210) (162,632) Proceeds from exercise of stock options ................................ 5,035 9,138 11,084 ------------ ---------- ---------- Net cash provided by financing activities ........................... 1,189,613 387,919 247,077 ------------ ---------- ---------- Cash Flows from Investing Activities: Acquisition of real estate and development funding ..................... (636,989) (292,607) (325,789) Investment in real estate mortgages and development funding ............ (222,524) (299,861) (265,084) Prepayment proceeds and principal payments received on real estate mortgages ...................................................... 407,241 54,618 162,247 Proceeds from sale of assets ........................................... 484,467 6,173 4,701 Proceeds from sale of securities ....................................... 3,606 -- -- Payment of Santa Anita merger related costs ............................ -- (16,979) -- Cash acquired from Santa Anita merger .................................. -- 30,249 -- Acquisition of Cobblestone ............................................. (178,523) -- -- Acquisition of La Quinta ............................................... (956,054) -- -- Cash acquired in Cobblestone merger .................................... 723 -- -- Cash acquired in La Quinta merger ...................................... 18,004 -- -- Working capital and notes receivable advances, net of repayments and collections ............................................ 6,211 (210) 284 Investment in equity securities ........................................ (30,222) (52,708) (13,509) ------------ ---------- ---------- Net cash used in investing activities ............................... (1,104,060) (571,325) (437,150) ------------ ---------- ---------- Net increase (decrease) in cash and cash equivalents ................ 261,724 1,006 (1,522) Cash and cash equivalents at: Beginning of year ...................................................... 43,732 42,726 44,248 ------------ ---------- ---------- End of year ............................................................ $ 305,456 $ 43,732 $ 42,726 ============ ========== ==========
The accompanying notes are an integral part of these financial statements 78 MEDITRUST CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------- 1998 1997 (In thousands, except per share amounts) ------------- ------------- Assets Real estate investments, net ..................................... $5,067,217 $2,935,772 Cash and cash equivalents ........................................ 292,694 24,059 Fees, interest and other receivables ............................. 42,039 21,070 Goodwill, net .................................................... 451,672 162,408 Due from Meditrust Operating Company ............................. -- 18,490 Net assets of discontinued operations ............................ 280,330 -- Other assets, net ................................................ 187,033 54,129 ---------- ---------- Total assets .................................................. $6,320,985 $3,215,928 ========== ========== Liabilities and Shareholders' Equity Indebtedness: Notes payable, net .............................................. $1,155,837 $ 900,594 Convertible debentures, net ..................................... 185,013 234,000 Bank notes payable, net ......................................... 1,831,336 179,527 Bonds and mortgages payable, net ................................ 129,536 63,317 ---------- ---------- Total indebtedness ............................................ 3,301,722 1,377,438 ---------- ---------- Due to Meditrust Operating Company ............................... 29,169 -- Accounts payable, accrued expenses and other liabilities ......... 116,741 46,250 ---------- ---------- Total liabilities ............................................. 3,447,632 1,423,688 ---------- ---------- Commitments and contingencies -- -- Shareholders' equity: Series A Preferred Stock, $.10 par value; 6,000 shares authorized; 700 shares issued and outstanding in 1998; stated liquidation preference of $250 per share.................................... 70 -- Common Stock, $.10 par value; 270,000 shares authorized; 150,631 and 89,433 shares issued and outstanding in 1998 and 1997, respectively ................................................... 15,063 8,943 Additional paid-in-capital ....................................... 3,820,436 1,985,229 Treasury stock at cost 1,635 shares in 1998 ...................... (160,223) -- Unearned compensation ........................................... (6,718) -- Accumulated other comprehensive income .......................... 16,971 3,569 Distributions in excess of earnings .............................. (799,118) (192,373) ---------- ---------- 2,886,481 1,805,368 Note receivable--Meditrust Operating Company ..................... (13,128) (13,128) ---------- ---------- Total shareholders' equity ..................................... 2,873,353 1,792,240 ---------- ---------- Total liabilities and shareholders' equity .................... $6,320,985 $3,215,928 ========== ==========
The accompanying notes are an integral part of these financial statements 79 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, --------------------------------------------- 1998 1997 1996 (In thousands, except per share amounts) ------------- ------------- ------------- Revenue: Rental ............................................ $ 191,874 $ 137,868 $ 109,119 Interest .......................................... 152,486 151,122 144,905 Rent from Meditrust Operating Company ............. 125,706 -- -- Interest from Meditrust Operating Company ......... 712 129 -- Royalty from Meditrust Operating Company .......... 6,326 -- -- Hotel operating revenue ........................... 5,781 -- -- Other ............................................. 35,987 -- -- ---------- --------- --------- 518,872 289,119 254,024 ---------- --------- --------- Expenses: Interest .......................................... 178,374 87,412 64,216 Depreciation and amortization ..................... 84,327 26,838 21,651 Amortization of goodwill .......................... 12,505 2,214 1,556 General and administrative ........................ 19,371 10,111 8,625 Hotel operations .................................. 1,063 -- -- Rental property operations ........................ 15,638 210 -- Loss on sale of securities ........................ 4,159 -- -- Gain on sale of assets ............................ (52,642) -- -- Income from unconsolidated joint venture .......... (906) 10 -- Other ............................................. 96,052 -- -- ---------- --------- --------- 357,941 126,795 96,048 ---------- --------- --------- Income from continuing operations .................. 160,931 162,324 157,976 Discontinued operations: Income from operations, net ....................... 14,635 688 -- Loss on disposal of Santa Anita, net .............. (82,953) -- -- Provision for loss on disposition of Cobblestone Golf Group, net ...................... (227,557) -- -- ---------- --------- --------- Net income (loss) .................................. (134,944) 163,012 157,976 Preferred stock dividends .......................... (8,444) -- -- ---------- --------- --------- Net income (loss) available to Common shareholders ...................................... $ (143,388) $ 163,012 $ 157,976 ========== ========= ========= Basic earnings per Common Share: ................... Income (loss) from continuing operations .......... $ 1.25 $ 2.13 $ 2.21 Discontinued operations ........................... (2.43) .01 -- ---------- --------- --------- Net income (loss) ................................. $ (1.18) $ 2.14 $ 2.21 ========== ========= ========= Diluted earnings per Common Share: ................. Income (loss) from continuing operations .......... $ 1.20 $ 2.11 $ 2.20 Discontinued operations ........................... (2.33) .01 -- ---------- --------- --------- Net income (loss) ................................. $ (1.13) $ 2.12 $ 2.20 ========== ========= =========
The accompanying notes are an integral part of these financial statements 80 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Shares of Beneficial Interest or Common Stock ------------------------ Additional Preferred Paid-in Treasury Shares Amount Stock Capital Stock (In thousands) -------- --------------- ----------- ------------ ---------- Balance, December 31, 1995 61,494 $ 1,192,612 Proceeds from issuance of shares of beneficial interest, net of offering costs of $16,316 ............... 11,055 296,484 Issuance of shares of beneficial interest for: Conversion of debentures, net of unamortized issue costs of $259 ................. 644 15,707 Employee compensation and stock options ............. 524 13,123 Distributions paid .............. Net income for the year ended December 31, 1996 Change in market value of equity investment in excess of cost ................. ------ ---------- ---------- --------- ---------- Balance, December 31, 1996 73,717 1,517,926 Distribution of MAC shares to Meditrust shareholders ......... Effect of merger with Santa Anita Realty ................... 13,671 (1,509,187) $1,927,790 Issuance of shares of Common Stock for: Conversion of debentures, net of unamortized issue costs of $165 ................. 1,589 159 47,023 Employee compensation and stock options ............. 456 45 10,416 Accumulated Other Distributions Unearned Compre- in Excess Note Comprehensive Compen- hensive of Receivable Income sation Income Earnings Operating Total (loss) (In thousands) ---------- ------------ -------------- ------------ ------------- -------------- Balance, December 31, 1995 $ (130,857) $1,061,755 Proceeds from issuance of shares of beneficial interest, net of offering costs of $16,316 ............... 296,484 Issuance of shares of beneficial interest for: Conversion of debentures, net of unamortized issue costs of $259 ................. 15,707 Employee compensation and stock options ............. 13,123 Distributions paid .............. (162,632) (162,632) Net income for the year ended December 31, 1996 157,976 157,976 $157,976 Change in market value of equity investment in excess of cost ................. $2,528 2,528 2,528 ---------- ------ --------- ---------- ---------- -------- Balance, December 31, 1996 2,528 (135,513) 1,384,941 $160,504 ======== Distribution of MAC shares to Meditrust shareholders ......... (43,662) (43,662) Effect of merger with Santa Anita Realty ................... $(13,128) 405,475 Issuance of shares of Common Stock for: Conversion of debentures, net of unamortized issue costs of $165 ................. 47,182 Employee compensation and stock options ............. 10,461
81 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Shares of Beneficial Interest or Common Stock ----------------- Additional Preferred Paid-in Treasury Shares Amount Stock Capital Stock (In thousands) -------- -------- ----------- ------------ -------------- Distributions paid ............. Net income for the year ended December 31, 1997 Change in market value of equity investment in excess of cost ................ ------ ------ ---------- ---------- --------- Balance, December 31, 1997 89,433 8,943 1,985,229 Proceeds from issuance of Common Stock, net of offering costs of $5,769 ...... 8,500 850 265,425 Proceeds from issuance of Preferred Stock, net of offering costs of $6,334 ...... $70 168,596 Purchase of treasury stock ..... $(160,223) Effect of merger with Cobblestone ................... 8,177 818 235,928 Effect of merger with La Quinta ........................ 43,280 4,328 1,146,028 Issuance of restricted stock grants ........................ 315 32 6,921 Issuance of shares of Common Stock for: Conversion of debentures, net of unamortized issue costs of $1 .................. 284 28 7,002 Employee compensation and stock options ............ 642 64 5,307 Dividends paid ................. Property distribution .......... Accumulated Other Distributions Unearned Compre- in Excess Note Comprehensive Compen- hensive of Receivable Income sation Income Earnings Operating Total (loss) (In thousands) ------------ ------------ -------------- ------------ ------------- -------------- Distributions paid ............. (176,210) (176,210) Net income for the year ended December 31, 1997 163,012 163,012 $163,012 Change in market value of equity investment in excess of cost ................ 1,041 1,041 1,041 ---------- ----- -------- ------- -------- -------- Balance, December 31, 1997 3,569 (192,373) (13,128) 1,792,240 $164,053 ======== Proceeds from issuance of Common Stock, net of offering costs of $5,769 ...... 266,275 Proceeds from issuance of Preferred Stock, net of offering costs of $6,334 ...... 168,666 Purchase of treasury stock ..... (160,223) Effect of merger with Cobblestone ................... 236,746 Effect of merger with La Quinta ........................ 1,150,356 Issuance of restricted stock grants ........................ $(6,718) 235 Issuance of shares of Common Stock for: Conversion of debentures, net of unamortized issue costs of $1 .................. 7,030 Employee compensation and stock options ............ 5,371 Dividends paid ................. (438,639) (438,639) Property distribution .......... (33,162) (33,162)
82 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
Shares of Beneficial Interest or Common Stock -------------------- Additional Preferred Paid-in Shares Amount Stock Capital (In thousands) --------- ---------- ----------- ------------ Net loss for the year ended December 31, 1998 ....................................... Change in market value of equity investment in excess of cost .......................................... Balance, December 31, 1998 150,631 $15,063 $70 $3,820,436 ======= ======= === ========== Accumulated Other Distributions Unearned Compre- in Excess Note Treasury Compen- hensive of Receivable Stock sation Income Earnings Operating (In thousands) -------------- ------------ ------------ -------------- ------------ Net loss for the year ended December 31, 1998 ....................................... (134,944) Change in market value of equity investment in excess of cost .......................................... 13,402 ------ Balance, December 31, 1998 $ (160,223) $ (6,718) $16,971 $ (799,118) $ (13,128) ========== ======== ======= ========== ========= Comprehensive Income Total (loss) (In thousands) ------------- -------------- Net loss for the year ended December 31, 1998 ....................................... (134,944) $ (134,944) Change in market value of equity investment in excess of cost .......................................... 13,402 13,402 -------- ---------- Balance, December 31, 1998 $2,873,353 $ (121,542) ========== ==========
The accompanying notes are an integral part of the financial statements 83 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, ---------------------------------------------- 1998 1997 1996 (In thousands) -------------- ------------- ------------- Cash Flows from Operating Activities: Net income (loss) ...................................................... $ (134,944) $ 163,012 $ 157,976 Adjustments to reconcile net income (loss) to net cash provided by continuing operations Depreciation of real estate ........................................... 86,395 26,750 21,269 Goodwill amortization ................................................. 15,066 2,214 1,557 Loss on sale of assets ................................................ 34,470 -- -- Shares issued for compensation ........................................ 430 1,994 2,039 Equity in income of joint venture, net of dividends received .......... 544 -- -- Other depreciation, amortization and other items, net ................. 15,749 1,367 1,211 Other non cash expenses ............................................... 309,612 -- -- ------------ ---------- ---------- Cash Flows from Operating Activities Available for Distribution ......... 327,322 195,337 184,052 Net change in other assets and liabilities .............................. (139,716) (10,142) 4,499 ------------ ---------- ---------- Net cash provided by operating activities ........................... 187,606 185,195 188,551 ------------ ---------- ---------- Cash Flows from Financing Activities: ................................... Proceeds from issuance of common and preferred stock ................... 447,044 -- 312,800 Purchase of treasury stock ............................................. (160,223) -- -- Proceeds from borrowings on bank notes payable ......................... 2,445,000 1,078,000 476,000 Repayment of bank notes payable ........................................ (767,000) (512,015) (370,000) Repayment of notes payable ............................................. (220,000) -- -- Equity offering and debt issuance costs ................................ (47,288) (5,896) (19,235) Intercompany lending, net .............................................. 26,385 (11,175) -- Repayment of convertible debentures .................................... (43,152) -- -- Principal payments on bonds and mortgages payable ...................... (37,625) (5,098) (940) Distributions to shareholders .......................................... (438,639) (176,210) (162,632) Proceeds from exercise of stock options ................................ 4,939 9,092 11,084 ------------ ---------- ---------- Net cash provided by financing activities ........................... 1,209,441 376,698 247,077 ------------ ---------- ---------- Cash Flows from Investing Activities: Acquisition of real estate and development funding ..................... (636,707) (292,607) (325,789) Investment in real estate mortgages and development funding ............ (222,524) (299,861) (265,084) Prepayment proceeds and principal payments received on real estate mortgages ...................................................... 407,241 54,618 162,247 Proceeds from sale of real estate ...................................... 459,833 6,173 4,701 Proceeds from sale of securities ....................................... 3,606 -- -- Payment of Santa Anita merger related costs ............................ -- (16,979) -- Cash acquired from Santa Anita merger .................................. -- 25,944 -- Acquisition of Cobblestone ............................................. (178,523) -- -- Acquisition of La Quinta ............................................... (956,054) -- -- Cash acquired from Cobblestone merger .................................. 723 -- -- Cash acquired from La Quinta merger .................................... 18,004 -- -- Working capital and notes receivable advances, net of repayments and collections ............................................ 6,211 (134) 284 Investment in MAC ...................................................... -- (43,662) -- Investment in equity securities ........................................ (30,222) (14,052) (13,509) ------------ ---------- ---------- Net cash used in investing activities ............................... (1,128,412) (580,560) (437,150) ------------ ---------- ---------- Net increase (decrease) in cash and cash equivalents ................ 268,635 (18,667) (1,522) Cash and cash equivalents at: Beginning of year ...................................................... 24,059 42,726 44,248 ------------ ---------- ---------- End of year ............................................................ $ 292,694 $ 24,059 $ 42,726 ============ ========== ==========
The accompanying notes are an integral part of these financial statements 84 MEDITRUST OPERATING COMPANY CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 1998 1997 (In thousands, except per share amounts) ------------ ------------ Assets Cash and cash equivalents ...................................... $ 12,762 $ 19,673 Fees, interest and other receivables ........................... 12,673 2,580 Due from Meditrust Corporation ................................. 46,874 -- Other current assets, net ...................................... 10,423 3,078 --------- -------- Total current assets ........................................ 82,732 25,331 Investment in common stock of Meditrust Corporation ............ 37,581 37,581 Goodwill, net .................................................. 34,379 32,485 Property, plant and equipment, less accumulated depreciation of $760 and 171, respectively ................................. 30,895 10,529 Artwork ........................................................ -- 14,500 Other non-current assets ....................................... 12,603 -- --------- -------- Total assets ................................................ $ 198,190 $120,426 ========= ======== Liabilities and Shareholders' Equity Accounts payable ............................................... $ 18,349 $ 9,981 Accrued payroll and employee benefits .......................... 33,457 9,312 Accrued expenses and other current liabilities ................. 30,980 9,713 Due to Meditrust Corporation ................................... -- 19,354 --------- -------- Total current liabilities ................................... 82,786 48,360 Note payable to Meditrust Corporation .......................... 13,128 13,128 Deferred revenue ............................................... -- 1,349 Other non-current liabilities .................................. 7,629 501 Net liabilities of discontinued operations ..................... 16,140 -- --------- -------- Total liabilities ........................................... 119,683 63,338 --------- -------- Commitments and contingencies -- -- Shareholders' equity: Common Stock, $.10 par value; 270,000 shares authorized; 149,326 and 88,128 shares issued and outstanding in 1998 and 1997, respectively .................................................. 14,933 8,813 Additional paid-in-capital ..................................... 109,001 49,739 Treasury stock at cost, 1,635 shares in 1998 ................... (3,103) -- Retained earnings (deficit) .................................... (18,803) (600) --------- -------- 102,028 57,952 Due from Meditrust Corporation ................................. (23,521) (864) --------- -------- Total shareholders' equity ................................... 78,507 57,088 --------- -------- Total liabilities and shareholders' equity .................. $ 198,190 $120,426 ========= ========
The accompanying notes are an integral part of these financial statements 85 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS
For the For the initial year ended period ended December 31, December 31, 1998 1997 (In thousands, except per share amounts) -------------- ---------------- Revenue: Hotel ................................................................... $ 252,642 $ -- Interest ................................................................ 607 48 --------- ------ 253,249 48 --------- ------ Expenses: Hotel operations ........................................................ 124,183 -- Depreciation and amortization ........................................... 2,901 -- Amortization of goodwill ................................................ 760 135 Interest and other ...................................................... 84 -- Interest to Meditrust Corporation ....................................... 712 129 General and administrative .............................................. 2,065 146 Royalty to Meditrust Corporation ........................................ 6,326 -- Rent to Meditrust Corporation ........................................... 125,706 -- Other ................................................................... 15,163 -- --------- ------ 277,900 410 --------- ------ Loss from continuing operations before benefit for income taxes .......... (24,651) (362) Income tax benefit ....................................................... (4,800) -- --------- ------ Loss from continuing operations .......................................... (19,851) (362) Discontinued operations: Loss from operations, net ............................................... (3,914) (238) Gain on disposal of Santa Anita, net .................................... 15,040 -- Provision for loss on disposition of Cobblestone Golf Group, net ........ (9,478) -- --------- ------ Net loss ................................................................. $ (18,203) $ (600) ========= ====== Basic earnings per Common Share: Loss from continuing operations ......................................... $ (.16) $ (.01) Discontinued operations ................................................. .01 -- --------- ------ Net loss ................................................................ $ (.15) $ (.01) ========= ====== Diluted earnings per Common Share: Loss from continuing operations ......................................... $ (.16) $ (.01) Discontinued operations ................................................. .01 -- --------- ------ Net loss ................................................................ $ (.15) $ (.01) ========= ======
The accompanying notes are an integral part of these financial statements 86 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Year Ended December 31,1998 and the Initial Period Ended December 31, 1997
Shares of Beneficial Interest or Common Stock ---------------------- Due from Additional Treasury Meditrust Retained Shares Amount Paid-in Capital Stock Corporation Earnings Total (In thousands) ---------- ----------- ---------------- ---------- ------------ ----------- --------- 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 ======= ======== ======== ======= ======== ======== ========
The accompanying notes are an integral part of these financial statements 87 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS
For the For the initial year ended period ended December 31, December 31, 1998 1997 (In thousands, except per share amounts) -------------- -------------- Cash Flows from Operating Activities: Net loss ............................................................. $(18,203) $ (600) Goodwill amortization ................................................ 760 135 Gain on sale of assets ............................................... (15,040) -- Shares issued for compensation ....................................... 8 -- Other depreciation and amortization .................................. 8,079 171 Other items .......................................................... 16,452 -- Net change in other assets and liabilities of discontinued operations (6,852) -- Net change in other assets and liabilities ........................... 3,361 (489) -------- ------- Net cash used in operating activities ............................. (11,435) (783) -------- ------- Cash Flows from Financing Activities: Proceeds from issuance of stock ...................................... 9,669 43,662 Purchase of treasury stock ........................................... (3,103) -- Equity offering costs ................................................ (105) -- Intercompany lending, net ............................................ (26,385) 11,175 Proceeds from stock option exercises ................................. 96 46 -------- ------- Net cash provided by (used in) financing activities ............... (19,828) 54,883 -------- ------- Cash Flows from Investing Activities: Capital improvements to real estate .................................. (282) -- Proceeds from sale of assets ......................................... 24,634 -- Cash acquired from Santa Anita merger ................................ -- 4,305 Collection of receivables and repayment of working capital advances -- (76) Investment in equity securities ...................................... -- (38,656) -------- ------- Net cash provided by (used in) investing activities ............... 24,352 (34,427) -------- ------- Net increase (decrease) in cash and cash equivalents .............. (6,911) 19,673 Cash and cash equivalents at: Beginning of year or at inception .................................... 19,673 -- -------- ------- End of year .......................................................... $ 12,762 $19,673 ======== =======
The accompanying notes are an integral part of these financial statements 88 1. Summary of Significant Accounting Policies Business Meditrust Corporation ("Realty") and Meditrust Operating Company and subsidiaries ("Operating Company") (collectively the "Companies" or "The Meditrust Companies") are two separate companies, the stocks of which trade as a single unit under a stock pairing arrangement on the New York Stock Exchange. Realty is a self administered real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, and invests primarily in healthcare facilities and lodging facilities. The healthcare facilities include nursing homes, assisted living facilities, medical office buildings, rehabilitation hospitals and other healthcare related facilities. These facilities are located throughout the United States and are operated by regional and national healthcare providers. Realty also invests in an entity which invests in similar facilities abroad. The lodging facilities include hotels located in the western and southern regions of the United States. Realty leases each of its hotels to Operating Company, who is responsible for operating the hotels, or to other third party lessees (the "Lessees"). At December 31, 1998, Realty leased 286 of its hotel investments to Operating Company for a 5 year term, pursuant to separate participating leases providing for the payment of the greater of base or participating rent, plus certain additional charges, as applicable (the "Participating Hotel Facility Leases"). Operating Company is currently engaged in hotel operations previously conducted by La Quinta Inns, Inc. and its wholly owned subsidiaries and its unincorporated partnership and joint venture ("La Quinta") which lease the respective facilities and license the La Quinta tradename from Realty and its subsidiaries. La Quinta is a fully-integrated lodging company that focuses on the operation and development of hotels. As of December 31, 1998, La Quinta operated 290 hotels, with over 37,000 rooms located in the western and southern regions of the United States. On November 11, 1998, the Boards of Directors of Realty and Operating Company approved a comprehensive restructuring plan designed to strengthen the Companies' financial position and clarify their investment and operating strategy by focusing on the heathcare and lodging businesses. Significant components of the restructuring plan include selling more than $1,000,000,000 of non-strategic assets, including their portfolio of golf-related real estate and operating properties ("Cobblestone Golf Group"), the Santa Anita Racetrack and adjacent property, and approximately $550,000,000 of non-strategic healthcare properties. Basis of Presentation and Consolidation Separate financial statements have been presented for Realty and for Operating Company. Combined Realty and Operating Company financial statements have been presented as The Meditrust Companies. All significant intercompany and inter-entity balances and transactions have been eliminated in combination. The Meditrust Companies and Realty use an unclassified balance sheet presentation. The consolidated financial statements of Realty and Operating Company include the accounts of the respective entity and its majority-owned partnerships after the elimination of all significant intercompany accounts and transactions. On July 17, 1998, the Companies acquired La Quinta and its related operations. This transaction was accounted for under the purchase method of accounting. Accordingly, the financial statements include, among other things, the results of operations and cash flows of La Quinta from July 17, 1998 through the date of the financial statements. As a result of the restructuring plan, the Companies have reflected the Cobblestone Golf Group and Santa Anita Racetrack as discontinued operations and certain healthcare properties as assets held for sale, in the accompanying financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. 89 The Companies' more significant accounting policies follow: Real Estate Investments Land, buildings and improvements are stated at cost. Depreciation is provided for on a straight-line basis over 20 to 40 years, the expected useful lives of the buildings and major improvements. Hotel equipment, furniture and fixtures are recorded at cost. Depreciation is provided using the straight-line method over 3 to 15 years, the estimated useful lives of the related assets. Leasehold improvements are recorded at cost and depreciated over the shorter of the lease term or the estimated useful life. Expenditures which materially increase the property's life are capitalized. The cost of maintenance and repairs is charged to expense as incurred. When depreciable property is retired or disposed of, the related cost and accumulated depreciation is removed from the accounts and any gain or loss is reflected in current operations. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For each asset not held for sale, the sum of expected future cash flows, undiscounted and without interest charges, of the asset is compared to the net book value of the asset. If the sum of expected future cash flows, undiscounted and without interest charges, is less than the net book value of the asset, the excess of the net book value over the estimated fair value is charged to current earnings. When an asset is identified by management as held for sale, the Companies discontinue depreciating the asset and the carrying value is reduced, if necessary to the estimated fair value less costs to sell. Fair value is determined based upon discounted cash flows of the assets at rates deemed reasonable for the type of property and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. A gain or loss is recorded to the extent the amounts ultimately received for the sale of assets differ from the adjusted book values of the assets. Gains and losses on sales of assets are recognized at the time the assets are sold provided there is reasonable assurance of the collectibility of the sales price and any future activities to be performed by the Companies relating to the assets sold are expected to be insignificant. Hotel construction in progress is carried at cost. All costs associated with, or allocable to, hotel construction are capitalized. All pre-opening and start-up costs are expensed as incurred. Loans are classified and accounted for as impaired loans when based on current information and events, it is probable that the Companies will be unable to collect all principal and interest due on the loan in accordance with the original contractual terms. Upon determination that an impairment has occurred, the amount of the impairment is recognized as a valuation allowance based upon an analysis of the net realizable value of the underlying property collateralizing the loan. Payments of interest on impaired loans received by the Companies are recorded as interest income provided the amount does not exceed that which would have been earned at the historical effective interest rate. Capitalized Acquisition and Interest Costs Realty capitalizes pre-acquisition costs, development costs and other indirect costs. Additionally, Realty capitalizes the interest cost associated with developing new facilities. The amount capitalized is based upon a rate of interest which approximates the Companies' cost of financing. Cash and Cash Equivalents Cash and cash equivalents consist of certificates of deposit and other investments with less than 90-day original maturities and are stated at cost which approximates fair market value. Goodwill Goodwill represents the excess of cost over the fair value of assets acquired and is being amortized using the straight-line method over periods ranging from 10 to 40 years. The Companies assess the recoverability of goodwill whenever adverse events or changes in circumstances or business climate indicate that the expected future cash flows (undiscounted and without interest charges) for individual business segments may not be sufficient to support recorded goodwill. If undiscounted cash flows are not sufficient to support the recorded asset, an impairment would be recognized to reduce the carrying value of the goodwill based on the expected discounted cash flows of the business segment. Expected cash flows would be discounted at a rate commensurate with the risk involved. 90 Goodwill associated with the Santa Anita merger primarily relates to the value of the paired-share structure and, due to the permanent nature of the structure, is being amortized over a 40 year period. Accordingly, the goodwill recorded as part of the Santa Anita merger is expected to remain even though the Santa Anita Racetrack has been sold, as long as the Companies continue to utilize the paired share structure. Goodwill also includes amounts associated with the acquisition of La Quinta and Realty's previous investment advisor which are being amortized on a straight-line basis over 20 and 10 year periods, respectively. Investments in Equity Securities Investments in equity securities have been classified as available-for-sale and recorded at current market value. The difference between market value and cost (unrealized holding gains and losses) is recorded in shareholders' equity. Gains and losses on sales of investments are calculated based on the specific identification method and are recognized at the time the investments are sold. Intangible Assets Intangible assets, consisting of La Quinta's tradename, reservation system and assembled workforce, are included in other assets and are amortized on a straight-line basis using lives ranging from 3 to 20 years based on management's assessment of the fair value of the intangible assets. The Companies evaluate the carrying values of intangible assets in the same manner that they evaluate the carrying values of real estate assets. Debt Issuance Costs Debt issuance costs have been deferred and are amortized on a straight-line basis (which approximates the effective interest method) over the term of the related borrowings. Deferred Revenue Realty's deferred revenue, which is a component of other liabilities, consists primarily of fees which are being amortized over the term of the related investment. Self-Insurance Programs The hotel operation uses a paid loss retrospective insurance plan for general and auto liability and workers' compensation whereby the operation is effectively self-insured. Predetermined loss limits have been arranged with insurance companies to limit the per occurrence cash outlay. Hotel employees and their dependents are covered by a self-insurance program for major medical and hospitalization coverage which is partially funded by payroll deductions. Payments for major medical and hospitalization to individual participants below specified amounts are self-insured by the Companies. Shareholders' Equity The outstanding shares of Realty's common stock and Operating Company's common stock are only transferable and tradable in combination as a paired unit consisting of one share of Realty's common stock and one share of Operating Company's common stock. Realty's Revenue Recognition Realty's rental income from operating leases is recognized on a straight-line basis over the life of the respective lease agreements. Interest income on real estate mortgages is recognized on the accrual basis, which approximates the effective interest method. Operating Company's Revenue and Seasonalilty Hotel revenues are derived from room rentals and other sources such as charges to guests for long-distance telephone service, fax machine use, movie and vending commissions, meeting and banquet room revenue and laundry services. Hotel revenues are recognized as earned. The hotel industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. In addition, the opening of new construction hotels and or the timing of hotel acquisitions may cause variation of revenue from quarter to quarter. 91 Earnings Per Share The Companies have adopted Financial Accounting Standards Board Statement No. 128 "Earnings Per Share" ("SFAS 128") for the year ended December 31, 1997. SFAS 128 specifies the computation, presentation and disclosure requirements for basic earnings per share and diluted earnings per share. Earnings per share disclosures for all periods presented have been calculated in accordance with requirements of SFAS 128. Basic earnings per share is computed based upon the weighted average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed based upon the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period presented. The diluted earnings per share computations also include options to purchase common stock which were outstanding during the period. The number of shares outstanding related to the options has been calculated by application of the "treasury stock" method. See Note 17 for more detailed disclosure regarding the applicable numerators and denominators used in the earnings per share calculations. Stock Based Compensation During 1996, the Companies adopted Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which provides companies an alternative to accounting for stock-based compensation as prescribed under Accounting Principles Board Opinion No. 25 ("APB 25"). SFAS 123 encourages, but does not require companies to recognize expense for stock-based awards based on their fair value at date of grant. SFAS 123 allows companies to follow existing accounting rules (intrinsic value method under APB 25) provided that pro-forma disclosures are made of what net income and earnings per share would have been had the new fair value method been used. The Companies have elected to adopt the disclosure requirements of SFAS 123, but will continue to account for stock-based compensation under APB 25. Fair Value of Financial Instruments Management has estimated the fair value of its financial instruments using available market information and various valuation methodologies. Considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimated values for Realty and Operating Company as of December 31, 1998 and 1997 are not necessarily indicative of the amounts that could be realized in current market exchanges. Income Taxes Realty has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, and believes it has met all the requirements for qualification as such. Accordingly, Realty will not be subject to federal income taxes on amounts distributed to shareholders, provided it distributes annually at least 95% of its REIT taxable income and meets certain other requirements for qualifying as a REIT. Therefore, no provision for federal income taxes is believed necessary in the financial statements of Realty. Operating Company's income tax expense (benefit) is based on reported earnings before income taxes. Deferred income taxes reflect the temporary differences between assets and liabilities recognized for financial reporting and such amounts recognized for tax purposes which requires recognition of deferred tax liabilities and assets. Deferred tax liabilities and assets are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized. Concentrations As of December 31, 1998, lodging facilities, all of which are operated by Operating Company, comprised approximately 49% of the Companies real estate investments. A private healthcare company and Sun Healthcare Group Inc., operate approximately 20% of the total real estate investments. The remainder of the Companies real estate investments is comprised of healthcare facilities. The lodging industry is highly competitive. Each hotel competes for guests primarily with other similar hotels in its vicinity. The Companies believe that brand recognition, location, quality of the hotel 92 and services provided, and price are the principal competitive factors affecting their lodging investments. Derivatives The Companies enter into interest rate swap agreements to manage interest rate exposure. The differential to be paid or received is accrued consistent with the terms of the agreements and market interest rates, and is recognized in interest expense over the term of the related debt using a method which approximates the effective interest method. The related amounts payable to or receivable from financial institutions are included in other liabilities or assets. The fair value of the swap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Newly Issued Accounting Standards In 1998, the Companies adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for the reporting and display of comprehensive income and its components. In 1998, the Companies adopted Financial Accounting Standards Board Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Companies' reportable segments. SFAS 131 also requires disclosure about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information (see Note 20). Financial Accounting Standards Board Statement No. 133: "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, although early application is encouraged. SFAS 133 requires that all derivative investments be recorded in the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or comprehensive income depending on whether a derivative is designated as part of a hedge transaction, and the type of hedge transaction. The Companies anticipate that due to their limited use of derivative instruments, the adoption of SFAS 133 will not have a material effect on the financial statements. Reclassification Certain reclassifications have been made to the 1997 presentation to conform to the 1998 presentation. 93 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:
For the year ended December 31, -------------------------------------------- 1998 1997 1996 (In thousands) ------------- ------------- ------------ Change in fees, interest and other receivables ........... $ 24,946 $ (10,581) $ (6,956) Change in other assets ................................... (6,544) (1,657) (2,834) Change in accrued expenses and other liabilities ......... (143,278) 1,607 14,289 ---------- --------- -------- $ (124,876) $ (10,631) $ 4,499 ========== ========= ========
Details of interest and income taxes paid and non-cash investing and financing transactions follow: The Meditrust Companies:
For the year ended December 31, ------------------------------------------- 1998 1997 1996 (In thousands) ------------- ------------ ------------ Interest paid during the period .............................. $ 166,452 $ 75,936 $ 56,666 Interest capitalized during the period ....................... 13,480 4,627 3,711 Non-cash investing and financing transactions: Value of real estate acquired: Land, land improvements and buildings ....................... 11,493 36,486 Retirements and write-offs of project costs ................. (20,651) Accumulated depreciation of buildings sold .................. 33,161 389 Increase (reduction) in real estate mortgages net of participation reduction .................................... (31,483) 256 (29,642) Change in market value of equity securities in excess of cost ............................................. 13,402 1,041 2,528 Value of shares issued for conversion of debentures ......... 7,167 48,161 15,966 In connection with the Cobblestone merger: Fair value of assets acquired ............................... 302,713 Excess purchase consideration over estimated fair market value of assets acquired ............................ 152,031 Liabilities assumed ......................................... (35,769) Cash, net ................................................... (177,800) Value of the issuance of Paired Common Shares ............... 241,175 In connection with the La Quinta merger: Fair value of assets acquired ............................... 2,660,188 Excess purchase consideration over estimated fair market value of assets acquired ............................ 301,977 Liabilities assumed ......................................... (851,479) Cash, net ................................................... (938,050) Value of the issuance of Paired Common Shares ............... 1,172,636 In connection with the Santa Anita merger: Fair value of assets acquired ............................... 234,375 Excess purchase consideration over estimated fair market value of assets acquired ............................ 176,922 Liabilities assumed ......................................... (46,490) Value of the issuance of Paired Common Shares ............... 395,056
94 Meditrust Corporation:
For the year ended December 31, ------------------------------------------- 1998 1997 1996 (In thousands) ------------- ------------ ------------ Interest paid during the period .............................. $ 166,181 $ 75,936 $ 56,666 Interest capitalized during the period ....................... 13,480 4,627 3,711 Non-cash investing and financing transactions: Value of real estate acquired: .............................. Land, land improvements and buildings ....................... 11,493 36,486 Retirements and write-offs of project costs ................. (20,651) Accumulated depreciation of buildings sold .................. 33,161 389 Increase (reduction) in real estate mortgages net of participation reduction .................................... (31,483) 256 (29,642) Change in market value of equity securities in excess of cost ............................................. 13,402 1,041 2,528 Value of shares issued for conversion of debentures ......... 7,031 47,347 15,966 Property distribution ....................................... (33,162) Stock dividend of MAC shares ................................ 43,662 In connection with the Cobblestone merger: Fair value of assets acquired ............................... 272,463 Excess purchase consideration over estimated fair market value of assets acquired ............................ 152,031 Liabilities assumed ......................................... (9,919) Cash, net ................................................... (177,800) Value of the issuance of common shares ...................... 236,775 In connection with the La Quinta merger: Fair value of assets acquired ............................... 2,426,339 Excess purchase consideration over estimated fair market value of assets acquired ............................ 301,977 Liabilities assumed ......................................... (639,910) Cash, net ................................................... (938,050) Value of the issuance of common shares ...................... 1,150,356 In connection with the Santa Anita merger: Fair value of assets acquired ............................... 252,626 Excess purchase consideration over estimated fair market value of assets acquired ............................ 148,735 Liabilities assumed ......................................... (21,830) Value of the issuance of common shares ...................... 405,475
95 Meditrust Operating Company:
For the For the initial year ended period ended December 31, December 31, -------------- ---------------- 1998 1997 (In thousands) -------------- ---------------- Interest paid during the period .................................. $ 324 $ -- Non-cash investing and financing transactions: Value of shares issued for conversion of debentures ............. 136 814 Property contribution ........................................... 33,162 In connection with the Cobblestone merger: Fair value of assets acquired ................................... 30,250 Liabilities assumed ............................................. (25,850) Value of the issuance of common shares .......................... 4,400 In connection with the La Quinta merger: Fair value of assets acquired ................................... 233,849 Liabilities assumed ............................................. (211,569) Value of the issuance of common shares .......................... 22,280 In connection with the Santa Anita merger: Fair value of assets acquired ................................... 19,322 Excess purchase consideration over estimated fair market value of assets acquired ................................................ 28,187 Liabilities assumed ............................................. (24,660) Value of the issuance of common shares .......................... 27,154
3. La Quinta Merger On July 17, 1998, Realty completed its merger with La Quinta (the "La Quinta Merger") whereby La Quinta merged with and into Realty, with Realty as the surviving corporation. Upon the closing of the La Quinta Merger, each share of common stock of La Quinta was converted into the right to receive 0.736 paired common shares, reduced by the amount to be received in an earnings and profits distribution. Approximately 43,280,000 paired common shares, with an aggregate market value of approximately $1,172,636,000, and approximately $956,054,000 in cash were exchanged in order to consummate the La Quinta Merger. In addition, approximately $851,479,000 of La Quinta's debt and associated costs were assumed. In accordance with the La Quinta Merger Agreement, on September 10, 1998, the Companies made a special distribution of profits inherited in the merger of approximately $128,618,000. As a result of plans contemplated at the time of the La Quinta Merger, management is committed to relocate certain functions of the La Quinta corporate headquarters, including marketing, legal, development, human resources, finance and executive, to Dallas, Texas from San Antonio, Texas. The accounting, information systems and reservation functions of La Quinta will remain in San Antonio. It is anticipated that the relocation will be completed by the end of the third quarter of 1999 and will affect approximately 100 employees. A provision for the estimated cost of relocation of approximately $10,100,000, including certain lease termination costs, severance and related employment costs, and office and employee relocation costs, has been included in the acquisition costs as liabilities assumed. Management has finalized the employee relocation plan and located appropriate office space in the Dallas area. Subsequent adjustments to management's estimate of the costs associated with the planned relocation will be made as an adjustment to goodwill. The operations of La Quinta are included in the combined and consolidated financial statements since consummation of the La Quinta Merger. The total consideration paid in connection with the La Quinta Merger was approximately $2,980,169,000. The excess of the purchase price, including costs of the La Quinta Merger, over the fair value of the net assets acquired approximated $301,977,000, and is being amortized over 20 years. 96 The following unaudited pro forma condensed combined consolidated results of operations of Realty and Operating Company have been prepared as if the La Quinta Merger had occurred on January 1, 1997:
For the year ended December 31, --------------------------- 1998 1997 (Unaudited in thousands, except per share amounts) ------------- ------------- 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
The pro forma condensed combined consolidated results for the year ended December 31, 1998 include approximately $111,215,000 of other expenses related to nonrecurring write-offs, provisions and restructuring charges further described in Note 12, a $4,159,000 realized loss on the sale of securities and a $52,642,000 realized gain on the sale of assets. The pro forma condensed combined consolidated results do not purport to be indicative of results that would have occurred had the La Quinta Merger been in effect for the periods presented, nor do they purport to be indicative of the results that will be obtained in the future. 4. Other Mergers On May 29, 1998, Realty completed its merger with Cobblestone Holdings, Inc. ("Cobblestone") pursuant to an Agreement and Plan of Merger dated as of January 11, 1998, as amended by a First Amendment thereto dated as of March 16, 1998 (as amended, the "Cobblestone Merger Agreement"). Cobblestone was engaged in the ownership, leasing, operation and management of 27 golf courses and related facilities. Under the terms of the Cobblestone Merger Agreement, Cobblestone merged with and into Realty, with Realty as the surviving corporation (the "Cobblestone Merger"). Upon the closing of the Cobblestone Merger, each share of common stock of Cobblestone was converted into the right to receive 3.867 paired common shares and each share of preferred stock of Cobblestone was converted into the right to receive .2953 paired common shares. The total number of paired common shares issued in connection with the Cobblestone Merger was approximately 8,177,000, with an aggregate market value of approximately $230,000,000, plus the issuance of approximately 452,000 options valued at $10,863,000. In addition, Realty advanced monies in order for Cobblestone to satisfy approximately $170,000,000 of its long-term debt and associated costs. Accordingly, the operations of Cobblestone are included in the combined and consolidated financial statements since consummation of the Cobblestone Merger. The total consideration paid in connection with the Cobblestone Merger was approximately $455,467,000. The excess of the purchase price, including costs associated with the merger, over the fair value of the net assets acquired approximated $152,000,000. On November 5, 1997, Meditrust merged into Santa Anita Realty Enterprises, Inc. and Meditrust Acquisition Company ("MAC") merged into Santa Anita Operating Company (collectively, "The Santa Anita Merger"). Santa Anita Realty Enterprises, Inc. changed its corporate name to "Meditrust Corporation," and Santa Anita Operating Company changed its corporate name to "Meditrust Operating Company". The Santa Anita Merger was accounted for as a reverse acquisition whereby Meditrust and MAC were treated as the acquirers for accounting purposes. The operations of Santa Anita Realty Enterprises, Inc. and Santa Anita Operating Company are included in the combined and consolidated financial statements since the Santa Anita Merger date. The aggregate purchase price of approximately $412,000,000, which includes costs of the Santa Anita Merger, has been allocated among the assets of the Santa Anita Companies, based on their respective fair market values. The excess of the purchase price, including costs of the Santa Anita Merger, over the fair value of the net assets acquired approximated $196,000,000 and is being amortized over forty years. 5. Discontinued Operations On November 11, 1998, the Boards of Directors of Realty and Operating Company approved a comprehensive restructuring plan. Significant components of the restructuring plan include the sale of Cobblestone Golf Group, which consists of 43 golf properties and related operations, and the Santa Anita Racetrack and adjacent property. Accordingly, operating results for Cobblestone Golf Group and the Santa Anita Racetrack have been reclassified and reported as discontinued operations. 97 On December 10, 1998, the Companies sold certain assets, leases, and licenses used in connection with the horseracing business conducted at Santa Anita Racetrack and recorded a loss on sale of $67,913,000. The Companies recorded a provision for loss on the disposition of Cobblestone Golf Group of approximately $237,035,000, which included estimated income taxes of $56,848,000, as of December 31, 1998 based upon the estimated proceeds to be realized upon sale. At December 31, 1998, the net assets subject to sale totaled $305,416,000 and have been classified as net assets of discontinued operations on the combined consolidated balance sheet. On February 11, 1999, the Companies signed a definitive agreement to sell the Cobblestone Golf Group (see Note 20). Operating results, for the nine months ended September 30, 1998, (exclusive of any corporate charges or interest expense) of discontinued golf and racetrack operations are as follows:
Cobblestone Golf Group Santa Anita Total (In thousands) ------------ ------------- ---------- Revenue ............ $43,278 $55,421 $98,699 Net income ......... 1,963 8,758 10,721
Revenue and net income from the measurement date of September 30, 1998 through December 31, 1998 are as follows:
Cobblestone Golf Group Santa Anita Total (In thousands) ------------ ------------- ---------- Revenue ............ $28,849 $7,741 $36,590 Net income ......... 1,763 132 1,895
6. Real Estate Investments The following is a summary of real estate investments:
December 31, ----------------------------- 1998 1997 (In thousands) ------------- ------------- Land .......................................................... $ 475,376 $ 249,852 Buildings and improvements, net of accumulated depreciation and other provisions of $186,594 and $124,582 .................... 3,381,392 1,223,255 Real estate mortgages and loans receivable, net of a valuation allowance of $18,991 and $0 at December 31, 1998 and 1997, respectively ................................................. 1,197,634 1,432,825 Investment in unconsolidated joint venture, net of accumulated depreciation of $250 ......................................... -- 29,840 Assets held for sale, net of accumulated depreciation and other provisions of $41,562 ........................................ 32,334 -- ---------- ---------- $5,086,736 $2,935,772 ========== ==========
During 1998, Realty acquired 15 assisted living facilities and 23 medical office buildings for $276,075,000. Realty also acquired 16 golf facilities for $121,976,000. In addition, during the year ended December 31, 1998, Realty provided net funding of $54,467,000 for the construction of 17 assisted living facilities and two golf facilities, and also provided $1,820,000 for an addition to a long-term care facility already in the portfolio. Realty and Operating Company also provided net funding of $182,369,000 and $282,000, respectively, for ongoing construction of facilities it currently owns which were in the portfolio prior to 1998 or for construction and capital improvements to hotels and golf courses acquired in the mergers with Cobblestone and La Quinta. Also during the year ended December 31, 1998, Realty provided permanent mortgage financing of $76,260,000 for two long-term care facilities, one medical office building and for a 135 acre development stage property. Realty also provided $2,945,000 in additions to permanent mortgages already in the portfolio. 98 Realty commenced new development funding of $33,061,000 relating to two long-term care facilities and one medical office building. Realty also provided $110,258,000 for ongoing construction of mortgaged facilities already in the portfolio. As a result of the merger with Cobblestone, Realty acquired 21 golf facilities and leasehold interests in four golf facilities and recorded them at appraised values of $224,434,000 and $23,641,000, respectively. Since these courses, as well as the 18 courses noted above, are components of Cobblestone Golf Group, they are included as net assets of discontinued operations as of December 31, 1998. Realty also acquired 280 operating hotels, 23 hotels under construction and land held for development and recorded them at appraised values of $2,503,264,000 as a result of the La Quinta Merger. During the year ended, December 31, 1998, Realty distributed $19,423,000 in real estate assets to Operating Company as part of a property distribution. During the year ended December 31, 1998, Realty received net proceeds of $320,135,000 from the sale of one long-term care facility, 32 assisted living facilities and nine rehabilitation facilities. Realty realized a net gain on these sales of $52,096,000. Realty also received net proceeds of $39,843,000 from the sale of a 50% ownership in a joint venture holding a fashion mall, as well as the land on which the fashion mall is located. A net gain of $546,000 was realized on the sale. In connection with the disposition of the racetrack operations, Realty received net proceeds of $99,855,000 from the sale of the Santa Anita Racetrack and adjacent land held for development. A net loss on the sale of $77,838,000 was realized and is included in the loss on disposal of discontinued operations. In connection with these sales, $1,909,000 in lease breakage fees were received and have been included as other income in the consolidated statements of income. During the year ended December 31, 1998, Realty received principal payments of $407,241,000 on real estate mortgages. Included in this amount were $212,032,000 prepayments of mortgage investments for which prepayment fees and make-whole gains of $34,078,000 were recognized and have been classified as other income in the consolidated statements of income. At December 31, 1998, Realty was committed to provide additional financing of approximately $161,000,000 relating to one medical office building, five long-term care facilities, 11 assisted living facilities and 13 hotel facilities currently under construction as well as additions to existing facilities in the portfolio. Realty had entered into transactions with entities in which the Companies' Former Chairman and Chief Executive Officer owned or was expected to own a controlling equity interest or a minority interest. As of December 31, 1998, Realty had funded $287,335,000 related to these transactions. During 1998 and 1997, Realty recognized interest income of $19,199,000 and $16,490,000 and rental income of $1,492,000 and $5,174,000 from investments with these entities, respectively. All of the terms and conditions of such transactions were subject to approval by the independent Directors of Realty. On August 3, 1998, the Companies' former Chairman resigned as Chairman and as a Director of Realty, and as Chief Executive Officer and Treasurer of Operating Company (see Note 14). Minority interests in partnerships relating to Realty's investments in two rehabilitation facilities (seven facilities at December 31, 1997) were $669,000 and $2,071,000 as of December 31, 1998 and 1997, respectively, and are included in accrued expenses and other liabilities in the consolidated financial statements. Realty has a 94% equity interest in these partnerships. Also included in accrued expenses and other liabilities at December 31, 1998 is $3,019,000 which represents amounts payable to the minority interests in five rehabilitation facilities sold in 1998. Realty has investments in certain hotel facilities, which are held by an unincorporated partnership and a joint venture. Realty has a 60% and 50% interest in each of these investments, respectively. These investments total $7,337,000 at December 31, 1998, and partner's equity in the partnership and joint venture of approximately $6,125,000 are also included in accrued expenses and other liabilities in the consolidated financial statements. 7. Other Assets Other assets include primarily La Quinta intangible assets, investments in equity securities classified as available-for-sale, furniture, fixtures and equipment, and other receivables. 99 The investment in equity securities includes approximately 26,606,000 shares of Nursing Home Properties Plc, a property investment group which specializes in the financing, through sale leaseback transactions, of nursing homes located in the United Kingdom. These shares were acquired at various dates between July, 1996 and August, 1998 for an aggregate cost of $57,204,000. At December 31, 1998, the market value of this investment was $66,591,000. The difference between market value and cost, $9,387,000, is included in shareholders' equity in the accompanying balance sheet. The investment in equity securities also includes 331,000 shares of stock and warrants to purchase 1,006,000 shares of stock in Balanced Care Corporation, a healthcare operator. This investment has a market value of $8,688,000 at December 31, 1998. The difference between market value and cost, $7,584,000, is included in shareholders' equity in the accompanying balance sheet. La Quinta's intangible assets consist of its tradename, reservation system, and assembled workforce with net book values at December 31, 1998, of $95,866,000, $4,293,000 and $7,943,000, respectively, which were acquired as a result of the La Quinta Merger. Realty provides for a valuation allowance against its assets on a periodic basis. As of December 31, 1998 and 1997 the valuation allowance provided against other assets aggregated approximately $500,000 and $8,992,000, respectively. 8. Shares of Beneficial Interest/Common Shares Cash flows from operating activities available for distribution differ from net income primarily due to depreciation and amortization, as well as other noncash expenses. Distributions in excess of earnings, as reflected on Realty's and the Companies' consolidated balance sheets, are primarily a result of an accumulation of this difference. All shares participate equally in distributions and in net assets available for distribution to shareholders on liquidation or termination of Realty. The Directors of Realty have the authority to effect certain share redemptions or prohibit the transfer of shares under certain circumstances. Total distributions to shareholders during the years ended December 31, 1998, 1997, and 1996 included a return of capital per share of 4.1%, 31.7%, and 5.25%, respectively. The 1998 and 1996 distributions also include long-term capital gain distributions of 30.2% and .23% per share, respectively. The 1998 distribution also includes unrecaptured Internal Revenue Code Section 1250 depreciation from real property of 6.3% per share. During 1998, Realty issued 7,000,000 depository shares of Meditrust Corporation. Each depository share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock (the "Preferred Stock") with a par value of $.10 per share. Net proceeds from this issuance were approximately $168,666,000 and were primarily used to repay existing indebtedness. Total distributions to preferred shareholders during the year ended December 31, 1998 included long term capital gain distributions of 31.4% per share and unrecaptured Internal Revenue Code Section 1250 depreciation from real property of 6.6% per share. On and after June 17, 2003, the Preferred Stock may be redeemed for cash at the option of Realty, in whole or from time to time in part, at a redemption price of $250 per share, plus accrued and unpaid dividends, if any, to the redemption date. The following classes of Preferred Stock, Excess Stock and Series Common Stock are authorized as of December 31, 1998; no shares were issued or outstanding at December 31, 1998 and 1997: Meditrust Operating Company Preferred Stock $.10 par value; 6,000,000 shares authorized; Meditrust Corporation Excess Stock $.10 par value; 25,000,000 shares authorized; Meditrust Operating Company Excess Stock $.10 par value; 25,000,000 shares authorized; Meditrust Corporation Series Common Stock $.10 par value; 30,000,000 shares authorized; Meditrust Operating Company Series Common Stock $.10 par value; 30,000,000 shares authorized. 9. Fair Value of Financial Instruments Fair value estimates are subjective in nature and are dependent on a number of significant assumptions associated with each financial instrument or group of financial instruments. Because of a 100 variety of permitted calculations and assumptions regarding estimates of future cash flows, risks, discount rates and relevant comparable market information, reasonable comparisons of the Companies' fair value information with other companies cannot necessarily be made. The following methods and assumptions were used for real estate mortgages and long term indebtedness to estimate the fair value of financial instruments for which it is practicable to estimate value: The fair value of real estate mortgages has been estimated by discounting future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of real estate mortgages amounted to approximately $1,177,368,000 and $1,429,077,000 as of December 31, 1998 and 1997, respectively. The carrying value of these mortgages is $1,197,634,000 and $1,432,825,000 as of December 31, 1998 and 1997, respectively. The quoted market price for the Companies' publicly traded convertible debentures and rates currently available to the Companies for debt with similar terms and remaining maturities were used to estimate fair value of existing debt. The fair value of the Companies' indebtedness amounted to approximately $3,293,946,000 and $1,434,412,000 as of December 31, 1998 and 1997, respectively. The carrying value of these convertible debentures and other debt is $3,307,947,000 and $1,377,438,000 as of December 31, 1998 and 1997, respectively. The fair value of the interest rate swap is based on quoted market prices and approximated $11,323,000 at December 31, 1998. 10. Indebtedness Indebtedness at December 31, 1997 and 1998 is as follows:
1998 1997 (In thousands, except per share amounts) ----------- ----------- Notes payable, net: Principal payments aggregating $118,500 due from August 1999 to August 2015, bearing interest at rates between 7.25% and 8.625% ........................................................ $117,950 $117,804 Principal payments aggregating $125,000 due in July 2000, bearing interest at 7.375% ............................................ 124,508 124,370 Principal payments aggregating $80,000 due in July 2001, bearing interest at 7.6% .............................................. 79,685 79,464 Principal payments aggregating $50,000 due in October 2001, bearing interest at 7.11% ..................................... 50,000 -- Principal payments aggregating $100,000 due in August 2002, bearing interest at LIBOR plus .45% ........................... -- 99,322 Principal payments aggregating $100,000 due in March 2004, bearing interest at 7.25% ..................................... 100,880 -- Principal payments aggregating $100,000 due in September 2005, bearing interest at 7.40% ..................................... 99,936 -- Principal payments aggregating $50,000 due in February 2007, bearing interest at 7.27% ..................................... 50,000 -- Principal payments aggregating $160,000 due in August 2007, bearing interest at 7% ........................................ 157,316 157,003 Principal payments aggregating $50,000 due in April 2008, bearing interest at 7.33% ............................................. 50,000 -- Principal payments aggregating $150,000 due in August 2011, bearing interest at 7.114% .................................... 148,947 148,759
101
1998 1997 (In thousands, except per share amounts) ------------ ------------- Principal payments aggregating $175,000 due in September 2026, (redeemable September 2003 at the option of the note holder), bearing interest at 7.82% ............................................. 174,115 173,872 Other ................................................................... 2,500 -- ------- ------- 1,155,837 900,594 --------- ------- Convertible debentures, net: 7% interest, convertible at $25.487 per share, due March 1998............ -- 5,037 6-7/8% interest, convertible at $30.896 per share, due November 1998 .................................................................. -- 43,553 8.54% interest, convertible at $27.15 per share, due July 2000........... 41,999 41,749 7-1/2% interest, convertible at $30.11 per share, due March 2001 ........ 89,406 88,951 9% interest, convertible at $22.47 per share, due January 2002 .......... 2,351 3,741 8.56% interest, convertible at $27.15 per share, due July 2002........... 51,257 50,969 --------- ------- 185,013 234,000 --------- ------- Bank notes payable, net: Revolving credit agreement expiring September 23, 1999 .................. -- 179,527 Revolving credit agreement expiring July 17, 2001 ....................... 594,625 -- Term loans, due July 17, 1999 ........................................... 743,398 -- Term loan, due July 17, 2001 ............................................ 493,313 -- --------- ------- 1,831,336 179,527 --------- ------- Bonds and mortgages payable, net: Mortgage notes, interest ranging from 7.9% to 12.2%, monthly principal and interest payments ranging from $7 to $78 and maturing from February 1998 through March 2033, collateralized by thirteen facilities ................................................ -- 59,962 Mortgage notes, interest ranging from 7.72% to 12.75%, monthly principal and interest payments ranging from $4 to $78 and maturing from February 1999 through March 2033, collateralized by ten facilities ..................................................... 44,186 -- Manatee County, Florida Industrial Revenue Bonds, Series 1983, annual principal payments ranging from $80 to $90 due in 1999 through 2000, $345 due in December 2003, and $2,770 due in December 2013, interest ranging from 13.0% to 13.5%, collateralized by one facility ........................................ 3,285 3,355 Mortgage loans maturing July 2000 through November 2001, 8.67% weighted average effective interest rate .............................. 48,292 -- Industrial development revenue bonds, maturing July 1999 through February 2012, 3.53% weighted average effective interest rate ......... 33,773 -- --------- ------- 129,536 63,317 --------- ------- $3,301,722 $1,377,438 ========== ==========
The notes payable, convertible debentures, bank notes payable, bonds and mortgages payable are presented net of unamortized debt issuance costs of $33,535,000 and $10,610,000 at December 31, 1998 and 1997, respectively. Amortization expense associated with the debt issuance costs amounted to $12,264,000, $2,692,000 and $2,636,000 for the years ended December 31, 1998, 1997 and 1996, respectively, and is reflected in interest expense. Notes Payable On August 7, 1997, Realty completed the sale of $160,000,000 of 7% notes due August 15, 2007. Realty also completed the sale of $100,000,000 Remarketed Reset Notes due August 15, 2002 bearing 102 interest at LIBOR plus .45%. Such interest is subject to reset quarterly during the first year of the loan. Subsequent to the first year of the loan, the character and duration of the interest rate will be determined periodically by Realty and the underwriter. On August 17, 1998 Realty redeemed the $100,000,000 Remarketed Reset Notes at par value. During 1997, Realty completed the sale of $150,000,000 of 7.114% notes due August 15, 2011. The notes were sold to a trust from which exercisable put option securities due August 15, 2004, each representing a fractional undivided beneficial interest in the trust, were issued. The trust has entered a call option pursuant to which the callholder has the right to purchase the notes from the trust on August 15, 2004 at par value. The trust also has a put option, which it is required to exercise if the callholder does not exercise the call option, pursuant to which Realty must repurchase the notes at par value on August 15, 2004. A portion of the net proceeds from the sale of the notes described above was used to repay the outstanding balance on the unsecured revolving line of credit and other unsecured short-term borrowings. In conjunction with the La Quinta Merger on July 17, 1998, Realty assumed La Quinta's notes payable, which approximated $473,000,000. In September 1998, Realty redeemed $120,000,000, 9.25% senior unsecured subordinated notes originally due 2003. Convertible Debentures The 7% debentures issued in February 1993 matured in March 1998. During 1998, prior to maturity, $5,027,000 of debentures were converted into 197,251 paired common shares. The remaining principal was repaid at maturity. During the year ended December 31, 1997, $3,095,000 of debentures were converted into 111,306 paired common shares. The 67/8% debentures issued in November 1993 matured in November 1998. During 1998, prior to maturity, $665,000 of debentures were converted into 21,521 paired common shares. The remaining principal was repaid at maturity. During the year ended December 31, 1997, $42,433,000 of debentures were converted into 1,373,394 paired common shares. The 8.54% debentures issued in July 1995 are subject to redemption by the Companies at 100% of the principal amount plus accrued interest. During the year ended December 31, 1997, $1,000,000 of debentures were converted into 36,830 paired common shares. The 71/2% debentures issued in March 1994 are subject to redemption by the Companies at 100% of the principal amount plus accrued interest. During the years ended December 31, 1998 and 1997, $65,000 and $443,000 of debentures were converted into 2,158 and 14,706 paired common shares, respectively. The 9% convertible debentures issued in April 1992 are subject to redemption by the Companies at 100% of the principal amount plus accrued interest. During the years ended December 31, 1998 and 1997, $1,410,000 and $1,190,000 of debentures were converted into 62,746 and 52,949 paired common shares, respectively. The 8.56% debentures issued in July 1995 are subject to redemption by the Companies at 100% of the principal amount plus accrued interest to the extent necessary to preserve Realty's status as a REIT. Bank Notes Payable On July 17, 1998, Realty entered into a new credit agreement (the "New Credit Agreement") which provides Realty with up to $2,250,000,000 in credit facilities, replacing Realty's existing $365,000,000 revolving credit facilities. The New Credit Agreement provides for borrowings in four separate tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid may not be reborrowed, which matures July 17, 1999 with a $250,000,000 mandatory principal payment on April 17, 1999; Tranche C, a term loan in the amount of $250,000,000, amounts of which if repaid may not be reborrowed, which matures July 17, 1999 with a six month extension option; 103 and Tranche D, a term loan in the amount of $500,000,000, amounts of which if repaid may not be reborrowed, which matures July 17, 2001. Borrowings under the New Credit Agreement include LIBOR, base rate and money market borrowings. Pricing on the loan commitments, lines and letters of credit under the New Credit Agreement varies according to the pricing level commensurate with the credit quality of Realty. Events of default under the New Credit Agreement include, among other things, failure to pay any principal or reimbursement obligation when due, failure to meet any of the covenants of the New Credit Agreement, failure of the representations and warranties to be true in any material respect, and default under other debt instruments of the Companies or their subsidiaries. The New Credit Agreement includes covenants with respect to maintaining certain financial benchmarks, limitations on the types and percentage of investments in certain business lines, limitations on dividends of Realty and Operating Company, and other restrictions. In addition, Operating Company is a guarantor of all of the obligations of Realty under the New Credit Agreement. On November 23, 1998, Realty amended its New Credit Agreement to provide for Realty's settlement of a portion of its forward equity issuance transaction, the amendment of certain financial covenants to accommodate asset sales, to exclude the impact of non-recurring charges in certain covenant calculations, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock will also extend on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 had not been issued by February 1, 1999. On February 1, 1999 this increase went into effect. Of the $1,000,000,000 revolving loan, $353,000,000 was available at December 31, 1998, bearing interest at the base rate (8.25%) or LIBOR plus 2.625% (7.98% at December 31, 1998). During July 1998, Realty entered into an interest rate swap agreement to reduce the impact of fluctuating interest rates on $1,250,000,000 of its New Credit Agreement. Realty agreed with the counterparty to exchange, on a monthly basis, the difference between Realty's fixed pay rate and the counterparty's variable pay rate of one month LIBOR. During the period from July to December, 1998, Realty paid a fixed rate of approximately 5.7% and received an average variable rate of approximately 5.5%. Differentials in the swapped amounts are recorded as adjustments to interest expense of Realty. Total interest expense related to the swap agreement was approximately $995,000 for the period from July to December 1998. At December 31, 1997, Realty had unsecured revolving lines of credit expiring September 23, 1999 in the amount of $365,000,000, of which $181,000,000 was available, bearing interest at approximately 6.8%. In July 1998, these revolving lines were refinanced with the New Credit Agreement. Bonds and Mortgages Payable Realty is obligated by agreements relating to sixteen issues of Industrial Revenue Bonds ("IRBs"), in an aggregate amount of $32,370,000, to purchase the bonds at face value prior to maturity under certain circumstances. The bonds have floating interest rates which are indexed periodically. Bondholders may, when the rate is changed, put the bonds to the designated remarketing agent. If the remarketing agent is unable to resell the bonds, it may draw upon an irrevocable letter of credit which secures the IRBs. In such event, Realty would be required to repay the funds drawn on the letters of credit within 24 months. As of December 31, 1998, no draws had been made upon any such letters of credit. The schedule of annual maturities shown below includes these IRBs as if they will not be subject to repayment prior to maturity. Assuming all bonds under such IRB arrangements are presented for payment prior to December 31, 1999 and the remarketing agents are unable to resell such bonds, the maturities of long-term debt shown below would increase by $8,835,000 for the year ending December 31, 2001. 104 The aggregate maturities of notes payable, convertible debentures, bank notes payable and bonds and mortgages payable, for the five years subsequent to December 31, 1998, are as follows:
(In thousands) 1999 ................ $ 778,784 2000 ................ 219,422 2001 ................ 1,356,639 2002 ................ 92,659 2003 ................ 207,301 Thereafter .......... 646,917 ---------- $3,301,722 ==========
11. Forward Equity Issuance Transaction On February 26, 1998, the Companies entered into transactions (the "Forward Equity Issuance Transaction" or "FEIT") with Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and successor in interest, "MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par value $.10 per share from each of the Companies at a purchase price of $32.625 per share (collectively with the paired common shares the shares of Series A non-voting convertible common stock are convertible into, the "Notional Shares"). The Series A Non-Voting Convertible Common Stock converted on a one to one basis to paired common stock of the Companies on June 18, 1998. Total proceeds from the issuance were approximately $277,000,000 (the "Initial Reference Amount"). Net proceeds from the issuance were approximately $272,000,000, and were used by the Companies to repay existing indebtedness. The Companies and MLI also entered into a Purchase Price Adjustment Agreement under which the Companies would, within one year from the date of MLI's purchase, on a periodic basis, adjust the purchase price based on the market price of the paired common stock at the time of any interim or final adjustments, so as to provide MLI with a guaranteed return of LIBOR plus 75 basis points (the "Return"). The paired common shares issued receive the same dividend as the Companies' paired common stock; however, the difference between LIBOR plus 75 basis points and the dividend payments received by MLI will be included as an additional adjustments under the Purchase Price Adjustment Agreement. Such adjustments were to be effected by deliveries of additional paired common shares to, or, receipts of paired common shares from, MLI. In the event that the market price for the paired shares is not high enough to provide MLI with the Return, the Companies would have to deliver additional paired shares to MLI, which would have a dilutive effect on the capital stock of the Companies. This dilutive effect increases significantly as the market price of the paired shares declines further below the original purchase price. Moreover, settlement of the FEIT transaction, whether at maturity or at an earlier date, may force the Companies to issue paired shares at a depressed price, which may heighten this dilutive effect on the capital stock of the Companies. Prior to the settlement, MLI shall hold any paired common shares delivered by the Companies under the Purchase Price Adjustment Agreement in a collateral account (the "Collateral Shares"). Under the adjustment mechanism, the Companies delivered approximately 9,700,000 Collateral Shares in 1998, all of which were returned to the Companies when the Companies settled in cash a portion of the adjustment transaction in December 1998. The FEIT has been accounted for as an equity transaction with the Notional Shares treated as outstanding from their date of issuance until the respective date of repurchase, if any, for both basic and diluted earnings per share purposes. For diluted earnings per share purposes, at the end of each quarterly period, the then outstanding Reference Amount (as defined herein) is divided by the quoted market price of a paired common share, and the excess, if applicable, of that number of paired common shares over the Notional Shares (the "Contingent Shares") is added to the denominator. Contingent shares are included in the calculation of year to date diluted earnings per share weighted for the interim periods in which they were included in the computation of diluted earnings per share. The "Reference Amount" equals the Initial Reference Amount plus the Return and net of any cash distributions on the Notional Shares or any other cash paid or otherwise delivered to MLI under the FEIT. 105 Payments that reduce the Reference Amount in effect satisfy all necessary conditions for physically settling that portion of the Reference Amount and are accounted for in a manner similar to a treasury stock transaction. Therefore, payments that reduce the Reference Amount are divided by the quoted market price of a paired common share on the date of payment. The calculated number is then multiplied by the fractional number of days in the period prior to the payment date and the resulting number of paired common shares is included in the calculation of diluted earnings per share for the period. On November 11, 1998, the Companies entered into an agreement with MLI to amend the FEIT. Under the agreement, Realty agreed to grant a mortgage of the Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the FEIT with cash generated in part from the sale of certain assets, including the Santa Anita Racetrack. Merrill Lynch agreed, subject to the terms of the settlement agreement, not to sell any shares of the existing FEIT until February 26, 1999. In December 1998, the Companies paid Merrill Lynch $152 million ($127 million of which was from the sale of certain assets including the Santa Anita Racetrack) for the repurchase of 1,635,000 Notional Shares and the release of 9,700,000 Collateral Shares. At December 31, 1998 the Notional Shares outstanding were reduced to approximately 6,865,000 paired common shares and there were no Contingent Shares issuable. 12. Other Expenses: During the three months ended March 31, 1998, the Companies pursued a strategy of diversifying into new business lines including lodging and golf. Consistent with this strategy, Realty commenced a reevaluation of its intentions with respect to certain existing healthcare real estate facilities and other assets. This process included review of the valuation of facilities in the portfolio, including those with deteriorating performance, and other assets and receivables that were unrelated to its historical primary business. As a result of this on-going analysis Realty identified assets which would be held for sale and recorded provisions to adjust the carrying value of certain facilities, other assets and receivables and a valuation reserve for certain mortgage loans receivable. Following the quarter ended March 31, 1998 one facility was sold and certain other assets and receivables were written off. On July 22, 1998, the President signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to continue to grow through use of the paired share structure. While the Companies' use of the paired share structure in connection with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under the Reform Act, the ability to continue to use the paired share structure to acquire additional real estate and operating businesses conducted with the real estate assets (including the golf and lodging industries) was substantially limited. In addition, during the summer of 1998, the debt and equity capital markets available to REITs deteriorated, thus limiting the Companies' access to cost-efficient capital. As a result of these events, the Companies commenced a strategic evaluation of their business which included an extensive review of their healthcare properties and mortgage loan portfolio, an analysis of the impact of the Reform Act, the Companies' limited ability to access the capital markets, and the operating strategy of the Companies' existing businesses. The analysis culminated in the development of a comprehensive restructuring plan, which was announced on November 12, 1998, which included the sale of approximately $550 million of non-strategic healthcare assets. Based upon the analysis described above, other expenses were recorded for the year ended December 31, 1998, as follows: Asset related: (In thousands) Provision for assets held for sale ...................................... $33,218 Provision for real estate assets ........................................ 14,700 Provision for loss on real estate mortgage and loans receivable ......... 16,036 Provision for loss on working capital and other receivables ............. 16,400 ------- Subtotal ................................................................ 80,354 Comprehensive restructuring plan: Employee severance ...................................................... 7,149 Write-off of capitalized pre-development costs .......................... 8,720
106 (In thousands) External consulting fees ...................... 11,882 -------- Subtotal ...................................... 27,751 Other Costs of transactions not consummated ......... 3,110 -------- Total ......................................... $111,215 ========
As a result of continued deteriorating performance at five healthcare facilities, management committed to a plan to sell these facilities as soon as practicable. As of December 31, 1998, Realty had recorded a provision, net of one facility that was sold prior to the end of the year, of $33,218,000 to reduce the carrying value of these facilities to estimated fair value less expected costs of sale. Management expects that the remaining assets will be disposed of during 1999. As part of the review of the healthcare portfolio, management identified four properties where recent events or changes in circumstances, including physical plant and licensure issues, indicated that the carrying value of the assets may not be recoverable. Management determined that the estimated undiscounted future cash flows for these assets was below the carrying value and, accordingly, Realty reduced the carrying value of these assets by $14,700,000 to estimated fair value. Management also identified one mortgage loan collateralized by a rehabilitation facility where continued eroding margins and an expiring guarantee indicated that the Companies will likely not be able to collect all amounts due according to the contractual terms of the loan agreement. Accordingly, the Companies provided a loan loss for this asset of approximately $8,000,000. In addition, Realty has also provided for the establishment of an additional $8,036,000 mortgage loan valuation allowance primarily in response to the implementation of new government reimbursement regulations impacting many of its operators during the second half of 1998. Realty also held working capital and other receivables that were unrelated to its historical primary business of healthcare financing. Management determined that certain of these accounts were uncollectible and protracted collection efforts for these assets would be an inefficient use of its resources and therefore recorded provisions of approximately $16,400,000 and then wrote off these assets. Pursuant to its comprehensive restructuring plan, the Companies announced plans to refocus their capital investment program by reducing healthcare investments and ceasing development of any new hotels other than the completion of those Inns and Suites currently under construction. Accordingly, the Companies recorded non recurring costs of $8,720,000 for the write-off of certain previously capitalized costs associated with lodging development, and $7,149,000 for severance related costs attributable to workforce reductions of 87 employees at the Companies' lodging and healthcare divisions. The Companies have also recorded $11,882,000 in costs incurred for various consultants engaged to assist in the development and implementation of the comprehensive restructuring plan. The Companies also incurred approximately $3,110,000 in costs related to the evaluation of certain acquisition targets, which the Companies are no longer pursuing. The total amount of the comprehensive restructuring plan charges that were unpaid at December 31, 1998 was $16,518,000. 13. Lease Commitments Healthcare Realty's healthcare related land and facilities are generally leased pursuant to non-cancelable, fixed-term operating leases expiring from 1999 to 2012. The leases ordinarily provide multiple, five-year renewal options and the right of first refusal or the option to purchase the facilities at the greater of the fair market value or Realty's investment at the end of the initial term of the lease or at various times during the lease. 107 The healthcare related lessees are required to pay aggregate base rent during the lease term and applicable debt service payments as well as percentage, supplemental and additional rent (as defined in the lease agreements). The majority of the healthcare related leases are triple net which generally requires the lessees to pay all taxes, insurance, maintenance and other operating costs of the land and facilities. Future minimum rents, expected to be received by Realty during the initial term of the healthcare related leases for the years subsequent to December 31, 1998, are as follows:
Year (In thousands) 1999 ......................... $146,993 2000 ......................... 143,400 2001 ......................... 137,809 2002 ......................... 133,559 2003 ......................... 131,919 2004 and thereafter .......... 433,138
Lodging The Participating Hotel Facility Leases between Realty and Operating Company are generally long-term and provide for quarterly base or minimum rents plus contingent or percentage rents based on quarterly gross revenue thresholds for each hotel facility. Operating Company is generally responsible for paying all operating expenses of the hotel facilities while Realty is responsible for costs attributable to real estate taxes and insurance. The leases are accounted for as operating leases. Total rental expense paid by Operating Company to Realty under such leases was approximately $125,706,000 for the year ended December 31, 1998 of which approximately $29,494,000 was contingent rent. Realty's future minimum rents at December 31, 1998 receivable from Operating Company under non-cancelable Participating Hotel Facility Leases for the years ending December 31, are as follows:
Year (In thousands) 1999 .......... $224,589 2000 .......... 227,036 2001 .......... 227,036 2002 .......... 227,036 2003 .......... 113,518
Realty also leases restaurants it owns to third parties. These leases are accounted for as operating leases and expire over a period from 1999 to 2018 and provide for minimum rentals and contingent rentals based on a percentage of annual sales in excess of stipulated amounts. Total restaurant rental income for 1998 was $3,382,000, which consisted of $2,812,000 minimum rent and $570,000 of contingent rent. Realty's future minimum rents at December 31, 1998 to be received under non-cancelable operating restaurant leases for the years ending December 31 are as follows:
Year (In thousands) 1999 ......................... $ 6,050 2000 ......................... 5,646 2001 ......................... 5,015 2002 ......................... 4,305 2003 ......................... 3,404 2004 and thereafter .......... 13,238
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- 108 cancelable lease terms in excess of one year at December 31, 1998 follow:
Year (In thousands) 1999 ......................... $ 364 2000 ......................... 356 2001 ......................... 356 2002 ......................... 294 2003 ......................... 272 2004 and thereafter .......... 1,337
Total rent for ground leases was $297,000 for 1998. Operating Company leases certain non-hotel, real estate and equipment for the hotels' operations under various lease agreements. The leases extend for varying periods through 2003 and generally are for a fixed amount each month. Total rent expense for operating leases was approximately $1,561,000 for the period from July 17, 1998 to December 31, 1998. Operating Company's future minimum rents at December 31, 1998 payable under non-hotel non-cancelable operating leases for the years ending December 31 are as follows (in thousands):
Year (In thousands) 1999 ......................... $3,033 2000 ......................... 2,800 2001 ......................... 2,220 2002 ......................... 1,977 2003 ......................... 1,787 2004 and thereafter .......... 298
14. Contingencies Litigation On January 8, 1998 the Companies received notice that they were named as defendants in an action entitled Lynn Robbins v. William J. Razzouk, et al., Civil Action No. 98CI-00192 filed January 7, 1998 in the District Court of Bexar County, Texas (the "Texas Court"), and on January 20, 1998 the Companies received notice that they were named as defendants in an action entitled Adele Brody v. William J. Razzouk, et al., Civil Action No. 98CI-00456 filed January 12, 1998 in the Texas Court. The complaints, which were consolidated into one action (the "Action"), (i) alleged, in part, that La Quinta and its directors violated their fiduciary duties of care and loyalty to La Quinta shareholders by entering into a merger agreement with the Companies without having first invited other bidders, and that the Companies aided and abetted La Quinta and its directors in the alleged breaches, and (ii) sought injunctive relief enjoining the merger with La Quinta and compensatory damages. The parties negotiated and entered into an agreement in principle to settle the Action, dated on or about May 8, 1998 (the "Memorandum of Understanding"). The Memorandum of Understanding set forth the principal bases for the settlement, which included the issuance of a series of press releases prior to the meetings of the shareholders of the Companies and La Quinta to consider the La Quinta Merger agreement, and the inclusion of a section in the joint proxy statement/prospectus prepared for the shareholder meetings which described the FEIT with MLI. The parties have negotiated and entered into a Stipulation and Agreement of Compromise, Settlement and Release (the "Stipulation" or "Settlement"), dated on or about October 8, 1998, which contains the terms of settlement of the Action. On October 8, 1998, the Texas Court entered an Order Re: Preliminary Approval ("Order") which, among other things, (i) preliminarily approved the Settlement; (ii) conditionally approved the Settlement Class; (iii) approved the Notice of Pendency and Settlement of Class Action for mailing to the Settlement Class; and (iv) scheduled a Settlement Hearing. On November 9, 1998, the Texas Court entered an amended Order which set the date for the Settlement Hearing to January 19, 1999. The Texas Court has the right to change the date of the Settlement Hearing without further notice to the Settlement Class. The Settlement is contingent upon Final Court Approval 109 of the Settlement (as defined in the Stipulation). At the Settlement Hearing, the parties will ask the Texas Court to enter a Final Judgment which will, among other things, (i) finally approve the Settlement; (ii) declare that the Action and the Settled Claims (as defined in the Stipulation) are finally and fully compromised and settled; (iii) deem that the Representative Plaintiffs, the Settlement Class and the Settlement Class Members have fully, finally and forever settled and released any and all Settled Claims against the Released Parties (as defined in the Stipulation); and (iv) dismiss the Action on the merits and with prejudice. Pursuant to the settlement, La Quinta on February 22, 1999, paid the class plaintiffs attorney's fees totaling $700,000 which were awarded by the Texas court. The Companies are a party to a number of other claims and lawsuits arising out of the normal course of business; the Companies believe that none of these claims or pending lawsuits, either individually or in the aggregate, will have a material adverse affect on the Companies' business or on their consolidated financial position or results of operations. Paired Share REIT Legislation On July 22, 1998, the President of the United States of America signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"). Included in the Reform Act is a freeze on the grandfathered status of paired share REITs such as the Companies. Under this legislation, the anti-pairing rules provided in the Internal Revenue Code of 1986, as amended (the "Code"), apply to real property interests acquired after March 26, 1998 by the Companies, or by a subsidiary or partnership in which a ten percent or greater interest is owned by the Companies, unless (1) the real property interests are acquired pursuant to a written agreement that was binding on March 26, 1998 and at all times thereafter or (2) the acquisition of such real property interests was described in a public announcement or in a filing with the SEC on or before March 26, 1998. Under the Reform Act, the properties acquired in connection with the July 17, 1998 La Quinta Merger and in connection with the merger on May 29, 1998 with Cobblestone generally are not subject to these anti-pairing rules. However, any property acquired by the Companies, La Quinta, or Cobblestone after March 26, 1998, other than property acquired pursuant to a written agreement that was binding on March 26, 1998 or described in a public announcement or in a filing with the SEC on or before March 26, 1998, is subject to the anti-pairing rules. Moreover, under the Reform Act any otherwise grandfathered property will become subject to the anti-pairing rules if the rent on a lease or renewal with respect to such property is determined to exceed an arm's length rate. In addition, the Reform Act also provides that a property held by the Companies that is not subject to the anti-pairing rules will become subject to such rules in the event of an improvement placed in service after December 31, 1999 that changes the use of the property and the cost of which is greater than 200 percent of (A) the undepreciated cost of the property (prior to the improvement) or (B) in the case of property acquired where there is a substituted basis (e.g., the properties acquired from La Quinta and Cobblestone), the fair market value of the property on the date it was acquired by the Companies. There is an exception for improvements placed in service before January 1, 2004 pursuant to a binding contract in effect on December 31, 1999 and at all times thereafter. This restriction on property improvements applies to the properties acquired from La Quinta and Cobblestone, as well as all other properties owned by the Companies, and limits the ability of the Companies to improve or change the use of those properties after December 31, 1999. The Companies are considering various steps which they might take in order to minimize the effect of the Reform Act. As part of their restructuring plan announced in November 1998, the Companies intend to operate their healthcare and lodging business using the paired share structure until the healthcare spin-off takes place. Restructuring the operations of Realty and Operating Company, however, to comply with the legislation may cause the Companies to incur substantial tax liabilities, to recognize an impairment loss on their goodwill asset or otherwise adversely affect the Companies. Other Events On August 3, 1998, Abraham D. Gosman resigned his position as Director and Chairman of the Boards of Directors of the Companies and Chief Executive Officer and Treasurer of Operating Company. In connection with his resignation, Mr. Gosman is seeking severance payments and the Companies are evaluating whether certain severance or other payments should be made to Mr. Gosman. As part of this 110 evaluation, the Companies are considering the applicability of Mr. Gosman's employment contract and whether such severance or other payments are appropriate. The results of the Companies' evaluation are currently uncertain and depending upon the results of this evaluation and the results of ongoing discussions with Mr. Gosman, Mr. Gosman may initiate litigation against the Companies. The ultimate outcome of this matter is not predictable and management is not able to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of this matter. It is possible that an unfavorable outcome of this matter could have a material adverse effect on the Companies' results of operations in a particular quarter or annual period. However, the Companies believe any such claim, even if materially adverse to the Companies' results of operations, should not have a material adverse effect on the Companies' financial position. 15. Stock Option and Benefit Plans The Meditrust Corporation Amended and Restated 1995 Share Award Plan (the "Meditrust Corporation Plan") provides that the maximum number of common shares (the "Meditrust Corporation Shares") that may be issued under the plan shall not exceed the sum of 3,616,741 plus an amount equal to 5% of the Meditrust Corporation Shares outstanding from time to time. The Meditrust Operating Company Amended and Restated 1995 Share Award Plan (the "Meditrust Operating Plan" and together with the Meditrust Corporation Plan, the "Plans") provides that the maximum number of common shares (the "Meditrust Operating Shares") that may be issued under the plan shall not exceed an amount equal to 5% of the Meditrust Operating Shares outstanding from time to time. Under each of the Plans, the maximum number of options and stock appreciation rights that may be granted to an eligible person during any one year period shall not exceed 450,000 subject to certain adjustments. Also under each of the Plans, awards are to be issued either as Options, Dividend Equivalents, Stock Appreciation Rights, Restricted Stock Awards, Performance Share Awards or Stock Bonuses (each, an "Award"). At December 31, 1998, under the Meditrust Corporation Plan and the Meditrust Operating Plan, 9,387,000 and 5,334,000 shares, respectively, were available for future grant. Each Award expires on such date as determined by management and the Compensation Committee of the Board of Directors (the "Committee"), but in the case of options or other rights to acquire paired common shares, not later than 10 years after the date of the Award. Options granted under each of the Plans vest according to a schedule determined by the Committee. The Committee may authorize the deferral of any payment of cash or issuance of paired common shares under each of the Plans at the election and request of a participant. Up to 4,000,000 shares are available under each of the Plans to be issued as incentive stock options. Directors, officers, employees and individual consultants, advisors or agents who render or who have rendered bona fide services to the corporation are eligible to participate in the plan for such corporation. The Committee is provided discretion to accelerate or extend the exercisability or vesting of any or all such outstanding Awards within the maximum 10 year period, including in the event of retirement, death or termination of employment. Options outstanding at December 31, 1998 expire in 2001 through 2008. Under each of the Meditrust Corporation Plan and the Meditrust Operating Plan, a like number of shares of the Meditrust Corporation Shares or Meditrust Operating Shares, as the case may be, shall be purchased from the other corporation or arrangements shall be made with such other corporation for the simultaneous issuance by the other corporation of the same number of common shares as the number of common shares issued in connection with an Award. Under each of the Plans, the option price shall not be less than the par value of the Meditrust Corporation Shares and the Meditrust Operating Shares subject to the Award. In the event of a "change in control," as defined in each of the Plans, all options outstanding will become fully vested. During 1998, 315,000 restricted shares of the Companies' stock were issued to key employees under the Plans. Restrictions generally limit the sale or transfer of shares during a restricted period, not exceeding eight years. Participants vest in the amounts granted on the earliest of eight years after the date of issuance, upon achieving the performance goals as defined, or as the Boards of Directors may determine. 111 Unearned compensation was charged for the market value of the restricted shares on the date of grant and is being amortized over the restricted period. The unamortized unearned compensation value is shown as a reduction of shareholders' equity in the accompanying consolidated and combined balance sheets. The Companies apply APB 25 and related Interpretations in accounting for these Plans. Accordingly, no compensation cost has been recognized for the fixed stock option plans. Options to purchase 864,000 Meditrust Corporation Shares and 168,000 Meditrust Operating Shares were exercisable as of December 31, 1998. Had compensation cost for the Companies' stock option-based compensation plans been determined based on the fair value at the grant dates for Awards under those plans consistent with the method pursuant to SFAS 123, the Companies' net income and earnings per share would have been reduced to the pro forma amounts indicated below:
For the year ended December 31, ---------------------------------------------- 1998 1997 1996 (In thousands, except per share amounts) -------------- ------------- ------------- Net income (loss) available to paired common shareholders: As reported ............................... $ (161,591) $ 162,412 $ 157,976 Pro forma* ................................ (162,120) 160,586 157,209 Earnings (loss) per paired common share: Basic as reported ......................... $ (1.34) $ 2.14 $ 2.21 Diluted as reported ....................... (1.29) 2.12 2.20 Basic pro forma* .......................... (1.35) 2.11 2.20 Diluted pro forma* ........................ (1.29) 2.09 2.19
* The pro forma effect of compensation costs determined using the fair value based method are not indicative of future amounts when the new method will apply to all outstanding vested and non-vested Awards. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively. Dividend yield of 14.1, 7.9 and 8.2 percent, and expected volatility of 33, 16 and 16 percent for each year, respectively. Risk-free interest rates of 4.4 percent in 1998, and ranging from 5.9 to 6.7 percent in 1997, and 5.9 to 6.6 percent for 1996; and an expected life of four years for each grant. 112 A summary of the Companies' stock option activity and related information follows:
For the year ended December 31, ------------------------------------------------------------------------- 1998 1997 1996 ------------------------ ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise (000's) Price (000's) Price (000's) Price Fixed options ----------- ---------- --------- ---------- --------- --------- Outstanding at beginning of year .......... 3,811 $ 30 1,171 $ 25 1,593 $ 24 Granted ..................... 2,934 13 2,639 33 Options from merger ......... 452 4 288 17 127 27 Exercised ................... (611) 8 (272) 24 (477) 25 Forfeited ................... (1,564) 31 (15) 25 (72) 27 ------ ------ ----- ------ ----- ------ Outstanding at end of year ................ 5,022 $ 20 3,811 $ 30 1,171 $ 25 ------ ------ ----- ------ ----- ------ Options exercisable at year end ................ 1,032 1,225 509 ------ ----- ----- Weighted average fair value of options granted during the year ............ $ 1.44 $ 2.71 $ 2.52 ------ ------ ------
The weighted-average exercise price equals the weighted-average grant date fair value as all options were granted at fair market value on the date of grant. The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable --------------------------------------------- ------------------------- Weighted Weighted Weighted Number Average Average Number Average Outstanding Remaining Exercise Exercisable Exercise at 12/31/98 Contractual Life Price at 12/31/98 Price Range of exercise prices ------------- ------------------ ------------ ------------- ----------- $21.85.................... 18,872 2.81 $ 21.85 18,872 $ 21.85 $27.46.................... 8,813 5.70 27.46 8,813 27.46 $25.07-$25.17............. 401,743 6.22 25.08 401,743 25.08 $24.97-$29.44............. 84,327 7.53 27.53 84,327 27.53 $30.58-$36.46............. 1,407,678 8.61 32.80 350,266 32.80 $12.625-$29............... 150,600 4.82 17.90 150,600 17.90 $3.95-$4.42............... 17,364 8.47 4.20 17,364 4.20 $13.44.................... 2,933,500 9.95 13.44 --------- ---- -------- --------- - ----- 5,022,897 9.04 $ 20.19 1,031,985 $ 26.49 ========= ==== ======== ========= ========
Retirement and Other Benefits Realty entered into a non-qualified Trustee Retirement Plan (the "Plan") during 1996. The Plan provides eligible Trustees defined retirement benefits based on Trustee fees and years of service. At December 31, 1998 and 1997, the present value of the accumulated benefit obligation was $1,802,000 and $1,616,000, respectively. Retirement expense, including prior amortization cost and a current provision for the Plan, totaled $1,214,000, $346,000 and $350,000 in the accompanying income statements for 1998, 1997 and 1996, respectively. On December 10, 1998, the Board of Directors of Meditrust Corporation voted to accept the recommendations of the Compensation Committee to make a payment, pursuant to the Meditrust Corporation Plan, of unrestricted stock of The Meditrust Companies to certain Directors that previously qualified under the Meditrust Trustee Retirement Plan, in an amount equal to the present value of each individual's accumulated benefit. 113 During 1995, Realty entered into a Split-Dollar Life Insurance Agreement with a trust established by the then Chairman and Chief Executive Officer, pursuant to which Realty has agreed to advance policy premiums on life insurance policies paying a death benefit to the trust. Realty is entitled to reimbursement of the amounts advanced, without interest, which right is collateralized by an assignment of the life insurance policies and a personal guarantee of the former Chairman in the amount of the excess, if any, of the premiums paid by Realty over the cash surrender value of the insurance policies. The Companies have savings plans which qualify under Section 401(K) of the Internal Revenue Code under which eligible employees are entitled to participate up to a specified annual maximum contribution level. The Companies match a portion of such contributions which amounted to $320,000, $106,000 and $90,000, for the years ended December 31, 1998, 1997 and 1996, respectively. The La Quinta Retirement Plan is a defined benefit pension plan covering all La Quinta employees. Benefits accruing under this plan are determined according to a career average benefit formula which is integrated with Social Security benefits. For each year of service as a participant in this plan, an employee accrues a benefit equal to one percent of his or her annual compensation plus .65 percent of compensation in excess of the Social Security covered compensation amount. The Companies' funding policy for this plan is to annually contribute the minimum amount required by federal law. The following table sets forth the funded status and amounts recognized in the Companies' combined financial statements for the La Quinta Retirement Plan at December 31, 1998:
(In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $12,836 .... $ (14,952) ========= Projected benefit obligation for services rendered to date .............. $ (18,802) Plan assets at fair value, primarily marketable securities .............. 19,020 --------- Projected plan assets in excess of benefit obligation ................... 218 Unrecognized net gain from past experiences different from those assumed (1,281) Prior service costs ..................................................... (1,122) --------- Accrued pension costs ................................................... $ (2,185) =========
The assumptions used in the calculations shown above were:
1998 ---------------- Discount rate ........................................ 6.75% Expected long-term rate of return on assets .......... 8.00% Rate of increase in compensation levels .............. 5.00%--6.00%
The net periodic pension cost for the La Quinta Retirement Plan was approximately $1,100,000 for the period July 18, 1998 to December 31, 1998. The net periodic pension cost for the La Quinta Retirement Plan included the following components for the year ended December 31, 1998:
(In thousands) Service cost (benefits earned during the period) .......... $ 1,960 Interest cost on projected benefit obligation ............. 1,218 Actual return on plan assets .............................. (3,087) Net amortization and deferral ............................. 186 Net deferred asset gain ................................... 1,879 -------- Net periodic pension cost ................................. $ 2,156 ========
Effective January 1, 1999, the Companies converted their existing retirement plan to a cash balance pension plan. Existing accrued benefits under the existing retirement plan were converted into a beginning account balance as of January 1, 1999. Under the new cash balance pension plan, the Companies will make quarterly contributions to the account balances calculated as a percentage of quarterly employee compensation based on years of service. Interest credits to the account balances will be based on one year U.S. Treasury Securities. The account balances will be made available to employees after they reach age 55. 114 La Quinta maintained a trust account intended for use in settling benefits due under the Supplemental Retirement Plan and Trust ("SERP") which covered a select group of management employees. As a result of the La Quinta Merger, a "Potential Change in Control", as defined in the SERP document, occurred. This event required the Companies to make a contribution to the trust sufficient to meet funding obligations as described in the SERP document within 90 days of signing the La Quinta Merger documents. On April 3,1998, La Quinta deposited $2,520,000 into the trust account to meet the initial funding requirement defined under the provisions of the SERP document. On December 31,1998, the trustee paid all benefits due under this plan to the management employees covered. 16. Income Taxes As a REIT, Realty is taxed only on undistributed REIT income. During the year ended December 31, 1998, Realty distributed at least 95% of its REIT taxable earnings to its shareholders. Section 382 of the Internal Revenue Code of 1986, as amended, restricts a corporation's ability to use its net operating loss ("NOL") carryforwards following certain "ownership changes." Operating Company determined that such an ownership change occurred as a result of the Santa Anita, Cobblestone and La Quinta Mergers, respectively, and accordingly the amount of NOL carryforwards available for use in any particular taxable year will be limited. To the extent that Operating Company does not utilize the full amount of the annual NOL limit, the unused amount may be used to offset taxable income in future years. NOL carryforwards expire 15 years after the tax year in which they arise, and the last of Operating Company's NOL carryforwards will expire in 2013. A valuation allowance is provided for the full amount of the NOL's as the realization of tax benefits from such NOL's is not assured. Operating Company recorded a deferred tax asset of $11,156,000 and a deferred tax liability of $5,485,000 as a result of the La Quinta Merger. A valuation allowance is provided for $11,156,000 of the deferred tax asset, as realization of such asset is not assured. Operating Company has provided a valuation allowance with respect to certain post-La Quinta Merger increases in deferred tax assets as realization of these amounts are not assured. Components of deferred income taxes for Operating Company as of December 31, 1998 and 1997 are as follows: Deferred tax assets for continuing operations:
December 31, December 31, 1998 1997 (In thousands) -------------- ------------- Federal net operating loss carryovers ............................. $ 11,099 $ 7,270 State net operating loss carryovers ............................... 1,488 1,160 Self-insurance deductible when paid ............................... 8,821 Vacation pay deductible when paid ................................. 1,391 Pension plan ...................................................... 592 Restructuring accruals deductible when paid ....................... 782 Other ............................................................. 442 Valuation allowance ............................................... (20,460) (8,430) --------- -------- Total deferred tax assets ........................................ $ 4,155 $ -- --------- -------- Deferred tax liabilities for continuing operations: Amortization of workforce-in-place and reservation system ......... $ 4,650 --------- Total deferred tax liabilities ................................... $ 4,650 ---------
A reconciliation of Operating Company's total income tax provision (benefit) for calendar year 1998 and the initial period ended December 31, 1997 to the statutory federal corporation income tax rate of 35% and applicable state tax rates as follows: 115
December 31, December 31, 1998 1997 (In thousands) ------------- -------------- Computed "expected" tax provision .................. $ (8,628) $ -- State tax provision, net of federal effect ......... (887) Nondeductible compensation ......................... 878 Nondeductible meals and entertainment .............. 79 Nondeductible amortization ......................... 304 Valuation allowance ................................ 873 Gain from discontinued operations .................. 2,581 -- -------- ------ Total income tax benefit ........................... $ (4,800) $ -- -------- ------
17. Earnings Per Share Combined consolidated earnings per share is computed as follows:
For the year ended December 31, (In thousands, except per share amounts) ------------------------------------------- 1998 1997 1996 ----------- ------------- ------------- Income from continuing operations ......................... $141,080 $ 161,962 $ 157,976 Preferred stock dividends ................................. (8,444) -- -- -------- --------- --------- Income from continuing operations available to common shareholders ...................................... $132,636 $ 161,962 $ 157,976 ======== ========= ========= Average outstanding shares of paired common stock ......... 120,515 76,070 71,445 Dilutive effect of: Contingently issuable shares ............................. 4,757 Stock options ............................................ 236 454 306 -------- --------- --------- Dilutive potential paired common stock .................... 125,508 76,524 71,751 ======== ========= ========= Earnings per share: Basic .................................................... $ 1.10 $ 2.13 $ 2.21 ======== ========= ========= Diluted .................................................. $ 1.06 $ 2.12 $ 2.20 ======== ========= =========
Options to purchase 3,471,000, 27,000 and 17,000 paired common shares at prices ranging from $27.98 to $43.81 were outstanding during the years ended December 31, 1998, 1997 and 1996 respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire on dates ranging from October 2006 to October 2007, were still outstanding at December 31, 1998. Convertible debentures outstanding for the years ended December 31, 1998, 1997 and 1996 of 6,579,000, 9,600,000 and 10,289,000, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect. Meditrust Corporation earnings per share is computed as follows:
For the year ended December 31, (In thousands, except per share amounts) --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Income from continuing operations .................. $160,931 $162,324 $157,976 Preferred stock dividends .......................... (8,444) -- -- -------- -------- -------- Income from continuing operations available to common shareholders ............................... $152,487 $162,324 $157,976 ======== ======== ======== Average outstanding shares of common stock ......... 121,820 76,274 71,445 Dilutive effect of: Contingently issuable shares ...................... 4,757 Stock options ..................................... 236 733 306 -------- -------- -------- Dilutive potential common stock .................... 126,813 77,007 71,751 ======== ======== ========
116
For the year ended December 31, (In thousands, except per share amounts) ------------------------------------ Earnings per share: Basic ................................... $ 1.25 $ 2.13 $ 2.21 ====== ====== ====== Diluted ................................. $ 1.20 $ 2.11 $ 2.20 ====== ====== ======
Options to purchase 3,471,000, 27,000 and 17,000 paired common shares at prices ranging from $27.98 to $43.81 were outstanding during the years ended December 31, 1998, 1997 and 1996, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire on dates ranging from October 2006 to October 2007, were still outstanding at December 31, 1998. Convertible debentures outstanding for the years ended December 31, 1998, 1997 and 1996 of 6,579,000, 9,600,000 and 10,289,000, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect. Meditrust Operating Company earnings per share is computed as follows:
For the year ended December 31, (In thousands, except per share amounts) -------------------------- 1998 1997 ------------- ---------- Loss from continuing operations .................... $ (19,851) $ (362) Preferred stock dividends .......................... -- -- --------- ------- Loss from continuing operations available to common shareholders ............................... $ (19,851) $ (362) ========= ======= Average outstanding shares of common stock ......... 120,515 82,490 Dilutive effect of: Contingently issuable shares ...................... -- Stock options ..................................... -- -- --------- ------- Dilutive potential common stock .................... 120,515 82,490 ========= ======= Earnings per share: Basic ............................................. $ (0.16) $ (0.01) ========= ======= Diluted ........................................... $ (0.16) $ (0.01) ========= =======
Options to purchase 18,000 paired common shares at $29.00 were outstanding during the year ended December 31, 1998, but were not included in the computation of diluted EPS because the options' exercise price was greater then the average market price of the common shares. The options, which expire in December 1999, were still outstanding at December 31, 1998. Convertible debentures outstanding for the years ended December 31, 1998, 1997 and 1996 of 6,579,000, 9,600,000 and 10,289,000, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect. Operating Company holds common shares of Realty which are unpaired pursuant to a stock option plan approved by the shareholders. The common shares held totaled 1,305,000 as of December 31, 1998. These shares affect the calculations of Realty's net income per common share but are eliminated in the calculation of net income per paired common share for The Meditrust Companies. 18. Transactions between Realty and Operating Company Operating Company leases hotel facilities from Realty and its subsidiaries. The Participating Hotel Facilities Lease arrangements between Operating Company and Realty include base and additional rent provisions and require Realty to assume costs attributable to property taxes and insurance. Operating Company has entered into a royalty arrangement with Realty for the use of the La Quinta tradename at a rate of approximately 2.5% of gross revenues, as defined in the agreement. Subsequent to the La Quinta Merger, Realty distributed certain assets, including two newly constructed lodging facilities, to Operating Company with an established value of $33,162,000. Realty and Operating Company accounted for this transaction as a property distribution and contribution, respectively. 117 During the year, Realty and Operating Company issued shares under the Plans. Amounts due from Realty and Operating Company in connection with Awards of shares under the Plans are shown as a reduction of shareholders' equity in the accompanying consolidated balance sheets of Realty and Operating Company, respectively. In connection with certain acquisitions, Operating Company issued shares to Realty and recorded a receivable. Due to the affiliation of Realty and Operating Company, the receivable from Realty has been classified in Operating Company's shareholders' equity. Operating Company delivered a note to Realty for $13,128,000 on November 5, 1997. The purpose of the note was to adjust the relative values of Meditrust and Meditrust Acquisition Company in order to ensure that the Santa Anita Merger qualified as a tax free reorganization. This transaction is eliminated in the combined consolidated financial statements. However, due to the affiliation of Realty and Operating Company, the note has been classified in shareholders' equity in Realty and a note payable has been recorded in Operating Company. The note is due on November 1, 2009 and bears interest at 6.42%. Interest is payable quarterly in arrears. As of December 31, 1998, net liabilities of discontinued operations of Operating Company include an intercompany payable to Realty of $41,226,000. This intercompany balance bears interest at 6.42%. In addition, there are intercompany balances related to working capital items that are not interest bearing. Operating Company owns 1,305,377 shares of Realty as a result of acquisition activity. Realty provides certain services to Operating Company primarily related to general tax preparation and consulting, legal, accounting, and certain aspects of human resources. In the opinion of management, the costs associated with these services were not material and have been excluded from the financial statements. 19. Quarterly Financial Information (Unaudited) The following quarterly financial data summarizes the unaudited quarterly results for the Companies for the years ended December 31, 1998 and 1997.
Quarter Ended 1998 (In thousands, except per share amounts) ------------------------------------------------------------ March 31 June 30 September 30 December 31 ------------- ------------ -------------- ------------ 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)
Quarter Ended 1997 (In thousands, except per share amounts) ----------------------------------------------------------- March 31 June 30 September 30 December 31 ------------ ------------ -------------- ------------ Revenue .................................... $ 67,965 $ 71,014 $ 74,744 $ 75,315 Income from continuing operations .......... 41,053 41,947 42,052 36,910 Discontinued operations .................... -- -- -- 450 Net income ................................. 41,053 41,947 42,052 37,360 Basic earnings per Paired Common Share: Income from continuing operations ......... 0.56 0.57 0.57 0.44 Discontinued operations ................... -- -- -- 0.01 Net income ................................ 0.56 0.57 0.57 0.45 Diluted earnings per Paired Common Share: Income from continuing operations ......... 0.55 0.56 0.56 0.44
118
Quarter Ended 1997 (In thousands, except per share amounts) --------------------------------------------- Discontinued operations ................. -- -- -- 0.01 Net income .............................. 0.55 0.56 0.56 0.45
20. Segment reporting The following is provided pursuant to SFAS. 131: Description of the types of products and services from which each reportable segment derives its revenues The Companies have two reportable segments: Healthcare and Lodging. The Healthcare segment generally invests in healthcare facilities throughout the United States by providing financing to healthcare operators. This financing takes the form of mortgages, development loans, and sale/leaseback transactions. The Lodging segment essentially includes the ownership, development and operation of hotels in the mid-priced segment of the lodging industry under the brand name La Quinta, which is concentrated in the western and southern United States. La Quinta Inns appeal to guests who desire high-quality rooms, convenient locations and attractive prices, but who do not require banquet and convention facilities, in-house restaurants, cocktail lounges or room service. There is no single competitor or group of competitors of La Quinta that is dominant in the lodging industry. Competitive factors in the industry include reasonableness of room rates, quality of accommodations, service level and convenience of locations. Measurement of segment profit or loss and segment assets The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Companies evaluate performance based on contribution from each reportable segment. Contribution is defined by the Companies as income from operations before interest expense, depreciation, amortization, gains and losses on sales of assets, provisions for losses on disposal or impairment of assets, income or loss from unconsolidated entities, income taxes and nonrecurring income and expenses. The measurement of each of these segments is made on a combined basis with revenue from external customers, and excludes lease income between Realty and Operating Company. The Companies account for Realty and Operating Company transactions as if the transactions were to third parties, that is, at current market prices. Factors management used to identify the enterprise's reportable segments The Companies reportable segments are strategic business segments operating in different industries and offering different products and services. They are managed separately because each business requires different skill levels and marketing strategies. The Lodging segment was acquired as a unit, and the management at the time of the acquisition was retained. As described in Note 5, the Golf and Horseracing segments have been reported as discontinued operations in the accompanying financial statements. The following table presents information used by management by reported segment. The Companies do not allocate interest expense, income taxes or unusual items to segments.
For the years ended December 31, (In thousands, except per share amounts) --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Healthcare: Rental income (a) ........................... $191,874 $137,868 $109,119 Interest income ............................. 153,093 151,170 144,905 Rental property operating costs ............. (7,199) (210) -- General and administrative expenses ......... (21,436) (10,257) (8,625) --------- --------- -------- Healthcare Contribution ..................... $316,332 $278,571 $245,399 --------- --------- -------- Lodging: Room revenue ................................ $241,868 -- -- Guest services and other .................... 16,555 -- --
119
For the years ended December 31, (In thousands, except per share amounts) ---------------------------------------- Operating expenses ................................... (125,246) -- -- Rental property operating costs ...................... (8,439) -- -- ------ -- -- Lodging Contribution ................................. $ 124,738 -- -- ---------- -- -- Combined Contribution ................................ 441,070 278,571 245,399 ---------- ------- ------- Reconcilation to Combined Consolidated Financial Statements: Interest expense ..................................... 178,458 87,412 64,216 Depreciation and amortization ........................ 87,228 26,838 21,651 Amortization of goodwill ............................. 13,265 2,349 1,556 Loss on sale of securities ........................... 4,159 -- -- Gain on sale of assets ............................... (52,642) -- -- Income from unconsolidated joint venture ............. (906) 10 -- Other income ......................................... (35,987) -- -- Other expenses ....................................... 111,215 -- -- ---------- ------- ------- 304,790 116,609 87,423 ---------- ------- ------- Income from continuing operations before benefit for income taxes ........................................ 136,280 161,962 157,976 Income tax benefit ................................... (4,800) ---------- ------- ------- Income from continuing operations .................... 141,080 161,962 157,976 Discontinued operations (Note 5): Income from discontinued operations ................. 10,721 450 Loss on disposal of discontinued operations ......... (67,913) Provision for loss on disposition of discontinued operations ......................................... (237,035) ---------- ------- ------- Net income (loss) .................................... (153,147) 162,412 157,976 Preferred stock dividends ............................ (8,444) ---------- ------- ------- Net income (loss) available to Paired Common shareholders ........................................ $ (161,591) $162,412 $157,976 ========== ======== ========
- - ------------ (a) Revenue from segments below the quantitative thresholds are attributable to two operating segments of the Companies. Those segments include a property management business, which manages medical office buildings not owned by the Healthcare segment, and rents received from restaurant properties leased to third parties included in the Lodging segment. None of those segments have ever met any of the quantitative thresholds for determining reportable segments. The following table presents assets by reported segment and in the aggregate.
December 31, ----------------------------- 1998 1997 (In thousands, except per share amounts) ------------- ------------- Healthcare gross real estate investments .............................. $2,738,927 $3,060,604 Lodging gross real estate investments ................................. 2,594,956 Accumulated depreciation, valuation allowances and provisions ......... (247,147) (124,832) ---------- ---------- Net real estate by reportable segment ................................. 5,086,736 2,935,772 Other assets: Cash and cash equivalents ............................................. 305,456 43,732 Fees, interest and other receivables .................................. 54,712 23,650 Goodwill, net ......................................................... 486,051 194,893 Net assets of discontinued operations ................................. 305,416
120
December 31, ----------------------------- 221,180 82,236 Other assets, net ......... ------------- ------------- Total assets .............. $6,459,551 $3,280,283 ========== ==========
The following table reconciles revenue to the accompanying financial statements.
For the years ended December 31, --------------------------------------- 1998 1997 1996 (In thousands, except per share amounts) ----------- ----------- ----------- Healthcare: Rental income ............................ $191,874 $137,868 $109,119 Interest income .......................... 153,093 151,170 144,905 -------- -------- -------- Total healthcare revenue ................. 344,967 289,038 254,024 Total lodging revenue .................... 258,423 -- -- Other income ............................. 35,987 -- -- -------- -------- -------- Total revenue ............................ $639,377 $289,038 $254,024 ======== ======== ========
21. Subsequent Events On January 14, 1999, the Board of Directors of Realty declared a dividend of $0.46 per share of common stock payable on February 16, 1999 to shareholders of record on January 29, 1999. This dividend relates to the quarter ended December 31, 1998. On February 11, 1999, the Companies signed a definitive agreement to sell the Cobblestone Golf Group for aggregate consideration, including assumed debt, of approximately $393,000,000. The transaction is expected to close by the end of the first quarter of 1999. On March 10, 1999, Realty reached a second agreement with its bank group to amend its New Credit Agreement. The second amendment, which is subject to the successful completion of the sale of Cobblestone Golf Group, provides for a portion of the sale proceeds to be applied to settle a portion of the FEIT. The second amendment also provides for, among other things, deletion of limitations on certain healthcare investments and lowering the Tranche A loan commitments to $850,000,000. In addition, on March 10, 1999, the Companies entered into an agreement with MLI and certain of its affiliates which stated that the proceeds from the sale of Cobblestone Golf Group in excess of $300,000,000 will be used to purchase all or a portion of the Notional Shares outstanding. Merrill Lynch has agreed not to sell any Notional Shares until March 31, 1999 while the Companies complete the sale of Cobblestone Golf Group. 121 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Boards of Directors of Meditrust Corporation and Meditrust Operating Company: In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of The Meditrust Companies, Meditrust Corporation, and Meditrust Operating Company at December 31, 1998 and 1997, and the results of The Meditrust Companies and Meditrust Corporation's operations and their cash flows for each of the three years in the period ended December 31, 1998, and the results of Meditrust Operating Company's operations and its cash flows for the year ended December 31, 1998 and the initial period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Companies' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP February 8, 1999, except for Note 21, as to which the date is March 10, 1999. 122 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Shareholders and Directors of The Meditrust Companies: Our report on the financial statements of The Meditrust Companies, Meditrust Corporation and Meditrust Operating Company, is included in this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index to this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP February 8, 1999 123 MEDITRUST CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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 - - -------------------- -------------- --------------- ---------------------- --------------------- ------------- Valuation allowance included in Other Assets for the year ended December 31: 1996 ............... $4,232,523 (3,075,328)(B) $1,157,195 1997 ............... $1,157,195 $ 7,779,772 $ 8,054,572(A) (8,000,000)(B) $8,991,539 1998 ............... $8,991,539 $16,400,000 $ (2,955,000)(C) $ 21,936,412(B) $ 500,127
(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.
Additions Balance at Charged to Additions Balance at Beginning of Costs and Charged To End of Description Period Expenses Other Accounts Deductions Period - - ------------------------- -------------- ------------ ---------------- ---------------------- -------------- Valuation allowance included in Accrued Expenses and Other Liabilities for the year ended December 31: 1996 .................... $ 9,714,572 $(1,690,000)(B) $ 8,054,572 1997 .................... $ 8,054,572 $(8,054,572)(A) -- 1998 .................... $ -- $ --
(A) Includes $8,054,572 reclassified as a reduction to Other Assets. (B) Relates to receivables charged off. 124
THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ --------- ---------- ------------ ------ ------- Alcohol and Substance Abuse Treatment Centers and Psychiatric Facilities Hollywood, CA ............ $ 4,035,000 $ 4,035,000(6) $1,715,000 $ 5,750,000 $1,104,723 1957 5/88 College Station, TX ...... 3,708,894 3,708,894(6) 980,185 4,689,079 1,865,900 1987 5/93 Acute Care Hospital Phoenix, AZ .............. 63,960,000 63,960,000 1,690,000 65,650,000 6,262,750 1954 2/95 Assisted Living Blytheville, AR .......... 3,756,249 3,756,249 130,000 3,886,249 86,086 1996 4/96 Maumelle, AR ............. 3,848,620 3,848,620 320,000 4,168,620 88,121 1996 11/96 Mountain Home, AR ........ 3,787,872 3,787,872 170,000 3,957,872 76,111 1996 11/96 Pocahontas, AR ........... 3,701,500 3,701,500 50,000 3,751,500 87,188 1996 11/96 Sherwood, AR ............. 3,929,170 3,929,170 450,000 4,379,170 102,845 1996 11/96 Flagstaff, AZ ............ 3,222,513 3,222,513 3,222,513 9,814 Phoenix, AZ .............. 6,051,282 6,051,282 6,051,282 163,953 1997 12/97 Scottsdale, AZ ........... 3,922,447 3,922,447 3,922,447 113,283 1998 3/98 Folsom, CA ............... 9,280,000 9,280,000 620,000 9,900,000 268,254 1997 1/98 Palm Desert, CA .......... 5,415,920 5,415,920 784,080 6,200,000 295,560 1996 2/87 Trumbull, CT ............. 12,717,665 12,717,665 12,717,665 190,708 1998 1/98 Brandon, FL .............. 5,404,280 5,404,280 290,000 5,694,280 382,806 1991 3/96 Deland, FL ............... 2,615,000 2,615,000 275,000 2,890,000 87,168 1996 9/97 Fort Myers, FL ........... 3,252,481 3,252,481 513,000 3,765,481 169,400 1996 3/96 Fort. Myers, FL .......... 3,012,558 3,012,558 620,000 3,632,558 213,384 1982 12/96 Jacksonville, FL ......... 3,348,171 3,348,171 380,000 3,728,171 111,082 1996 11/97 Lakeland, FL ............. 6,076,053 6,076,053 600,000 6,676,053 430,372 1991 3/96 Leesburg, FL ............. 2,420,000 2,420,000 180,000 2,600,000 110,924 1996 3/97 Ocala, FL ................ 2,555,000 2,555,000 175,000 2,730,000 119,215 1996 6/97 Ormond Beach, FL ......... 2,580,000 2,580,000 310,000 2,890,000 89,031 1996 10/97 Port Orange, FL .......... 2,435,000 2,435,000 295,000 2,730,000 114,465 1996 6/97
125 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ ---------- ---------- ------------- ----- -------- Port Richey, FL .......... $ 4,602,955 $ 4,602,955 $1,322,045 $ 5,925,000 $253,344 1996 2/97 Sarasota, FL ............. 7,841,931 7,841,931 7,841,931 202,870 1982 3/96 Stuart, FL ............... 2,380,000 2,380,000 270,000 2,650,000 118,992 1996 6/96 Tampa, FL ................ 3,366,481 3,366,481 399,000 3,765,481 175,350 1997 12/96 Tequesta, FL ............. 2,420,000 2,420,000 380,000 2,800,000 115,966 1998 12/97 Tequesta, FL ............. 2,636,499 2,636,499 2,636,499 95,597 1998 12/97 West Melbourne, FL ....... 2,460,000 2,460,000 240,000 2,700,000 123,000 1998 10/97 West Melbourne, FL ....... 2,751,181 2,751,181 2,751,181 50,144 1998 10/97 Pocatello, ID ............ 3,200,000 3,200,000 160,000 3,360,000 180,009 1996 10/96 Abilene, KS .............. 1,720,000 1,720,000 120,000 1,840,000 50,162 1996 6/97 4 facilities in KS, 1 facility in OK ........ 6,762,000 6,762,000 748,000 7,510,000 535,433 1993 3/96 Tewksbury, MA ............ 4,943,256 4,943,256 480,000 5,423,256 350,166 1987 3/96 Hagerstown, MD ........... 2,813,866 2,813,866 2,813,866 17,837 1998 4/98 Ann Arbor, MI ............ 2,797,488 2,797,488 280,800 3,078,288 443,406 1995 12/96 Davison, MI .............. 1,336,648 1,336,648 89,000 1,425,648 16,710 1998 7/98 Delta, MI ................ 3,520,133 3,520,133 494,000 4,014,133 44,003 1998 7/98 Delta, MI ................ 1,337,736 1,337,736 260,000 1,597,736 16,722 1998 7/98 Farmington Hills, MI ..... 3,205,250 3,205,250 215,600 3,420,850 166,950 1995 12/96 Farmington Hills, MI ..... 3,504,592 13,504,592 246,400 3,750,992 182,525 1995 12/96 2 facilities in Holly, MI 13,154,821 3,154,821 13,154,821 109,624 1998 7/98 Haslett (Lansing),MI ..... 6,518,771 6,518,771 436,000 6,954,771 215,190 1997 11/97 Sterling Heights,MI ...... 8,920,000 18,920,000 460,000 9,380,000 479,847 1987 12/95 2 facilities in Troy, MI . 13,355,257 3,355,257 13,355,257 111,294 1998 7/98 Utica, MI ................ 3,077,414 3,077,414 277,200 3,354,614 160,275 1995 12/96 Faribault, MN ............ 1,125,390 1,125,390 60,000 1,185,390 37,102 1997 11/97 Mankato, MN .............. 1,198,173 1,198,173 86,000 1,284,173 39,571 1997 11/97 Owatonna, MN ............. 1,230,173 1,230,173 54,000 1,284,173 40,509 1997 11/97 Sauk Rapids, MN .......... 905,825 905,825 82,000 987,825 29,977 1997 11/97 Willmar, MN .............. 1,123,390 1,123,390 62,000 1,185,390 37,031 1997 11/97 Winona, MN ............... 1,200,173 1,200,173 84,000 1,284,173 39,627 1997 11/97
126 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ ----------- ----------- ------------- ------ -------- Charlotte, NC ........ $4,546,973 $4,546,973 $ 624,000 $ 5,170,973 $151,254 1997 11/97 Charlotte, NC ........ 6,515,381 6,515,381 504,000 7,019,381 215,328 1997 11/97 Greensboro, NC ....... 3,553,509 3,553,509 304,000 3,857,509 117,541 1997 11/97 Greensboro, NC ....... 6,321,281 6,321,281 576,000 6,897,281 209,217 1997 11/97 Lakewood Village,NY .. 1,370,399 1,370,399 1,370,399 7,220 1987 12/95 Manlius, NY .......... $963,000 8,610,000 8,610,000 510,000 9,120,000 395,583 1994 5/97 Chubbock, ID ......... 4,472,363 4,472,363 90,000 4,562,363 286,741 1996 8/96 Coeur d'Alene, ID .... 6,712,071 6,712,071 340,000 7,052,071 223,744 1997 6/96 Barberton, OH ........ 2,160,000 2,160,000 240,000 2,400,000 45,000 1997 3/98 Bowling Green, OH .... 1,845,000 1,845,000 200,000 2,045,000 57,660 1997 10/97 Colerain Township,OH . 6,872,605 6,872,605 604,395 7,477,000 371,920 1987 12/95 Englewood, OH ........ 2,100,000 2,100,000 240,000 2,340,000 48,125 1998 2/98 Lima, OH ............. 3,830,666 3,830,666 3,830,666 75,491 1997 10/97 Mansfield, OH ........ 2,350,000 2,350,000 210,000 2,560,000 48,958 1997 10/97 Mansfield, OH ........ 4,290,601 4,290,601 4,290,601 97,824 1997 10/97 Marion, OH ........... 2,515,000 2,515,000 270,000 2,785,000 41,917 1998 5/98 Xenia, OH ............ 5,368,305 5,368,305 5,368,305 83,892 1997 10/97 Bartlesville, OK ..... 1,800,000 1,800,000 110,000 1,910,000 52,500 1997 11/97 Ontario, OR .......... 2,940,000 2,940,000 110,000 3,050,000 136,353 1985 5/97 Beaver Falls, PA ..... 2,964,368 2,964,368 2,964,368 53,172 1998 2/98 Berwick, PA .......... 2,577,105 2,577,105 2,577,105 57,027 1998 2/98 Dillsburg, PA ........ 3,682,609 3,682,609 3,682,609 98,914 1998 2/98 Duncanville, PA ...... 3,349,018 3,349,018 288,000 3,637,018 76,747 1997 11/96 Lewisburg, PA ........ 2,536,515 2,536,515 2,536,515 75,464 1998 2/98 Lewistown, PA ........ 2,491,416 2,491,416 2,491,416 51,653 1998 2/98 North Wales, PA ...... 4,487,033 4,487,033 480,000 4,967,033 233,700 1997 7/97 North Wales, PA ...... 5,831,013 5,831,013 5,831,013 145,710 1997 7/97 Reading, PA .......... 3,845,940 3,845,940 372,000 4,217,940 94,083 1997 2/97 Richboro, PA ......... 9,624,115 9,624,115 1,212,000 10,836,115 501,250 1990 2/96 Scranton, PA ......... 3,156,603 3,156,603 3,156,603 52,227 1997 12/97
127 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ --------- ----------- ------------- ------ --------- State College, PA .. $ 3,277,006 $ 3,277,006 $360,000 $ 3,637,006 $109,232 1996 8/96 Peckville, PA ...... 2,073,206 2,073,206 2,073,206 33,890 1998 2/98 Yardley, PA ........ 4,494,920 4,494,920 504,000 4,998,920 234,100 1996 12/96 (Irmo) Columbia, SC 3,562,784 3,562,784 231,800 3,794,584 117,594 1997 11/97 Anderson, SC ....... 10,499,705 10,499,705 170,000 10,669,705 637,240 1987 10/97 Charleston, SC ..... 3,676,366 3,676,366 399,000 4,075,366 121,910 1997 11/97 Hendersonville, TN . 1,453,758 1,453,758 1,453,758 11,006 1998 7/98 Kingsport, TN ...... 1,539,264 1,539,264 1,539,264 12,401 1998 7/98 Knoxville, TN ...... 1,750,755 1,750,755 1,750,755 9,944 1998 7/98 Abilene, TX ........ 2,134,231 2,134,231 150,000 2,284,231 84,474 1996 6/96 Big Springs, TX .... 2,037,899 2,037,899 10,000 2,047,899 80,674 1996 6/97 2 facilities in TX . 4,257,036 4,257,036 222,000 4,479,036 172,274 1996 6/97 Kerrville, TX ...... 1,766,000 1,766,000 195,000 1,961,000 73,580 1996 5/97 Lancaster, TX ...... 1,500,000 1,500,000 175,000 1,675,000 46,875 1996 10/97 Lubbock, TX ........ 5,362,195 5,362,195 220,000 5,582,195 212,254 1996 4/96 3 facilities in TX . 5,456,834 5,456,834 240,000 5,696,834 215,992 1996 6/97 3 facilities in TX . 4,968,892 4,968,892 230,000 5,198,892 289,856 1996 9/96 New Braunfels, TX .. 1,960,000 1,960,000 155,000 2,115,000 77,626 1996 6/97 San Antonio, TX .... 2,450,000 2,450,000 250,000 2,700,000 96,976 1997 6/97 6 facilities in TX . 11,155,104 11,155,104 625,000 11,780,104 743,680 1996 5/96 Temple, TX ......... 1,900,000 1,900,000 250,000 2,150,000 119,198 1996 3/97 Chesterfield, VA ... 2,053,993 2,053,993 2,053,993 10,830 1998 7/98 Stafford, VA ....... 3,135,835 3,135,835 470,000 3,605,835 45,731 1970 6/98 Staunton, VA ....... 2,451,654 2,451,654 2,451,654 9,718 1998 7/98 Bellingham, WA ..... 3,327,423 3,327,423 350,000 3,677,423 202,609 1996 10/96 Federal Way, WA .... 5,185,000 5,185,000 590,000 5,775,000 400,455 1996 4/96 Moses Lake, WA ..... 5,770,000 5,770,000 240,000 6,010,000 267,322 1996 5/97 Brown Deer, WI ..... 635,266 635,266 72,000 707,266 33,100 1995 12/96 Eau Claire, WI ..... 1,208,173 1,208,173 76,000 1,284,173 39,865 1996 11/97 Plover, WI ......... 2,093,924 2,093,924 140,000 2,233,924 71,483 1996 11/97
128 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ ----------- ----------- ------------- ------ --------- Kenosha, WI ........... $ 1,299,524 $ 1,299,524 $ 100,000 $ 1,399,524 $ 16,244 1998 7/98 Manitowoc, WI ......... 1,016,608 1,016,608 70,000 1,086,608 33,567 1996 11/97 Medford, WI ........... 860,802 860,802 70,000 930,802 29,441 1996 11/97 Menomonie, WI ......... 912,000 912,000 57,000 969,000 36,100 1996 11/97 Middleton, WI ......... 1,405,738 1,405,738 76,000 1,481,738 46,345 1996 11/97 Neenah, WI ............ 1,312,955 1,312,955 70,000 1,382,955 43,273 1996 11/97 New Richmond, WI ...... 696,000 696,000 54,000 750,000 27,550 1996 11/97 Onalaska, WI .......... 1,205,931 1,205,931 84,000 1,289,931 62,800 1995 12/96 Oshkosh, WI ........... 1,016,608 1,016,608 70,000 1,086,608 33,567 1996 11/97 Plymouth, WI .......... 706,000 706,000 54,000 760,000 27,949 1996 11/97 Sun Prairie, WI ....... 1,113,390 1,113,390 72,000 1,185,390 36,751 1996 11/97 Sussex, WI ............ 874,824 874,824 86,000 960,824 45,575 1995 12/96 Wausau, WI ............ 1,535,443 1,535,443 140,000 1,675,443 52,597 1996 11/97 Wisconsin Rapids, WI .. 956,000 956,000 64,000 1,020,000 37,848 1996 11/97 Wisconsin Rapids, WI .. 1,233,123 1,233,123 70,000 1,303,123 42,042 1997 6/97 Martinsburg, WV ....... 4,089,923 4,089,923 4,089,923 73,142 1987 12/95 Golf Courses Phoenix, AZ ........... 5,471,479 5,471,479 2,510,904 7,982,383 82,394 1993 5/98 Phoenix, AZ ........... 4,446,011 4,446,011 2,969,990 7,416,001 68,428 1973 5/98 Phoenix, AZ ........... 7,322,042 7,322,042 2,554,778 9,876,820 93,924 1977 5/98 Mesa, AZ .............. $ 242,595 4,989,975 4,989,975 3,371,036 8,361,011 76,771 5/98 Escondido, CA ......... 6,596,324 6,596,324 3,857,897 10,454,221 101,676 5/98 Oceanside, CA ......... 7,703,840 $529,049 8,232,889 2,911,762 11,144,651 114,016 5/98 San Diego, CA ......... 20,013,170 719,206 20,732,376 7,447,839 28,180,215 284,779 5/98 San Diego, CA ......... 991,165 991,165 145,468 1,136,633 18,849 1986 5/98 Escondido, CA ......... 5,515,457 8,573,825 8,573,825 1,922,187 10,496,012 155,429 5/98 Ventura, CA ........... 2,626,084 2,626,084 69,017 2,695,101 68,877 1931 5/98 Jacksonville, FL ...... 3,480,927 3,480,927 1,961,147 5,442,074 59,505 6/98 Orlando, FL ........... 4,204,273 287,814 4,492,087 1,505,228 5,997,315 61,815 1993 5/98 Oldsmar, FL ........... 10,574,785 52,577 10,627,362 5,473,299 16,100,661 166,909 1974 5/98
129 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ ---------- ----------- ------------- ------- -------- Tampa, FL .......... $ 4,287,344 $ 112,871 $ 4,400,215 $1,484,656 $ 5,884,871 $ 53,705 1993 5/98 Atlanta, GA ........ 4,147,675 269,457 4,417,132 1,465,326 5,882,458 62,128 5/98 Snellville, GA ..... 4,658,179 222,611 4,880,790 2,817,105 7,697,895 73,669 1996 5/98 Atlanta, GA ........ 6,421,620 6,421,620 3,536,965 9,958,585 46,716 8/98 Atlanta, GA ........ 6,192,743 6,192,743 3,515,270 9,708,013 202,210 3/98 Nags Head, NC ...... 7,657,934 7,657,934 4,175,255 11,833,189 85,188 8/98 Holly Springs, NC .. 5,486,374 5,486,374 2,962,875 8,449,249 61,223 8/98 Gary, NC ........... 4,594,088 4,594,088 2,498,465 7,092,553 52,366 8/98 Clayton, NC ........ 2,641,510 2,641,510 1,433,367 4,074,877 29,848 8/98 Advance, NC ........ 1,135,037 1,135,037 608,293 1,743,330 12,882 8/98 Corolla, NC ........ 3,826,611 3,826,611 2,080,832 5,907,443 43,714 8/98 Austin, TX ......... 12,630,609 158,773 12,789,382 6,938,328 19,727,710 190,732 1980 5/98 Austin, TX ......... 2,844,629 2,844,629 1,346,813 4,191,442 44,676 1965 5/98 Richmond, TX ....... 7,533,834 143,480 7,677,314 3,259,218 10,936,532 105,478 1994 5/98 McKinney, TX ....... 6,674,770 3,408,567 10,083,337 5,742,408 15,825,745 146,559 1988 5/98 McKinney, TX ....... 6,587,050 40,384 6,627,434 3,510,826 10,138,260 95,944 1988 5/98 Trophy Club, TX .... 14,292,555 63,545 14,356,100 7,334,397 21,690,497 219,448 1979 5/98 Grand Prairie, TX .. 2,357,821 2,357,821 1,059,194 3,417,015 36,140 5/98 Yaupon,TX .......... 4,423,988 4,423,988 2,485,313 6,909,301 65,224 5/98 Frisco, TX ......... 680,735 680,735 71,964 752,699 5/98 Houston, TX ........ 9,313,085 9,313,085 9,313,085 238,975 1957 5/98 Benbrook, TX ....... 479,595 479,595 157,895 637,490 8/98 Aledo, TX .......... 4,513,589 4,513,589 2,456,089 6,969,678 123,474 3/98 DeSoto, TX ......... 3,274,219 3,274,219 1,770,914 5,045,133 89,617 3/98 Plano, TX .......... 7,586,553 7,586,553 4,150,499 11,737,052 208,167 3/98 Plano, TX .......... 5,830,724 5,830,724 3,154,700 8,985,424 160,069 3/98 San Antonio, TX .... 4,349,568 4,349,568 2,338,105 6,687,673 115,629 3/98 Gainesville, VA .... 4,667,000 4,667,000 2,360,999 7,027,999 88,854 5/98 Midlothian, VA ..... 6,374,273 53,228 6,427,501 4,094,469 10,521,970 100,568 1977 5/98 Williamsburg, VA ... 4,394,351 4,394,351 2,532,201 6,926,552 54,061 5/98
130
THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Cost Capitalized/ Building & Adjusted Improvements Subsequent to Encumbrances at Acquisition Acquisitions -------------- ---------------- --------------- Long Term Care Alabaster, AL .............. $ 7,609,000 Benton, AR ................. 8,257,410 Kentfield, CA .............. 9,650,000 Fresno, CA ................. $7,469,068 14,469,580 Cheshire, CT ............... 6,770,000 Ansonia, CT ................ 7,750,000 Danbury, CT ................ 5,295,000 Darien, CT ................. 4,202,477 Milford, CT ................ 10,000,000 Milford, CT ................ 3,224,151 Newington, CT .............. 8,970,000 Southbury, CT .............. 5,538,590 Westport, CT ............... 4,970,000 Wethersfield, CT ........... 19,083,219 Bradenton, FL .............. 3,285,000 9,900,000 Naples, FL ................. 6,528,616 Palm Beach, FL ............. 12,300,000 Sarasota, FL ............... 4,447,012 Venice, FL ................. 8,592,203 Indianapolis, IN ........... 2,455,612 New Haven, IN .............. 4,628,541 Bowling Green, KY .......... 10,000,000 Beverly, MA ................ 6,300,000 Concord, MA ................ 8,762,000 New Bedford, MA ............ 7,492,000 East Longmeadow,MA ......... 15,995,928 Holyoke, MA ................ 12,664,918 Lexington, MA .............. 11,210,000 Lowell, MA ................. 10,492,351 Total Building & Accumulated Const. Date Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired -------------- ------------- ------------- --------------- -------- --------- Long Term Care Alabaster, AL .............. $ 7,609,000 $ 150,000 $ 7,759,000 $1,970,323 1971 8/87 Benton, AR ................. 8,257,410 135,000 8,392,410 1,180,467 Kentfield, CA .............. 9,650,000 350,000 10,000,000 2,593,418 1963 3/88 Fresno, CA ................. 14,469,580 2,088,920 16,558,500 2,914,496 1991 3/91 Cheshire, CT ............... 6,770,000 455,000 7,225,000 2,235,492 1975 10/85 Ansonia, CT ................ 7,750,000 750,000 8,500,000 1,001,050 1993 11/96 Danbury, CT ................ 5,295,000 305,000 5,600,000 1,748,421 1976 10/85 Darien, CT ................. 4,202,477 45,000 4,247,477 490,280 1975 6/94 Milford, CT ................ 10,000,000 10,000,000 1,145,815 1971 6/94 Milford, CT ................ 3,224,151 1,020,000 4,244,151 369,435 1992 6/94 Newington, CT .............. 8,970,000 430,000 9,400,000 2,961,953 1978 10/85 Southbury, CT .............. 5,538,590 5,538,590 611,567 1975 6/94 Westport, CT ............... 4,970,000 400,000 5,370,000 1,641,114 1965 10/85 Wethersfield, CT ........... 19,083,219 19,083,219 4,503,563 1965 8/86 Bradenton, FL .............. 9,900,000 4,100,000 14,000,000 2,744,255 1985 12/87 Naples, FL ................. 6,528,616 26,775 6,555,391 733,194 1969 1/96 Palm Beach, FL ............. 12,300,000 2,700,000 15,000,000 2,076,795 1996 4/96 Sarasota, FL ............... 4,447,012 1,060,800 5,507,812 333,540 1982 1/96 Venice, FL ................. 8,592,203 128,500 8,720,703 644,400 1985 1/96 Indianapolis, IN ........... 2,455,612 114,700 2,570,312 184,176 1973 1/96 New Haven, IN .............. 4,628,541 128,100 4,756,641 343,560 1982 1/96 Bowling Green, KY .......... 10,000,000 10,000,000 1,145,817 1992 6/94 Beverly, MA ................ 6,300,000 645,000 6,945,000 2,080,315 1972 10/85 Concord, MA ................ 8,762,000 3,538,000 12,300,000 711,907 1995 11/95 New Bedford, MA ............ 7,492,000 1,008,000 8,500,000 608,712 1995 11/95 East Longmeadow,MA ......... 15,995,928 400,000 16,395,928 3,847,068 1986 9/87 Holyoke, MA ................ 12,664,918 121,600 12,786,518 1,986,193 1973 9/92 Lexington, MA .............. 11,210,000 590,000 11,800,000 3,459,605 1965 8/86 Lowell, MA ................. 10,492,351 500,000 10,992,351 1,644,880 1975 9/92
131
THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Encumbrances at Acquisition Acquisitions Improvements -------------- ---------------- --------------- -------------- Lynn, MA .................... $14,163,515 $14,163,515 Millbury, MA ................ 10,233,000 10,233,000 New Bedford, MA ............. 10,859,303 10,859,303 Newton, MA .................. 12,430,000 12,430,000 Northampton, MA ............. 2,709,612 2,709,612 Peabody, MA ................. 7,245,315 7,245,315 Randolph, MA ................ 9,014,760 9,014,760 Weymouth, MA ................ 10,719,932 10,719,932 Wilmington, MA .............. 6,689,925 6,689,925 Montgomery Village,MD ....... 16,888,000 16,888,000 Grand Blanc, MI ............. 7,363,800 7,363,800 Battle Creek, MI ............ 7,674,443 7,674,443 Kansas City, MO ............. 8,559,900 8,559,900 Bedford, NH ................. $7,290,672 12,691,500 12,691,500 Effingham Falls, NH ......... 11,984,845 11,984,845 Milford, NH ................. 3,195,288 3,195,288 Milford, NH ................. 4,222,545 4,222,545 Peterborough, NH ............ 4,779,992 4,779,992 Keene, NH ................... 3,688,917 3,688,917 Winchester, NH .............. 3,363,325 3,363,325 Bound Brook, NJ ............. 1,624,000 1,624,000 Bridgewater, NJ ............. 12,678,944 12,678,944 Camden, NJ .................. 8,334,780 8,334,780 New Milford, NJ ............. 11,110,000 11,110,000 Oradell, NJ ................. 14,986,000 14,986,000 Marlton, NJ ................. 14,060,000 14,060,000 Cortland, NY ................ 27,812,817 27,812,817 Niskayuna, NY ............... 10,542,539 10,542,539 Rensselaer, NY .............. 1,400,000 1,400,000 Troy, NY .................... 10,459,237 10,459,237 Accumulated Const. Date Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------- -------------- --------------- -------- --------- Lynn, MA .................... $1,206,734 $15,370,249 $2,039,091 1960 4/93 Millbury, MA ................ 467,000 10,700,000 377,340 1996 6/97 New Bedford, MA ............. 10,859,303 1,219,213 1995 11/95 Newton, MA .................. 630,000 13,060,000 4,104,511 1977 10/85 Northampton, MA ............. 187,500 2,897,112 310,475 1974 6/94 Peabody, MA ................. 805,035 8,050,350 2,298,681 1987 10/90 Randolph, MA ................ 1,001,640 10,016,400 1,859,319 1987 10/90 Weymouth, MA ................ 850,000 11,569,932 1,228,315 1994 6/94 Wilmington, MA .............. 743,325 7,433,250 2,153,214 1987 10/90 Montgomery Village,MD ....... 1,300,000 18,188,000 1,372,139 1994 11/95 Grand Blanc, MI ............. 120,000 7,483,800 1,899,236 1970 5/88 Battle Creek, MI ............ 146,970 7,821,413 1,098,958 1933 4/93 Kansas City, MO ............. 238,000 8,797,900 2,300,458 1965 3/88 Bedford, NH ................. 808,500 13,500,000 962,698 1920 6/94 Effingham Falls, NH ......... 1,478,800 13,463,645 1,675,916 1985 4/93 Milford, NH ................. 52,000 3,247,288 239,652 1900 1/96 Milford, NH ................. 82,000 4,304,545 316,692 1972 1/96 Peterborough, NH ............ 128,700 4,908,692 600,786 1976 1/96 Keene, NH ................... 87,000 3,775,917 276,660 1965 1/96 Winchester, NH .............. 35,000 3,398,325 252,252 1987 1/96 Bound Brook, NJ ............. 1,176,000 2,800,000 487,155 1963 12/86 Bridgewater, NJ ............. 1,193,400 13,872,344 928,387 1971 1/96 Camden, NJ .................. 450,250 8,785,030 2,500,411 1984 12/86 New Milford, NJ ............. 1,090,000 12,200,000 3,055,271 1971 12/87 Oradell, NJ ................. 1,714,000 16,700,000 1,217,619 1995 11/95 Marlton, NJ ................. 240,000 14,300,000 1,142,388 1995 11/95 Cortland, NY ................ 263,000 28,075,817 3,740,224 1971 8/93 Niskayuna, NY ............... 292,000 10,834,539 1,527,969 1976 3/93 Rensselaer, NY .............. 1,400,000 145,850 1975 11/94 Troy, NY .................... 56,100 10,515,337 1,412,255 1972 8/93
132
THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Cost Capitalized/ Building & Adjusted Improvements Subsequent to Encumbrances at Acquisition Acquisitions -------------- ---------------- --------------- Bellbrook, OH ............... $ 2,787,134 Huber Heights, OH ........... 3,593,360 Medina, OH .................. 12,367,785 New London, OH .............. 2,110,837 Swanton, OH ................. 5,500,000 Troy, OH .................... 6,206,197 West Carrolton, OH .......... 3,483,669 Erie, PA .................... 5,128,000 Greensburg, PA .............. 5,544,012 DeSoto, TX .................. 5,709,730 MountlakeTerrace,WA ......... 4,831,020 Waterford, WI ............... 13,608,228 4 facilities in WV .......... 16,299,400 Medical Office Buildings Tempe, AZ ................... 8,239,068 Lakewood, CA ................ 8,317,585 Los Gatos, CA ............... 13,453,194 Arcadia, CA ................. $7,675,842 10,764,952 Boca Raton, FL .............. 17,968,149 Boca Raton, FL .............. 8,847,282 Boynton Beach, FL ........... 3,108,793 Boynton Beach, FL ........... 4,414,510 Hollywood, FL ............... 8,200,012 Jupiter, FL ................. 4,410,569 Loxahatchee, FL ............. 2,590,922 3,483,338 Loxahatchee, FL ............. 2,387,386 3,009,294 Loxahatchee, FL ............. 2,584,023 3,281,910 Palm Bay, FL ................ 3,115,229 Palm Beach,FL ............... 43,408,996 Plantation, FL .............. 8,230,445 Total Building & Accumulated Const. Date Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------------ ------------- ------------- --------------- -------- --------- Bellbrook, OH ............... $ 2,787,134 $ 212,000 $ 2,999,134 $ 573,341 1981 12/90 Huber Heights, OH ........... 3,593,360 174,000 3,767,360 738,134 1984 12/90 Medina, OH .................. 12,367,785 232,000 12,599,785 2,848,165 1954 4/88 New London, OH .............. 2,110,837 22,600 2,133,437 434,379 1985 12/90 Swanton, OH ................. 5,500,000 350,000 5,850,000 554,245 1950 4/95 Troy, OH .................... 6,206,197 210,600 6,416,797 443,906 1970 1/96 West Carrolton, OH .......... 3,483,669 216,400 3,700,069 716,415 1983 12/90 Erie, PA .................... 5,128,000 335,000 5,463,000 1,397,040 1977 12/87 Greensburg, PA .............. 5,544,012 525,000 6,069,012 1,003,023 1991 6/90 DeSoto, TX .................. 5,709,730(7) 849,270 6,559,000 1,519,578 1988 1/88 MountlakeTerrace,WA ......... 4,831,020 1,029,980 5,861,000 557,238 1987 5/93 Waterford, WI ............... 13,608,228(6) 280,000 13,888,228 1,926,696 1968 4/93 4 facilities in WV .......... 16,299,400 900,600 17,200,000 1,258,285 1987 12/95 Medical Office Buildings Tempe, AZ ................... 8,239,068 555,000 8,794,068 284,804 1997 1/98 Lakewood, CA ................ 8,317,585 8,317,585 328,855 1997 1/98 Los Gatos, CA ............... 13,453,194 13,453,194 512,952 1997 1/98 Arcadia, CA ................. 10,764,952 3,500,000 14,264,952 307,779 11/97 Boca Raton, FL .............. 17,968,149 17,968,149 661,149 1997 1/98 Boca Raton, FL .............. 8,847,282 3,900,000 12,747,282 53,508 1985 10/98 Boynton Beach, FL ........... 3,108,793 390,000 3,498,793 123,030 1997 1/98 Boynton Beach, FL ........... 4,414,510 455,000 4,869,510 181,082 1997 1/98 Hollywood, FL ............... 8,200,012 8,200,012 317,935 1997 1/98 Jupiter, FL ................. 4,410,569 695,000 5,105,569 172,292 1997 1/98 Loxahatchee, FL ............. 3,483,338 880,000 4,363,338 131,463 1997 1/98 Loxahatchee, FL ............. 3,009,294 560,000 3,569,294 109,074 1997 1/98 Loxahatchee, FL ............. 3,281,910 3,281,910 122,364 1997 1/98 Palm Bay, FL ................ 3,115,229 390,000 3,505,229 114,306 1997 1/98 Palm Beach,FL ............... 43,408,996 43,408,996 1997 1/98 Plantation, FL .............. 8,230,445 1,090,000 9,320,445 327,800 1997 5/98
133
THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Encumbrances at Acquisition Acquisitions Improvements -------------- ----------------- ----------------- ----------------- Plantation, FL ................... $ 7,906,570 $ 11,762,977 $ 11,762,977 Delray Beach, FL ................. 19,615,626 19,615,626 Palm Spring, FL .................. 4,900,274 4,900,274 West Palm Beach, FL .............. 7,318,439 7,318,439 Concord, MA ...................... Voorhees, NJ ..................... 20,436,273 20,436,273 Dallas, TX ....................... 16,189,492 16,189,492 Edinburg, TX ..................... 10,788,524 10,788,524 El Paso, TX ...................... 16,804,249 16,804,249 Victoria, TX ..................... 10,282,627 10,282,627 Rehabilitation Topeka, KS ....................... 4,847,654 10,353,830 10,353,830 Land Temecula, CA ..................... 480,000 ----------- --------------- --------- --------------- Subtotal ........................ 53,238,189 1,670,308,873 6,061,562 1,676,370,435 ----------- --------------- --------- --------------- Hotels Unallocated Dev & Const Costs 23,490,528 $ (23,490,528) -- Birmingham, AL ................... 4,139,503 48,417 4,187,920 Birmingham, AL ................... 8,568,797 3,158 8,571,955 Birmingham, AL ................... 7,891,894 5,787 7,897,681 Huntsville, AL ................... 7,117,420 4,165 7,121,586 Huntsville, AL ................... 6,906,010 15,168 6,921,178 Mobile, AL ....................... 5,075,001 23,011 5,098,012 Montgomery, AL ................... 8,236,093 49,225 8,285,318 Tuscaloosa, AL ................... 3,472,470 47,580 3,520,050 Little Rock, AR .................. 4,850,805 3,567 4,854,373 Little Rock, AR .................. 3,116,595 82,417 3,199,013 Accumulated Const. Date Land (2) Total (5) Deprec.(4)(5) Date Acquired --------------- ------------------- --------------- -------- --------- Plantation, FL ................... $ 1,100,000 $ 12,862,977 $ 195,544 1997 1/98 Delray Beach, FL ................. 19,615,626 781,067 1997 1/98 Palm Spring, FL .................. 4,900,274 151,219 1997 1/98 West Palm Beach, FL .............. 820,000 8,138,439 285,927 1997 1/98 Concord, MA ...................... 1,850,000 1,850,000 1997 1/98 Voorhees, NJ ..................... 4,750,000 25,186,273 732,004 1997 1/98 Dallas, TX ....................... 220,000 16,409,492 639,049 1997 1/98 Edinburg, TX ..................... 95,000 10,883,524 371,694 1997 1/98 El Paso, TX ...................... 16,804,249 557,703 1997 1/98 Victoria, TX ..................... 10,282,627 349,279 1997 1/98 Rehabilitation Topeka, KS ....................... 1,295,499 11,649,329 2,551,321 1989 2/89 Land Temecula, CA ..................... 330,000 330,000(6) ------------- ---------------- ------------- Subtotal ........................ 216,889,096 1,893,259,531 145,464,498 ------------- ---------------- ------------- Hotels Unallocated Dev & Const Costs -- -- -- -- -- Birmingham, AL ................... 728,062 4,915,982 83,639 1985 7/98 Birmingham, AL ................... 1,512,123 10,084,078 135,550 1996 7/98 Birmingham, AL ................... 1,367,572 9,265,253 125,227 1997 7/98 Huntsville, AL ................... 1,253,577 8,375,163 126,285 1983 7/98 Huntsville, AL ................... 1,216,269 8,137,447 121,974 1985 7/98 Mobile, AL ....................... 893,150 5,991,162 93,264 1979 7/98 Montgomery, AL ................... 1,450,990 9,736,308 151,225 1982 7/98 Tuscaloosa, AL ................... 610,351 4,130,401 67,972 1982 7/98 Little Rock, AR .................. 853,586 5,707,959 88,852 1983 7/98 Little Rock, AR .................. 547,549 3,746,562 61,508 1975 7/98
134 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ ---------- ----------- ------------- ------ -------- Little Rock, AR ........ $ 7,403,968 $ 20,758 $ 7,424,727 $1,303,986 $ 8,728,713 $130,539 1980 7/98 Little Rock, AR ........ 3,824,783 32,054 3,856,837 672,523 4,529,360 78,821 1993 7/98 North Little Rock, AR .. 6,605,396 4,708 6,610,105 1,163,220 7,773,325 118,973 1983 7/98 Chandler, AZ ........... 6,078,484 457,913 6,536,397 951,803 7,488,199 88,046 1998 7/98 Flagstaff, AZ .......... 6,570,932 1,776 6,572,708 1,159,576 7,732,284 102,006 1996 7/98 Mesa, AZ ............... 7,370,306 164,120 7,534,426 1,327,392 8,861,818 120,347 1997 7/98 Peoria, AZ ............. 6,013,092 166,476 6,179,568 963,994 7,143,562 95,403 1998 7/98 Phoenix, AZ ............ 8,894,259 19,403 8,913,662 1,567,137 10,480,799 158,133 1973 7/98 Phoenix, AZ ............ 7,884,309 306,341 8,190,651 1,388,910 9,579,561 147,751 1993 7/98 Phoenix, AZ ............ 7,036,272 104,562 7,140,835 821,636 7,962,470 110,441 1997 7/98 Scottsdale, AZ ......... 12,352,538 14,000 12,366,538 2,179,860 14,546,398 199,609 1996 7/98 Tempe, AZ .............. 12,584,021 27,755 12,611,777 2,218,271 14,830,048 175,807 1982 7/98 Tucson, AZ ............. 8,901,960 56,587 8,958,548 1,568,496 10,527,044 159,829 1991 7/98 Tucson, AZ ............. 7,789,754 30,310 7,820,065 1,372,224 9,192,289 140,556 1973 7/98 Tucson, AZ ............. 6,811,360 1,778 6,813,138 1,202,005 8,015,143 106,629 1996 7/98 Bakersfield, CA ........ 5,756,768 26,682 5,783,451 1,013,462 6,796,913 102,470 1986 7/98 Chula Vista, CA ........ 14,703,759 27,355 14,731,114 2,592,343 17,323,457 202,999 1986 7/98 Costa Mesa, CA ......... 7,592,769 29,737 7,622,506 1,337,462 8,959,968 137,357 1980 7/98 Fremont, CA ............ 4,495,925 4,547,941 9,043,866 2,486,143 11,530,009 -- 1999 7/98 Fresno, CA ............. 3,965,010 9,781 3,974,791 697,269 4,672,060 75,038 1986 7/98 Irvine, CA ............. 10,816,163 25,196 10,841,359 1,906,297 12,747,656 200,064 1987 7/98 La Palma, CA ........... 11,057,877 130,241 11,188,118 1,948,952 13,137,070 196,904 1994 7/98 Mission Valley, CA ..... -- -- -- 3,611,225 3,611,225 -- N/A 7/98 Ontario, CA ............ 6,250,091 4,454,527 10,704,617 1,464,145 12,168,762 30,777 1998 7/98 Redding, CA ............ 6,704,273 106,594 6,810,867 1,180,669 7,991,536 129,324 1993 7/98 Sacramento, CA ......... 10,521,578 20,745 10,542,323 -- 10,542,323 304,094 1985 7/98 Sacramento, CA ......... 9,148,634 36,262 9,184,896 1,612,009 10,796,905 171,450 1993 7/98 San Bernardino, CA ..... 10,729,322 32,931 10,762,254 1,890,972 12,653,226 187,539 1983 7/98 San Buenaventura, CA ... 5,873,995 29,527 5,903,522 1,034,149 6,937,671 107,948 1988 7/98 San Diego, CA .......... 5,173,136 33,200 5,206,336 910,468 6,116,804 95,628 1987 7/98
135 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- -------------- ------------ ---------- ----------- ------------- ------ -------- South San Francisco, CA $19,630,626 $ 37,691 $19,668,317 $3,461,790 $23,130,107 $270,076 1987 7/98 Stockton, CA ........... 11,762,912 27,681 11,790,593 2,073,370 13,863,963 206,373 1984 7/98 Valencia, CA ........... -- -- -- 2,487,486 2,487,486 -- N/A 7/98 Vista, CA .............. 6,608,756 30,363 6,639,119 1,163,813 7,802,932 118,688 1987 7/98 Aurora, CO ............. 10,090,478 2,810 10,093,288 1,778,234 11,871,522 176,699 1982 7/98 Colorado Springs, CO ... 6,143,464 6,950 6,150,415 1,081,702 7,232,117 110,382 1985 7/98 Colorado Springs, CO ... 7,591,836 (260,138) 7,331,698 1,238,742 8,570,440 128,180 1998 7/98 Denver, CO ............. 11,755,008 35,579 11,790,587 2,071,975 13,862,562 205,457 1974 7/98 Denver, CO ............. 6,500,817 184,649 6,685,466 1,144,765 7,830,231 117,871 1974 7/98 Denver, CO ............. 7,894,924 66,315 7,961,239 1,390,784 9,352,023 140,596 1980 7/98 Denver, CO ............. 13,981,316 69,837 14,051,153 2,467,291 16,518,444 228,027 1996 7/98 Denver, CO ............. 10,627,274 13,056 10,640,330 1,512,646 12,152,977 66,043 1998 7/98 Grand Junction, CO ..... 6,687,464 60,001 6,747,465 466,163 7,213,628 120,162 1997 7/98 Lakewood, CO ........... 7,571,644 851,707 8,423,352 1,106,781 9,530,132 130,628 1998 7/98 Lewisville, CO ......... 7,845,924 87,345 7,933,269 1,475,795 9,409,064 122,463 1997 7/98 Pueblo, CO ............. 7,280,369 (470,750) 6,809,619 742,076 7,551,695 119,996 1998 7/98 Westminister, CO ....... 8,880,218 36,371 8,916,589 1,564,659 10,481,248 157,977 1986 7/98 Westminister, CO ....... 9,863,738 58,759 9,922,498 1,738,221 11,660,719 175,933 1986 7/98 Wheat Ridge, CO ........ 10,793,362 54,044 10,847,406 1,902,273 12,749,679 188,832 1985 7/98 Altamonte Springs, FL .. 7,431,923 22,474 7,454,398 1,309,077 8,763,475 131,533 1987 7/98 Brandon, FL ............ 8,192,791 18,258 8,211,049 1,208,344 9,419,393 131,509 1997 7/98 Clearwater, FL ......... 6,852,662 48,657 6,901,319 1,206,855 8,108,174 123,509 1988 7/98 Coral Springs, FL ...... 7,888,175 67,541 7,955,716 1,389,593 9,345,309 144,046 1994 7/98 Daytona Beach, FL ...... 7,201,071 36,684 7,237,755 1,268,339 8,506,094 131,960 1991 7/98 Deerfield Beach, FL .... 6,432,943 62,649 6,495,593 1,132,787 7,628,380 116,429 1986 7/98 Fort Lauderdale, FL .... 12,286,111 26,068 12,312,180 2,165,699 14,477,879 200,847 1995 7/98 Fort Lauderdale, FL .... 9,039,567 538,445 9,578,012 1,416,013 10,994,025 164,703 1998 7/98 Fort Lauderdale, FL .... -- -- -- 648,808 648,808 -- N/A 7/98 Fort Myers, FL ......... 7,471,064 23,080 7,494,144 1,315,985 8,810,129 132,353 1984 7/98 Gainesville, FL ........ 8,137,122 30,698 8,167,821 1,433,525 9,601,346 143,838 1989 7/98
136 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquire ------------ -------------- ------------- ------------- ---------- ----------- ------------- ------ ------- Jacksonville, FL ..... $ 6,408,732 $ 22,532 $ 6,431,264 $1,128,515 $ 7,559,779 $114,797 1980 7/98 Jacksonville, FL ..... 6,923,144 14,994 6,938,138 1,219,293 8,157,431 122,310 1986 7/98 Jacksonville, FL ..... 7,413,329 16,939 7,430,268 1,305,796 8,736,064 130,254 1982 7/98 Jacksonville, FL ..... 7,987,537 91,145 8,078,682 1,343,005 9,421,687 130,752 1997 7/98 Lake Mary, FL ........ 7,511,096 408,865 7,919,961 1,020,912 8,940,872 137,678 1998 7/98 Lakeland, FL ......... 7,973,877 125,672 8,099,549 1,189,768 9,289,317 129,322 1997 7/98 Miami, FL ............ 13,206,890 85,864 13,292,755 2,328,189 15,620,944 228,491 1986 7/98 Miami, FL ............ 8,948,658 1,141,346 10,090,004 1,537,039 11,627,043 126,534 1998 7/98 Ocala, FL ............ 6,882,908 229,922 7,112,829 891,376 8,004,205 123,006 1998 7/98 Orlando, FL .......... 6,656,415 1,395,162 8,051,577 1,011,827 9,063,404 73,280 1998 7/98 Orlando, FL .......... 2,230,894 4,797,302 7,028,196 1,339,955 8,368,151 -- 1999 7/98 Orlando, FL .......... 1,570,657 5,460,020 7,030,677 2,590,302 9,620,979 -- 1999 7/98 Orlando, FL .......... 10,251,049 20,532 10,271,582 1,806,570 12,078,152 180,877 1987 7/98 Orlando, FL .......... 15,422,958 37,380 15,460,338 2,719,260 18,179,598 263,787 1994 7/98 Panama City, FL ...... 6,802,665 98,484 6,901,149 1,097,320 7,998,469 115,778 1997 7/98 Pensacola, FL ........ 8,957,428 29,297 8,986,725 1,578,284 10,565,009 155,841 1985 7/98 Pinellas Park, FL .... 6,623,817 37,495 6,661,312 1,166,470 7,827,782 116,278 1985 7/98 Plantation, FL ....... 6,824,583 2,502,305 9,326,889 1,378,533 10,705,421 -- 1998 7/98 St. Petersburg, FL ... 5,792,905 22,185 5,815,091 1,019,839 6,834,930 108,049 1987 7/98 Tallahassee, FL ...... 13,048,829 18,928 13,067,757 2,300,296 15,368,053 226,907 1979 7/98 Tallahassee, FL ...... 8,149,524 44,412 8,193,937 1,435,713 9,629,650 143,665 1986 7/98 Tampa, FL ............ 3,659,646 60,646 3,720,293 643,382 4,363,675 69,082 1984 7/98 Tampa, FL ............ 11,881,605 43,125 11,924,730 2,094,316 14,019,046 164,139 1983 7/98 Tampa, FL ............ 6,869,201 46,061 6,915,263 1,160,882 8,076,145 111,043 1997 7/98 Alpharetta, GA ....... 7,423,945 (8,091) 7,415,854 1,632,105 9,047,959 121,271 1997 7/98 Atlanta, GA .......... 6,461,075 1,788,405 8,249,480 2,196,386 10,445,867 25,936 1998 7/98 Atlanta, GA .......... 5,784,092 2,402,354 8,186,446 1,366,704 9,553,150 -- 1998 7/98 Augusta, GA .......... 4,852,929 44,749 4,897,678 853,961 5,751,639 88,286 1985 7/98 Austell, GA .......... 4,373,863 22,370 4,396,233 769,420 5,165,653 80,926 1986 7/98 College Park, GA ..... 2,929,266 126,292 3,055,559 514,491 3,570,050 62,287 1979 7/98
137 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------- -------------- ------------- ------------ ----------- ----------- ------------- ------ --------- College Park, GA ..... $ 3,110,554 $ 9,170 $ 3,119,725 $ 546,483 $ 3,666,208 $ 51,569 1995 7/98 Columbus, GA ......... 6,123,710 33,180 6,156,890 1,078,216 7,235,106 115,560 1980 7/98 Conyers, GA .......... 6,853,690 893,917 7,747,607 1,263,029 9,010,636 116,068 1998 7/98 Lithonia, GA ......... 3,625,380 24,137 3,649,517 637,335 4,286,852 70,269 1985 7/98 Macon, GA ............ 6,601,559 4,511 6,606,070 1,164,981 7,771,051 100,110 1996 7/98 Marietta, GA ......... 6,051,123 57,742 6,108,865 1,065,407 7,174,272 107,482 1984 7/98 Norcross, GA ......... 4,392,960 13,913 4,406,874 772,790 5,179,664 79,572 1986 7/98 Norcross, GA ......... 4,462,376 58,443 4,520,820 785,040 5,305,860 85,521 1983 7/98 Savannah, GA ......... 9,292,087 9,665 9,301,752 1,637,342 10,939,094 161,426 1982 7/98 Savannah, GA ......... 4,462,501 14,049 4,476,551 785,062 5,261,613 72,818 1995 7/98 Tucker, GA ........... 4,545,700 12,393 4,558,094 799,744 5,357,838 82,076 1987 7/98 Arlington Heights, IL 8,371,126 72,221 8,443,348 1,474,819 9,918,167 153,826 1989 7/98 Champaign, IL ........ 2,645,580 135,679 2,781,258 447,686 3,228,944 70,810 1982 7/98 Elk Grove Village, IL 8,987,067 76,370 9,063,438 1,583,515 10,646,953 165,212 1985 7/98 Hoffman Estates, IL .. 9,254,248 30,316 9,284,564 1,630,664 10,915,228 167,012 1989 7/98 Moline, IL ........... 2,257,510 38,326 2,295,836 395,911 2,691,747 83,399 1986 7/98 Oakbrook Terrace, IL . 8,738,589 93,467 8,832,056 1,539,666 10,371,722 159,120 1984 7/98 Schaumburg, IL ....... 8,309,673 10,362 8,320,035 1,463,975 9,784,010 149,998 1982 7/98 Indianapolis, IN ..... 9,561,210 69,123 9,630,333 1,684,834 11,315,167 163,526 1980 7/98 Indianapolis, IN ..... 3,530,754 16,056 3,546,810 602,589 4,149,399 109,256 1981 7/98 Merrillville, IN ..... 3,323,615 189,142 3,512,757 574,980 4,087,737 75,071 1979 7/98 Lenexa, KS ........... 5,758,096 75,485 5,833,581 1,013,679 6,847,260 129,742 1978 7/98 Wichita, KS .......... 3,479,512 463,411 3,942,923 -- 3,942,923 399,852 1978 7/98 Lexington, KY ........ 5,300,151 18,229 5,318,380 932,883 6,251,263 88,077 1982 7/98 Alexandria, LA ....... 6,814,270 (40,054) 6,774,216 995,042 7,769,257 116,289 1997 7/98 Baton Rouge, LA ...... 9,845,427 26,402 9,871,829 1,734,990 11,606,819 174,286 1984 7/98 Bossier City, LA ..... 10,601,965 5,506 10,607,471 1,868,497 12,475,968 186,574 1982 7/98 Gretna, LA ........... 8,561,779 23,158 8,584,937 1,508,464 10,093,401 150,666 1985 7/98 Kenner, LA ........... 14,984,662 42,956 15,027,619 2,641,914 17,669,533 257,869 1993 7/98 Lafayette, La, LA .... 7,540,154 10,278 7,550,432 1,328,177 8,878,609 136,499 1969 7/98
138 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- -------------- ------------ ----------- ----------- ------------- -------- ------- Metairie, LA ..... $10,786,292 $ 73,550 $10,859,842 $ -- $10,859,842 $683,251 1967 7/98 Metairie, LA ..... 15,458,306 15,847 15,474,153 -- 15,474,153 694,626 1985 7/98 Monroe, LA ....... 5,384,339 5,381 5,389,720 947,739 6,337,459 98,986 1984 7/98 New Orleans, LA .. 4,354,349 48,964 4,403,314 765,976 5,169,290 80,790 1985 7/98 New Orleans, LA .. 7,135,565 34,317 7,169,882 1,256,779 8,426,661 125,732 1985 7/98 New Orleans, LA .. 5,307,196 6,213,888 11,521,084 1,223,302 12,744,386 -- 1999 7/98 Shreveport, LA ... 6,505,540 (55,955) 6,449,585 664,699 7,114,284 107,803 1997 7/98 Slidell, LA ...... 6,451,551 68,363 6,519,914 1,136,071 7,655,985 118,134 1993 7/98 Sulphur, LA ...... 9,120,039 4,618 9,124,657 1,606,980 10,731,637 159,636 1985 7/98 Hazelwood, MO .... 2,240,543 26,589 2,267,133 392,775 2,659,908 81,010 1977 7/98 St Louis, MO ..... 9,461,134 (94,739) 9,366,396 867,193 10,233,589 150,453 1997 7/98 Jackson, MS ...... 2,896,382 49,830 2,946,212 508,688 3,454,900 62,034 1974 7/98 Jackson, MS ...... 4,212,283 42,066 4,254,349 709,949 4,964,298 69,785 1993 7/98 Cary, NC ......... 13,293,656 (55,763) 13,237,893 2,345,939 15,583,832 196,437 1996 7/98 Cary, NC ......... 8,728,546 (367,174) 8,361,372 1,653,827 10,015,199 221,880 1998 7/98 Charlotte, NC .... 5,439,007 2,392,286 7,831,293 1,227,118 9,058,411 -- 1998 7/98 Charlotte, NC .... 6,860,195 32,041 6,892,237 1,208,184 8,100,421 122,750 1985 7/98 Charlotte, NC .... 4,462,651 15,453 4,478,104 783,722 5,261,826 82,767 1986 7/98 Durham, NC ....... 690,651 4,118,626 4,809,277 1,147,248 5,956,525 -- 1999 7/98 Greensboro, NC ... 91,528 4,090,360 4,181,888 1,241,004 5,422,892 -- 1999 7/98 Greensboro, NC ... -- -- -- 289,698 289,698 -- N/A 7/98 Raleigh, NC ...... 1,381,047 6,114,382 7,495,429 1,244,653 8,740,082 -- 1999 7/98 Raleigh, NC ...... 9,240,392 121,089 9,361,482 1,484,478 10,845,960 148,371 1997 7/98 Winston-Salem, NC 1,516,141 4,002,848 5,518,988 1,707,220 7,226,208 -- 1999 7/98 Omaha, NE ........ 4,063,807 74,738 4,138,545 706,438 4,844,983 89,518 1981 7/98 Albuquerque, NM .. 6,979,226 22,423 7,001,649 1,229,190 8,230,839 125,185 1970 7/98 Albuquerque, NM .. 9,657,110 9,379 9,666,490 1,701,758 11,368,248 169,154 1985 7/98 Albuquerque, NM .. 7,419,168 34,142 7,453,310 1,306,827 8,760,137 131,066 1982 7/98 Albuquerque, NM .. 7,061,635 707,073 7,768,708 815,418 8,584,126 111,657 1997 7/98 Farmington, NM ... 5,354,541 27,357 5,381,899 1,037,151 6,419,050 98,082 1983 7/98
139 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ --------------- ------------- ------------ ----------- ----------- ------------- ------ -------- Las Cruces, NM ...... $ 3,887,580 $ 12,977 $ 3,900,557 $ 683,605 $ 4,584,162 $ 73,904 1990 7/98 Santa Fe, NM ........ 10,482,425 38,475 10,520,900 1,847,401 12,368,301 181,345 1986 7/98 Las Vegas, NV ....... 4,095,884 3,895,557 7,991,441 1,418,487 9,409,928 -- 1999 7/98 Las Vegas, NV ....... -- -- -- -- -- -- Leased 7/98 Las Vegas, NV ....... 10,831,428 1,983,925 12,815,353 1,899,819 14,715,172 214,320 1994 7/98 Reno, NV ............ 6,292,389 24,382 6,316,772 1,107,983 7,424,755 114,115 1981 7/98 Columbus, OH ........ 4,261,818 37,333 4,299,151 749,647 5,048,798 121,846 1980 7/98 Del City, OK ........ 5,994,389 12,223 6,006,612 1,055,395 7,062,007 107,797 1985 7/98 Norman, OK .......... 6,512,329 (26,934) 6,485,395 974,479 7,459,874 105,907 1997 7/98 Oklahoma City, OK ... 2,431,771 4,322,216 6,753,986 1,325,810 8,079,796 -- 1999 7/98 Oklahoma City, OK ... 7,521,155 83,859 7,605,015 1,324,824 8,929,839 134,718 1979 7/98 Oklahoma City, OK ... 12,707,607 59,460 12,767,067 2,240,080 15,007,147 213,575 1996 7/98 Tulsa, OK ........... 3,764,727 41,662 3,806,389 661,925 4,468,314 71,130 1974 7/98 Tulsa, OK ........... 4,816,485 24,065 4,840,551 847,530 5,688,081 88,254 1985 7/98 Tulsa, OK ........... 4,210,223 17,848 4,228,071 740,542 4,968,613 77,851 1990 7/98 Moon Township, PA ... 5,617,668 46,154 5,663,821 988,897 6,652,718 108,695 1985 7/98 Anderson, SC ........ 3,482,009 21,922 3,503,931 612,034 4,115,965 56,141 1995 7/98 Columbia, SC ........ 3,225,225 55,986 3,281,211 566,719 3,847,930 63,495 1980 7/98 Greensboro, SC ...... 5,980,091 22,028 6,002,119 1,052,872 7,054,991 109,817 1981 7/98 Greenville, SC ...... 991,210 4,516,697 5,507,907 852,127 6,360,034 -- 1999 7/98 Myrtle Beach, SC .... 7,317,710 275,349 7,593,059 1,841,290 9,434,349 117,881 1996 7/98 North Charleston, SC 5,307,416 25,370 5,332,786 934,165 6,266,951 96,527 1981 7/98 Chattanooga, TN ..... 5,721,768 13,860 5,735,628 1,007,285 6,742,913 92,497 1995 7/98 Kingsport, TN ....... 5,113,764 (50,615) 5,063,149 889,325 5,952,474 96,533 1995 7/98 Knoxville, TN ....... 5,550,237 25,654 5,575,891 977,015 6,552,906 101,349 1986 7/98 Knoxville, TN ....... 3,878,194 13,380 3,891,574 681,949 4,573,523 80,208 1995 7/98 Memphis, TN ......... 3,336,592 3,947,805 7,284,398 1,514,027 8,798,424 -- 1998 7/98 Memphis, TN ......... 5,745,873 13,826 5,759,700 1,011,539 6,771,239 108,386 1979 7/98 Memphis, TN ......... 3,519,797 57,170 3,576,967 618,702 4,195,669 67,594 1983 7/98 Memphis, TN ......... 6,051,153 24,867 6,076,020 1,065,412 7,141,432 110,110 1986 7/98
140 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ ---------- ----------- ------------- ------ -------- Nashville-South, TN .. $ 8,235,038 $ 24,347 $ 8,259,386 $1,450,804 $ 9,710,190 $148,121 1982 7/98 Nashville-South, TN .. 4,992,812 38,776 5,031,588 878,646 5,910,234 98,104 1979 7/98 Nashville-South, TN .. 8,741,098 17,693 8,758,791 1,540,108 10,298,899 154,335 1993 7/98 Abilene, TX .......... 4,621,327 8,450 4,629,777 813,090 5,442,867 84,747 1979 7/98 Addison, TX .......... 12,293,005 16,588 12,309,593 2,169,354 14,478,947 196,782 1996 7/98 Amarillo, TX ......... 6,732,642 29,486 6,762,128 1,185,675 7,947,803 122,300 1983 7/98 Amarillo, TX ......... 5,386,670 2,377 5,389,047 948,151 6,337,198 95,991 1986 7/98 Arlington, TX ........ 13,933,240 141,841 14,075,081 2,456,369 16,531,450 259,369 1989 7/98 Arlington, TX ........ 8,267,633 13,618 8,281,251 1,471,857 9,753,108 130,832 1997 7/98 Austin, TX ........... 3,412,522 4,200,001 7,612,523 2,946,105 10,558,628 -- 1998 7/98 Austin, TX ........... 1,041,028 5,195,294 6,236,321 1,212,401 7,448,722 -- 1999 7/98 Austin, TX ........... 9,775,256 2,836 9,778,092 1,722,589 11,500,681 170,692 1983 7/98 Austin, TX ........... 8,439,970 12,607 8,452,577 1,486,968 9,939,545 149,252 1972 7/98 Austin, TX ........... 10,532,391 51,775 10,584,166 1,856,219 12,440,385 150,227 1975 7/98 Austin, TX ........... 9,870,999 32,117 9,903,116 1,739,503 11,642,619 172,766 1977 7/98 Austin, TX ........... 11,881,356 65,534 11,946,891 2,094,272 14,041,163 210,366 1993 7/98 Austin, TX ........... 15,276,708 43,101 15,319,809 2,695,890 18,015,699 225,808 1996 7/98 Balcones Heights, TX . 133,941 2,028 135,969 -- 135,969 2,808 1968 7/98 Baytown, TX .......... 5,344,949 35,116 5,380,065 940,788 6,320,853 96,932 1984 7/98 Beaumont, TX ......... 7,210,109 24,503 7,234,612 1,269,934 8,504,546 128,572 1979 7/98 Bedford, TX .......... 4,794,865 16,092 4,810,958 843,697 5,654,655 93,549 1991 7/98 Clute, TX ............ 4,402,811 26,462 4,429,273 774,528 5,203,801 84,207 1977 7/98 College Station, TX .. 11,461,417 23,378 11,484,796 2,020,165 13,504,961 202,645 1980 7/98 Corpus Christi, TX ... 8,802,172 72,723 8,874,896 1,550,886 10,425,782 155,715 1983 7/98 Corpus Christi, TX ... 5,521,350 24,124 5,545,474 971,918 6,517,392 101,463 1973 7/98 Dallas, TX ........... 5,551,202 13,086 5,564,288 977,185 6,541,473 111,294 1971 7/98 Dallas, TX ........... 7,544,290 10,413 7,554,704 1,603,738 9,158,442 131,978 1975 7/98 Dallas, TX ........... 8,225,565 10,760 8,236,325 1,449,132 9,685,457 144,264 1974 7/98 Dallas, TX ........... 4,737,976 2,477 4,740,453 833,675 5,574,128 83,819 1974 7/98 Dallas, TX ........... 7,045,322 3,955 7,049,278 1,240,854 8,290,132 122,091 1978 7/98
141 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- -------------- ------------ ----------- ----------- ------------- ------ --------- Del Rio, TX ........ $ 2,774,995 $ 15,724 $ 2,790,720 $ 487,267 $ 3,277,987 $ 54,967 1993 7/98 Denton, TX ......... 4,732,766 56,899 4,789,666 832,756 5,622,422 87,639 1992 7/98 Eagle Pass, TX ..... 6,068,832 10,109 6,078,942 1,068,532 7,147,474 109,889 1982 7/98 El Paso, TX ........ 1,993,099 1,533,248 3,526,348 349,285 3,875,633 42,337 1989 7/98 El Paso, TX ........ 6,435,249 32,428 6,467,677 1,133,194 7,600,871 114,839 1980 7/98 El Paso, TX ........ 6,701,217 25,309 6,726,527 1,180,130 7,906,657 120,900 1969 7/98 El Paso, TX ........ 6,166,588 10,507 6,177,095 1,085,783 7,262,878 111,279 1984 7/98 Euless, TX ......... 6,665,600 6,421 6,672,021 1,173,844 7,845,865 120,335 1981 7/98 Farmers Branch, TX . 7,087,609 10,975 7,098,584 1,248,316 8,346,900 123,333 1990 7/98 Fort Stockton, TX .. 3,736,240 6,086 3,742,326 656,898 4,399,224 67,166 1994 7/98 Fort Worth, TX ..... 9,224,663 12,253 9,236,916 1,627,882 10,864,798 147,814 1996 7/98 Fort Worth, TX ..... 7,974,545 159,330 8,133,875 1,196,924 9,330,799 138,014 1997 7/98 Galveston, TX ...... 6,842,408 65,872 6,908,280 1,205,045 8,113,325 131,978 1988 7/98 Garland, TX ........ 7,129,797 6,042 7,135,839 1,255,761 8,391,600 125,526 1979 7/98 Georgetown, TX ..... 4,808,723 29,132 4,837,855 846,160 5,684,015 84,021 1994 7/98 Grand Prairie, TX .. 5,233,559 32,708 5,266,267 921,131 6,187,398 94,468 1980 7/98 Harlingen, TX ...... 7,120,695 49,035 7,169,730 1,254,155 8,423,885 129,477 1982 7/98 Houston, TX ........ 1,617,173 4,622,710 6,239,883 1,501,567 7,741,449 -- 1999 7/98 Houston, TX ........ 8,821,421 74,646 8,896,068 1,554,283 10,450,351 160,902 1969 7/98 Houston, TX ........ 4,420,603 8,406 4,429,009 636,698 5,065,707 87,605 1973 7/98 Houston, TX ........ 5,890,076 16,021 5,906,097 1,036,987 6,943,084 108,023 1977 7/98 Houston, TX ........ 6,273,192 71,646 6,344,838 1,104,595 7,449,433 113,998 1978 7/98 Houston, TX ........ 6,642,552 37,318 6,679,870 1,169,777 7,849,647 121,034 1985 7/98 Houston, TX ........ 10,399,067 31,742 10,430,809 1,832,691 12,263,500 182,455 1986 7/98 Houston, TX ........ 6,018,910 21,551 6,040,461 1,059,722 7,100,183 108,890 1989 7/98 Houston, TX ........ 2,274,304 8,038 2,282,342 398,909 2,681,251 54,367 1989 7/98 Houston, TX ........ 3,695,447 2,751 3,698,198 649,699 4,347,897 73,246 1976 7/98 Houston, TX ........ 6,076,965 24,937 6,101,903 1,069,967 7,171,870 110,169 1977 7/98 Houston, TX ........ 4,067,389 17,350 4,084,739 715,336 4,800,075 75,994 1980 7/98 Houston, TX ........ 7,007,505 19,742 7,027,247 1,234,180 8,261,427 125,260 1981 7/98
142 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- ------------- ------------ --------- ----------- ------------- ---- -------- Houston, TX ............. $ 7,426,052 $ (45,019) $ 7,381,033 $ 873,698 $ 8,254,731 $ 118,669 1997 7/98 Houston, TX ............. 12,152,069 386,205 12,538,274 2,755,165 15,293,438 208,069 1998 7/98 Huntsville, TX .......... 6,758,618 26,842 6,785,460 1,190,259 7,975,719 112,665 1996 7/98 Irving, TX .............. 8,641,754 5,127 8,646,882 1,522,577 10,169,459 156,923 1974 7/98 Irving, TX .............. 11,014,227 13,919 11,028,146 1,943,687 12,971,833 177,453 1996 7/98 Killeen, TX ............. 5,932,179 4,208 5,936,386 1,044,191 6,980,577 108,749 1976 7/98 La Marque, TX ........... 2,205,750 (39,445) 2,166,305 389,250 2,555,555 -- 1990 7/98 La Porte, TX ............ 7,485,670 6,796 7,492,466 1,318,562 8,811,028 132,262 1985 7/98 Laredo, TX .............. 10,698,219 45,637 10,743,856 1,885,483 12,629,339 194,601 1969 7/98 Lewisville, TX .......... 6,832,961 15,209 6,848,170 1,203,378 8,051,548 121,621 1984 7/98 Live Oak, TX ............ 6,889,107 10,531 6,899,638 1,213,286 8,112,924 125,221 1986 7/98 Longview, TX ............ 5,944,128 15,093 5,959,222 1,046,525 7,005,747 106,274 1983 7/98 Lubbock, TX ............. 7,098,710 11,440 7,110,151 1,250,275 8,360,426 128,845 1976 7/98 Lubbock, TX ............. 5,815,970 127,162 5,943,133 1,023,909 6,967,042 112,195 1994 7/98 Lufkin, TX .............. 5,887,501 43,602 5,931,104 1,036,533 6,967,637 106,236 1984 7/98 Mesquite, TX ............ -- -- -- 341,446 341,446 -- N/A 7/98 Midland, TX ............. 4,982,957 24,901 5,007,859 876,907 5,884,766 94,158 1983 7/98 Nacogdoches, TX ......... 3,352,383 32,951 3,385,334 589,159 3,974,493 63,307 1984 7/98 North Richland Hills, TX 5,707,616 7,993 5,715,609 1,004,788 6,720,397 99,960 1993 7/98 Odessa, TX .............. 6,327,946 33,590 6,361,537 1,114,258 7,475,795 113,565 1981 7/98 Plano, TX ............... 4,370,769 67,958 4,438,727 768,874 5,207,601 80,306 1980 7/98 Plano, TX ............... 9,439,404 (459,088) 8,980,316 1,269,573 10,249,889 155,317 1997 7/98 Round Rock, TX .......... 10,234,147 49,912 10,284,060 1,803,588 12,087,648 183,930 1991 7/98 San Angelo, TX .......... 5,962,114 21,409 5,983,523 1,049,699 7,033,222 114,787 1986 7/98 San Antonio, TX ......... 20,288,264 73,140 20,361,404 3,577,844 23,939,248 314,471 1968 7/98 San Antonio, TX ......... 9,913,036 7,550 9,920,586 1,746,921 11,667,507 1,259,770 1968 7/98 San Antonio, TX ......... 6,526,296 24,876 6,551,172 1,149,261 7,700,433 118,533 1970 7/98 San Antonio, TX ......... 9,172,066 67,996 9,240,062 1,616,162 10,856,224 167,771 1975 7/98 San Antonio, TX ......... 5,697,351 3,596 5,700,947 1,002,977 6,703,924 722,890 1975 7/98 San Antonio, TX ......... 5,627,889 34,285 5,662,175 990,719 6,652,894 103,906 1981 7/98
143 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Accumulated Const. Date Encumbrances at Acquisition Acquisitions Improvements Land (2) Total (5) Deprec.(4)(5) Date Acquired ------------ -------------- -------------- ------------ ---------- ----------- ------------- ----- ------- San Antonio, TX ...... $10,806,800 $ 34,395 $10,841,195 $1,904,644 $12,745,839 $154,217 1982 7/98 San Antonio, TX ...... 12,794,370 4,917 12,799,287 2,255,392 15,054,679 224,861 1984 7/98 San Antonio, TX ...... 3,284,488 26,366 3,310,854 577,177 3,888,031 63,674 1974 7/98 San Antonio, TX ...... 5,311,012 22,211 5,333,224 934,799 6,268,023 99,057 1976 7/98 San Antonio, TX ...... -- -- -- 1,432,542 1,432,542 -- N/A 7/98 San Marcos, TX ....... 7,024,196 30,615 7,054,811 1,237,126 8,291,937 120,636 1995 7/98 Shenandoah, TX ....... 9,129,561 40,777 9,170,338 1,608,643 10,778,981 158,531 1986 7/98 Shermann, TX ......... 7,584,039 (68,288) 7,515,751 954,414 8,470,164 124,825 1997 7/98 Stafford, TX ......... 9,515,881 14,469 9,530,351 1,676,835 11,207,186 169,928 1990 7/98 Temple, TX ........... 4,846,042 1,400 4,847,443 852,745 5,700,188 85,758 1984 7/98 Texarkana, TX ........ 4,948,588 50,127 4,998,715 870,842 5,869,557 92,109 1982 7/98 Texas City, TX ....... 4,027,610 3,766 4,031,376 708,316 4,739,692 71,245 1978 7/98 Tyler, TX ............ 9,253,152 4,279 9,257,431 1,630,453 10,887,884 161,047 1983 7/98 Victoria, TX ......... 7,226,090 18,363 7,244,453 1,272,754 8,517,207 128,596 1984 7/98 Waco, TX ............. 6,689,172 4,977 6,694,150 1,292,751 7,986,901 124,851 1971 7/98 White Settlement, TX . 6,233,038 2,793 6,235,832 1,097,492 7,333,324 110,828 1980 7/98 Wichita Falls, TX .... 5,020,159 5,209 5,025,368 883,472 5,908,840 92,949 1973 7/98 Layton, UT ........... 3,669,799 10,653 3,680,452 645,173 4,325,625 74,157 1988 7/98 Midvale, UT .......... 5,820,947 104,811 5,925,759 1,024,752 6,950,511 121,664 1978 7/98 Ogden, UT ............ 8,909,631 (270,496) 8,639,136 791,871 9,431,007 132,904 1997 7/98 Salt Lake City, UT ... -- -- -- 6,577,985 6,577,985 -- N/A 7/98 Salt Lake City, UT ... 8,538,608 14,981 8,553,589 1,530,439 10,084,028 132,464 1997 7/98 Bristol, VA .......... 3,808,727 4,367 3,813,094 669,690 4,482,784 67,945 1995 7/98 Hampton, VA .......... 4,507,663 28,888 4,536,551 793,032 5,329,583 85,261 1985 7/98 Richmond, VA ......... 3,173,648 30,033 3,203,682 557,617 3,761,299 63,947 1987 7/98 Virginia Beach, VA ... 3,702,148 17,685 3,719,833 650,882 4,370,715 74,786 1984 7/98 Kirkland, WA ......... 11,147,010 149,368 11,296,378 1,951,151 13,247,529 220,549 1986 7/98
144
THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 Cost Capitalized/ Building & Adjusted Total Improvements Subsequent to Building & Encumbrances at Acquisition Acquisitions Improvements -------------- ---------------- --------------- ---------------- Sea-Tac, WA ............................ $ 7,647,560 $ 170,337 $ 7,817,897 Tacoma, WA ............................. 8,956,029 99,004 9,055,032 Cheyenne, WY ........................... 2,793,345 67,132 2,860,477 -------------- ----------- -------------- Subtotal .............................. -- 2,124,497,074 78,822,780 2,203,319,854 -- -------------- ----------- -------------- Grand Total ........................... $53,238,189 $3,794,805,947 $84,884,342 $3,879,690,289 =========== ============== =========== ============== Accumulated Const. Date Land (2) Total (5) Deprec.(4)(5) Date Acquired --------------- ---------------- --------------- -------- --------- Sea-Tac, WA ............................ $ 1,332,999 $ 9,150,896 $ 165,440 1987 7/98 Tacoma, WA ............................. 1,562,329 10,617,361 186,377 1988 7/98 Cheyenne, WY ........................... 485,089 3,345,566 72,301 1981 7/98 ------------ -------------- ------------ Subtotal .............................. 391,636,281 2,594,956,135 38,946,635 ------------ -------------- ------------ Grand Total ........................... $608,525,377 $4,488,215,666 $184,411,133 ============ ============== ============
145 THE MEDITRUST COMPANIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (1) Facility classifications are Long-Term Care (LTC), Retirement Living (RL), Psychiatric Hospital (Psych), Rehabilitation Hospital (Rehab), Assisted Living (AL), and Medical Office Buildings (MOB), Golf Courses (GC) and land under development (LND). (2) Gross amount at which land is carried at close of period also represents initial cost to Realty. (3) Cost for federal income tax purposes. (4) Depreciation is calculated using a 40-year life for healthcare and lodging facilities and a 30-year life for all golf course buildings and a 20-year life for golf course improvements. (5) Real estate and accumulated depreciation reconciliations for the three years ended December 31, 1998 are as follows:
Accumulated Real Estate Depreciation ------------- ------------- (In thousands) Balance at close of year--December 31, 1995 ................... $ 746,379 $ 77,203 Additions during the period: Acquisitions ................................................ 325,789 Value of real estate acquired ............................... 36,875 Additions to existing properties ............................ Provision for depreciation .................................. 21,269 Deductions: Sale of real estate ......................................... (4,701) (390) ---------- --------- Balance at close of year--December 31, 1996 ................... 1,104,342 98,082 Additions during the period: Acquisitions ................................................ 292,607 Value of real estate acquired in merger ..................... 237,003 Provision for depreciation .................................. 26,750 Deductions: Sale of real estate ......................................... (6,173) ---------- Balance at close of year--December 31, 1997 ................... 1,627,779 124,832 Additions during the period: Acquisitions ................................................ 636,989 Value of real estate acquired in mergers .................... 2,751,339 Provision for depreciation .................................. 86,395 Other ....................................................... 6,344 Deductions: Sale of real estate ......................................... (518,190) (33,161) Income from joint venture net of dividends received ......... (544) Other ....................................................... (9,158) ---------- Balance at close of year--December 31, 1998 ................... 4,488,215 184,410 Provision for impairment ...................................... 47,918 Included in net assets of discontinued operations ............. (370,957) (4,172) ---------- --------- Balance per financial statements .............................. $4,117,258 $ 228,156 ========== =========
(6) Real estate investments reserved against due to impairment. (7) Real estate assets held for sale that were written down to fair value less costs to sell. 146
MEDITRUST CORPORATION SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 1998 Interest Final Maturity Description (A) Rate Date - - ------------------------------------------------------------------------ ---------- ------------------- Individual mortgages in excess of 3% of the total carrying amount: 7 long-term care facilities located in Missouri ........................ 10.70% August 1, 2006 10 long-term care facilities located in Texas, Missouri, and 10.95% November 17, 2001 Nebraska .............................................................. 18 long-term care facilities located in Colorado, Florida, Indiana, 10.85% August 23, 2005 Kansas, Missouri, Nebraska, North Carolina, Tennessee and Washington ............................................................ 17 long-term care facilities located in Arizona, Colorado, Florida, 10.75% May 21, 2003 Georgia, Indiana, Kansas, Tennessee and Utah .......................... Periodic Face Payment Amount of Description (A) Terms Mortgages - - ------------------------------------------------------------------------ ---------------------------- -------------- Individual mortgages in excess of 3% of the total carrying amount: 7 long-term care facilities located in Missouri ........................ Monthly payments of $ 41,385,000 principal and interest of $384,767, balloon payment of $38,544,000 due at maturity 10 long-term care facilities located in Texas, Missouri, and Monthly payments of 40,803,800 Nebraska .............................................................. principal and interest of $381,767, balloon payment of $39,087,000 due at maturity 18 long-term care facilities located in Colorado, Florida, Indiana, Monthly payments of 87,940,000 Kansas, Missouri, Nebraska, North Carolina, Tennessee and principal and interest of Washington ............................................................ $825,488, balloon payment of $80,961,000 due at maturity 17 long-term care facilities located in Arizona, Colorado, Florida, Monthly payments of 103,073,000 Georgia, Indiana, Kansas, Tennessee and Utah .......................... principal and interest of $968,000, balloon payment of $95,501,000 due at maturity Carrying Amount of Description (A) Mortgages (D) - - ------------------------------------------------------------------------ -------------- Individual mortgages in excess of 3% of the total carrying amount: 7 long-term care facilities located in Missouri ........................ $ 41,132,940 10 long-term care facilities located in Texas, Missouri, and 40,060,019 Nebraska .............................................................. 18 long-term care facilities located in Colorado, Florida, Indiana, 86,474,955 Kansas, Missouri, Nebraska, North Carolina, Tennessee and Washington ............................................................ 17 long-term care facilities located in Arizona, Colorado, Florida, 100,494,835 Georgia, Indiana, Kansas, Tennessee and Utah ..........................
147
MEDITRUST CORPORATION SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 1998 Interest Final Maturity Description (A) Rate Date - - -------------------------------------------------------------------- -------------- ------------------------ Mortgages individually less than 3% of total carrying amount: Long-term care facilities, 62 mortgages, face amounts ranging From 8.20% From August 1999 from $525,000 to $29,158,000, located in Arizona, California, to 12.50% to March 2012 Colorado, Connecticut, Florida, Idaho, Indiana, Massachusetts, Michigan, Missouri, New Jersey, New Mexico, Nevada, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Washington, West Virginia and Wyoming ......................................... Retirement living facilities, 3 mortgages, face amounts ranging From 8.83% From January 2000 from $5,500,000 to $12,100,000, located in North Carolina, to 10.90% to January 2007 Ohio and Utah ..................................................... Alcohol and substance abuse treatment facility, face amount of 11.00% September 29, 2005 $33,300,000, located in New York .................................. Medical office buildings, 6 mortgages, face amounts ranging From 7.6% From March 2000 from $2,697,298 to $30,122,543, located in Arizona, Florida, to 9.75% to October 2008 Nevada and Tennessee .............................................. Assisted living facilities, 9 mortgages, face amounts ranging From 8.84% From September 2005 from $3,387,878 to $26,450,000, located in Florida, Michigan, to 9.85% to June 2012 Washington, Colorado, Idaho ....................................... Land under development, 1 loan, located in Florida ................. 9.25% March 4, 2004 Other notes secured by real estate in California ................... From 8.50% to 10.52% Construction Loans: Long-term care facilities, 4 loans, amounts ranging from 9.25% (C) $6,112,079 to $12,232,034, located in Florida and Ohio ............ Medical office building, 1 loan, located in New Jersey ............. 9.75% (C) Assisted living facility, 1 loan, located in Michigan .............. 9.25% (C) Periodic Face Carrying Payment Amount of Amount of Description (A) Terms Mortgages Mortgages (D) - - -------------------------------------------------------------------- ---------- ----------- ----------------------- Mortgages individually less than 3% of total carrying amount: Long-term care facilities, 62 mortgages, face amounts ranging (E) $ 632,021,956(F) from $525,000 to $29,158,000, located in Arizona, California, Colorado, Connecticut, Florida, Idaho, Indiana, Massachusetts, Michigan, Missouri, New Jersey, New Mexico, Nevada, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Washington, West Virginia and Wyoming ......................................... Retirement living facilities, 3 mortgages, face amounts ranging (E) 20,925,150 from $5,500,000 to $12,100,000, located in North Carolina, Ohio and Utah ..................................................... Alcohol and substance abuse treatment facility, face amount of (E) 32,344,743 $33,300,000, located in New York .................................. Medical office buildings, 6 mortgages, face amounts ranging (E) 71,945,990 from $2,697,298 to $30,122,543, located in Arizona, Florida, Nevada and Tennessee .............................................. Assisted living facilities, 9 mortgages, face amounts ranging (E) 115,555,997 from $3,387,878 to $26,450,000, located in Florida, Michigan, Washington, Colorado, Idaho ....................................... Land under development, 1 loan, located in Florida ................. (E) 13,508,402 Other notes secured by real estate in California ................... (E) 5,272,903 Construction Loans: Long-term care facilities, 4 loans, amounts ranging from 32,030,410 $6,112,079 to $12,232,034, located in Florida and Ohio ............ Medical office building, 1 loan, located in New Jersey ............. 20,298,282 Assisted living facility, 1 loan, located in Michigan .............. 4,558,418 ---------------- $ 1,216,625,000(B) ================
- - -------- (A) Virtually all mortgage loans on real estate are first mortgage loans. (B) The aggregate cost for federal income tax purposes. (C) Final maturity date will be determined upon completion of construction. (D) No mortgage loan is subject to delinquent principal or interest. (E) Monthly payments of principal and interest normally payable at a level amount, with a balloon payment at maturity. (F) Includes a mortgage loan collateralized by a rehabilitation facility where eroding margins and an expiring guarantee indicate that the Companies will not likely collect all amounts due. Accordingly, the Companies provided a loan loss for this asset of approximately $8,000,000. 148 MEDITRUST CORPORATION SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 1998 Reconciliation of carrying amount of mortgage loans for the three years ended December 31, 1997 is as follows:
(In thousands) - - ---------------------------------------------- Balance at December 31, 1995 ................. $1,108,623 Additions during period: New mortgage loans ......................... 137,686 Construction loan advances ................. 117,495 Other ...................................... 9,903 Deductions during period: Collection of principal .................... (33,962) Non-cash deductions ........................ (29,642) Prepayment of mortgage loans ............... (128,285) ---------- Balance at December 31, 1996 ................. 1,181,818 Additions during period: New mortgage loans ......................... 139,304 Construction loan advances ................. 160,557 Other ...................................... 5,764 Deductions during period: Collection of principal .................... (7,629) Prepayment of mortgage loans ............... (46,989) ---------- Balance at December 31, 1997 ................. 1,432,825 Additions during period: New mortgage loans ......................... 76,260 Construction loan advances ................. 146,264 Deductions during period: Collection of principal .................... (9,125) Non-cash deduction ......................... (31,483) Prepayment of mortgage loans ............... (398,116) ---------- Balance at December 31, 1998 ................. $1,216,625 ========== Reserve for loan loss ....................... (16,036) Reallocation of valuation allowance ......... (2,955) ---------- Balance per financial statements ............ 1,197,634
149 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
Page(s) ---------- 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 .................................
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable 150 or have been disclosed in the notes to consolidated financial statements, and therefore, have been omitted. 3. Exhibits Exhibits required as part of this report are listed in the index appearing on Pages 154 through 159. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Meditrust Corporation -- Incorporated by reference to Exhibit 4.1 to Joint Amended and Restated 1995 Registration Statement on Form S-8 of Meditrust Share Award Plan Corporation and Meditrust Operating Company (File Nos. 333-39771 and 333-39771-01) Meditrust Operating Company -- Incorporated by reference to Exhibit 4.2 to Joint Amended and Restated 1995 Registration Statement on Form S-8 of Meditrust Share Award Plan Corporation and Meditrust Operating Company (File Nos. 333-39771 and 333-39771-01) Employment Agreement with -- Incorporated by reference to Exhibit 10.1 to the Joint Abraham D. Gosman Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998
(b) Reports on Form 8-K. The Meditrust Companies filed one joint current report on Form 8-K, event date November 12, 1998, during the quarter ended December 31, 1998. 151 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDITRUST CORPORATION By: /s/ Laurie T. Gerber ------------------------------------------ Chief Financial Officer (and Principal Financial and Accounting Officer) Dated: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - - --------------------------- ------------------------------------ --------------- /s/ Thomas M. Taylor Chairman of the Board of Directors March 31, 1999 - - ------------------------- Thomas M. Taylor /s/ David F. Benson Director, President and Treasurer March 31, 1999 - - ------------------------- (Principal Executive Officer) David F. Benson /s/ Donald J. Amaral Director March 31, 1999 - - ------------------------- Donald J. Amaral /s/ Edward W. Brooke Director March 31, 1999 - - ------------------------- Edward W. Brooke /s/ James P. Conn Director March 31, 1999 - - ------------------------- James P. Conn /s/ John C. Cushman Director March 31, 1999 - - ------------------------- John C. Cushman /s/ C. Gerald Goldsmith Director March 31, 1999 - - ------------------------- C. Gerald Goldsmith /s/ Thomas J. Magovern Director March 31, 1999 - - ------------------------- Thomas J. Magovern /s/ Gerald Tsai, Jr. Director March 31, 1999 - - ------------------------- Gerald Tsai, Jr. /s/ Stephen E. Merrill Director March 31, 1999 - - ------------------------- Stephen E. Merrill /s/ Nancy Goodman Brinker Director March 31, 1999 - - ------------------------- Nancy Goodman Brinker
152 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDITRUST OPERATING COMPANY By: /s/ William C. Baker ------------------------------------ President Dated: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - - --------------------------- ------------------------------------ --------------- /s/ Thomas M. Taylor Chairman of the Board of Directors March 31, 1999 - - ------------------------- Thomas M. Taylor /s/ William C. Baker President, Director, (Principal March 31, 1999 - - ------------------------- Executive, Financial and Accounting William C. Baker Officer) /s/ Donald J. Amaral Director March 31, 1999 - - ------------------------- Donald J. Amaral /s/ David F. Benson Director March 31, 1999 - - ------------------------- David F. Benson /s/ Edward W. Brooke Director March 31, 1999 - - ------------------------- Edward W. Brooke /s/ C. Gerald Goldsmith Director March 31, 1999 - - ------------------------- C. Gerald Goldsmith /s/ William G. Byrnes Director March 31, 1999 - - ------------------------- William G. Byrnes /s/ Nancy Goodman Brinker Director March 31, 1999 - - ------------------------- Nancy Goodman Brinker /s/ Thomas J. Magovern Director March 31, 1999 - - ------------------------- Thomas J. Magovern /s/ Gerald Tsai, Jr. Director March 31, 1999 - - ------------------------- Gerald Tsai, Jr.
153 EXHIBITS INDEX
Exhibit No Title Method of Filing 2.1 Agreement and Plan of Merger, dated as of Incorporated by reference to Exhibit 10.1 to January 3, 1998 by and among La Quinta the Joint Current Report on Form 8-K of Inns, Inc., Meditrust Corporation and Meditrust Corporation and Meditrust Meditrust Operating Company Operating Company, event date January 8, 1998 2.2 Agreement and Plan of Merger dated as of Incorporated by reference to Exhibit 2 to the January 11, 1998 among Meditrust Joint Current Report on Form 8-K of Corporation, Meditrust Operating Company Meditrust Corporation and Meditrust and Cobblestone Holdings, Inc. Operating Company, event date January 11, 1998 2.3 First Amendment to Agreement and Plan of Incorporated by reference to Exhibit 2 to the Merger among Meditrust Corporation, Joint Current Report on Form 8-K of Meditrust Operating Company and Meditrust Corporation and Meditrust Cobblestone Holdings, Inc., dated as of Operating Company, event date March 16, March 16, 1998 1998 3.1 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.2 to Meditrust Corporation filed with the the Joint Registration Statement on Form Secretary of State of Delaware on March 2, S-4 of Meditrust Corporation and Meditrust 1998 Operating Company (File Nos. 333-47737 and 333-47737-01) 3.2 Certificate of Amendment of Restated Incorporated by reference to Exhibit 3.8 to Certificate of Incorporation of Meditrust the Joint Quarterly Report on form 10-Q for Corporation filed with the Secretary of State the Quarter ended June 30, 1998 of Delaware on July 17, 1998 3.3 Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.4 to Meditrust Operating Company filed with the the Joint Registration Statement on Form Secretary of State of Delaware on March 2, S-4 of Meditrust Corporation and Meditrust 1998 Operating Company (File Nos. 333-47737 and 333-47737-01) 3.4 Certificate of Amendment of Restated Incorporated by reference to Exhibit 3.9 to Certificate of Incorporation of Meditrust the Joint Quarterly Report on form 10-Q for Operating Company filed with the Secretary the Quarter ended June 30, 1998 of State of Delaware on July 17, 1998 3.5 Certificate of Designation for the 9% Series Incorporated by reference to Exhibit 4.1 to A Cumulative Redeemable Preferred Stock Joint Current Report on Form 8-K of of Meditrust Corporation filed with the Meditrust Corporation and Meditrust Secretary of State of Delaware on June 12, Operating Company, event date June 10, 1998 1998 3.6 Amended and Restated By-laws of Incorporated by reference to Exhibit 3.5 to Meditrust Corporation the Joint Registration Statement on Form S-4 of Meditrust Corporation and Meditrust Operating Company (File Nos. 333-47737 and 333-47737-01)
154
Exhibit No Title Method of Filing 3.7 Amended and Restated By-Laws of Incorporated by reference to Exhibit 3.6 to Meditrust Operating Company the Joint Registration Statement on Form S-4 of Meditrust Corporation and Meditrust Operating Company (File Nos. 333-47737 and 333-47737-01) 4.1 Pairing Agreement by and between Incorporated by reference to Exhibit 5 to Meditrust Corporation (formerly known as Joint Registration Statement on Form 8-A of Santa Anita Realty Enterprises, Inc.) and Santa Anita Operating Company filed Meditrust Operating Company (formerly February 5, 1980 known as Santa Anita Operating Company) dated as of December 20, 1979 4.2 First Amendment to Pairing Agreement, by Incorporated by reference to Exhibit 4.4 to and between Meditrust Corporation and Joint Registration Statement on Form S-8 of Meditrust Operating Company, dated Meditrust Corporation and Meditrust November 6, 1997 Operating Company (File Nos. 333-39771 and 333-39771-01) 4.3 Second Amendment to Pairing Agreement, Incorporated by reference to Exhibit 4.3 to by and between Meditrust Corporation and the Joint Registration Statement on Form Meditrust Operating Company, dated S-4 of Meditrust Corporation and Meditrust February 6, 1998 Operating Company (File Nos. 333-47737 and 333-47737-01) 4.4 Third Amendment to Pairing Agreement, by Filed herewith and between Meditrust Corporation and Meditrust Operating Company, dated July 17, 1998 4.5 Rights Agreement, dated June 15, 1989, Incorporated by reference to Exhibit 2.1 to among Meditrust Corporation (formerly Joint Registration Statement on Form 8-A of known as Santa Anita Realty Enterprises, Santa Anita Realty Enterprises, Inc., filed Inc.), Meditrust Operating Company June 19, 1989 (formerly known as Santa Anita Operating Company), and Boston EquiServe, as Rights Agent 4.6 Appointment of Boston EquiServe as Rights Incorporated by reference to Exhibit 4.6 to Agent, dated October 24, 1997 Joint Registration Statement on Form S-8 of Meditrust Corporation and Meditrust Operating Company (File Nos. 333-39771 and 333-39771-01) 4.7 Meditrust Corporation Amended and Incorporated by reference to Exhibit 4.1 to Restated 1995 Share Award Plan Joint Registration Statement on Form S-8 of Meditrust Corporation and Meditrust Operating Company (File Nos. 333-39771 and 333-39771-01) 4.8 Meditrust Operating Company Amended Incorporated by reference to Exhibit 4.2 to and Restated 1995 Share Award Plan Joint Registration Statement on Form S-8 of Meditrust Corporation and Meditrust Operating Company (File Nos. 333-39771 and 333-39771-01)
155
Exhibit No Title Method of Filing 4.9 Form of Fiscal Agency Agreement dated Incorporated by reference to Exhibit 4.7 to November 15, 1993 between Meditrust and Form 10-K of Meditrust for the fiscal year Fleet National Bank as fiscal agent ended December 31, 1993 4.10 Form of Indenture dated April 23, 1992 Incorporated by reference to Exhibit 4 to the between Meditrust and Fleet National Bank, Registration Statement on Form S-3 of as trustee Meditrust (File No. 33-45979) 4.11 Form of 9% Convertible Debenture due Incorporated by reference to Exhibit 4.1 to 2002 the Registration Statement on Form S-3 of Meditrust (File No. 33-45979) 4.12 Form of Indenture dated March 9, 1994 Incorporated by reference to Exhibit 4 to the between Meditrust and Shawmut Bank as Registration Statement on Form S-3 of Trustee Meditrust (File No. 33-50835) 4.13 Form of 7 1/2% Convertible Debenture due Incorporated by reference to Exhibit 4 to the 2001 Registration Statement on Form S-3 of Meditrust (File No. 33-50835) 4.14 Form of First Supplemental Indenture dated Incorporated by reference to Exhibit 4.1 to as of July 26, 1995, to Indenture dated as of the Current Report on Form 8-K of Meditrust July 26, 1995 between Meditrust and Fleet dated July 13, 1995 National Bank 4.15 Form of 8.54% Convertible Senior Note due Incorporated by reference to Exhibit 4.1 to July 1, 2000 the Current Report on Form 8-K of Meditrust dated July 27, 1995 4.16 Form of 8.56% Convertible Senior Note due Incorporated by reference to Exhibit 4.1 to July 1, 2002 the Current Report on Form 8-K of Meditrust dated July 27, 1995 4.17 Form of Second Supplemental Indenture Incorporated by reference to Exhibit 4.1 to dated as of July 28, 1995, to Indenture the Current Report on Form 8-K of Meditrust dated as of July 26, 1995 between dated July 27, 1995 Meditrust and Fleet National Bank, as trustee 4.18 Form of Fixed Rate Senior Medium-term Incorporated by reference to Exhibit 4.3 to Note the Current Report on Form 8-K of Meditrust dated August 8, 1995 4.19 Form of Floating Rate Medium-term Note Incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K of Meditrust dated August 8, 1995 4.20 Form of Third Supplemental Indenture dated Incorporated by reference to Exhibit 4.2 to as of August 10, 1995, to Indenture dated the Current Report on Form 8-K of Meditrust as of July 26, 1995 between Meditrust and dated August 8, 1995 Fleet National Bank 4.21 Form of 7.375% Note due July 15, 2000 Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Meditrust dated July 13, 1995
156
Exhibit No Title Method of Filing 4.22 Form of 7.60% Note due July 15, 2001 Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Meditrust dated July 13, 1995 4.23 Form of Fourth Supplemental Indenture Incorporated by reference to Exhibit 4.1 to dated as of September 5, 1996, to the Current Report on Form 8-K of Meditrust Indenture dated as of July 26, 1995 dated September 6, 1996 between Meditrust and Fleet National Bank 4.24 Form of 7.82% Note due September 10, Incorporated by reference to Exhibit 4.1 to 2026 the Current Report on Form 8-K of Meditrust dated September 6, 1996 4.25 Form of Fifth Supplemental Indenture dated Filed herewith as of August 12, 1997, to Indenture dated as of July 26, 1995 between Meditrust and Fleet National Bank (State Street Bank and Trust Company, as Successor Trustee) 4.26 Form of Remarketed Reset Note due August Filed herewith 15, 2002 4.27 Form of Sixth Supplemental Indenture dated Filed herewith as of August 12, 1997, to Indenture dated as of July 26, 1995 between Meditrust and State Street Bank and Trust Company 4.28 Form of 7% Notes due August 15, 2007 Filed herewith 4.29 Form of Seventh Supplemental Indenture Filed herewith dated August 12, 1997, to Indenture dated as of July 26, 1995 between Meditrust and State Street Bank and Trust Company 4.30 Form of 7.114% Note due August 15, 2011 Filed herewith 4.31 Form of Deposit Agreement, among Incorporated by reference to Exhibit 4.3 to Meditrust Corporation and State Street Bank Joint Current Report on Form 8-K of and Trust Company and all holders from Meditrust Corporation and Meditrust time to time of Receipts for Depositary Operating Company, event date June 16, Shares, including form of Depositary 1998 Receipts 10.1 Credit Agreement dated as of July 17, 1998 Incorporated by reference to Joint Quarterly among Meditrust Corporation, Morgan Report on Form 10-Q for the Quarter ended Guaranty Trust Company of New York and June 30, 1998 the other Banks set forth therein 10.2 Amended and Restated Lease Agreement Incorporated by reference to Exhibit 2.2 to between Mediplex of Queens, Inc. and the Form 8-K of Meditrust dated January 13, QPH, Inc. dated December 30, 1986 1987
157
Exhibit No Title Method of Filing 10.3 Employment Agreement dated as of July 17, Incorporated by reference to Exhibit 10.1 to 1998 by and between Meditrust Operating the Joint Quarterly Report on Form 10-Q for Company and Abraham D. Gosman the Quarter ended September 30, 1998 10.4 Registration Rights Agreement, dated as of Incorporated by reference to Exhibit 10.3 to January 3, 1998 by and among Meditrust Joint Current Report on Form 8-K of Corporation, Meditrust Operating Company Meditrust Corporation and Meditrust and certain other parties signatory thereto Operating Company, event date January 8, 1998 10.5 Shareholders Agreement, dated as of Incorporated by reference to Exhibit 10.2 to January 3, 1998, by and among Meditrust Joint Current Report of Form 8-K of Corporation, Meditrust Operating Company, Meditrust Corporation and Meditrust certain shareholders of La Quinta Inns, Inc., Operating Company, event date January 8, and solely for purposes of Section 3.6 of 1998 such Agreement, La Quinta Inns, Inc. 10.6 Shareholders Agreement, dated as of Incorporated by reference to Exhibit 10 to January 11, 1998 among Meditrust the Joint Current Report on Form 8-K of Corporation, Meditrust Operating Company Meditrust Corporation and Meditrust and Certain Shareholders of Cobblestone Operating Company, event date January 11, Holdings, Inc. 1998 10.7 First Amendment to Shareholders Incorporated by reference to Annex D-1 to Agreement dated April 30, 1998, by and the Joint Proxy Statement/Prospectus on among Meditrust Corporation, Meditrust Form S-4/A of Meditrust Corporation and Operating Company and certain Meditrust Operating Company (File Nos. shareholders of La Quinta Inns, Inc., and 333-47737 and 333-47737-01) solely for the pursposes of Section 3.6 of such Agreement, La Quinta Inns, Inc. 10.8 First Amendment to Shareholders Incorporated by reference to Exhibit 10 to Agreement among Meditrust Corporation, the Joint Current Report on Form 8-K of Meditrust Operating Company and Certain Meditrust Corporation and Meditrust Shareholders of Cobblestone Holdings, Inc., Operating Company, event date March 16, dated as of March 16, 1998 1998 10.9 Purchase Agreement dated as of February Incorporated by reference to Exhibit 4.28 to 26, 1998 among Meditrust Corporation, the Joint Registration Statement on Form Meditrust Operating Company, Merrill Lynch S-4/A of Meditrust Corporation and International and Merrill Lynch, Pierce, Meditrust Operating Company (File Nos. Fenner & Smith Incorporated 333-47737 and 333-47737-01) 10.10 Amendment Agreement to Purchase Incorporated by reference to Exhibit 99.3 to Agreement dated as of July 16, 1998 the Joint Quarterly Report on Form 10-Q for among Meditrust Corporation, Meditrust the Quarter ended June 30, 1998 Operating Company, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated
158
Exhibit No Title Method of Filing 10.11 Amendment Agreement to Purchase Incorporated by reference to Exhibit 99.4 to Agreement dated as of July 31, 1998 the Joint Quarterly Report on Form 10-Q for among Meditrust Corporation, Meditrust the Quarter endedJune 30, 1998 Operating Company, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated 10.12 Amendment Agreement to Purchase Incorporated by reference to Exhibit 99.5 to Agreement dated as of September 11, 1998 the Joint Registration Statement on Form among Meditrust Corporation, Meditrust S-3/A of Meditrust Corporation and Operating Company, Merrill Lynch Meditrust Operating Company (File Nos. International and Merrill Lynch, Pierce, 333-40055 and 333-40055-01) Fenner & Smith Incorporated 10.13 Amendment Agreement to Purchase Filed herewith Agreement dated as of November 11, 1998 among Meditrust Corporation, Meditrust Operating Company, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated 10.14 Unsecured Purchase Price Adjustment Filed herewith Mechanism Agreement among Meditrust Corporation, Meditrust Operating Company, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated as a partial amendment and restatement of that certain Purchase Price Adjustment Mechanism Agreement dated as of February 26, 1998 10.15 Amended and Restated Settlement Filed herewith Agreement dated as of November 11, 1998 among Meditrust Corporation, Meditrust Operating Company, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated 10.16 Amendment to Credit Agreement dated as Filed herewith November 23, 1998 among Meditrust Corporation, Morgan Guaranty Trust Company of New York and the other Banks set forth therein 11 Statement Regarding Computation of Per Filed herewith Share Earnings 21 Subsidiaries of the Registrant Filed herewith 23 Consent of PricewaterhouseCoopers L.L.P. Filed herewith 27 Financial Data Schedule Filed herewith
159 Exhibit 11 THE MEDITRUST COMPANIES STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
Years ended December 31, -------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- Basic: Weighted average number of shares outstanding ......... 120,515 76,070 71,445 Net income from continuing operations ................. $141,080 $161,962 $157,976 Preferred stock dividends ............................. (8,444) -- -- Income from continuing operations available to common shareholders .................................. $132,636 $161,962 $157,976 Per share amounts: Net income per share .................................. (A) $ 1.10 $ 2.13 $ 2.21 Diluted: Weighted average number of shares used in Basic calculation .......................................... 120,515 76,070 71,445 Dilutive effect of: Contingently issuable shares .......................... 4,757 -- -- Stock options ......................................... 236 454 306 Diluted weighted average shares and equivalent shares outstanding ................................... (B) 125,508 76,524 71,751 Net income from continuing operations ................. $141,080 $161,962 $157,976 Preferred stock dividends ............................. (8,444) -- -- Income from continuing operations available to common shareholders .................................. $132,636 $161,962 $157,976 Per share amounts: Net income per share .................................. (A) $ 1.06 $ 2.12 $ 2.20
- - ------------ (A) This calculation is submitted in accordance with Regulation S-K item 601(b) (11) (B) Convertible debentures are not included due to their antidilutive effect. 160 EX-4.4 2 THIRD AMENDMENT TO PAIRING AGREEMENT THIRD AMENDMENT TO PAIRING AGREEMENT THIRD AMENDMENT TO PAIRING AGREEMENT ("Third Amendment") dated as of July 17, 1998 by and between Meditrust Corporation, a Delaware corporation ("REIT"), and Meditrust Operating Company, a Delaware corporation ("OPCO"). WHEREAS, REIT and OPCO are parties to a Pairing Agreement dated as of December 20, 1979, as amended by the First Amendment to Pairing Agreement, dated November 6, 1997, as further amended by the Second Amendment to Pairing Agreement, dated February 6, 1998 (as so amended, the "Pairing Agreement"); WHEREAS, the Boards of Directors of each of REIT and OPCO adopted, and the shareholders of REIT and OPCO approved, amendments to each of the respective certificates of incorporation of REIT and OPCO to authorize the issuance 25,000,000 shares of REIT capital stock and OPCO capital stock known as Excess Stock ("REIT Excess Stock" and "OPCO Excess Stock," respectively); WHEREAS, REIT and OPCO desire to amend the Pairing Agreement to provide that shares of REIT Excess Stock and shares of OPCO Excess Stock issuable upon conversion of Realty Common Stock (as defined in the Pairing Agreement), Operating Company Common Shares (as defined in the Pairing Agreement) or Convertible Equity Stock (as defined below) will, upon issuance, be paired in the same manner as, and be subject to the same conditions, limitations, restrictions and requirements as Realty Common Stock and Operating Company Common Shares; and WHEREAS, REIT and OPCO desire to clarify the terms of the Second Amendment to Pairing Agreement such that all series of series common stock that are convertible into Realty Common Stock, Operating Company Shares, REIT Excess Stock or OPCO Excess Stock will be subject to the pairing provisions of the Pairing Agreement. NOW, THEREFORE, in consideration of the mutual agreements contained in the Pairing Agreement and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Section 9 of the Pairing Agreement is hereby deleted in its entirety and shall be replaced with the following: "9. Preferred Stock, Series Common Stock and Excess Stock. The terms "Realty Common Stock" and "Operating Company Common Shares," as used in this Pairing Agreement, shall include, respectively, any preferred stock or series common stock of Realty or Operating Company which is convertible into Realty Common Stock or Operating Company Common Shares (the "Convertible Equity Stock") and shall also include any REIT Excess Stock or OPCO Excess Stock issued as a result of the conversion of Realty Common Stock, Operating Common Shares or Convertible Equity Stock, to the end that such Convertible Equity Stock, REIT Excess Stock or OPCO Excess Stock, as the case may be, shall be paired in the same manner as, and be subject to the same conditions, limitations, restrictions and requirements as the Realty Common Stock and Operating Company Common Shares under this Pairing Agreement." 2. As amended by this Third Amendment, the Pairing Agreement is ratified, confirmed and approved in all respects. IN WITNESS WHEREOF, the parties have executed this Third Amendment as of the day and year first above written. MEDITRUST CORPORATION By: /s/ Michael Benjamin ------------------------------- Name: Michael S. Benjamin, Esq. Title: Senior Vice President MEDITRUST OPERATING COMPANY By: /s/ Edward J. Robinson ------------------------------- Name: Edward J. Robinson Title: Chief Operating Officer 2 EX-4.25 3 FIFTH SUPPLEMENTAL INDENTURE FIFTH SUPPLEMENTAL INDENTURE Dated as of August 15, 1997 to INDENTURE Dated as of July 26, 1995 between MEDITRUST and FLEET NATIONAL BANK, as Trustee (STATE STREET BANK AND TRUST COMPANY, Successor Trustee) 7% Notes due August 15, 2007 FIFTH SUPPLEMENTAL INDENTURE FIFTH SUPPLEMENTAL INDENTURE, dated as of August 15, 1997 between Meditrust, a Massachusetts business trust (the "Company"), and State Street Bank and Trust Company, a Massachusetts trust company (the "Trustee"), to the Indenture dated as of July 26, 1995, between the Company and Fleet National Bank, predecessor Trustee (the "Indenture"). WHEREAS, the parties hereto have entered into the Indenture which provides for the issuance by the Company of one or more series of securities thereunder; and WHEREAS, Section 9.01 of the Indenture provides, among other things, that the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, without the consent of any Holders, may enter into an indenture supplemental to the Indenture (a) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company or (b) to establish the form or terms of Securities of any series as permitted by Sections 2.01 and 2.02; and WHEREAS, the Company wishes to issue an additional series of securities under the Indenture, designated its 7% Notes due August 15, 2007 (the "Notes"); and WHEREAS, the Company desires and has requested the Trustee to join with it in the execution and delivery of this Fifth Supplemental Indenture for the purpose of amending the Indenture in certain respects with respect to the Notes; and WHEREAS, the amendments contained in this Fifth Supplemental Indenture shall apply only to the Notes, and the covenants of the Company contained in this Fifth Supplemental Indenture are solely for the benefit of the Holders of the Notes; and WHEREAS, all acts necessary to constitute this Fifth Supplemental Indenture as a valid, binding and legal obligation of the Company have been done and performed; NOW, THEREFORE, witnesseth that, in consideration of the premises and of the covenants herein, it is hereby agreed as follows: ARTICLE ONE The Terms and Form of the Notes ------------------------------- (a) Terms of the Notes. (i) The Notes shall be limited to the aggregate principal amount of $160,000,000, which shall be designated "7% Notes due August 15, 2007." (ii) The Notes shall be issued only in denominations of $1,000 principal amount and integral multiples thereof; shall be dated the date of their authentication; shall mature on August 15, 2007; shall bear interest at the rate of 7% per annum from August 15, 1997, computed on the basis of a 360-day year of twelve 30-day months, payable commencing on February 15, 1998 and on each succeeding February 15 and August 15 thereafter until maturity to the persons in whose name the Notes shall be registered as of each February 1 and August 1 next preceding such interest payment date; shall be entitled to the benefit of the covenants of the Company set forth in Article Two (a) and (b) hereof in addition to those set forth in the Indenture. (b) Form of the Notes. (i) The text of the Notes due shall be substantially in the following form: -2- MEDITRUST 7% Note Due August 15, 2007 7% 7% DUE August 15, 2007 DUE August 15, 2007 MEDITRUST, a Massachusetts business trust, promises to pay to SPECIMEN or registered assigns, the principal sum of _____________________ Dollars, on August 15, 2007 Interest Payment Dates: February 15 and August 15 Record Dates: February 1 and August 1 [Additional provisions of this Security are set forth on the reverse side of this Security.] _____________, ____ MEDITRUST (SEAL) By: ____________________________ Secretary By: ____________________________ President CERTIFICATE OF AUTHENTICATION STATE STREET BANK AND TRUST COMPANY, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By: ____________________________ Authorized Officer 3 MEDITRUST 7% Notes Due August 15, 2007 1. Interest. Meditrust, a Massachusetts business trust (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semiannually on February 15 and August 15 of each year beginning February 15, 1998. Interest on the Notes will accrue from August 15, 1997. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Paying Agent will pay interest (except defaulted interest) on the Notes from monies provided by the Company to the persons who are the registered Holders of the Notes at the close of business on the February 1 or August 1 next preceding the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Paying Agent will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Paying Agent will make all payments of principal and interest in immediately available funds, so long as The Depository Trust Company or a successor depository continues to make its Same-Day Funds Settlement System available to the Company. 3. Registrar and Agents. Initially, State Street Bank and Trust Company will act as Registrar, Paying Agent and agent for service of notices and demands. The Company may change any Registrar, co-registrar, Paying Agent and agent for service of notices and demands without notice. The Company or any of its Subsidiaries may act as Paying Agent. The address of State Street Bank and Trust Company is Two International Place, Boston, MA 02110, Attn: Corporate Trust Dept. 4. Indenture, Limitations. The Company issued the Notes as a series of its securities under an Indenture dated as of July 26, 1995 as supplemented by a Fifth Supplemental Indenture dated as of August 15, 1997 (the Indenture") between the Company and State Street Bank and Trust Company, as successor trustee (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). The Notes are subject to all such terms, and the Holders of the Notes are referred to the Indenture and the TIA for a statement of such terms. The Notes are general unsecured obligations of the Company limited to $160,000,000 principal amount. The Indenture imposes certain limitations on the ability of the Company to, among other things, incur certain liens and certain additional indebtedness, make payments in respect of its shares of beneficial interest, merge or consolidate with any other Person and sell, lease, transfer or dispose of its properties or assets. 4 5. Denominations, Transfer, Exchange. This Note is one of a duly authorized issue of Securities of the Company designated as its 7% Notes due August 15, 2007. The Notes are in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. A Holder may register the transfer of or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. 6. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 7. Unclaimed Money. If money for the payment of principal or interest on any Note remains unclaimed for three years, the Trustee and the Paying Agent will pay the money back to the Company at its written request, unless otherwise required by law. Thereafter, Holders may look only to the Company for payment. 8. Discharge Prior to Maturity. The Indenture will be discharged and cancelled except for certain sections thereof upon payment of all the Notes, or upon the irrevocable deposit with the Trustee of funds or U.S. Government Obligations maturing on or before such payment date sufficient, together with scheduled payments of interest thereon without reinvestment, to pay principal, premium, if any, and interest on such payment date. 9. Supplemental Indenture. Subject to certain exceptions, the Indenture may be amended or supplemented with respect to the Notes with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding and any existing default or compliance with any provision may be waived with the consent of the Holders of the majority in principal amount of the Notes then outstanding. Without the consent of or notice to any Holder, the Company may supplement the Indenture, to, among other things, provide for uncertificated Notes, cure any ambiguity, defect or inconsistency, or make any other change that does not adversely affect the interests or rights of any Holder. 10. Successors. Upon satisfaction of the conditions provided in the Indenture, if a successor to the Company assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor will be released from those obligations. 11. Defaults and Remedies. If an Event of Default with respect to the Notes, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of a majority in principal amount of Notes may declare all the Notes to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it, subject to the provisions of the TIA, before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or 5 power with respect to the Notes. The Trustee may withhold from Holders of Securities notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company is required to file periodic reports with the Trustee as to the absence of any Default or Event of Default. 12. Trustee Dealings with the Company. State Street Bank and Trust Company, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates as if it were not the Trustee. 13. No Recourse Against Others. No shareholder, trustee or officer, as such, past, present or future, of the Company or any successor corporation or trust shall have any liability for any obligation of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Note by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. 14. Authentication. This Note shall not be valid until the Trustee signs the certificate of authentication on the reverse side of this Note. 15. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and any supplemental indentures thereto. It also will furnish the text of this Note in larger type. Requests may be made to: MEDITRUST, 197 Third Avenue, Needham Heights, Massachusetts 02194, Attention: John G. Demeritt, Controller. 6 ASSIGNMENT FORM If you, the Holder, want to assign this Note, fill in the form below and have your signature guaranteed: For value received, I or we assign and transfer this Note to (INSERT ASSIGNEE'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER) |----------------------------| | | |----------------------------| ................................................................................ ................................................................................ ................................................................................ ................................................................................ (Print or type assignee's name, address and zip code) and irrevocably appoint......................................................... ................................................... agent to transfer this Note on the books of the Company. The agent may substitute another to act for it. ___________________________________________________________ Date:........................................................................... Your signature:................................................................. (Sign exactly as your name appears on the reverse side of this Note) Signature Guaranteed By:........................................................ Note: Signature must be guaranteed by a participant in a Signature Guaranty Medallion Program. 7 ARTICLE TWO Additional Provisions --------------------- The following provisions in addition to those contained in the Indenture will apply to the Notes: (a) Limitation on Liens. -------------------- The Company will not pledge or otherwise subject to any lien, any of its or its Subsidiaries' property or assets unless the Notes are secured by such pledge or lien equally and ratably with all other obligations secured thereby so long as such other obligations shall be so secured; provided that such covenant will not apply to liens securing obligations which do not in the aggregate at any one time outstanding exceed 10% of Consolidated Net Tangible Assets of the Company and its consolidated Subsidiaries and also will not apply to: (1) Any lien or charge on any property, tangible or intangible, real or personal, existing at the time of acquisition or construction of such property (including acquisition through merger or consolidation) or given to secure the payment of all or any part of the purchase or construction price thereof or to secure any indebtedness incurred prior to, at the time of, or within one year after, the acquisition or completion of construction thereof for the purpose of financing all or any part of the purchase or construction price thereof; (2) Any liens securing the performance of any contract or undertaking of the Company not directly or indirectly in connection with the borrowing of money, obtaining of advances or credit or the securing of debts, if made and continuing in the ordinary course of business; (3) Any lien in favor of the United States or any state thereof or the District of Columbia, or any agency, department or other instrumentality thereof, to secure progress, advance or other payments pursuant to any contract or provision of any statute; (4) Mechanics', materialmen's, carriers', or other like liens arising in the ordinary course of business (including construction of facilities) in respect of obligations which are not due or which are being contested in good faith; (5) Any lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulations, which is required by law or governmental regulation as a condition to the transaction of any business, or the exercise of any privilege, franchise or license; 8 (6) Any liens for taxes, assessments or governmental charges or levies not yet delinquent, or liens for taxes, assessments or governmental charges or levies already delinquent but the validity of which is being contested in good faith; (7) Liens (including judgment liens) arising in connection with legal proceedings so long as such proceedings are being contested in good faith and in the case of judgment liens, execution thereof is stayed; (8) Liens relating to secured indebtedness of the Company outstanding as of June 30, 1996; and (9) Any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any lien referred to in the foregoing clauses (1) to (8) inclusive, of this subsection (a), provided, however, that the amount of any and all obligations and indebtedness secured thereby shall not exceed the amount thereof so secured immediately prior to the time of such extension, renewal or replacement and that such extension, renewal or replacement shall be limited to all or a part of the property which secured the charge or lien so extended, renewed or replaced (plus improvements on such property). As used herein: "Consolidated Net Tangible Assets" means the aggregate amount of assets (less applicable reserves and other properly deductible items) less (i) all current liabilities and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expenses and other like intangibles of the Company and its consolidated Subsidiaries, all as set forth on the most recent balance sheet of the Company and its consolidated Subsidiaries and prepared in accordance with generally accepted accounting principles; and "Subsidiary" means an affiliate controlled by the Company directly, or indirectly through one or more intermediaries. (b) Limitation on Incurrence of Obligations for Borrowed Money. The Company will not create, assume, incur or otherwise become liable in respect of, any (1) Senior Debt unless the aggregate outstanding principal amount of Senior Debt of the Company will not, at the time of such creation, assumption or incurrence and after giving affect thereto and to any concurrent transactions, exceed the greater of (i) 150% of Capital Base, or (ii) 225% of Tangible Net Worth; and (2) Non-Recourse Debt unless the aggregate principal amount of Senior Debt and Non-Recourse Debt outstanding of the Company will not, at the time of such creation, 9 assumption or incurrence and after giving affect thereto and to any concurrent transactions, exceed 225% of Capital Base. For any period during which the Company shall have a Subsidiary or Subsidiaries, the limitations contained in this subsection (b) shall be applied to the consolidated financial statements of the Company and its Subsidiaries. As used herein: "Capital Base" means, at any date, the sum of Tangible Net Worth and Subordinated Debt; "Capital Lease" means at any time any lease of Property which, in accordance with generally accepted accounting principles, would at such time be required to be capitalized on a balance sheet of the lessee; "Capital Lease Obligation" means at any time the amount of the liability in respect of a Capital Lease which, in accordance with generally accepted accounting principles, would at such time be required to be capitalized on a balance sheet of the lessee; "Debt" when used with respect to any Person means (i) its indebtedness, secured or unsecured, for borrowed money; (ii) liabilities secured by any existing Lien on Property owned by such Person; (iii) Capital Lease Obligations, and the present value of all payments due under any arrangement for retention of title (discounted at a rate per annum equal to the average interest borne by all outstanding Debt Securities determined on a weighted average basis and compounded semi-annually) if such arrangement is in substance an installment purchase or an arrangement for the retention of title for security purposes; and (iv) guarantees of obligations of the character specified in the foregoing clauses (i), (ii) and (iii) to the full extent of the liability of the guarantor (discounted to present value, as provided in the foregoing clause (iii), in the case of guarantees of title retention arrangements); "Liabilities" means, at any date, the items shown as liabilities on the balance sheet of the Company, except any items of deferred income, including capital gains; "Lien" means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and all other title exceptions and encumbrances affecting Property. For all purposes of this Indenture, the Company shall be deemed to be the owner of any Property which it has acquired or holds 10 subject to a conditional sale agreement, Capital Lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes; "Non-Recourse Debt" when used with respect to any Person, means any Debt secured by, and only by, property on or with respect to which such Debt is incurred where the rights and remedies of the holder of such Debt in the event of default do not extend to assets other than the property constituting security therefore; "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof; "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible; "Senior Debt" means all Debt other than Non-Recourse Debt and Subordinated Debt; "Subordinated Debt" means unsecured Debt of the Company which is issued or assumed pursuant to, or evidenced by, an indenture or other instrument which contains provisions for the subordination of such Debt (to which appropriate reference shall be made in the instruments evidencing such Debt if not contained therein) to the Debt Securities (and, at the option of the Company, if so provided, to other Debt of the Company, either generally or as specifically designated); "Subsidiary" means an affiliate controlled by the Company directly, or indirectly through one or more intermediaries; "Tangible Assets" means all assets of the Company (including assets held subject to Capital Leases and other arrangements described in the last sentence of the definition of "Lien") except: (i) deferred assets, other than prepaid insurance, prepaid taxes and deposits; (ii) patents, copyrights, trademarks, trade names, franchises, goodwill, experimental expense and other similar intangibles; and (iii) unamortized debt discount and expense; and "Tangible Net Worth" means, with respect to the Company at any date, the net book value (after deducting related depreciation, obsolescence, amortization, valuation and other proper reserves) of the Tangible Assets of the Company at such date minus the amount of its Liabilities at such date. 11 ARTICLE THREE Miscellaneous ------------- The Indenture, except as amended herein, is in all respects ratified and confirmed and this Fifth Supplemental Indenture and all its provisions herein contained shall be deemed a part thereof in the manner and to the extent herein and therein provided. The terms used in this Fifth Supplemental Indenture, but not defined herein, shall have the meanings assigned thereto in the Indenture. THIS FIFTH SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. This Fifth Supplemental Indenture may be simultaneously executed in any number of counterparts, and all such counterparts executed and delivered, each as an original, shall constitute one and the same instrument. THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. IN WITNESS WHEREOF, the parties hereto have caused this Fifth Supplemental Indenture to be duly executed, as of the day and year first above written. MEDITRUST By: _______________________________ Name: Title: Chief Financial Officer 12 STATE STREET BANK AND TRUST COMPANY, as trustee By: _______________________________ Name: Title: COMMONWEALTH OF MASSACHUSETTS ) ) ss.: County of Norfolk ) On the day of August, 1997, before me personally came , to me known, who, being by me duly sworn, did depose and say that she is Chief Financial Officer of Meditrust, one of the business entities described in and which executed the foregoing instrument; that s/he knows the seal of Meditrust; that the seal affixed to said instrument is Meditrust's seal; that it was so affixed by authority of the Board of Trustees of Meditrust; and that s/he signed her name thereto by like authority. [SEAL] ________________________________ Notary Public My commission expires: COMMONWEALTH OF MASSACHUSETTS ) ) ss.: County of Suffolk___________________ ) On the ________ day of August __, 1997, before me personally came _________________________, to me known, who, being by me duly sworn, did depose and say that s/he is _______________________________ of State Street Bank and Trust Company, one of the business entities described in and which executed the foregoing instrument; that s/he knows the seal of said bank; that the seal affixed to said instrument is such bank's seal; that it was so affixed by authority of the Board of Directors of said bank; and that s/he signed his/her name thereto by like authority. [SEAL] ___________________________ Notary Public My commission expires: 13 EX-4.26 4 FORM OF GLOBAL NOTE FORM OF GLOBAL NOTE UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO, HAS AN INTEREST HEREIN. No. $100,000,000 MEDITRUST Remarketed Reset Note due August 15, 2002 CUSIP 5850ITAK4 Meditrust, a Massachusetts business trust (the "Company"), for value received, hereby promises to pay to CEDE & CO. or registered assigns, in the Borough of Manhattan, The City of New York, the principal sum of ONE HUNDRED MILLION DOLLARS ($100,000,000), on August 15, 2002, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest in arrears on each November 15, February 15, May 15 and August 15, as the case may be, or any other date (including August 15, 1998) as shall be established by the Company as an interest payment date (each, an "Interest Payment Date"), commencing on November 15, 1997, and at maturity, on the principal amount of this Global Note, in like coin or currency, at the times and at the rate per annum from time to time in effect as set forth below, from the most recent date to which interest has been paid or, if no interest has been paid, from August 12, 1997. The interest so payable on each Interest Payment Date will, subject to certain exceptions provided in the Indenture referred to below, be paid to the person in whose name this Global Note is registered on the 15th calendar day, whether or not a Business Day, next preceding the applicable Interest Payment Date. This Global Note is issued in respect of a duly authorized issue of Securities of the Company, designated as the Remarketed Reset Notes due August 15, 2002 of the Company (the "Notes"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $100,000,000. The Notes represent one of a duly authorized series of Securities of the Company, issued and to be issued in one or more series under an Indenture dated as of July 26, 1996 and a Supplemental Indenture, dated as of August 12, 1997 (collectively, the "Indenture"), between the Company and State Street Bank and Trust Company, as trustee (herein called the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by the Trust Indenture Act of 1939, as amended (the "Act"). The Notes are subject to all such terms, and beneficial owners of interests in this Global Note are referred to the Indenture and the Act for a statement of such terms. All terms used in this Global Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Notes of this series are general and unsecured obligations of the Company. Except as provided below, owners of beneficial interests in the Notes evidenced by this Global Note will not be entitled to receive definitive Notes evidencing such ownership. Beneficial interests in the Notes will be held through a depositary selected by the Company, which initially is The Depository Trust Company ("DTC"). This Global Note will be deposited with and held by DTC and is registered in the name of DTC=s nominee. So long as DTC=s nominee is the registered owner of this Global Note, such nominee for all purposes will be considered the sole owner of the Notes under the Indenture. If DTC is at any time unwilling, unable or ineligible to continue as depositary and a successor depositary is not appointed by the Company within 90 calendar days of its receipt of notice from DTC to such effect, the Company will issue individual Notes in definitive form in exchange for this Global Note. In addition, the Company may at any time and in its sole discretion determine not to have the Notes represented by a Global Note. In either instance, an owner of a beneficial interest in this Global Note will be entitled to have Notes equal in principal amount to such beneficial interest registered in its name and will be entitled to physical delivery of such Notes in definitive form. Notes so issued in definitive form will be issued in denominations of $1,000 and any integral multiple thereof and will be issued in registered form only, without coupons. During the period from and including August 12, 1997 to but excluding August 15, 1998 (the "Initial Spread Period"), the interest rate on the Notes will be reset quarterly, and will equal LIBOR (as defined herein) plus the applicable Spread. The Spread during the Initial Spread Period is 0.45%. Unless notice of redemption as a whole has been given, after the Initial Spread Period the duration, redemption dates, redemption type, redemption prices (if applicable), Commencement Date (as defined herein), Interest Payment Dates (as defined herein) and interest rate mode will be agreed to by the Company and the Remarketing Underwriter (as defined herein) by 3:00 p.m., New York City time, on each applicable Duration/Mode Determination Date (as defined herein) and the Spread will be agreed to by the Company and the Remarketing 2 Underwriter by 3:00 p.m., New York City time, on the corresponding Spread Determination Date (as defined herein). Interest on the Notes during each Subsequent Spread Period (a "Subsequent Spread Period") shall be payable, as applicable, either (i) at a floating interest rate (such Notes being in the "Floating Rate Mode," and such interest rate being a "Floating Rate") or (ii) at a fixed interest rate (such Notes being in the "Fixed Rate Mode" and such interest rate being a "Fixed Rate"), in each case as determined by the Remarketing Underwriter and the Company in accordance with a Remarketing Agreement between the Remarketing Underwriter and the Company (the "Remarketing Agreement"). During the Initial Spread Period, interest on the Notes will be payable quarterly in arrears, on November 15, 1997, February 15, 1998, May 15, 1998 and August 15, 1998 (or, if not a Business Day (as defined herein), on the next succeeding Business Day (except as described below)), to the persons in whose names the Notes are registered at the close of business on the applicable record date (i.e., the 15th calendar day, whether or not a Business Day, next preceding the applicable Interest Payment Date) next preceding such Interest Payment Date. During the Initial Spread Period and any Subsequent Spread Period for which the Notes are in the Floating Rate Mode, the interest rate on the Notes will be reset quarterly and the Notes will bear interest at a per annum rate (computed on the basis of the actual number of days elapsed over a 360-day year) equal to LIBOR for the applicable Quarterly Period (as defined herein), plus the applicable Spread. Interest on the Notes will accrue from and include each Interest Payment Date (or, in the case of the Initial Quarterly Period (as defined herein), July 9, 1997) but exclude the next succeeding Interest Payment Date or maturity date, as the case may be. The Initial Quarterly Period will be the period from and including August 12, 1997 to but excluding the first Interest Payment Date (November 15, 1997) (the "Initial Quarterly Period"). Thereafter, each Quarterly Period during the Initial Spread Period or any Subsequent Spread Period for which the Notes are in the Floating Rate Mode (each, a "Quarterly Period") will be from and including the most recent Interest Payment Date to which interest has been paid to but excluding the next Interest Payment Date; the first day of a Quarterly Period is referred to herein as an "Interest Reset Date." After the Initial Spread Period, the Spread applicable to each Subsequent Spread Period will be determined on each subsequent Spread Determination Date which precedes the beginning of the corresponding Subsequent Spread Period, pursuant to agreement between the Company and the Remarketing Underwriter (except as otherwise provided below). If the Company and the Remarketing Underwriter are unable to agree on the Spread for any Subsequent Spread Period, (1) the Subsequent Spread Period will be one year, (2) the Notes will be reset to the Floating Rate Mode, (3) the Spread for such Subsequent Spread Period will be the Alternate Spread (as defined herein) and (4) the Notes will be redeemable at the option of the Company, in whole or in part, upon at least five Business Days= notice given by no later than the fifth Business Day after the relevant Spread Determination Date, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the redemption date, except that the Notes may not be redeemed prior to the Tender Date (as defined herein) or later than the last day of such one-year Subsequent Spread Period. The Alternate Spread will be the percentage equal to LIBOR (as described herein) for the Quarterly Period beginning on the first date of such 3 Subsequent Spread Period (the "Commencement Date"). If any Interest Payment Date (other than at maturity), redemption date, Interest Reset Date, Duration/Mode Determination Date, Spread Determination Date, Commencement Date or Tender Date in the Floating Rate Mode would otherwise be a day that is not a Business Day, such Interest Payment Date, redemption date, Interest Reset Date, Duration/Mode Determination Date, Spread Determination Date, Commencement Date or Tender Date will be postponed to the next succeeding day that is a Business Day, except that if such Business Day is in the next succeeding calendar month, such Interest Payment Date, redemption date, Interest Reset Date, Commencement Date or Tender Date shall be the next preceding Business Day. If the maturity date for the Notes falls on a day that is not a Business Day, the related payment of principal and interest will be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest will accrue on the amounts so payable for the period from and after such date. LIBOR applicable for a Quarterly Period will be determined by the Rate Agent (as defined herein) as of the second London Business Day (as defined herein) preceding each Interest Reset Date (the "LIBOR Determination Date") in accordance with the following provisions: (i) LIBOR will be determined on the basis of the offered rates for three-month deposits in U.S. Dollars of not less than U.S.$1,000,000, commencing on the second London Business Day immediately following such LIBOR Determination Date, which appears on Telerate Page 3750 (as defined herein) as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. "Telerate Page 3750" means the display designated on page "3750" on the Telerate Service (or such other page as may replace the 3750 page on that service or such other service or services as may be nominated by the British Bankers= Association for the purpose of displaying London interbank offered rates for U.S. Dollar deposits). If no rate appears on Telerate Page 3750, LIBOR for such LIBOR Determination Date will be determined in accordance with the provisions of paragraph (ii) below. (ii) With respect to a LIBOR Determination Date on which no rate appears on Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date, the Rate Agent shall request the principal London offices of each of four major reference banks in the London interbank market selected by the Rate Agent to provide the Rate Agent with a quotation of the rate at which three-month deposits in U.S. Dollars, commencing on the second London Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to an amount of not less than U.S.$1,000,000 that is representative for a single transaction in such market at such time. If at least two such quotations are provided, LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Rate Agent. If fewer than two quotations are provided, LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., New York City time, on such LIBOR Determination Date by three major banks in The City of New York selected by the Rate Agent (after consultation with the Company) for loans in U.S. Dollars to leading European banks, 4 having a three-month maturity commencing on the second London Business Day immediately following such LIBOR Determination Date and in a principal amount equal to an amount of not less than U.S.$1,000,000 that is representative for a single transaction in such market at such time; provided, however, that if the banks selected as aforesaid by the Rate Agent are not quoting as mentioned in this sentence, LIBOR for such LIBOR Determination Date will be LIBOR determined with respect to the immediately preceding LIBOR Determination Date, or in the case of the first LIBOR Determination Date, LIBOR for the Initial Quarterly Period. If the Notes are to be reset to the Fixed Rate Mode, as agreed to by the Company and the Remarketing Underwriter on a Duration/Mode Determination Date, then the applicable Fixed Rate for the corresponding Subsequent Spread Period will be determined as of the sixth calendar day following the Spread Determination Date (provided that such date is a Business Day; otherwise, as of the next Business Day thereafter) (the "Fixed Rate Determination Date") (provided, however, that in the case where the Notice Date (as defined herein) also falls on the Fixed Rate Determination Date, the Fixed Rate Determination Date will be the following Business Day thereafter), in accordance with the following provisions: the Fixed Rate will be a per annum rate and will be determined as of 12:00 noon on such Fixed Rate Determination Date by adding the applicable Spread (as agreed to by the Company and the Remarketing Underwriter on the preceding Spread Determination Date) to the yield to maturity (expressed as a bond equivalent, on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the applicable United States Treasury security, selected by the Rate Agent after consultation with the Remarketing Underwriter, as having a maturity comparable to the duration selected for the following Subsequent Spread Period, which would be used in accordance with customary financial practice in pricing new issues of corporate debt securities of comparable maturity to the duration selected for the following Subsequent Spread Period. Interest in the Fixed Rate Mode will be computed on the basis of a 360-day year of twelve 30-day months. Such interest will be payable semiannually in arrears on the Interest Payment Dates (February 15 and August 15, unless otherwise specified by the Company and the Remarketing Underwriter on the applicable Duration/Mode Determination Date) at the applicable Fixed Rate, as determined by the Company and the Remarketing Underwriter on the Fixed Rate Determination Date, beginning on the Commencement Date and for the duration of the relevant Subsequent Spread Period. Interest on the Notes will accrue from and including each Interest Payment Date to but excluding the next succeeding Interest Payment Date or maturity date, as the case may be. If any Interest Payment Date or any redemption date in the Fixed Rate Mode falls on a day that is not a Business Day (in either case, other than any Interest Payment Date or redemption date that falls on a Commencement Date, in which case such date will be postponed to the next day that is a Business Day), the related payment of principal and interest will be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest will accrue on the amounts so payable for the period from and after such dates. The Spread that will be applicable during each Subsequent Spread Period will be the percentage (a) recommended by the Remarketing Underwriter so as to result in a rate that, in the 5 opinion of the Remarketing Underwriter, will enable tendered Notes to be remarketed by the Remarketing Underwriter at 100% of the principal amount thereof, as described below, and (b) agreed to by the Company. Unless notice of redemption of the Notes as a whole has been given, the duration, redemption dates, redemption types (i.e., par, premium or make-whole), redemption prices (if applicable), Commencement Date, Interest Payment Dates and interest rate mode (i.e., Fixed Rate Mode or Floating Rate Mode) (and any other relevant terms) for each Subsequent Spread Period will be established by 3:00 p.m., New York City time, on the 15th calendar day prior to the Commencement Date of each Subsequent Spread Period (the "Duration/Mode Determination Date"). In addition, the Spread for each Subsequent Spread Period will be established by 3:00 p.m., New York City time, on the 10th calendar day prior to the Commencement Date of such Subsequent Spread Period (the "Spread Determination Date"). The Company will request, not later than seven nor more than 15 calendar days prior to any Spread Determination Date, that DTC notify its Participants of such Spread Determination Date and of the procedures that must be followed if any beneficial owner of a Note wishes to tender such Note as described below. The term "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in The City of New York are required or authorized to close and, in the case of Notes in the Floating Rate Mode, that is also a London Business Day. The term "London Business Day" means any day on which dealings in deposits in U.S. Dollars are transacted in the London interbank market. Unless notice of redemption of the Notes as a whole has been given, the Company will cause a notice to be given to Noteholders on the New York Business Day (as defined herein) next following the Spread Determination Date for each Subsequent Spread Period, specifying (1) the duration of such Subsequent Spread Period, (2) the mode (i.e., Fixed Rate Mode or Floating Rate Mode), (3) the Commencement Date, (4) any redemption dates, (5) any redemption type (i.e., par, premium or make-whole), (6) any redemption prices, (7) the Spread for such Subsequent Spread Period, (8) the identity of the Remarketing Underwriter, if applicable, and (9) any other relevant provisions. The term "New York Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in The City of New York are required or authorized to close. All percentages resulting from any calculation of any interest rate for the Notes will be rounded, if necessary, to the nearest one hundred thousandth of a percentage point, with five one millionths of a percentage point rounded upward and all dollar amounts will be rounded to the nearest cent, with one half cent being rounded upward. In the event the Company and the Remarketing Underwriter agree on the Spread on the Spread Determination Date with respect to any Subsequent Spread Period, the Company and the Remarketing Underwriter will enter into a Remarketing Underwriting Agreement (the "Remarketing Underwriting Agreement") on such Spread Determination Date, under which the Remarketing Underwriter will agree, subject to the terms and conditions set forth therein, to purchase from tendering Noteholders on the date immediately following the end of a Subsequent Spread Period (the "Tender Date") all Notes with respect to which the Remarketing Underwriter 6 receives a Tender Notice as described below at 100% of the principal amount thereof (the "Purchase Price"). In such event (except as otherwise provided below), each beneficial owner of a Note may, at such owner=s option, upon giving notice as provided below (the "Tender Notice"), tender such Note for purchase by the Remarketing Underwriter on the Tender Date at the Purchase Price. The Purchase Price will be paid by the Remarketing Underwriter in accordance with the standard procedures of DTC. Interest accrued on the Notes with respect to the preceding Quarterly Period will be paid by the Company in the manner described above. The Tender Notice must be received by the Remarketing Underwriter during the period commencing on the calendar day following the Spread Determination Date (or, if not a Business Day, on the next succeeding Business Day) and ending at 5:00 p.m., New York City time, on the fifth calendar day following the Spread Determination Date (or, if not a Business Day, on the next succeeding Business Day) (the "Notice Date"). Except as otherwise provided below, a Tender Notice shall be irrevocable. If a Tender Notice is not received for any reason by the Remarketing Underwriter with respect to any Note by 5:00 p.m., New York City time, on the Notice Date, the beneficial owner of such Note shall be deemed to have elected not to tender such Note for purchase by the Remarketing Underwriter. The obligation of the Remarketing Underwriter to purchase Notes from tendering Noteholders will be subject to several conditions precedent set forth in the Remarketing Underwriting Agreement. In addition, the Remarketing Underwriting Agreement will provide for the termination thereof by the Remarketing Underwriter upon the occurrence of certain events. In the event that, with respect to any Subsequent Spread Period, the Remarketing Underwriter does not purchase on the relevant Tender Date all of the Notes for which a Tender Notice shall have been given, then (1) all such Tender Notices will be null and void, (2) none of the Notes for which such Tender Notices shall have been given will be purchased by the Remarketing Underwriter on such Tender Date, (3) the Subsequent Spread Period will be one year, which Subsequent Spread Period shall be deemed to have commenced upon the applicable Commencement Date, (4) the Notes will be reset to the Floating Rate Mode, (5) the Spread for such Subsequent Spread Period shall be the Alternate Spread and (6) the Notes will be redeemable at the option of the Company, in whole or in part, upon at least 10 Business Days= notice given by no later than the fifth Business Day following the relevant Tender Date, on the date set forth in such notice, which shall be no later than the last day of such one-year Subsequent Spread Period, in the manner described below, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the redemption date. No beneficial owner of any Note shall have any rights or claims under the Remarketing Underwriting Agreement or against the Company or the Remarketing Underwriter as a result of the Remarketing Underwriter not purchasing such Notes, except as provided in clause (5) of the last sentence of the preceding paragraph. The Company will have no obligation under any circumstance to repurchase any Notes, except in the case of Notes called for redemption as described herein. If the Remarketing Underwriter does not purchase all Notes tendered for purchase on any Tender Date, it will promptly notify the Company and the Trustee. As soon as practicable after 7 receipt of such notice, the Company will cause a notice to be given to Noteholders specifying (1) the one-year duration of the Subsequent Spread Period, (2) that the Notes will reset to the Floating Rate Mode, (3) the Spread for such Subsequent Spread Period (which shall be the Alternate Spread) and (4) LIBOR for the Initial Quarterly Period of such Subsequent Spread Period. The term "Remarketing Underwriter" means the nationally recognized broker-dealer selected by the Company to act as Remarketing Underwriter. The term "Rate Agent" means the entity selected by the Company as its agent to determine (i) LIBOR and the interest rate on the Notes for any Quarterly Period and/or (ii) the yield to maturity on the applicable United States Treasury security that is used in connection with the determination of the applicable Fixed Rate, and the ensuing applicable Fixed Rate. Pursuant to a Remarketing Agreement, Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed to act as Remarketing Underwriter and Rate Agent. The Company, in its sole discretion, may change the Remarketing Underwriter and the Rate Agent for any Subsequent Spread Period at any time at or prior to 3:00 p.m., New York City time, on the Duration/Mode Determination Date relating thereto. The Notes may not be redeemed by the Company prior to August 15, 1998. On that date and on those Interest Payment Dates specified as redemption dates by the Company on the Duration/Mode Determination Date in connection with any Subsequent Spread Period, the Notes may be redeemed, at the option of the Company, in whole or in part, upon notice thereof given at any time during the 45 calendar day period ending on the tenth calendar day prior to the redemption date (provided that notice of any partial redemption must be given at least 15 calendar days prior to the redemption date), in accordance with the redemption type selected on the Duration/Mode Determination Date. In the event of any redemption of less than all of the outstanding Notes, the particular Notes to be redeemed will be selected by such method as the Company shall deem fair and appropriate. So long as the Global Note is held by DTC, the Company will give notice to DTC, and DTC will determine the principal amount to be redeemed from the account of each Participant. The redemption type to be chosen by the Company and the Remarketing Underwriter on the Duration/Mode Determination Date may be one of the following as defined herein: (i) Par Redemption; (ii) Premium Redemption; or (iii) Make-Whole Redemption. "Par Redemption" means redemption at a redemption price equal to 100% of the principal amount thereof, plus accrued interest thereon, if any, to the redemption date. "Premium Redemption" means redemption at a redemption price or prices greater than 100% of the principal amount thereof, plus accrued interest thereon, if any, to the redemption date, as determined on the Duration/Mode Determination Date. "Make-Whole Redemption" means redemption at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed plus accrued interest thereon, if any, to the redemption date and (ii) the Make-Whole Amount (as defined herein), if any, with respect to such Notes. "Make-Whole Amount" means, in connection with any optional redemption or accelerated payment of any Note, the excess, if any, of (i) the aggregate present value as of the date of such redemption or accelerated payment of each dollar or principal being redeemed or 8 paid and the amount of interest (exclusive of interest accrued to the date of redemption or accelerated payment) that would have been payable in respect of such dollar if such redemption or accelerated payment had not been made, determined by discounting, on a semiannual basis, such principal and interest at the Reinvestment Rate (as defined herein) (determined on the third Business Day preceding the date such notice of redemption is given or declaration of acceleration is made) from the respective dates on which such principal and interest would have been payable if such redemption or accelerated payment had not been made, over (ii) the aggregate principal amount of the Notes being redeemed or paid. "Reinvestment Rate" means 0.25% (twenty-five one hundredths of one percent) plus the yield on treasury securities at constant maturity under the heading "Week Ending" published in the Statistical Release (as defined herein) under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the remaining life to maturity, as of the payment date of the principal being redeemed or paid. If no maturity exactly corresponds to such maturity, yields for the two published maturities most closely corresponding to such maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For purposes of calculating the Reinvestment Rate, the most recent Statistical Release published prior to the date of determination of the Make-Whole Amount shall be used. "Statistical Release" means the statistical release designated "H. 15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded United States government securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination under the Supplemental Indenture, then such other reasonably comparable index which shall be designated by the Rate Agent, after consultation with the Company. In case an Event of Default (as defined in the Indenture) with respect to the Notes shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the provisions provided in the Indenture. The Indenture contains provisions permitting the holders of not less than a majority of the aggregate principal amount of the outstanding Notes, on behalf of the holders of all such Notes at a meeting duly called and held as provided in the Indenture, to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided in the Indenture to be made, given or taken by the holders of the Notes, including without limitation, waiving (a) compliance by the Company with certain provisions of the Indenture, and (b) certain past defaults under the Indenture and their consequences. Any resolution passed or decision taken at any meeting of the holders of the Notes in accordance with the provisions of the Indenture shall be conclusive and binding upon such holders and upon all future holders of this Note and other Notes issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof. 9 No shareholder, trustee or officer, as such, past, present or future, of the Company or any successor corporation or trust shall have any liability for any obligation of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Note by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 10 THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. The Company, the Trustee, and any agent of the Company or the Trustee may treat the registered holder hereof as the absolute owner of this Global Note for all purposes. When a successor corporation assumes all of the obligations of its predecessor under the Notes and the Indenture, the predecessor corporation will be released from those obligations. 11 This Global Note shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee. IN WITNESS WHEREOF, Meditrust has caused this Global Note to be executed. Dated: August 12, 1997 MEDITRUST By:_____________________________________ Name:___________________________________ Title:__________________________________ CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated herein referred to in the within-mentioned Indenture. STATE STREET BANK AND TRUST COMPANY as Trustee By_________________________________ Authorized Signatory Dated: August 12, 1997 12 EX-4.27 5 SIXTH SUPPLEMENTAL INDENTURE SIXTH SUPPLEMENTAL INDENTURE Dated as of August 12, 1997 to INDENTURE Dated as of July 26, 1995 between MEDITRUST and STATE STREET BANK AND TRUST COMPANY as Successor Trustee Exercisable Put Option Notes due August 15, 2011 SIXTH SUPPLEMENTAL INDENTURE SIXTH SUPPLEMENTAL INDENTURE, dated as of August 12, 1997 between Meditrust, a Massachusetts business trust (the "Company"), and State Street Bank and Trust Company, a Massachusetts trust company (the "Trustee"), to the Indenture dated as of July 26, 1995, between the Company and Fleet National Bank, predecessor Trustee (the "Indenture"). WHEREAS, the parties hereto have entered into the Indenture which provides for the issuance by the Company of one or more series of securities thereunder; and WHEREAS, Section 9.01 of the Indenture provides, among other things, that the Company, when authorized by Board Resolution, and the Trustee, at any time and from time to time, without notice to or consent of any Holders, may amend the Indenture or enter into an indenture supplemental to the Indenture (a) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company or (b) to establish the form or terms of securities of any series as permitted by Sections 2.01 and 2.02 of the Indenture; and WHEREAS, the Company wishes to issue an additional series of securities under the Indenture, designated its Exercisable Put Option Notes due August 15, 2011 (the "Notes"); and WHEREAS, the Company desires and has requested the Trustee to join with it in the execution and delivery of this Sixth Supplemental Indenture for the purpose of amending the Indenture in certain respects with respect to the Notes; and WHEREAS, the amendments contained in this Sixth Supplemental Indenture shall apply only to the Notes, and the covenants of the Company contained in this Sixth Supplemental Indenture are solely for the benefit of the Holders of the Notes; and WHEREAS, all acts necessary to constitute this Sixth Supplemental Indenture as a valid, binding and legal obligation of the Company have been done and performed; NOW, THEREFORE, witnesseth that, in consideration of the premises and of the covenants herein, it is hereby agreed as follows: 2 ARTICLE ONE The Terms and Form of the Notes ------------------------------- (a) Terms of the Notes. (i) The Notes shall constitute one series of securities having the title Exercisable Put Option Notes due August 15, 2011. (ii) The Notes shall be limited in the aggregate principal amount of $150,000,000. (iii) The Notes shall be issued at 100% of the principal amount thereof. (iv) The Notes will mature on August 15, 2011, subject to the Call Option (as defined below) and the Put Option (as defined below). (v) The rate at which the Notes shall bear interest shall be (A) at 7.114% per annum from August 12, 1997, to but not including August 15, 2004, and (B) at the Interest Rate to Maturity (as defined below) from August 15, 2004 until August 15, 2011. The Interest Payment Dates on which interest will be payable shall be February 15 and August 15 in each year, beginning February 15, 1998; the Record Dates for the interest payable on the Notes on any Interest Payment Date shall be the Business Day immediately preceding each Interest Payment Date (if the Notes are evidenced by a global note in book-entry form and otherwise shall be the last Business Day of the calendar month immediately preceding the month in which the related Interest Payment Date occurs) and the basis upon which interest shall be calculated shall be that of a 360-day year consisting of twelve 30-day months. (vi) The Notes will be issuable in denominations of $100,000 and multiples of $1,000 in excess thereof. (vii) The place where the principal of, premium, if any, and interest on the Notes shall be payable and the Notes may be surrendered for registration of transfer or exchange and where notices or demands to or upon the Company in respect of the Notes and the Indenture may be served shall be State Street Bank and Trust Company, 111 Westminster Street, RIM0199, Providence, Rhode Island 02903-2305. (viii) The entire outstanding principal amount of the Notes (and premium, if any) shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 6.02 of the Indenture. 3 (ix) Payment of the principal of (and premium, if any) and interest on the Notes shall be payable in Dollars, and the Notes shall be denominated in Dollars. (x) In exchange for certain consideration to be paid by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Callholder") to the initial holder of the Notes (the "Noteholder"), the Noteholder will enter into a Call Option with the Callholder, pursuant to which the Callholder will have the right to purchase the Notes from the Noteholder (the "Call Option") on August 15, 2004 (the "Call Settlement Date") at 100% of the principal amount thereof (the "Call Price"). On the Call Settlement Date, the Company may repurchase the Notes, in whole but not in part, from the Callholder at a price equal to the greater of (A) 100% of the principle amount of the Notes and (B) the sum of the present values of the Remaining Scheduled Payments (as defined below) thereon, as determined by the Callholder, discounted to the Call Settlement Date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, plus in either case accrued and unpaid interest from August 15, 2004 on the principal amount being purchased to the date of purchase. If the Company elects to repurchase the Notes, it shall pay the purchase price therefor in same-day funds by wire transfer to an account designated by the Callholder on the Call Settlement Date. The Callholder will notify the Company and the trustee of the Trust (the "Trust Trustee"), not later than five Business Days prior to the Call Settlement Date, of its intention to purchase the Notes subject to the exceptions described herein. The Company thereafter will notify the Trust Trustee and the Callholder, not later than the Business Day immediately preceding the Determination Date (as defined below), that the Company has irrevocably determined to exercise its right to repurchase the Notes from the Callholder. From and after August 15, 2004, the Notes will bear interest at the Interest Rate to Maturity. The obligation of the Callholder to purchase the Notes on the Call Settlement Date is subject to the condition that no Event of Default, or any event which, with the giving of notice or passage of time, or both, would constitute an Event of Default, with respect to the Notes shall have occurred and be continuing. The Interest Rate to Maturity shall be determined by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Calculation Agent") by 4:00 p.m., New York City time, on the third Business Day immediately preceding August 15, 2004 (the "Determination Date") to the nearest one hundred-thousandth (0.00001) of one percent per annum and will be the Base Rate (7.114%) plus the Spread, which will be based on the Dollar Price (as defined below) of the Notes calculated as described in the next sentence. The "Dollar Price" of the Notes shall be equal to the present value of the remaining principal and interest payments of the Base Rate from August 15, 2004, discounted at the Treasury Rate. The Spread, as determined in the manner specified in the next succeeding sentence, shall be the lowest bid, expressed as a spread in the terms of the Base Rate given the Dollar Price as calculated in the prior sentence. The Spread will be obtained by the Calculation Agent on the Determination Date from each of five leading dealers of publicly 4 traded debt securities of the Company in The City of New York (which may include the Calculation Agent or one of its affiliates) selected by the Calculation Agent, for the full aggregate principal amount of the Notes, but assuming an issue date on August 15, 2004, a stated annual interest rate equal to the Base Rate plus the spread bid by such dealer, for settlement, without accrued interest, on August 15, 2004. If fewer than five such dealers bid as described above, then the Spread shall be the arithmetic mean of the bids obtained, determined as described above. Notwithstanding the calculation of the Spread described above, if the Calculation Agent and the Company agree, the Callholder and the Company may mutually determine the Interest Rate to Maturity for the Notes. The Interest Rate to Maturity announced by the Calculation Agent, absent manifest error, shall be binding and conclusive upon the beneficial owners and holders of the Notes, the Company and the Trustee. "Treasury Rate" means, with respect to the Call Settlement Date, the rate per annum equal to the semiannual equivalent yield to maturity or interpolated (on a day count basis) yield to maturity of the Comparable Treasury Issues (as defined below), assuming a price for the Comparable Treasury Issues (expressed as a percentage of its principal amount), equal to Comparable Treasury Price (as defined below) for such Call Settlement Date. "Comparable Treasury Issues" means the United States Treasury security or securities selected by the Calculation Agent as having an actual or interpolated maturity or maturities comparable to the remaining term of the Notes being purchased. "Comparable Treasury Price" means, with respect to the Call Settlement Date, (a) the offer prices for the Comparable Treasury Issues (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Call Settlement Date, as set forth on "Telerate Page 500" (or such other page as may replace Page 500) or (b) if such page (or any successor page) is not displayed or does not contain such an offer prices on such Business Day, (i) the average of the Reference Treasury Dealer Quotations for such Call Settlement Date, after excluding the highest and lowest such Reference Treasury Quotations, or (ii) if the Calculation Agent obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations. "Telerate Page 500" means the display designated as "Page 500" on the Dow Jones Telerate Service (or such other page as may replace Page 500 on such service) or such other service displaying such Treasury Rate as may replace the Dow Jones Telerate Service. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Call Settlement Date, the average, as determined by the Calculation Agent, of the offer prices for the Comparable Treasury Issues (expressed in each case as a percentage of its principal amount) quoted in writing to the Calculation Agent by such Reference Treasury Dealer by 3:30 p.m., on the third Business Day preceding such call Settlement Date. "Reference Treasury Dealer" means each of CS First Boston Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Salomon Brothers Inc. and their respective successors; provided, however, that 5 it any of the foregoing or their affiliates shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Calculation Agent shall substitute therefor another Primary Treasury Dealer. "Remaining Scheduled Payments" means, with respect to the Notes, the remaining scheduled payments of the principal thereof to be purchased and interest thereon, to the extent of the Base Rate (7.114%) only, that would be due after the related Call Settlement Date but for such purchase; provided, however, that, if such Call Settlement Date is not an Interest Payment Date with respect to such Notes, the amount on the next scheduled interest payment thereon, to the extent of the Base Rate only, will be reduced by the amount of interest accrued thereon, to the extent of the Base Rate only, to such Call Settlement Date. If the Callholder has exercised its right to call the Notes and the Company has not previously notified the Callholder and the Trustee of its intention to exercise its right to purchase the Notes from the Callholder, the Callholder will notify the Company and the Trustee by telephone, confirmed in writing, by 4:00 p.m., New York City time, on the Determination Date, of the Interest Rate to Maturity. All of the Notes will be automatically delivered to the account of the Callholder (by book-entry through The Depository Trust Company ("DTC")) or the Company, as and the case may be, pending payment of the purchase price therefor, on the Call Settlement Date. (xi) The Noteholder shall have the right, upon at least one Business Day but not more than four Business Days prior written notice, to require the Company to repurchase on August 15, 2004 (the "Put Settlement Date") all of the Notes (the "Put Option") at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the Put Settlement Date. The Trustee shall also give notice of its intent to exercise the Put Option on the Put Settlement Date if the Callholder has exercised the Call Option but fails to make payment in full thereon on the date required in the Call Option. (xii) Except for such rights as are set forth in the Call Option and the Put Option, the holders of the Notes shall have no special rights in addition to those provided in the Indenture upon the occurrence of any particular events. (xiii) Other than as set forth herein, there shall be no deletions from, modifications of or additions to the Events of Default or additional covenants of the Company with respect to the Notes from those set forth in the Indenture. (xiv) The Notes will initially be issued in definitive form as a single note. Upon the exercise of the Call Option, the definitive Note may be exchanged for a single global note (the "Global Note") registered in the name of DTC or its nominee. If represented by a Global Note, (i) DTC or its nominee will credit, on its book-entry registration and transfer system, the 6 respective amounts of Notes represented by the Global Note; (ii) ownership of beneficial interest in the Global Note will be limited to institutions that have accounts with DTC or its nominee ("Participants") and to persons that may hold interests through Participants; (iii) beneficial owners of interest in the Global Note may exchange such interests for Notes of like tenor of any authorized form and denomination only in the manner provided in Section 2.06 of the Indenture; and (iv) DTC shall be depositary of the Global Note. (xv) The Notes shall not be issuable as Bearer Securities. (xvi) Interest on any Note shall be payable only to the Person in whose name that Note (or one or more Predecessors Securities thereof) is registered at the close of business on the Regular Record Date for such interest. (xvii) the Notes are not Guaranteed Securities. (b) Form of the Notes. (i) The text of the Notes due shall be substantially in the following form: 7 MEDITRUST 7.114% Notes due August 15, 2011 PRINCIPAL AMOUNT $150,000,000 CUSIP NO: 584979AA6 DUE August 15, 2011 MEDITRUST, a Massachusetts business trust, promises to pay to Meditrust Exercisable Put Option Secturities(sm)Trust or registered assigns, the principal sum of One Hundred Fifty Million Dollars, on August 15, 2011. Additional provisions of this Security are set forth on the reverse side of this Security. _______________, ____ MEDITRUST (SEAL) By:______________________ Secretary By:______________________ President CERTIFICATE OF AUTHENTICATION STATE STREET BANK AND TRUST COMPANY, as Trustee, certifies that this is one of the Securities referred to in the within-mentioned Indenture. By:______________________ Authorized Officer 8 MEDITRUST Exercisable Put Option Notes due August 15, 2011 CUSIP NO: 584979AA6 THE NOTES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. 1. Interest. Meditrust, a Massachusetts business trust, and any successor under the Indenture (the "Company"), for value received, hereby promises to pay to Meditrust Exercisable Put Option SecuritiesSM Trust (the "Trust"), formed pursuant to an Amended and Restated Declaration of Trust and Trust Agreement (the "Trust Agreement"), dated as of August 7, 1997, or to any subsequent registered assignee or transferee Holder hereof upon presentation, the principal sum of ONE HUNDRED AND FIFTY MILLION DOLLARS ($150,000,000) on August 15, 2011 (the "Maturity Date"), and to pay interest on the outstanding principal amount of this Note (i) at 7.114% per annum (the "Initial Interest Rate") from August 12, 1997 (the "Original Issuance Date") to but not including August 15, 2004, and (ii) at the Interest Rate to Maturity (determined as hereinafter provided) from August 15, 2004 until the Maturity Date. The Company shall pay interest on the Notes semi-annually in arrears on February 15, and August 15 of each year, commencing February 15, 1998, or if any such day is not a Business Day, on the next succeeding Business Day (and without any interest or other payment in respect of such delay) (each an "Interest Payment Date"). Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. 2. Method of Payment. The Paying Agent will pay interest (except defaulted interest) on the Notes from monies provided by the Company to the persons who are the registered Holders of the Notes at the close of business on the Business Day immediately preceding each Interest Payment Date (if the Notes are evidenced by a global note in book-entry form and otherwise shall be the last Business Day of the calendar month immediately preceding the month in which the related interest payment date occurs). Holders must surrender Notes to a Paying Agent to collect principal payments. The Paying Agent will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. 9 The Paying Agent will make all payments of principal and interest in immediately available funds, so long as The Depository Trust Company or a successor depository continues to make its Same-Day Funds Settlement System available to the Company. 3. Registrar and Agents. Initially, State Street Bank and Trust Company will act as Registrar, Paying Agent and agent for service of notices and demands. The Company may change any Registrar, co-registrar, Paying Agent and agent for service of notices and demands without notice. The Company or any of its Subsidiaries may act as Paying Agent. The address of State Street Bank and Trust Company is [111 Westminster Street, RIM0199, Providence, Rhode Island 02903-2305.] 4. Indenture, Limitations. The Company issued the Notes as a series of its securities under an Indenture dated as of July 26, 1995 as supplemented by a Sixth Supplemental Indenture dated as of August 12, 1997 (the "Indenture") between the Company and State Street Bank and Trust Company, as successor trustee (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code " 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). The Notes are subject to all such terms, and the Holders of the Notes are referred to the Indenture and the TIA for a statement of such terms. The Notes are general unsecured obligations of the Company limited to $150,000,000 principal amount. The Indenture imposes certain limitations on the ability of the Company to, among other things, incur certain liens and certain additional indebtedness, make payments in respect of its shares of beneficial interest, merge or consolidate with any other Person and sell, lease, transfer or dispose of its properties or assets. 5. Call and Repurchase Option. In exchange for certain consideration paid by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Callholder") to the Trust, the Trust has entered into a Call Option with the Callholder, pursuant to which the Callholder has the right to purchase the Notes from the Trust (the "Call Option") on August 15, 2004 (the "Call Settlement Date") at 100% of the principal amount thereof (the "Call Price"). On the Call Settlement Date, the Company may repurchase the Notes, in whole but not in part, from the Callholder at a price equal to the greater of (i) 100% of the principal amount of the Notes and (ii) the sum of the present values of the Remaining Scheduled Payments (as defined herein) thereon, as determined by the Callholder, discounted to the Call Settlement Date on a semiannual basis (assuming a 360- day year consisting of twelve 30-day months) at the Treasury Rate, plus in either case accrued and unpaid interest from August 15, 2004 on the principal amount being purchased to the date of purchase. If the Company elects to repurchase the Notes, it shall pay the purchase price therefor in same-day funds by wire transfer to an account designated by the Callholder on the Call Settlement Date. 10 The Callholder will notify the Company and trustee of the Trust (the "Trust Trustee"), not later than five Business Days prior to the Call Settlement Date, of its intention to purchase the Notes subject to the exceptions described herein. The Company thereafter will notify the Trust Trustee and the Callholder, not later than the Business Day immediately preceding the Determination Date (as defined herein), that the Company has irrevocably determined to exercise its right to repurchase the Notes from the Callholder. From and after August 15, 2004, the Notes will bear interest at the Interest Rate to Maturity. The obligation of the Callholder to purchase the Notes on the Call Settlement Date is subject to the condition that no Event of Default, or any event which, with the giving of notice or passage of time, or both, would constitute an Event of Default, with respect to the Notes shall have occurred and be continuing. The Interest Rate to Maturity shall be determined by Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Calculation Agent") by 4:00 p.m., New York City time, on the third Business Day immediately preceding August 15, 2004 (the "Determination Date") to the nearest one hundred-thousandth (0.00001) of one percent per annum and will be the Base Rate (6.194%) plus the Spread, which will be based on the Dollar Price (as defined herein) of the Notes calculated as described in the next sentence. The "Dollar Price" of the Notes shall be equal to the present value of the remaining principal and interest payments of the Base Rate from August 15, 2004, discounted at the Treasury Rate. The Spread, as determined in the manner specified in the next succeeding sentence, shall be the lowest bid, expressed as a spread in the terms of the Base Rate given the Dollar Price as calculated in the prior sentence. The Spread will be obtained by the Calculation Agent on the Determination Date from each of five leading dealers of publicly traded debt securities of the Company in The City of New York (which may include the Calculation Agent or one of its affiliates) selected by the Calculation Agent, for the full aggregate principal amount of the Notes, but assuming an issue date on August 15, 2004, a stated annual interest rate equal to the Base Rate plus the spread bids by such dealer, for settlement without accrued interest on August 15, 2004. If fewer than five such dealers bid as described above, then the Spread shall be the arithmetic mean of the bid obtained determined as described above. Notwithstanding the calculation of the Spread described above, if the Calculation Agent and the Company agree, the Callholder and the Company may mutually determine the Interest Rate to Maturity for the Notes. The Interest Rate to Maturity announced by the Calculation Agent, absent manifest error, shall be binding and conclusive upon the beneficial owners and Holders of the Notes, the Company and the Trustee. "Treasury Rate" means, with respect to the Call Settlement Date, the rate per annum equal to the semiannual equivalent yield to maturity or interpolated (on a day count basis) yield to maturity of the Comparable Treasury Issues (as defined herein), assuming a price for the Comparable Treasury Issues (expressed as a percentage of its principal amount), equal to the Comparable Treasury Price (as defined herein) for such Call Settlement Date. 11 "Comparable Treasury Issues" means the United States Treasury security or securities selected by the Calculation Agent as having an actual or interpolated maturity or maturities comparable to the remaining term of the Notes being purchased. "Comparable Treasury Price" means, with respect to the Call Settlement Date, (a) the offer prices for the Comparable Treasury Issues (expressed in each case as a percentage of its principal amount) on the third Business Day preceding such Call Settlement Date, as set forth on "Telerate Page 500" (or such other page as may replace Page 500) or (b) if such page (or any successor page) is not displayed or does not contain such offer prices on such Business Day, (i) the average of the Reference Treasury Dealer Quotations for such Call Settlement Date, after excluding the highest and lowest such Reference Treasury Quotations, or (ii) if the Calculation Agent obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations. "Telerate Page 500" means the display designated as "Page 500" on the Dow Jones Telerate Service (or such other page as may replace Page 500 on such service) or such other service displaying such Treasury Rate as may replace the Dow Jones Telerate Service. "Reference Treasury Dealer Quotations" means, with respect to each reference Treasury Dealer and any Call Settlement Date, the average, as determined by the Calculation Agent, of the offer prices for the Comparable Treasury Issues (expressed in each case as a percentage of its principal amount) quoted in writing to the Calculation Agent by such Reference Treasury Dealer by 3:30 p.m., on the third Business Day preceding such Call Settlement Date. "Reference Treasury Dealer" means each of CS First Boston Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Salomon Brothers Inc. and their respective successors; provided, however, that if any of the foregoing or their affiliates shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Calculation Agent shall substitute therefor another Primary Treasury Dealer. "Remaining Scheduled Payments" means, with respect to the Notes, the remaining scheduled payments of the principal thereof to be purchased and interest thereon, to the extent of the Base Rate (6.194%) only, that would be due after the related Call Settlement Date but for such purchase; provided, however, that if such Call Settlement Date is not an Interest Payment Date with respect to such Notes, the amount of the next succeeding scheduled interest payment thereon, to the extent of the Base Rate only, will be reduced by the amount of interest accrued thereon, to the extent of the Base Rate only, to such Call Settlement Date. If the Callholder has exercised its right to call the Notes and the Issuer has not previously notified the Callholder and the Trust Trustee of its intention to exercise its right to purchase the Notes from the Callholder, the Callholder will notify the Issuer and the Trust Trustee by telephone, confirmed in writing, by 4:00 p.m., New York City time, on the Determination Date, of the Interest Rate to Maturity. 12 All of the Notes will be automatically delivered to the account of the Callholder (by book-entry through the Depository Trust Company) or the Issuer, as the case may be, pending payment of the purchase price therefor, on the Call Settlement Date. 6. Put Option. The Trust has the right, upon at least one Business Day but not more than four Business Days prior written notice, to require the Company to repurchase on August 15, 2004 (the "Put Settlement Date") all of the Notes (the "Put Option") at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the Put Settlement Date. The Trust Trustee shall also give notice of its intent to exercise the Put Option on the Put Settlement Date if the Callholder has exercised the Call Option but fails to make payment in full thereon on the date required in the Call Option. 7. Denominations, Transfer, Exchange. This Note is one of a duly authorized issue of Securities of the Company designated as its Exercisable Put Option Notes due August 15, 2011 limited in aggregate principal amount to $150,000,000. The Notes are in registered form without coupons in denominations of $100,000, and multiples of $1,000 principal amount and integral multiples thereof. A Holder may register the transfer of or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. 8. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 9. Unclaimed Money. If money for the payment of principal or interest on any Note remains unclaimed for three years, the Trustee and the Paying Agent will pay the money back to the Company at its written request, unless otherwise required by law. Thereafter. Holders may look only to the Company for payment. 10. Discharge Prior to Maturity. The Indenture will be discharged and cancelled except for certain sections thereof upon payment of all the Notes, or upon the irrevocable deposit with the Trustee of funds or U.S. Government Obligations maturing on or before such payment date sufficient, together with scheduled payments of interest thereon without reinvestment, to pay principal, premium, if any, and interest on such payment date. 11. Supplemental Indenture. Subject to certain exceptions, the Indenture may be amended or supplemented with respect to the Notes with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding and any existing default or compliance with any provision may be waived with the consent of the Holders of the majority in principal amount of the Notes then outstanding. Without the consent of or notice to any Holder, the Company may supplement the Indenture, to, among other things, provide for uncertificated Notes, cure any ambiguity, defect or inconsistency, or make any other change that does not 13 adversely affect the interests or rights of any Holder. 12. Successors. Upon satisfaction of the conditions provided in the Indenture, if a successor to the Company assumes all the obligations of its predecessor under the Notes and the Indenture, the predecessor will be released from those obligations. 13. Defaults and Remedies. If an Event of Default with respect to the Notes, as defined in the Indenture, occurs and is continuing, the Trustee or the Holders of a majority in principal amount of Notes may declare all the Notes to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it, subject to the provisions of the TIA, before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of a majority in principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power with respect to the Notes. The Trustee may withhold from Holders of Securities notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company is required to file periodic reports with the Trustee as to the absence of any Default or Event of Default. 14. Trustee Dealings with the Company. Fleet National Bank, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates as if it were not the Trustee. 15. No Recourse Against Others. No shareholder, trustee or officer, as such, past, present or future, of the Company or any successor corporation or trust shall have any liability for any obligation of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder of a Note by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE 14 PERFORMANCE OF ANY OBLIGATION. 16. Authentication. This Note shall not be valid until the Trustee signs the certificate of authentication on the reverse side of this Note. 17. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (=Uniform Gifts to Minors Act). The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and any supplemental indentures thereto. It also will furnish the text of this Note in larger type. Requests may be made to: MEDITRUST, 197 Third Avenue, Needham Heights, Massachusetts 02194, Attention: John G. Demeritt, Controller. 15 ASSIGNMENT FORM If you, the Holder, want to assign this Note, fill in the form below and have your signature guaranteed: For value received, I or we assign and transfer this Note to (INSERT ASSIGNEE'S SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER) ||============================================================================|| || || || || ||============================================================================|| ................................................................. ................................................................. ................................................................. ................................................................. (Print or type assignee's name, address and zip code) and irrevocably appoint ......................................... ................................................... agent to transfer this Note on the books of the Company. The agent may substitute another to act for it. Date:............................................................ Your signature:.................................................. (Sign exactly as your name appears on the reverse side of this Note) Signature Guaranteed By:......................................... Note: Signature must be guaranteed by a participant in a Signature Guaranty Medallion Program.] 16 ARTICLE THREE Miscellaneous ------------- The Indenture, except as amended herein, is in all respects ratified and confirmed and this Sixth Supplemental Indenture and all its provisions herein contained shall be deemed a part thereof in the manner and to the extent herein and therein provided. The terms used in this Sixth Supplemental Indenture, but not defined herein, shall have the meanings assigned thereto in the Indenture. THIS SIXTH SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. This Sixth Supplemental Indenture may be simultaneously executed in any number of counterparts, and all such counterparts executed and delivered, each as an original, shall constitute one and the same instrument. THE DECLARATION OF TRUST ESTABLISHING THE COMPANY DATED AUGUST 6, 1985, AS AMENDED, A COPY OF WHICH IS DULY FILED WITH THE OFFICE OF THE SECRETARY OF STATE OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAME "MEDITRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS "TRUSTEES," BUT NOT INDIVIDUALLY OR PERSONALLY; AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. IN WITNESS WHEREOF, the parties hereto have caused this Sixth Supplemental Indenture to be duly executed, as of the day and year first above written. MEDITRUST By:________________________________ Name: Title: [Chief Financial Officer][Treasurer] 17 STATE STREET BANK AND TRUST COMPANY, as trustee By:_______________________________ Name: Title: COMMONWEALTH OF MASSACHUSETTS ) ) ss.: County of Norfolk ) On the __ day of August, 1997, before me personally came ________________, to me known, who, being by me duly sworn, did depose and say that s/he is [Chief Financial Officer][Treasurer] of Meditrust, one of the business entities described in and which executed the foregoing instrument; that s/he knows the seal of Meditrust; that the seal affixed to said instrument is Meditrust's seal; that it was so affixed by authority of the Board of Trustees of Meditrust; and that s/he signed her name thereto by like authority. [SEAL] -------------------------- Notary Public My commission expires: STATE OF RHODE ISLAND ) ) ss.: County of ___________ ) On the day of August __, 1997, before me personally came _________________, to me known, who, being by me duly sworn, did depose and say that s/he is _____________________ of State Street Bank and Trust Company, one of the business entities described in and which executed the foregoing instrument; that s/he knows the seal of said bank; that the seal affixed to said instrument is such bank's seal; that it was so affixed by authority of the Board of Directors of said bank; and that s/he signed his/her name thereto by like authority. [SEAL] ---------------------------- Notary Public My commission expires: 18 EX-4.29 6 SEVENTH SUPPLEMENTAL INDENTURE SEVENTH SUPPLEMENTAL INDENTURE by and between MEDITRUST and STATE STREET BANK AND TRUST COMPANY August 12, 1997 MEDITRUST $100,000,000 Remarketed Reset Notes due August 15, 2002 This SEVENTH SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") made and entered into as of August 12, 1997 between Meditrust, a Massachusetts business trust (the "Company"), and State Street Bank and Trust Company, a national banking association (the "Trustee"). WITNESSETH THAT: WHEREAS, the Company and State Street Bank and Trust Company have executed and delivered an Indenture, dated as of July 26, 1995 (the "Indenture"), relating to the Company's issuance, from time to time, of various series of debt securities; and WHEREAS, the Company has determined to issue debt securities known as its $100,000,000 Remarketed Reset Notes due August 15, 2002 (the "Notes"); and WHEREAS, the Indenture provides that certain terms and conditions for each series of debt securities issued by the Company thereunder may be set forth in an indenture supplemental to the Indenture; NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: ARTICLE ONE DEFINED TERMS Section 101. The following definitions supplement, and, to the extent inconsistent with, replace the definitions in Section 101 of the Indenture: "Alternate Spread" means the percentage equal to LIBOR for the Quarterly Period beginning on the Commencement Date of the relevant Subsequent Spread Period. "Annual Service Charge" as of any date means the maximum amount which is expensed in any 12-month period for interest on Debt of the Company and its Subsidiaries. "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in The City of New York are required or authorized to close and, in the case of Notes in the Floating Rate Mode, that is also a London Business Day. "Capital Stock" means, with respect to any Person, any capital stock (including preferred stock), shares, interests, participation or other ownership interests (however designated) of such Person and any rights (other than debt securities convertible into or exchangeable for capital stock), warrants or options to purchase any thereof. "Commencement Date" means the first date of a Subsequent Spread Period. "Duration/Mode Determination Date" means the fifteenth calendar date prior to the Commencement Date of each Subsequent Spread Period on which the character and duration of the interest rate on the Notes as well as the redemption type (and any other relevant terms) for the Subsequent Spread Period will be agreed to by the Company and the Remarketing Underwriter. "Initial Quarterly Period" is defined in the third paragraph of Section 201(c) hereof. "Initial Spread" means the Spread applicable during the Initial Spread Period. "Initial Spread Period" means the period from and including August 12, 1997 to but excluding August 15, 1998 during which the interest rate on the Notes will be reset quarterly and will equal LIBOR plus the Initial Spread. "Interest Payment Date" means any date interest is paid on the Notes. "Interest Reset Date" means the first day of a Quarterly Period. "LIBOR Determination Date" means the second London Business Day preceding each Interest Reset Date, on which the Rate Agent will determine LIBOR applicable for a Quarterly Period. "LIBOR" means, with respect to determining the interest rate on Notes in the Floating Rate Mode, the offered rate for three-month deposits in U.S. Dollars of not less than U.S. $1,000,000, commencing on the second London Business Day immediately following such LIBOR Determination Date, which appears on Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. With respect to a LIBOR Determination Date on which no rate appears on Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date, the Rate Agent shall request the principal London offices of each of four major reference banks in the London interbank market selected by the Rate Agent to provide the Rate Agent with a quotation of the rate at which three-month deposits in U.S. Dollars, commencing on the second London Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to an amount of not less than U.S. $1,000,000 that is representative for a single transaction in such market at such time. If at least two such quotations are provided, LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Rate Agent. If fewer than two quotations are provided, LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., New York City time, on such LIBOR Determination Date by three major banks in The City of New York selected by the Rate Agent (after consultation with the Company) for loans in U.S. Dollars to leading European banks, having a three-month maturity commencing on the second London Business Day immediately following such LIBOR 2 Determination Date and in a principal amount equal to an amount of not less than U.S. $1,000,000 that is representative for a single transaction in such market at such time; provided, however, that if the banks selected as aforesaid by the Rate Agent are not quoting as mentioned in this sentence, LIBOR for such LIBOR Determination Date will be LIBOR determined with respect to the immediately preceding LIBOR Determination Date, or in the case of the first LIBOR Determination Date, LIBOR for the Initial Quarterly Period. "London Business Day" means any day on which dealings in deposits in U.S. Dollars are transacted in the London interbank market. "Make-Whole Amount" means, in connection with any optional redemption or accelerated payment of any Note, the excess, if any, of (i) the aggregate present value as of the date of such redemption or accelerated payment of each dollar of principal being redeemed or paid and the amount of interest (exclusive of interest accrued to the date of redemption or accelerated payment) that would have been payable in respect of such dollar if such redemption or accelerated payment had not been made, determined by discounting, on a semiannual basis, such principal and interest at the Reinvestment Rate (determined on the third Business Day preceding the date such notice of redemption is given or declaration of acceleration is made) from the respective dates on which such principal and interest would have been payable if such redemption or accelerated payment had not been made, over (ii) the aggregate principal amount of the Notes being redeemed or paid. For purposes of this Supplemental Indenture and the Notes, references in the Indenture to the payment of the principal (and premium, if any) and interest on the Notes shall be deemed to include the payment of the Make-Whole Amount, if any, due upon redemption with respect to the Notes. "Make-Whole Redemption" means redemption at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed plus accrued interest thereon, if any, to the redemption date and (ii) the Make-Whole Amount, if any, with respect to such Notes. "Par Redemption" means redemption at a redemption price equal to 100% of the principal amount thereof, plus accrued interest thereon, if any, to the redemption date. "Premium Redemption" means redemption at a redemption price or prices greater than 100% of the principal amount thereof, plus accrued interest thereon, if any, to the redemption date, as determined on the Duration/Mode Determination Date. "Quarterly Period" means the period from and including the most recent Interest Payment Date to which interest has been paid to but excluding the next Interest Payment Date. "Rate Agent" means the nationally recognized broker-dealer selected by the Company as its agent to determine (i) LIBOR and the interest rate on the Notes for any Quarterly Period and/or (ii) the yield to maturity on the applicable United States Treasury security that is used in connection with the determination of the applicable Fixed Rate, and the ensuing applicable Fixed Rate. 3 "Record Date" means the fifteenth calendar day, whether or not a Business Day, next preceding the applicable Interest Payment Date. "Reinvestment Rate" means .25% (twenty-five one hundredths of one percent) plus the yield on treasury securities at constant maturity under the heading "Week Ending" published in the Statistical Release under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the remaining life to maturity, as of the payment date of the principal being redeemed or paid. If no maturity exactly corresponds to such maturity, yields for the two published maturities most closely corresponding to such maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For purposes of calculating the Reinvestment Rate, the most recent Statistical Release published prior to the date of determination of the Make-Whole Amount shall be used. "Remarketing Underwriter" means the nationally recognized broker-dealer selected by the Company to act as Remarketing Underwriter. "Remarketing Underwriting Agreement" means the agreement entered into by the Company and the Remarketing Underwriter in the event the Company and the Remarketing Underwriter agree on the Spread on the Spread Determination Date with respect to any Subsequent Spread Period. "Spread" refers to the percentage that, added to LIBOR (when in the Floating Rate Mode) or the comparable Treasury rate (when in the Fixed Rate Mode), equals the interest rate payable on the Notes. "Spread Determination Date" is the tenth calendar day prior to the Commencement Date of such Subsequent Spread Period on which the Spread for each Subsequent Spread Period will be established by 3:00 p.m., New York City time. "Statistical Release" means the statistical release designated "H. 15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded United States government securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination under this Supplemental Indenture, then such other reasonably comparable index which shall be designated by the Rate Agent, after consultation with the Company. "Subsequent Spread" means the Spread determined by agreement between the Remarketing Underwriter and the Company to result in a rate which will enable 100% of tendered Notes to be remarketed. "Subsequent Spread Period" means one or more periods of at least six months and not more than nine years (or any integral multiple of six months therein), designated by the Company, 4 commencing on a February 15 or August 15 (or as otherwise specified by the Company and the Remarketing Underwriter on the applicable Duration/Mode Determination Date in connection with the establishment of each Subsequent Spread Period) through and including August 15, 2002. "Subsidiary" means any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests of which are owned, directly or indirectly, by the Company or one or more other Subsidiaries of the Company. For the purposes of this definition, "voting equity securities" means equity securities having voting power for the election of directors, whether at all times or only so long as no senior class of security has such voting power by reason of any contingency. "Telerate Page 3750" means the display designated on page "3750" on the Telerate Service (or such other page as may replace the 3750 page on that service or such other service or services as may be nominated by the British Bankers' Association for the purpose of displaying London interbank offered rates for U.S. Dollar deposits). "Tender Date" is defined in Section 201(e) hereof. "Tender Notice" is defined in Section 201(e) hereof. ARTICLE TWO TERMS OF THE NOTES Section 201. Pursuant to Section 301 of the Indenture, the Notes shall have the following terms and conditions: (a) Title; Limitation on Aggregate Principal Amount. The Notes shall be known as the Company's $100,000,000 Remarketed Reset Notes due August 15, 2002. The Notes will be limited to an aggregate principal amount of $100,000,000. (b) Principal Repayment; Currency. The stated maturity of the Notes is August 15, 2002, provided, however, the Notes may be earlier redeemed at the option of the Company as provided in paragraph (d) below. The principal of each Note payable on the maturity date shall be paid against presentation and surrender thereof at the corporate trust office of the Trustee, located initially at Two International Place, Boston, Massachusetts 02110, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public or private debts. The Company will not pay Additional Amounts (as defined in the Indenture) on the Notes. (c) Interest Payments. During the Initial Spread Period, the interest rate on the Notes will be reset on each Interest Reset Date, and will equal LIBOR plus the Initial Spread. The Initial Spread is .45%. After the Initial Spread Period, unless notice of redemption of the Notes as a whole 5 has been given, the duration, redemption dates, redemption type, redemption prices (if applicable), Commencement Date, Interest Payment Date and interest rate mode will be agreed to by the Company and the Remarketing Underwriter by 3:00 p.m., New York City time, on each applicable Duration/Mode Determination Date and the Spread will be agreed to by the Company and the Remarketing Underwriter by 3:00 p.m., New York City time, on the corresponding Spread Determination Date. Interest on the Notes during each Subsequent Spread Period shall be payable, as applicable, either (i) at a floating interest rate (such Notes being in the "Floating Rate Mode", and such interest rate being a "Floating Rate") or (ii) at a fixed interest rate (such Notes being in the "Fixed Rate Mode" and such interest rate being a "Fixed Rate"), in each case as determined by the Remarketing Underwriter and the Company in accordance with a Remarketing Agreement between the Remarketing Underwriter and the Company (the "Remarketing Agreement"). After the Initial Spread Period, the Spread applicable to each Subsequent Spread Period will be determined on each subsequent Spread Determination Date which precedes the beginning of the corresponding Subsequent Spread Period, pursuant to agreement between the Company and the Remarketing Underwriter (except as otherwise provided below), and the interest rate mode used for each Subsequent Spread Period may be a Floating Rate Mode or a Fixed Rate Mode, at the discretion of the Company and the Remarketing Underwriter. If the Company and the Remarketing Underwriter are unable to agree on the Spread for any Subsequent Spread Period, (1) the Subsequent Spread Period will be one year, (2) the Notes will be reset to the Floating Rate Mode, (3) the Spread for such Subsequent Spread Period will be the Alternate Spread and (4) the Notes will be redeemable at the option of the Company, in whole or in part, upon at least five Business Days' notice given by no later than the fifth Business Day after the relevant Spread Determination Date, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the redemption date, except that the Notes may not be redeemed prior to the Tender Date or later than the last day of such one-year Subsequent Spread Period. During the Initial Spread Period, interest on the Notes will be payable in Dollars quarterly in arrears on November 15, 1997, February 15, 1998, May 15, 1998 and August 15, 1998 (or, if not a Business Day, on the next succeeding Business Day except as described herein). After the Initial Spread Period, (i) if the Notes are in the Floating Rate Mode, interest on the Notes will be payable, unless otherwise specified on the applicable Duration/Mode Determination Date, quarterly in arrears on each November 15, February 15, May 15 and August 15, during the applicable Subsequent Spread Period, or (ii) if the Notes are in the Fixed Rate Mode, interest on the Notes will be payable, unless otherwise specified on the applicable Duration/Mode Determination Date, semiannually in arrears on each January 9 and July 9 beginning on the Commencement Date and for the duration of the applicable Subsequent Spread Period. Interest on the Notes is payable to the persons in whose names the Notes are registered at the close of business on the applicable Record Date next preceding the applicable Interest Payment Date. Interest on the Notes will accrue from and including each Interest Payment Date (or in the case of the Initial Quarterly Period, July 9, 1997) to but excluding the next succeeding Interest Payment Date or maturity date, as the case may be. The Initial Quarterly Period will be the period from and including August 12, 1997 to but excluding the first Interest Payment Date (November 15, 6 1997) (the "Initial Quarterly Period"). Thereafter, each Quarterly Period during the Initial Spread Period or any Subsequent Spread Period will be from and including the most recent Interest Payment Date to which interest has been paid to but excluding the next Interest Payment Date. Payment of interest on the Notes shall be made by the Trustee to or at the direction of The Depository Trust Company or its nominee, Cede & Co., who will in turn immediately credit the account of the Remarketing Underwriter. If any Interest Payment Date (other than at maturity), redemption date, Interest Reset Date, Duration/Mode Determination Date, Spread Determination Date, Commencement Date or Tender Date would otherwise be a day that is not a Business Day, such Interest Payment Date, redemption date, Interest Reset Date, Duration/Mode Determination Date, Spread Determination Date, Commencement Date or Tender Date will be postponed to the next succeeding day that is a Business Day, except that if such Business Day is in the next succeeding calendar month, such Interest Payment Date, redemption date, Interest Reset Date, Commencement Date or Tender Date shall be the next preceding Business Day. If the maturity date for the Notes falls on a day that is not a Business Day, the related payment of principal and interest will be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest will accrue on the amounts so payable for the period for the period from and after such dates. If the Notes are in the Floating Rate Mode, such Notes will bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a 360-day year) equal to LIBOR for the applicable Quarterly Period plus the applicable Spread, as agreed to by the Company and the Remarketing Underwriter, and such interest rate will be reset quarterly. If the Notes are in the Fixed Rate Mode, interest will equal the applicable Spread, as agreed to by the Company and the Remarketing Underwriter, plus the applicable Treasury rate, computed on the basis of a 360-day year of twelve 30-day months. Interest in the Fixed Rate Mode will accrue from and including each Interest Payment Date to but excluding the next succeeding Interest Payment Date or maturity date, as the case may be. If any Interest Payment Date or any redemption date in the Fixed Rate Mode falls on a day that is not a Business Day (in either case, other than any Interest Payment Date or redemption date that falls on a Commencement Date, in which case such Commencement Date will be postponed to the next day that is a Business Day), the related payment of principal and interest will be made on the next succeeding Business Day as if it were made on the date such payment was due, and no interest will accrue on the amounts so payable for the period from and after such date. Unless the Company shall have otherwise provided pursuant to Section 4 of the Remarketing Agreement, dated as of August 7, 1997 between the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), the Rate Agent will be Merrill Lynch. All percentages resulting from any calculation in respect of a Note will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of 7 a percentage point rounded upward, and all dollar amounts used in or resulting from such calculation in respect of a Note will be rounded to the nearest cent (with one-half cent rounded upward). Unless notice of redemption of the Notes as a whole has been given, the Company will cause a notice to be given to holders of Notes on the New York Business Day (as defined below) following the Spread Determination Date for each Subsequent Spread Period in the manner described below, specifying (1) the duration of such Subsequent Spread Period, (2) the mode (i.e., Fixed Rate Mode or Floating Rate Mode), (3) the Commencement Date, (4) any redemption dates, (5) any redemption type (i.e., par, premium or make-whole), (6) any redemption prices, (7) the Spread for such Subsequent Spread Period, (8) the identity of the Remarketing Underwriter, if applicable, and (9) any other relevant provisions. The term "New York Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in The City of New York are required or authorized to close. (d) Prepayment at the Option of the Company; Redemption. The Notes are not redeemable prior to August 15, 1998. On that date and thereafter, the Notes may be redeemable, at the option of the Company, on those Interest Payment Dates that are specified as redemption dates by the Company on the applicable Duration/Mode Determination Date, in whole or in part, upon notice thereof given at any time during the 45 calendar day period ending on the tenth calendar day prior to the redemption date (provided that notice of any partial redemption must be given to the Noteholders at least 15 calendar days prior to the redemption date), in accordance with the redemption type selected on the Duration/Mode Determination Date. The redemption type to be chosen by the Company and the Remarketing Underwriter on the Duration/Mode Determination Date may be one of the following: (i) Par Redemption; (ii) Premium Redemption; or (iii) Make- Whole Redemption. (e) Tender at Option of Beneficial Owners. The Company will request, not later than seven nor more than 15 calendar days prior to any Spread Determination Date, that The Depository Trust Company ("DTC") notify its Participants of such Spread Determination Date and of the procedures that must be followed if any beneficial owner of a Note wishes to tender such Note as described herein. If the Company and the Remarketing Underwriter agree on the Spread on the Spread Determination Date with respect to any Subsequent Spread Period, each Note may be tendered to the Remarketing Underwriter for purchase from the tendering Noteholder at 100% of its principal amount and for remarketing by the Remarketing Underwriter on the calendar day (or if such day is not a Business Day, on the next succeeding Business Day except as otherwise provided herein) immediately following the end of each Subsequent Spread Period (the "Tender Date"). In the case of the Initial Spread Period, the Notes may be tendered on August 15, 1998. Notice of a beneficial owner's election to tender to the Remarketing Underwriter, which notice is irrevocable (the "Tender Notice"), must be received by the Remarketing Underwriter during the period commencing on the calendar day following the Spread Determination Date (or, if not a Business Day, on the next succeeding Business Day) and ending at 5:00 p.m., New York City time, on the fifth calendar day following the relevant Spread Determination Date. The obligation of the 8 Remarketing Underwriter to purchase tendered Notes from the tendering Noteholders will be subject to certain conditions and termination events as provided in the Remarketing Underwriting Agreement. If, pursuant to those certain conditions or termination events set forth in the Remarketing Underwriting Agreement, the Remarketing Underwriter does not purchase all Notes on the relevant Tender Date, for which a Tender Notice shall have been given, (1) all Tender Notices relating thereto will be null and void, (2) none of the Notes for which such Tender Notices shall have been given will be purchased by the Remarketing Underwriter on such Tender Date, (3) the Subsequent Spread Period will be one year, which Subsequent Spread Period shall be deemed to have commenced on the applicable Commencement Date, (4) the Notes will be reset to the Floating Rate Mode, (5) the Spread for such Subsequent Spread Period will be the Alternate Spread and (6) the Notes will be redeemable at the option of the Company, in whole or in part, upon at least ten Business Days' notice given by no later than the fifth Business Day following the relevant Tender Date on the date set forth in such notice, which shall be no later than the last day of such one-year Subsequent Spread Period, at a redemption price equal to 100% of the principal amount thereof, together with accrued interest to the redemption date. No beneficial owner of any Note shall have any rights or claims against the Company or the Remarketing Underwriter as a result of the Remarketing Underwriter not purchasing such Notes, except as provided in clause (5) of the preceding sentence. If the Remarketing Underwriter does not purchase all Notes tendered for purchase on any Tender Date, it will promptly notify the Company and the Trustee. As soon as practicable after receipt of such notice, the Company will cause a notice to be given to holders of the Notes specifying (1) the one-year duration of the Subsequent Spread Period, (2) that the Notes will be reset to the Floating Rate Mode, (3) the Spread for such Subsequent Spread Period (which shall be the Alternate Spread) and (4) LIBOR for the initial Quarterly Period of such Subsequent Spread Period. (f) Form of Notes. The Notes shall be issued by the Company in registered form as set forth in Exhibit A attached hereto and all of the terms and provisions thereof are incorporated herein by reference. The Notes will be issued in the form of single fully registered global security without coupons (the "Global Note") which will be deposited with, or on behalf of, DTC, and registered in the name of DTC's nominee, Cede & Co. Except under the circumstance described below, the Notes will not be issuable in a definitive form. Unless and until it is exchanged in whole or in part for the individual notes represented thereby, a Global Note may not be transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any nominee of DTC to a successor depository or any nominee of such successor. So long as DTC or its nominee is the registered owner of such Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Note for all purposes under this Supplemental Indenture. Except as described below, owners of beneficial interest in Notes evidenced by a Global Note will not be entitled to have any of the individual Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of any such Notes in definitive form and will not be 9 considered the owners or holders thereof under the Indenture or this Supplemental Indenture. If DTC is at any time unwilling, unable or ineligible to continue as depository and a successor depository is not appointed by the Company within 90 days, the Company will issue individual Notes in exchange for the Global Note representing such Notes. In addition, the Company may at any time and in its sole discretion, subject to certain limitations set forth in the Indenture, determine not to have any of such Notes represented by one or more Global Notes and in such event will issue individual Notes in exchange for the Global Note or Notes representing such debt Securities. Individual Notes so issued will be issued in denominations of $1,000 and integral multiples thereof and will be issued in registered form only, without coupons. (g) Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Company shall be directed to it at 197 First Avenue, Needham Heights, Massachusetts 02194, Attention: David F. Benson, President; notices to the Trustee shall be directed to it at Two International Place, Boston, Massachusetts 02110, Attention: Corporate Trust Division. ARTICLE THREE ADDITIONAL EVENTS OF DEFAULT For purposes of this Supplemental Indenture and the Notes, in addition to the Events of Default set forth in Section 501 of the Indenture, it shall also constitute an "Event of Default" if an event of default under any bond, debenture, note or other evidence of indebtedness of the Company (including an event of default with respect to any other series of securities), or under any mortgage, indenture or other instrument of the Company under which there may be issued or by which there may be secured or evidenced any indebtedness of the Company (or by any Subsidiary, the repayment of which the Company has guaranteed or for which the Company is directly responsible or liable as obligor or guarantor), whether such indebtedness now exists or shall hereafter be created, shall happen and shall result in an aggregate principal amount exceeding $20,000,000 becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of ten days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in principal amount of the outstanding Notes, a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder. 10 ARTICLE FOUR EFFECTIVENESS This Supplemental Indenture shall be effective for all purposes as of the date and time this Supplemental Indenture has been executed and delivered by the Company and the Trustee in accordance with Article Nine of the Indenture. As supplemented hereby, the Indenture is hereby confirmed as being in full force and effect. ARTICLE FIVE MISCELLANEOUS Section 601. In the event any provision of this Supplemental Indenture shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof or any provision of the Indenture. Section 602. To the extent that any terms of the Notes are inconsistent with the terms of the Indenture, the terms of the Notes shall govern and supersede such inconsistent terms. Section 603. This Supplemental Indenture shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. Section 604. This Supplemental Indenture may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 11 IN WITNESS WHEREOF, the Company and the Trustee have caused this Supplemental Indenture to be executed as an instrument under seal in their respective corporate names and attested by their duly authorized officers, all as of the date first above written. (SEAL) MEDITRUST Attest: By: ________________________________ Name: Title: ________________________________ Name: Title: (SEAL) STATE STREET BANK AND TRUST COMPANY Attest: By: ________________________________ Name: Title: ________________________________ Name: Title: EX-10.13 7 AMENDMENT TO PURCHASE AGREEMENT FINAL AMENDMENT --------- TO -- PURCHASE AGREEMENT ------------------ THIS AMENDMENT to that certain Purchase Agreement (the "Purchase Agreement"), dated as of February 26, 1998, by and among Meditrust Corporation (the "REIT"), Meditrust Operating Company (the "OPCO") (the REIT and the OPCO, each a "Company" and together the "Companies"), Merrill Lynch International ("MLI"), and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent acting for the account of MLI ("Merrill Lynch" and, collectively with MLI, the "Merrill Lynch Parties"), as amended by that certain Amendment Agreement dated as of July 16, 1998 by and among the Companies and the Merrill Lynch Parties, as amended ("Amendment Agreement No. 1"), that certain Amendment Agreement dated as of July 31, 1998 by and among the Companies and the Merrill Lynch Parties, as amended ("Amendment Agreement No. 2"), and that certain Amendment Agreement dated as of September 11, 1998 by and among the Companies and the Merrill Lynch Parties ("Amendment Agreement No. 3," and, collectively with Amendment No. 1 and Amendment No. 2, the "Amendment Agreements"), is made as of this 11th day of November, 1998, by and among the Companies, MLI and Merrill Lynch, as agent acting for the account of MLI and as owner of the Purchase Shares (as defined in the Purchase Agreement) and assignee of the Purchase Agreement. W I T N E S S E T H ------------------- WHEREAS, prior to the date hereof, the Companies and the Merrill Lynch Parties have entered into the Purchase Agreement, the Amendment Agreements and that certain Purchase Price Adjustment Mechanism Agreement, dated as of February 26, 1998, as amended and restated as of February 26, 1998 by entering into a Secured Purchase Price Adjustment Mechanism Agreement (the "Secured Adjustment Agreement") and an Unsecured Purchase Price Adjustment Mechanism Agreement (the "Unsecured Adjustment Agreement" and, together with the Secured Adjustment Agreement, the "Restated Adjustment Agreements") by and among the Companies and the Merrill Lynch Parties, (the "Adjustment Agreements," collectively with the Purchase Agreement, each as modified by the Amendment Agreements, the "Forward Equity Transaction Documents"); WHEREAS, the parties hereto desire to enter into a Settlement Agreement as of the date hereof (the "Settlement Agreement") and, in connection with the Settlement Agreement, to amend the Forward Equity Transaction Documents by entering into this Amendment and the Restated Adjustment Agreements. NOW, THEREFORE, in consideration of the mutual undertakings set forth herein, the parties, intending to be legally bound, agree as follows: 1. Amendment Agreements. Each of the Amendment Agreements is hereby rescinded in its entirety, and shall be of no further force or effect. However, the intent of the foregoing is not to affect any actions taken prior to the date hereof pursuant to any of the Amendment Agreements. Further, the parties hereto expressly reserve their rights with respect to any actions taken under the Forward Equity Transaction Documents prior to the date hereof, except that the parties agree that the Registration Statement declared effective on October 8, 1998 shall constitute a Resale Registration Statement as contemplated by the Purchase Agreement. The parties hereto acknowledge and agree that this Amendment shall constitute the only legally binding instrument on the parties that amends or modifies the Purchase Agreement dated as of February 26, 1998. 2. Assignment of Shares from Merrill Lynch to MLI. The Companies hereby authorize and consent to the assignment from Merrill Lynch to MLI of those Shares sold by MLI to Merrill Lynch pursuant to that certain Sale and Assignment Agreement dated as of October 23, 1998. 3. Resale of the Shares. Section 5.2 of the Purchase Agreement is hereby deleted in its entirety and shall be replaced with the following: Resale. The Merrill Lynch Parties acknowledge and agree that in connection with any transfer of any Shares they will provide to the transfer agent prompt notice of any Shares sold pursuant to a Prospectus Supplement (as defined in Section 7) or otherwise transferred in compliance with applicable federal and state securities laws. The Merrill Lynch Parties acknowledge that there may occasionally be times when, subject to the provisions of Section 7.2(a), the Companies (i) must suspend the right of the Merrill Lynch Parties to effect sales of the Shares through the use of a Prospectus Supplement until such time as a Prospectus Supplement has been filed by the Companies with the Commission, or an amendment to the Registration Statement has been filed by the Companies and declared effective by the Commission, or until such time as the Companies have filed an appropriate report with the Commission pursuant to the Exchange Act, or (ii) shall have failed (whether or not such failure is due to regulatory review) to take all actions required of the Companies under the Forward Equity Transaction Documents to enable the Merrill Lynch Parties to publicly sell the Shares including, without limitation, the failure of the Company to (X) maintain an effective registration statement covering such Shares, (Y) provide the Merrill Lynch Parties with a deliverable Prospectus and Prospectus Supplement, or (Z) provide the appropriate Resale Closing Documents (each, a "Black-out Period"). The Companies agree that following the termination of the Merrill Lynch Parties' Standstill pursuant to the terms of the Settlement Agreement, the number of days in all Black-out Periods taken together, whether or not consecutive, shall not exceed 20 calendar days (a "Black-out Measurement Period") (counting only the days following the termination of the 2 Merrill Lynch Parties' Standstill). In the event that the number of days in all Black-out Periods taken together, whether or not consecutive, exceeds the Black-out Measurement Period then the Companies shall immediately comply with the provisions of Section 7 and the Merrill Lynch Parties may effect sales of the Shares unless the Companies shall have delivered (i) a written notice to the Merrill Lynch Parties requesting a 20-day extension prior to the end of the Black-out Measurement Period and (ii) $25 million in cash (a "Black-out Period Extension Fee") to the Merrill Lynch Parties on or prior to the end of the third Business Day immediately following the expiration of such Black-out Measurement Period in accordance with instructions provided by the Merrill Lynch Parties to the Companies promptly following the request for such extension and the Companies acknowledge that continuation of the Black-out Period beyond the Black-out Measurement Period shall entitle the Merrill Lynch Parties to a claim for such Black-out Period Extension Fee; provided, however, that in the event that a Black-out Period is in effect at the end of a Black-out Measurement Period, and the continuation of such Black-out Period is only the result of (i) the Companies waiting for the Commission to (A) provide verbal or written comments to a filing with the Commission, or (B) declare any filing effective after the Companies have completed such filing, then the Companies, in lieu of paying the Black-out Extension Fee may elect to deliver Paired Shares to the collateral account of MLI pursuant to and in accordance with Section 5 of each of the Restated Adjustment Agreements at the greater of (i) the rate of 200% instead of 150% on the Interim Settlement Amount in Interim Settlement Shares (as provided in Section 5(a) of such Restated Adjustment Agreement, and each as defined in such Agreement) or (ii) that number of Interim Settlement Shares such that such number of Interim Settlement Shares plus any Interim Settlement Shares and Adjustment Shares then held by the Merrill Lynch Parties valued at the Closing Price on such date will equal at least 120% of the Reference Amount (as provided in Section 5(a) of such Restated Adjustment Agreement) until the Companies shall have taken all actions required of the Companies under the Forward Equity Transaction Documents to enable the Merrill Lynch Parties to publicly sell the Shares, and the Spread (as defined in Section 1(ah) of such Restated Adjustment Agreement) for such period shall increase to 400 basis points until the circumstances described in clauses (A) and (B) have ended. In the event that the Companies make the election in the immediately preceding sentence, then the Black-out Measurement Period, for purposes of this Amendment, shall be deemed to be extended until the circumstances described in clauses (A) and (B) above have ended. Upon payment of any Black-out Period Extension Fee and effective as of the day immediately following the last day of the previous Black-out Measurement Period, the then applicable Black-out Measurement Period shall be increased by 20 calendar days (counting only the days following the termination of the Merrill Lynch Parties' Standstill). Each subsequent extension of the Black-out 3 Period Measurement Period shall be subject to the foregoing requirements. Any Black-out Period Extension Fee paid shall reduce the Reference Amount under the Unsecured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Unsecured Adjustment Agreement. Subject to the foregoing and compliance with Section 7.2(a) hereof, the Merrill Lynch Parties hereby covenant that during a Black-out Period they will not effect sales of any Shares pursuant to said Resale Prospectus during the period commencing at the time at which the Companies give the Merrill Lynch Parties written notice (which such notice shall have been given by the Companies as promptly as practicable) of the suspension of the use of said Resale Prospectus and ending at the time the Companies give the Merrill Lynch Parties written notice that the Merrill Lynch Parties may thereafter effect sales pursuant to said Resale Prospectus. The Merrill Lynch Parties further covenant to notify the Companies promptly of the sale of all of the Shares. 4. Registration of the Shares. The Companies have filed with the Commission (a) Post-Effective Amendment No. 2 to the Companies' Joint Registration Statement on Form S-3 (File Nos. 333-40055 and 333-40055-1) (the "Registration Statement") and (b) a Prospectus Supplement under Rule 424(b) of the Securities Act to the Prospectus dated September 29, 1998 contained in the Registration Statement covering the sale of up to 11,000,000 Shares (the "Initial Prospectus Supplement"). Based on verbal advice from the Commission to the parties, the Registration Statement, as amended, was declared effective by the Commission as of October 8, 1998. The parties hereby acknowledge and agree that the Registration Statement constitutes a Resale Registration Statement and the Merrill Lynch Parties agree to not assert in any legal proceeding with the Companies that the Registration Statement does not constitute a Resale Registration Statement. In connection with the foregoing, Section 7 of the Purchase Agreement is hereby amended as follows: (a) The term "Resale Registration Statement" as used in the Purchase Agreement (other than Section 7.5) shall mean the Registration Statement and any amendments and supplements to such registration statement, including all post-effective amendments thereto, and all exhibits and all material incorporated by reference into such registration statement. The term "Resale Prospectus" as used in the Purchase Agreement (other than Section 7.5) shall mean the Initial Prospectus Supplement or any subsequent Prospectus Supplement (as defined below). (b) Section 7.1(a) of the Purchase Agreement is hereby amended by (i) deleting the phrase "prepare and file with the Commission a Resale Registration Statement (as defined below) covering the resale by the Merrill Lynch Parties, from time to time, of a number of shares equal to the number of Purchase Shares in any of the manners specified in the Restated Adjustment Agreements (the "Initial Resale registration Statement") and use its best efforts to obtain effectiveness of the Initial Resale Registration Statement by the fifth Business Day (as defined in the Restated Adjustment Agreements) following the Conversion 4 Date)" and inserting the following in place of such phrase: prepare and file with the Commission such additional Prospectus Supplement or Prospectus Supplements under Rule 424(b) of the Securities Act to the Prospectus contained in the Registration Statement (including the Initial Prospectus Supplement, each, a "Prospectus Supplement") covering the sale by the Merrill Lynch Parties, from time to time, of such number of Shares that are not covered by the Initial Prospectus Supplement, in any of the manners specified in the Adjustment Agreements. (c) Section 7.1(e) of the Purchase Agreement is hereby deleted in its entirety and shall be replaced with the following: in order to facilitate the public sale or other disposition of all or any of the Shares by the Merrill Lynch Parties, furnish to the Merrill Lynch Parties with respect to the Shares registered under any Resale Registration Statement, in connection with any such public sale or other disposition, an opinion of counsel to the Companies covering the matters set forth on Exhibits B-1 and B-2 hereto and such other documents as the Merrill Lynch Parties may reasonably request (including a comfort letter from the Companies' independent certified public accountants and a certificate of bring down of representations and warranties in connection with sale of Shares under the Resale Registration Statement) (collectively, the "Resale Closing Documents") (i) upon the termination of the Merrill Lynch Parties' Standstill (or if there is a Black-out Period immediately following such termination then upon the termination of such Black-out Period), (ii) quarterly beginning with the Companies' filing of a Joint Quarterly Report on Form 10-Q after the termination of the Merrill Lynch Parties' Standstill (or as soon as practicable thereafter if such quarterly filing is made during a Black-out Period), or (iii) in the event the public sale or other disposition of the Shares is effected through an underwritten offering or a block trade, as of the date of the closing of any sale of such Shares or date of pricing with respect to the sale of such Shares, as applicable upon prior notice from the Merrill Lynch Parties to the Companies as to which date applies; provided, however, that the Companies shall not be required to deliver any Resale Closing Documents in the event that the aggregate offering price of any Shares offered in an underwritten offering or a block trade is less than $20,000,000, unless as of the date of any such underwritten offering or block sale, the Companies have not made any previous delivery of Resale Closing Documents to the Merrill Lynch Parties in connection with any other public sale or other disposition of the Shares. 5 (d) Section 7.2(g) is hereby deleted in its entirety. 5. All references to the "Adjustment Agreement" shall be deemed a reference to the Restated Adjustment Agreements collectively. 6. General Provisions. (a) Notices. All notices, consents and other communications required hereunder shall be delivered in the manner set forth in the Purchase Agreement. (b) Changes. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the parties hereto. (c) Severability. In case any provision contained in this Amendment should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. (d) Governing Law; Jurisdiction. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. (e) Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. (f) Conflicts with Other Agreements. In the event any conflict between the provisions of this Amendment and the Purchase Agreement, the terms and provisions of this Amendment shall govern. [Rest of page intentionally left blank] 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized representatives as of the date and year first above written. MEDITRUST CORPORATION By: /s/ Michael Benjamin ------------------------------ Name: Michael S. Benjamin, Esq. Title: Senior Vice President MEDITRUST OPERATING COMPANY By: /s/ William Baker ------------------------------ Name: William C. Baker Title: President MERRILL LYNCH INTERNATIONAL By: /s/ John O'Dowd ------------------------------ Name: John O'Dowd Title: Vice President MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Onu Odim ------------------------------ Name: Onu Odim Title: Managing Director 7 EX-10.14 8 UNSECURED PURCHASE PRICE ADJUSTMENT AGREEMENT UNSECURED PURCHASE PRICE ADJUSTMENT MECHANISM AGREEMENT ------------------------------------------------------- THIS UNSECURED PURCHASE PRICE ADJUSTMENT MECHANISM AGREEMENT (this "Agreement") is made as of the 26th day of February, 1998, by and among Meditrust Corporation (the "REIT"), Meditrust Operating Company ("OPCO," and together with the REIT, the "Companies"), Merrill Lynch International ("MLI"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") as agent for MLI and as owner of the Purchase Shares and assignee of the Purchase Agreement (together with MLI, the "Merrill Lynch Parties"). The Companies and the Merrill Lynch Parties are referred to herein collectively as the "Parties" and each individually, as a "Party." The Parties hereto entered into the Purchase Agreement (the "Purchase Agreement") and Purchase Price Adjustment Mechanism Agreement (the "Original Adjustment Agreement") each dated as of February 26, 1998 and those certain Amendment Agreements dated as of July 16, July 31 and September 11, 1998 (collectively, the "Amendments"), which Amendments amended the Purchase Agreement and the Original Adjustment Agreement to the extent set forth therein. The Parties are executing and delivering an Amended and Restated Settlement Agreement dated as of November 11, 1998 (the "Settlement Agreement") which sets forth certain additional agreements and covenants related to the transactions contemplated by the Purchase Agreement and the Original Adjustment Agreement, as amended prior to the date hereof. As required thereby, the Parties are entering into an Amendment to Purchase Agreement, a Secured Purchase Price Adjustment Mechanism Agreement dated as of February 26, 1998 (the "Secured Adjustment Agreement") and this Agreement contemporaneously with the execution and delivery of the Settlement Agreement, which, collectively, are intended to (i) amend and restate in its entirety the Original Adjustment Agreement, and (ii) rescind the Amendments in their entirety such that such Amendments are thereafter of no further force and effect. Accordingly, the purpose of this Agreement and the Secured Adjustment Agreement, collectively, is to amend and restate the Original Adjustment Agreement, as amended by the Amendments, in its entirety and to set forth the terms and conditions of the purchase price adjustment transaction (the "Transaction") entered into between MLI and the Companies. IN CONSIDERATION of the mutual representations, warranties and covenants herein contained, and on the terms and subject to the conditions herein set forth, the Companies and MLI hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: a. Ability to Settle in Paired Shares. As of the date hereof, the Companies have not, and after the date hereof, the Companies will not, enter into any obligation that would contractually prohibit the Companies from delivering Paired Shares pursuant to Sections 3.2, 4.2 or 5 of this Agreement. b. Adjustment Shares. 5,855,000 Paired Shares, as may be adjusted from time to time pursuant to Section 1(c) or Section 4.1(d), reduced by the number of Settlement Shares that are the subject of Settlement pursuant to Section 3.1 or Section 4.1 or by the number of Paired Shares delivered to the Companies pursuant to Section 3.3(c). c. Certain Adjustments to Reference Price or Number of Adjustment Shares. In the event of: (i) a subdivision, consolidation or reclassification of the Paired Shares, or a free distribution or dividend of any Paired Shares to all existing holders of Paired Shares by way of bonus, capitalization or similar issue; (ii) a distribution or dividend to all existing holders of Paired Shares of (A) additional Paired Shares or (B) other share capital or securities granting right to payment of dividends and/or the proceeds of liquidation of the Companies equally or proportionally with such payments to holders of Paired Shares, an adjustment shall thereupon be effected to the Reference Price and/or the Adjustment Shares at the time of such event with the intent that following such adjustment, the value of this Transaction is economically equivalent to the value immediately prior to the occurrence of the event causing the adjustment. (cA) Blackout Day. Means any day on which the Companies shall have (i) suspended the right of the Merrill Lynch Parties to effect sales of the Shares through the use of a Prospectus Supplement until such time as a Prospectus Supplement has been filed by the Companies with the Commission, or an amendment to the Registration Statement has been filed by the Companies and declared effective by the Commission, or until such time as the Companies have filed an appropriate report with the Commission pursuant to the Exchange Act, or (ii) failed to take any actions required of the Companies under the Forward Equity Transaction Documents (as defined in the Settlement Agreement) to enable the Merrill Lynch Parties to publicly sell Paired Shares under this Agreement including, without limitation, the failure of the Company to (i) maintain an effective registration statement covering such Paired Shares (whether or not such failure is due to regulatory review), (ii) provide the Merrill Lynch Parties with a deliverable Prospectus and/or Prospectus Supplement, or (iii) provide the appropriate Resale Closing Documents (as defined in the Purchase Agreement, as amended by the Amendment to Purchase Agreement). d. Block Sale. Any privately negotiated sales of the Paired Shares involving at least a block of such security (as defined in Rule 10b18 under the Exchange Act) that are not effected to or through a broker or dealer. 2 e. Business Day. Any day other than Saturday, Sunday, or any other day on which banking institutions in the States of Delaware or New York are not open for business. f. Calculation Agent. MLI, whose calculations and determinations shall be made in a reasonable manner. (fA) Cash Payment Amount. Means, on each Reset Date or Interim Settlement Date, an amount in U.S. Dollars equal to: (i) the sum of all per Paired Share cash amounts paid or delivered by the Companies to MLI under Section 3.3 (other than amounts that reduce the Adjustment Shares pursuant to Section 3.3(c)) during the relevant Compounding Period; the per Paired Share amount to be determined by dividing the amount of cash delivered pursuant to Section 3.3 by the number of Adjustment Shares on the date so paid or delivered; plus (ii) an amount representing interest that could have been earned on such cash amounts at the USD LIBOR rate having a designated maturity of 1 month, plus 75 basis points, for the period from the date that such cash amounts are received by MLI until such Reset Date or Interim Settlement Date. g. Closing Price. The last sale price of the Paired Shares on the Relevant Exchange on the relevant date. (gA) Collateral Account. Means the collateral account in the name of the Meditrust Corporation Pledged Collateral for MLI at MLPF&S. The Collateral Account as of the date hereof is Acct. #51L10522 at MLPF&S. h. Commission. The Securities and Exchange Commission. i. Compounding Period. Means each period commencing on and including: (i) in the case of the first Compounding Period, the Initial Settlement Date and ending on but excluding the first Reset Date, and (ii) for each period thereafter, a Reset Date and ending on (but excluding) the next following Reset Date. j. [Intentionally Omitted] k. Distribution Amount. Means, on each Reset Date or Interim Settlement Date, an amount in U.S. Dollars equal to: 3 (i) the sum of all cash distributions paid on a single Paired Share during the relevant Compounding Period; plus (ii) an amount representing interest that could have been earned on such distributions at the USD LIBOR rate having a designated maturity of 1 month, plus 75 basis points, for the period from the date that such distributions would have been received by a holder of such number of Paired Shares until such Reset Date or Interim Settlement Date. l. DRIP Distribution. Sales to any Distribution Reinvestment Plan now or hereafter established by the Companies, or to any agent acting on behalf of such Plan, for sale to participants in such Plan. m. Effective Date. February 26, 1998. (mA) [Intentionally Omitted] n. Exchange Act. The Securities Exchange Act of 1934, as amended. o. Exchange Trading Day. Each day on which the Relevant Exchange is open for trading. p. Execution Price. The Closing Price on the Effective Date. q. Gradual Market Distribution. An offering of the Paired Shares into the existing trading market for outstanding shares of the same class at other than a fixed price on or through facilities of a national securities exchange or to or through a market maker otherwise than on an exchange. r. Initial Price. Means, (i) for the Compounding Period ending on May 31, 1998, an amount in U.S. Dollars equal to $32.625, and (ii) for each subsequent Reset Date, the Reference Price as calculated on or adjusted as of the prior Reset Date. s. Initial Settlement Date. February 26, 1998. (sA) Interim Settlement Date. Means (i) each Tuesday until the Reference Amount has been reduced to zero dollars and (ii) any day on which cash amounts are paid or delivered to MLI under Section 3.3; provided that if such date is not an Exchange Trading Day, then the Interim Settlement Date shall be the next succeeding Exchange Trading Day. 4 t. Interim Settlement Amount. With respect to a given Interim Settlement Date, means the amount by which the Reference Amount minus $10,000,000 exceeds the product of (x) the Closing Price and (y) the number of Adjustment Shares. u. Interim Settlement Shares. The Interim Settlement Amount divided by the Closing Price on such Reset Date or Interim Settlement Date. v. Maturity Date. February 26, 1999. w. Paired Shares. Units consisting of one share of common stock, $.10 par value per share, of the REIT and one share of common stock, par value $.10 per share, of OPCO, which shares are paired and traded as a unit. x. Relevant Exchange. Means, with respect to any Exchange Trading Day, the principal Stock Exchange on which the Paired Shares are traded on that day. y. Reference Amount. On each Reset Date and Interim Settlement Date, the Reference Price multiplied by the Adjustment Shares or Settlement Shares, as applicable. z. Reference Price. On each Reset Date and Interim Settlement Date, the Reference Price shall be determined by: (i) compounding the Initial Price for each Compounding Period at USD LIBOR rate plus Spread for a designated maturity of 1 month (Actual/360 day count fraction) to such Reset Date and Interim Settlement Date; (ii) subtracting the Distribution Amount at that date; and (iii) subtracting the Cash Payment Amount at that date. aa. Reset Date. Means, through the final Settlement Date, (i) the last day of each month, beginning May 31,1998 (provided, that if such day is not a Business day then the Reset Date shall be the next succeeding Business Day) and (ii) as to any Settlement Shares, the Settlement Date that such Settlement Shares are settled. bb. Securities Act. The Securities Act of 1933, as amended. cc. Settlement. Has the meaning set forth in Section 3.1 or Section 4.1, as applicable. dd. Settlement Amount. The net sales proceeds realized by or on behalf of MLI for all sales of Paired Shares in connection with any Settlement, calculated as follows: (i) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1 is an Underwritten Offering, the Settlement Amount will equal the gross proceeds realized, net of a negotiated underwriting discount; 5 (ii) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1 is a Block Sale, the Settlement Amount will equal the gross sales proceeds realized, net of a negotiated underwriting discount; (iii) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1 is a Gradual Market Distribution, the Settlement Amount will equal the gross sales proceeds realized from sales to the market over the period of the distribution, net of a resale spread of 50 basis points; (iv) if the manner of Settlement Sale pursuant to Section 3.1 or 4.1 is a DRIP Distribution, the Settlement Amount will equal the gross sales proceeds realized from sales to any Purchase Agent for a Company Distribution Reinvestment Plan, net of a resale spread of 50 basis points; (v) if the manner of Settlement Sale pursuant to Section 3.1 is a Subscription Distribution, the Settlement Amount will equal the gross proceeds realized, net of any fees, discounts or other costs incurred by the Companies in connection with such Subscription Distribution. ee. Settlement Date. The date on which, in accordance with standard market practice, the Paired Shares are delivered and the funds received, in respect of any Settlement in accordance with Section 3.2 or Section 4.2. ff. [Intentionally Omitted]. gg. Settlement Shares. The number of Adjustment Shares subject to Settlement. hh. Spread. 75 basis points, subject to adjustment pursuant to Section 6.5 of this Agreement, Section 7 of the Settlement Agreement and Section 5.2 of the Purchase Agreement, as amended by the Amendment to Purchase Agreement. ii. Stock Exchange. Means the New York Stock Exchange, the American Stock Exchange or NASDAQ. jj. Underwritten Offering. An underwritten fixed price offering of the Paired Shares. kk. USD LIBOR. The London Inter Bank Offered Rate in respect of U.S. Dollars for the designated maturity as quoted on Page 3750 on the Telerate Service (or such other page as may replace Page 3750 on that service) as of 11:00 a.m., London time, on the date on which it is to be determined. ll. Subscription Distribution. An offering of the Paired Shares to existing holders of the Paired Shares. 6 2. Representations and Warranties. ------------------------------- The representations and warranties of the Companies in Section 4 of the Purchase Agreement, dated as of February 26, 1998 (the "Purchase Agreement"), among the Companies, MLI and MLPF&S are hereby incorporated by reference herein as of the date hereof, and the Companies hereby so represent and warrant to MLI as of the date hereof. The provisions of Section 6 of the Purchase Agreement shall also be applicable to any Paired Shares delivered to MLI under this Agreement. 3. Settlement by or at the Companies' Direction. --------------------------------------------- a. Settlement Sale. Subject to Section 4.2(a)(ii), on any Reset Date or on any other Exchange Trading Date agreed by both parties, up to and including the Maturity Date, the Companies may give telephonic notice to MLI to settle, and MLI shall settle, in a commercially reasonable manner (which may require sales over a period of more than 1 day), all or a portion of the Adjustment Shares ("Settlement"), as specified by the Companies, through sale of not less than the number of Paired Shares, the sale of which would result in a Settlement Amount equal to 100% of the Reference Amount on the Settlement Date, and not more than the number of Paired Shares, the sale of which would result in a Settlement Amount equal to 105% of the Reference Amount on the Settlement Date, in any of the manners set forth below, as selected by the Companies: (i) an Underwritten Offering (for which the Companies shall provide at least 21 Business Days prior notice to MLI); (ii) a Block Sale (for which the Companies shall provide at least 3 Business Days prior notice to MLI); (iii) a Gradual Market Distribution (for which the Companies shall provide at least 1 Business Days prior notice to MLI); (iv) a DRIP Distribution (for which the Companies shall provide at least 1 Business Days prior notice to MLI); or (v) a Subscription Distribution (for which the Companies shall provide at least 5 Business Days prior notice to MLI). If the Companies do not specify a manner of sale, a Gradual Market Distribution shall be used. Settlement procedures shall begin as soon as commercially practicable, as determined by MLI, after MLI receives notice from the Companies and no later than the first Exchange Trading Day after expiration of the notice period unless otherwise agreed by the Companies and MLI. At such time as the Companies deliver notice pursuant to this Section 3.1, the Companies may direct MLI to sell not less than the number of Paired Shares equal to the number of Settlement Shares, and MLI shall comply with such direction in a commercially reasonable manner. 7 b. Settlement Mechanics. i. If, on the Settlement Date, the Settlement Amount is greater than the Reference Amount, MLI will pay the Companies an amount in cash or Paired Shares (valued at the Closing Price on the Settlement Date) equal to the difference. ii. If the number of Paired Shares sold by MLI pursuant to Section 3.1 is greater than the number of Settlement Shares, the Companies shall deliver to MLI, on the Settlement Date, a number of Paired Shares equal to the difference. If the number of Paired Shares sold by MLI pursuant to Section 3.1 is less than the number of Settlement Shares, MLI shall deliver to the Companies, on the Settlement Date, a number of Paired Shares equal to the difference. iii. In all events, MLI will pay to the Companies an amount equal to all cash distributions received by MLI that are payable to holders of the Paired Shares but not paid prior to the Settlement Date, on a number of Paired Shares equal to the Settlement Shares, on the Business Day after the relevant distribution payment date declared by the Board of Directors of the REIT and OPCO. iv. If MLI, in connection with any Settlement, receives net sales proceeds, as calculated pursuant to the definition of Settlement Amount, from the sale of Paired Shares prior to the applicable Settlement Date, MLI, on the Settlement Date, shall pay the Companies an amount in cash representing interest that could have been earned on such net sales proceeds at the USD LIBOR rate having a designated maturity of 1 month, plus 75 basis points, for the period from the date that such net sales proceeds are received by MLI until such Settlement Date. c. Cash Payments. i. Notwithstanding anything provided herein or in the Purchase Agreement or the Settlement Agreement, the Companies shall have the right to pay or otherwise deliver cash to MLI to reduce the Reference Amount (by reducing the Reference Price on a per Adjustment Share basis) and the date of such payment or delivery shall constitute an Interim Settlement Date and MLI shall deliver or cause to be delivered to the Companies any Interim Settlement Shares as required by Section_5(b) hereof. ii. Any cash paid or otherwise delivered to MLI pursuant to Sections 4.2(a)(i) and 5(c) of this Agreement, Sections 4.2(ii), 4.3, 5, 6.3(b), 6.4, 7(b), 8.1 and 9 of the Settlement Agreement and Section 5.2 of the Purchase Agreement, as amended by the Amendment to Purchase Agreement, shall, in each case, reduce the Reference Amount (by reducing the Reference 8 Price on a per Adjustment Share basis) and the date of any such payment or delivery shall constitute an Interim Settlement Date and MLI shall deliver or cause to be delivered to the Companies any Interim Settlement Shares as required by Section 5(b) hereof. iii. In the event that on the date of any cash payment contemplated by Section 3.3(a) or 3.3(b) no such Interim Settlement Shares are held in the Collateral Account or after giving effect to the application of any cash payment no such Interim Settlement Shares will be held in the Collateral Account, the Merrill Lynch Parties shall deliver, or cause to be delivered, within five (5) Business Days to the Companies, in addition to any Interim Settlement Shares required to be delivered, that number of Paired Shares then held by the Merrill Lynch Parties pursuant to the Purchase Agreement or this Agreement in excess of that number of Paired Shares determined by dividing the Reference Amount (after deducting any such cash payment not applied in respect of Interim Settlement Shares) by the Closing Price on the date of such payment or transfer. Any such delivery of excess Paired Shares other than Interim Settlement Shares shall reduce the number of Adjustment Shares by the number of Paired Shares so delivered. 4. Settlement by the Merrill Lynch Parties. a. Settlement Sales. i. After the Standstill (as defined in the Settlement Agreement) ends, MLI shall have the right to sell in any of the manners set forth in Section 3.1 or 4.1(b) hereof (the "Settlement") 100% of the Adjustment Shares and in connection therewith to sell a number of Paired Shares equal to the number of Paired Shares purchased by MLI pursuant to the Purchase Agreement (the "Original Shares") and any and all Interim Settlement Shares. MLI shall be entitled to continue settlement procedures and the Companies shall continue to deliver Interim Settlement Shares pursuant to Section 5 hereof (if required) and otherwise perform the Companies' obligations under this Agreement until the Reference Amount has been reduced to zero or until the Companies make a cash payment to MLI in settlement of the remaining Reference Amount. ii. The Companies and MLI agree that sales of Paired Shares will be made in a commercially reasonable manner, which may include private or public sales and Block Sales at discounts to current market prices that, in MLI's judgment, are commercially reasonable and appropriate at the time of such sales. Notwithstanding the foregoing, if MLI proposes to make a sale of 750,000 or more Paired Shares to a single purchaser in a single transaction 9 or series of transactions, other than through the facilities of the New York Stock Exchange at prevailing market prices, it shall first notify the Companies of the material terms of such sale (including the number of Paired Shares and the proposed price per Paired Share, which may, subject to the preceding sentence, be based upon a discount to the closing or other identified price or other relevant measure) and the Companies shall then have the right to purchase (or to designate one or more purchasers for) such Paired Shares on such terms; provided, however, that if the Companies (or their designee(s)) shall fail to commit to such purchase (i) if MLI gives the Companies notice prior to 12:00 p.m. New York City time on an Exchange Trading Day, prior to 4:30 p.m. New York City time on the day on which MLI gives the Companies notice of the proposed sale as provided above (or the next succeeding Business Day if the day of the delivery of such notice is not a Business Day), (ii) if MLI gives the Companies notice on or after 12:00 p.m. and before 6:00 p.m., prior to 9:00 a.m. New York City time on the Exchange Trading Day following the day on which MLI gives the Companies notice of the proposed sale as provided above or (iii) if such sale involves 2,000,000 or more Paired Shares to be sold in a single transaction, notwithstanding the provisions of clauses (i) and (ii) above, within 24 hours (excluding hours in non-Business Days) of the time at which MLI gives the Companies notice of the proposed sale as provided above, MLI may proceed to effect such sale on the proposed terms with such purchaser or purchasers as it selects. iii. At the option of MLI, subject to the ownership limitation provisions of Section 6.2 hereof, (i) all right, title and interest to Interim Settlement Shares having a value (based on the Closing Price on such date) equal to (x) the Reference Amount on such date less (y) an amount equal to the Adjustment Shares multiplied by the Closing Price on such date shall be transferred to MLI and (ii) such Interim Settlement Shares shall be transferred to an account at MLPF&S in the name of and for the exclusive benefit of MLI (the "MLI Account"). The number of Paired Shares in the MLI Account in excess of the number of Paired Shares equal to the Adjustment Shares (the "Additional Shares") shall continue to be treated as Interim Settlement Shares for purposes of this Agreement. iv. Upon reduction of the Reference Amount in the Secured Adjustment Agreement to zero (-0-) dollars through the payment of cash by the Companies to MLI: (i) a Reset Date shall occur, (ii) the lesser of (x) 2,645,000 Paired Shares or (y) such number of Paired Shares as remains in the Collateral Account shall be transferred to the MLI Account, (iii) the number of Adjustment Shares shall be increased by such number of Paired Shares determined pursuant to clause (ii) above, and (iv) the Reference Price shall be recalculated by multiplying the Reference Price determined 10 as of such Reset Date by the quotient of (x) the number of Adjustment Shares immediately prior to such transfer pursuant to clause (ii) above divided by (y) the number of Adjustment Shares calculated pursuant to clause (iii) above. v. The transfer of Additional Shares pursuant to Section 4.1(c) or the transfer of Paired Shares pursuant to Section 4.1(d) shall constitute the purchase of a securities entitlement from the Companies for value by MLI and the transfer of all right, title and interest in and to the Additional Shares to MLI, and after such transfer MLI shall be the owner of such Additional Shares for all purposes. b. Settlement Mechanics. i. (i) After November 11, 1998 and any Business Day thereafter, any and all cash amounts in the Collateral Account (if any) shall be transferred to MLI to reduce the Reference Amount. (ii) After November 11, 1998, the Companies can no longer direct the settlement of Adjustment Shares pursuant to Section 3.1 of this Agreement without the Merrill Lynch Parties' consent. ii. [Intentionally omitted] iii. If, on the Settlement Date, the Settlement Amount is greater than the Reference Amount, MLI will pay the Companies an amount in cash equal to the difference. iv. In all events, MLI will pay to the Companies an amount equal to all cash distributions received by MLI that are payable to holders of the Paired Shares but not paid prior to the Settlement Date, on a number of Paired Shares equal to the Settlement Shares, on the Business Day after the relevant distribution payment date declared by the Boards of Directors of the REIT and OPCO. v. If the number of Paired Shares sold by MLI pursuant to Section 4.1 is greater than the number of Settlement Shares, the Companies shall deliver to MLI, on the Settlement Date, a number of Paired Shares equal to the difference. If the number of Paired Shares sold by MLI pursuant to Section 4.1 is less than the number of Settlement Shares, MLI shall deliver to the Companies, on the Settlement Date, a number of Paired Shares equal to the difference. vi. If MLI, in connection with any Settlement, receives net sales proceeds, as calculated pursuant to the definition of Settlement Amount, from the sale of Paired Shares prior to the applicable Settlement Date, MLI, on the Settlement Date, shall pay the Companies an amount in cash representing interest that could have been earned on such net sales proceeds at the USD LIBOR rate having a designated maturity of 1 month, plus 75 basis points, 11 for the period from the date that such net sales proceeds are received by MLI until such Settlement Date. 5. Interim Settlements. i. On and after November 11, 1998, within 5 Business Days following each Reset Date or Interim Settlement Date, as the case may be, the Companies shall deliver to the Collateral Account an amount of Paired Shares as follows: (i) During the pendency of the Standstill, 125% of the Interim Settlement Amount in Interim Settlement Shares; (ii) After the Standstill, 100% of the Interim Settlement Amount in Interim Settlement Shares unless, subject to clause (iii) below, the date on which such Interim Settlement Shares are delivered is a Black-Out Day, in which case, 150% of the Interim Settlement Amount in Interim Settlement Shares; (iii) If the date on which such Interim Settlement Shares are delivered is a Black-Out Day due to regulatory delays, as described in Section 5.2 of the Purchase Agreement, as amended by the Amendment to Purchase Agreement, and the Companies shall have elected to deliver additional Interim Settlement Shares and to increase the Spread rather than delivering the $25 million payment contemplated therein, the greater of (A) 200% of the Interim Settlement Amount in Interim Settlement Shares, or (B) that number of Interim Settlement Shares such that such number of Interim Settlement Shares plus any Interim Settlement Shares and Adjustment Shares then held by the Merrill Lynch Parties valued at the Closing Price on such Reset Date or Interim Settlement Date will equal at least 120% of the Reference Amount. Notwithstanding the foregoing, in the event that on any Reset Date there are Interim Settlement Shares in the Collateral Account, then such Interim Settlement Shares shall be deemed redelivered to the Collateral Account pursuant to the preceding sentence. Interim Settlement Shares shall be registered in the stock register of the Companies as instructed by MLI and shall be held by MLPF&S or a custodian or depository designated by MLPF&S. ii. On any Interim Settlement Date, if Interim Settlement Shares are held by MLI, MLI shall deliver to the Companies within five (5) Business Days after such Reset Date, the amount in Interim Settlement Shares by which the amount in Interim Settlement Shares held by MLI (valued at the Closing Price on such Reset Date) plus any cash amounts in the Collateral Account exceeds the required number of Interim Settlement Shares provided for in ss.5(a). 12 iii. As provided by Section 5 of the Settlement Agreement, Distributions on the Interim Settlement Shares will be paid to MLI pursuant to ss.3.3 hereof. iv. Once the Reference Amount is reduced to zero (-0-) dollars, MLI shall immediately release all claims to any Interim Settlement Shares not used in Settlement and deliver such Interim Settlement Shares to the Companies. v. The Companies and the Merrill Lynch Parties confirm that the Companies have granted to the Merrill Lynch Parties and that the Merrill Lynch Parties have a first priority security interest in any and all Interim Settlement Shares and any and all cash amounts heretofore or hereafter delivered to the Merrill Lynch Parties or their respective agent and held in the Collateral Account pursuant to this Section 5. MLPF&S acknowledges that it is holding and will hold any and all Interim Settlement Shares and any and all cash (if any) now or hereafter held in the Collateral Account pursuant to Section 5 of this Agreement as pledge agent and bailee on behalf of the Merrill Lynch Parties as pledgee. 6. Certain Covenants and Other Provisions. a. Par Value. MLI shall pay to the Companies $.10 par value per share for each share comprising a Paired Share delivered to MLI pursuant to this Agreement. b. Limitation on Ownership of Paired Shares. MLPF&S will manage the settlement process in such a way as to ensure that the Merrill Lynch Parties combined not be the beneficial owner, or be deemed to be the beneficial owner, at any given time of a number of Paired Shares that is greater than 9.25% of the Companies' outstanding Paired Shares. c. Allocation of Payments by the MLI. When making any payment to the Companies pursuant to this Agreement, MLI shall allocate such payment between the REIT and OPCO in the manner specified by the Companies. d. Purchase Price Adjustment Treatment The Companies and the MLI agree, to the extent relevant to their respective business and commercial activities and in the absence of an administrative determination or judicial ruling to the contrary, to treat for United States federal income tax and financial accounting purposes 13 payments and deliveries made under this Agreement as adjustments to the purchase price paid for the Purchase Shares pursuant to Section 2 of the Purchase Agreement. e. Registration Statement. Any Paired Shares delivered by the Companies to MLI pursuant to this Agreement shall be the subject of an Effective Registration Statement. The Companies further agree that they will cause any registration statement to remain in effect until the earliest of the date on which (i)<0- 95>the Adjustment Shares plus all Interim Settlement Shares have been sold by or on behalf of MLI, (ii) MLI has advised the Companies that it no longer requires that such registration be effective or (iii) the date on which the Reference Amount shall have been reduced to zero (-0-). The provisions of Section 5.2 and Section 7.2 of the Purchase Agreement shall be deemed to apply to any registration statement filed by the Companies pursuant to this Agreement. f. Delivery of Paired Shares. The Companies covenant and agree with MLI that Paired Shares delivered by the Companies pursuant to settlement events in accordance herewith will be duly authorized, validly issued, fully paid and nonassessable. The issuance of such Paired Shares will not require the consent, approval, authorization, registration, or qualification of any government authority, except such as shall have been obtained on or before the delivery date to MLI in connection with any registration statement filed with respect to any such Paired Shares. g. Securities Law Compliance. Each party agrees that it will comply, in connection with this Transaction and all related or contemporaneous sales and purchases of the Companies' Paired Shares, with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations thereunder and any rules or regulations or code of conduct of, or agreements with, (i) the National Association of Securities Dealers, Inc., and (ii) the Relevant Exchange. h. Regulatory Compliance. Each party agrees that if the delivery of Paired Shares upon settlement is subject to any restriction imposed by a regulatory authority, it shall not be an event of default, and the parties will negotiate in good faith a procedure to effect settlement of such shares in a manner which complies with any relevant rules of such regulatory authority and which is satisfactory in form and substance to their respective counsel, subject to Section 6.2 of this Agreement and Section 7 of the Purchase Agreement. Each party further agrees that any sale pursuant to Section 3.1 of this Agreement may be delayed or postponed if, in MLPF&S's judgement, such delay or postponement is necessary to comply with the requirements of applicable law or regulation. 14 i. Settlement Transfer. All settlements shall occur through DTC or any other mutually acceptable depository. j. Trading Authorization. The following individuals and/or any individual authorized in writing by the respective Treasurers of the Companies are authorized by the Companies to provide trading instructions to MLI with regard to this transaction. For the REIT: ------------- David Benson Laurie Gerber Michael Benjamin Michael Bushee For OPCO: --------- William Baker David Benson Laurie Gerber Michael Benjamin The address, telephone number and facsimile number of each of these individuals is: c/o The Meditrust Companies, 197 First Avenue, Needham, Massachusetts 02194, telephone: (781) 4336000, and facsimile: (781) 4331290. k. Specific Performance. The parties acknowledge and agree that the failure of the Companies or MLI to deliver Paired Shares in accordance with the provisions hereof would result in damage to the other party that could not be adequately compensated by a monetary award. The parties therefore agree that, if either party fails to deliver Paired Shares in accordance with the provisions hereof, the other party may, in addition to all other remedies, seek an order of specific performance from a court of appropriate jurisdiction. 15 l. Governing Law. The Agreement will be governed by and construed in accordance with the laws of the State of New York without reference to choice of law doctrine. m. Confidentiality. Subject to the other applicable subsections of this Section 6, to any contrary requirement of law and to the right of each party to enforce its rights hereunder in any legal action, each party shall keep strictly confidential and shall cause its employees and agents to keep strictly confidential the terms of this Agreement and any information relating to or concerning the other party which it or any of its agents or employees may acquire pursuant to, or in the course of performing its obligation under, any provision of this Agreement. n. Return of Paired Shares and Cash Collateral. Upon the date on which the Reference Amount has been reduced to zero, MLI shall (i) transfer, assign and deliver to the Companies any cash and/or Paired Shares previously delivered by the Companies pursuant to this Agreement (including Paired Shares delivered pursuant to the Purchase Agreement) and not previously delivered to the Companies or sold by the Merrill Lynch Parties pursuant to the Restated Adjustment Agreements or, in the case of cash, applied to reduce the Reference Amount, and (ii) release all claims to cash and Interim Settlement Shares then held in the Collateral Account (including interest earned thereon) and immediately deliver such amounts and all Interim Settlement Shares to the Companies. o. Reservation of Rights. The Parties hereto expressly reserve their rights with respect to any actions taken under the Forward Equity Transaction Documents (as defined in the Settlement Agreement) prior to the date hereof, except that the Parties agree that the Registration Statement declared effective on October 8, 1998 shall constitute a Resale Registration Statement as contemplated by the Purchase Agreement. 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. MERRILL LYNCH INTERNATIONAL By: /s/ John O'Dowd ------------------------------ Name: John O'Dowd Title: Vice President MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Onu Odim ------------------------------ Name: Onu Odim Title: Managing Director MEDITRUST OPERATING COMPANY By: /s/ William Baker ------------------------------ Name: William C. Baker Title: President MEDITRUST CORPORATION By: /s/ Michael Benjamin ------------------------------ Name: Michael S. Benjamin, Esq. Title: Senior Vice President 17 EX-10.15 9 AMENDED AND RESTATED SETTLEMENT AGREEMENT AMENDED AND RESTATED SETTLEMENT AGREEMENT THIS AMENDED AND RESTATED SETTLEMENT AGREEMENT (the "Agreement") is made as of this 11th day of November, 1998, by and among Meditrust Corporation, a Delaware corporation ("REIT"), Meditrust Operating Company, a Delaware corporation ("OPCO" and, together with REIT, the "Companies" and each a "Company"), Merrill Lynch International ("MLI") and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent acting for the account of MLI and as owner of the Purchase Shares (as defined in the Purchase Agreement (as defined herein)) and successor to the rights and obligations of MLI under the Purchase Agreement ("Merrill Lynch" and, together with MLI, the "Merrill Lynch Parties"). The Companies and the Merrill Lynch Parties are sometimes referred to herein as the "Parties" and each individually, a "Party." Capitalized terms used but not defined herein shall have the meaning ascribed thereto in the Purchase Agreement or the Adjustment Agreements, as the circumstances require. WHEREAS, the Parties hereto entered into a Settlement Agreement dated as of November 11, 1998 (the "Original Settlement Agreement") which sets forth certain agreements and covenants, and as required by an Agreement between the Parties hereto dated November 11, 1998, the Parties are entering into this Agreement which is intended to amend and restate the Original Settlement Agreement. Accordingly, the purpose of this Agreement is to amend and restate the Original Settlement Agreement in its entirety and to set forth the terms and conditions of the agreements contained herein. WHEREAS, the Parties hereto are parties to that certain Purchase Agreement dated as of February 26, 1998 (the "Original Purchase Agreement") and that certain Purchase Price Adjustment Mechanism Agreement dated as of February 26, 1998 (the "Original Adjustment Agreement"), as each have been amended by those certain Amendment Agreements dated as of July 16, July 31 and September 11, 1998 (the "First Amendment," "Second Amendment," and "Third Amendment," respectively, and collectively, the "Amendments") (as so amended, the "Purchase Agreement" and the "Adjustment Agreement," respectively, and, collectively, the "Forward Equity Transaction Documents"); WHEREAS, the Parties desire to amend the Purchase Agreement pursuant to the Amendment to Purchase Agreement substantially in the form attached as Exhibit A hereto and to amend and restate the Adjustment Agreement by entering into the Secured Purchase Price Adjustment Mechanism Agreement (the "Secured Adjustment Agreement") and the Unsecured Purchase Price Adjustment Mechanism Agreement (the "Unsecured Adjustment Agreement," and together with the Secured Adjustment Agreement, the "Restated Adjustment Agreements"), each in substantially the form attached as Exhibits B-1 and B-2 hereto, respectively; WHEREAS, the Parties further desire to enter into certain other agreements pertaining to those transactions contemplated by the Forward Equity Transaction Documents, each of which will be set forth in this Agreement or in the other documents and instruments delivered in connection herewith. NOW, THEREFORE, in consideration of the agreements and covenants set forth herein, the Parties hereto hereby covenant and agree as follows: 1. Amendment of Purchase Agreement and Amendment and Restatement of Adjustment Agreement. The Parties hereto agree to execute and deliver on the date hereof the Amendment to Purchase Agreement and the Restated Adjustment Agreements, substantially in the forms attached as Exhibit A, Exhibit B-1 and Exhibit B-2 hereto, 2 respectively. Upon execution and delivery of the Amendment to Purchase Agreement and the Restated Adjustment Agreements, the Parties agree that the Original Adjustment Agreement and the Amendments shall thereafter be superseded and rescinded, respectively and, in each case, of no further force and effect. However, the effect of the foregoing is not to affect any action taken prior to the date hereof pursuant to the Original Adjustment Agreement and the Amendments. Further, the Parties hereto expressly reserve their rights with respect to any actions taken under the Forward Equity Transaction Documents prior to the date hereof, except that the Parties agree that the Registration Statement declared effective on October 8, 1998 shall constitute a Resale Registration Statement as contemplated by the Purchase Agreement. The Companies agree and acknowledge that the Merrill Lynch Parties are entering into this Agreement on the condition that the Original Adjustment Agreement be amended and restated as provided herein, and in reliance thereon, and that such amendment and restatement is an essential part of the agreements contemplated herein. 2. Maximum Payment to Reduce Reference Amounts and Purchase Paired Shares. The Parties agree that Schedules 2A and 2B hereto set forth calculations of the Reference Amounts under the Restated Adjustment Agreements as of November 10, 1998. The Parties acknowledge and agree that the aggregate amount to be paid or otherwise delivered to the Merrill Lynch Parties as payment on the "Reference Amount" under the Restated Adjustment Agreements shall not exceed the sum of (a) [$80,000,000] in the case of the Secured Adjustment Agreement and [$197,312,500] in the case of the Unsecured Adjustment Agreement, plus, in each case (b) the applicable amount determined in accordance with Section 1(z)(i) of the respective Restated Adjustment Agreements. Further, the Merrill Lynch Parties agree that, upon payment in full of the then applicable Reference Amount under both of the Restated Adjustment Agreements, they shall deliver, or cause to be delivered, to the Companies, without further payment therefor, any and all Paired Shares delivered to them in connection with, as a result of, or pursuant to the Purchase Agreement or the Restated Adjustment Agreements and not previously delivered to the Companies or sold by the Merrill Lynch Parties pursuant to the Restated Adjustment Agreements. 3. Effect of Cash Payment to the Merrill Lynch Parties. Any and all cash paid or otherwise delivered to the Merrill Lynch Parties by or on behalf of the Companies (a)_pursuant to Sections 4.2(ii), 4.3, 5, 6.3(b), 6.4, 7(b), 8.1 and 9 of this Agreement and Section_5.2 of the Purchase Agreement, as amended by the Amendment to Purchase Agreement, shall reduce the Reference Amount (by reducing, on a per Adjustment Share basis, the Reference Price) of the Unsecured Adjustment Agreement in the manner set forth in Section 3.3 of the Unsecured Adjustment Agreement, and (b) pursuant to Sections 6.1, 6.3(a), 6.5 and 9 of this Agreement, shall reduce the Reference Amount (by reducing, on a per Adjustment Share basis, the Reference Price) of the Secured Adjustment Agreement in the manner set forth in Section_3.3 of the Secured Adjustment Agreement. 3 4. Standstill. a. Initial Standstill. In consideration of the Standstill Consideration (as defined below), the Merrill Lynch Parties agree that, subject to Section 4.4, from the date hereof and until January 31, 1999, they will not directly or indirectly sell, assign, transfer, pledge or otherwise dispose of, or enter into any put or other contract, option or other arrangement or undertaking (including any socalled shortsale which the Merrill Lynch Parties then intend to settle with the Paired Shares delivered to them in connection with, as a result of, or pursuant to the terms of the Forward Equity Transaction Documents or, after the date hereof, the Purchase Agreement, as amended by the Amendment to Purchase Agreement, or the Restated Adjustment Agreements) with respect to the direct or indirect sale, assignment, transfer or other disposition of, any Paired Shares delivered to them in connection with, as a result of, or pursuant to the terms of, the Forward Equity Transaction Documents prior to the date hereof or pursuant to the Restated Adjustment Agreements on and after the date hereof; provided, however, that the Merrill Lynch Parties may enter into such an arrangement or undertaking (subject to the provisions of the Purchase Agreement as amended by the Amendment to Purchase Agreement, and the Restated Adjustment Agreements) in the event the transaction contemplated by such arrangement or undertaking will not be consummated until after January 31, 1999 (or February 28, 1999 in the event the Standstill is extended pursuant to Section 4.3) (the "Standstill"). The foregoing shall in no event restrict or limit sales by the Merrill Lynch Parties for the account of clients or for their own account so long as the Paired Shares to be sold were not delivered to the Merrill Lynch Parties pursuant to the Purchase Agreement or the Restated Adjustment Agreements. Further, the Parties agree that the Companies shall not, during the term of the Standstill, be required to comply with the requirements in the Purchase Agreement, as amended by the Amendment to Purchase Agreement, and the Restated Adjustment Agreements with respect to making an Effective Registration Statement available to the Merrill Lynch Parties; provided, that the foregoing shall in no way relieve the Companies' obligations contained in such Agreements immediately following the termination of the Standstill. b. Standstill Consideration. In consideration of the Merrill Lynch Parties' Standstill, the Companies agree to (i) execute and deliver to the Merrill Lynch Parties concurrently herewith (a) a Deed of Trust Note and a Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing substantially in the form of Exhibits C1 and C2 hereto, respectively (collectively, the "NonRecourse Note and Mortgage"), and (b) a Subordination and Attornment and Estoppel Certificate of Los Angeles Turf Club, Incorporated substantially in the form of Exhibits C3 and C4 hereto, respectively; and (ii) pay to the Merrill Lynch Parties 4 an aggregate of $25 million in cash on or prior to December 24, 1998 in the event the Companies (or the REIT) have not, on or prior to such date, completed an offering or private placement of convertible preferred stock, common stock or other equity securities or securities convertible into equity securities the net proceeds of which (A) exceed $100 million, and (B) have been paid or otherwise delivered to the Merrill Lynch Parties to reduce the Reference Amount under the Unsecured Adjustment Agreement (such $25 million payment, the "December Payment" and, together with the NonRecourse Note and Mortgage, the "Standstill Consideration"). The Companies agree to not challenge in any legal proceeding the adequacy of the consideration received by the Companies in connection with their delivery of, or agreement to deliver, the Standstill Consideration. Such December Payment shall reduce the Reference Amount under the Unsecured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Unsecured Adjustment Agreement. c. Standstill Extension. Provided the Merrill Lynch Parties' Standstill has not been terminated in accordance with the terms of this Agreement, the Companies shall have the option to extend such Standstill until February 26, 1999 upon written notice to the Merrill Lynch Parties and payment by or on behalf of the Companies to the Merrill Lynch Parties of $25 million (the "January Payment"), delivered on or prior to the close of business on January 31, 1999. The January Payment, if made, shall reduce the Reference Amount under the Unsecured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Unsecured Adjustment Agreement. d. Termination of Standstill. The Standstill shall terminate in the event (i) the December Payment, if required, is not made to the Merrill Lynch Parties on or prior to the close of business on December 24, 1998; provided, however, that the foregoing shall not relieve the Companies of their obligation to make such $25 million December Payment or preclude the Merrill Lynch Parties from pursuing any and all legal remedies to collect such payment; (ii) the lender's title insurance policy required by Section 6.2 hereof is not delivered within the time period set forth therein; (iii) the Companies fail to deliver promptly the Net Sales Proceeds (as defined in Section 6.4 hereof) after payment of the NonRecourse Note and Mortgage as contemplated by Section 6.4; (iv) the Companies fail to deliver the earnest money deposit as contemplated by Section 6.5 hereof; (v) the Companies fail to deliver to MLI the net proceeds of an offering as contemplated by the second sentence of Section 8.1 or fail to comply with the provisions of the first and second sentence of Section 8.2 hereof; (vi) the Companies offer or sell any equity securities or securities convertible into equity securities (except as specifically permitted by Section 9 hereof) while the Reference Amount under either of the Restated Adjustment Agreements exceeds zero (0) dollars and the net 5 proceeds from such offering or private placement (or the portion of the net proceeds necessary to reduce the Reference Amount under both of the Restated Adjustment Agreements to zero (0) dollars) are not paid or otherwise delivered to MLI as contemplated by Section 9 hereof, (vii) the Companies fail to deliver to MLI any Interim Settlement Shares, dividends on Interim Settlement Shares or cash required by Section 5 of the Restated Adjustment Agreements within one (1) Business Day of any date on which such delivery is required; (viii) the Companies fail to comply with the obligations set forth in the second to the last sentence of Section 4.2 hereof; or (ix) an Event of Default under Section 23(a), (c), (h) or (l) of the Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing shall have occurred and continues as of the date of such Standstill termination. In the event such Standstill is so terminated, then (i) any restrictions on the ability of the Merrill Lynch Parties contained in this Agreement or any other agreement contemplated hereunder to sell Paired Shares shall immediately cease and (ii) the Companies shall promptly prepare and file any required amendment or supplement to the Registration Statement and Prospectus covering the Paired Shares held by the Merrill Lynch Parties and use their best efforts to cause the required Resale Closing Documents to be promptly delivered. 5. Collateral Account and Purchased Shares. The Parties acknowledge and agree that, as of the close of business on November 9, 1998, the collateral account established by MLI pursuant to the Forward Equity Transaction Documents (the "Collateral Account") held the amount of cash and Paired Shares set forth on Schedule 2 hereto. Merrill Lynch acknowledges that it owns, and holds for its own account, 8,500,000 Paired Shares purchased by MLI pursuant to the Purchase Agreement. The Companies hereby direct the Merrill Lynch Parties to promptly transfer the cash held in the Collateral Account as of the date of this Agreement to the order of MLI, which amount shall reduce the Reference Amount in accordance with the provisions of Section 3.3 of the Unsecured Adjustment Agreement. Further, the Companies direct the Merrill Lynch Parties to promptly transfer the cash deposited from time to time in the Collateral Account as dividends on the Paired Shares then held in the Collateral Account by the Merrill Lynch Parties (including the November 13 dividend) to the order of MLI, which amounts shall, upon such transfer, reduce the Reference Amounts in accordance with the provisions of Section 3.3 of the respective Restated Adjustment Agreements. 6. Santa Anita Matters. a. Return of Instrument; Discharge of Mortgage. Upon payment of $80 million to the order of MLI on account of the NonRecourse Note and Mortgage (which shall reduce the Reference Amount under the Secured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Secured Adjustment Agreement), the Merrill Lynch Parties shall deliver to the Companies, the NonRecourse Note and Mortgage, any and all documents delivered in connection 6 therewith and a Discharge of Mortgage reasonably satisfactory to the buyer of the Santa Anita Racetrack and the Companies and any interest of the Merrill Lynch Parties in the real property and operations which are the subject of the NonRecourse Note and Mortgage shall terminate. The Merrill Lynch Parties acknowledge that time will be of the essence for such delivery and agree that such instrument, if requested by the Companies, will be delivered contemporaneously (including delivery at the closing of any sale of the Santa Anita Racetrack) with such payment. b. Lender's Title Insurance. The Companies agree to deliver to the Merrill Lynch Parties, on or prior to November 30, 1998, a customary lender's title insurance policy on the real property interests subject to the NonRecourse Note and Mortgage. c. Effect of Foreclosure. (a) The Parties hereby acknowledge and agree that $80 million of the net proceeds from the foreclosure (the "Net Foreclosure Proceeds") of the NonRecourse Note and Mortgage upon delivery to MLI shall reduce the Reference Amount under the Secured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Secured Adjustment Agreement and that such NonRecourse Note and Mortgage shall, upon foreclosure, terminate. i. The Net Foreclosure Proceeds, after payment of $80 million to MLI, shall be payable to, and for the account of, the Companies; provided, however, that the Merrill Lynch Parties shall retain that amount of Net Foreclosure Proceeds (if any) in excess of the amount of any federal, state or local income taxes of the Companies directly attributable to such foreclosure (or the grant of the underlying mortgage) reasonably determined by the Companies (the "Tax Remittance"). To accomplish the foregoing, the Companies shall notify the Merrill Lynch Parties of the amount of such Tax Remittance, and shall deliver to the Merrill Lynch Parties a schedule displaying the calculation of such Tax Remittance, and the Merrill Lynch Parties shall promptly remit, or cause to be remitted, to the Companies, such amount; provided, however, that in no event shall the Merrill Lynch Parties be required to remit amounts as a Tax Remittance if such remittance would cause the Merrill Lynch Parties to retain less than $80 million of Net Foreclosure Proceeds (including the amount of such proceeds applied to the NonRecourse Note and Mortgage). The excess (if any) of such Net Foreclosure Proceeds after payment of such $80 million and the delivery of such Tax Remittance (subject to the proviso in the foregoing sentence) shall reduce the Reference Amount under the Unsecured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Unsecured Adjustment Agreement. 7 ii. The "Net Foreclosure Proceeds" shall consist of the gross proceeds in any such foreclosure less only the reasonable, outofpocket costs directly attributable to such foreclosure incurred and paid by or on behalf of the Merrill Lynch Parties, provided, that, in no event shall taxes or other nonforeclosure related expenses of the Merrill Lynch Parties be deducted in calculating such Net Foreclosure Proceeds. The Merrill Lynch Parties shall deliver to the Companies a schedule displaying the calculation of such Net Foreclosure Proceeds within fifteen (15) Business Days of such foreclosure. d. Excess Proceeds on Sale of Santa Anita Racetrack. i. The Companies agree to pay or to otherwise deliver to MLI the amount of the net proceeds from the sale of the Santa Anita Racetrack (the "Net Sales Proceeds") in excess of the $80 million due and payable to MLI pursuant to the terms of the NonRecourse Note and Mortgage, which excess amount will, upon delivery to MLI, reduce the Reference Amount under the Unsecured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Unsecured Adjustment Agreement. ii. The "Net Sales Proceeds" shall consist of the gross proceeds in any such sale less only (i) reasonable, outofpocket costs directly attributable to such sale, and (ii) the amount of any federal, state or local income taxes of the Companies directly attributable to such sale (or to the grant or discharge of the mortgage contemplated by this Agreement). The Companies shall deliver to the Merrill Lynch Parties a schedule displaying the calculation of such Net Sales Proceeds within fifteen (15) Business Days of the consummation of such sale. e. Forfeiture of Deposit. The Companies agree to promptly pay or otherwise deliver the $6.5 million earnest money deposit to MLI in the event such earnest money deposit is forfeited by the proposed buyer of such facility under the terms of the agreement governing the delivery and forfeiture of such earnest money deposit. Such earnest money deposit, upon delivery to MLI, shall reduce the Reference Amount under the Secured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Secured Adjustment Agreement. 7. Extension of NonRecourse Note and Mortgage. (a) The principal amount of the NonRecourse Note and Mortgage, which amount shall not bear interest, shall be due and payable in full on January 4, 1999 (the "Maturity Date"). Notwithstanding the foregoing, if the NonRecourse Note and Mortgage has not been paid in full by January 4, 1999, the 8 Companies shall have the right to extend (pursuant to one or more extensions) the Maturity Date until March 31, 1999, provided that, during such extension and until the principal amount of the NonRecourse Note and Mortgage is paid in full, the Spread (as defined in the Adjustment Agreement) under each of the Restated Adjustment Agreements shall be increased as follows, in each case retroactive to January 4, 1999 and in complete substitution of the prior month's Spread increase set forth below:
Date Spread Increase To ---- ------------------ 1/04/99 - 1/31/99 150 Basis Points 2/1/99 - 2/28/99 250 Basis Points 3/1/99 - Non-Recourse 350 Basis Points Note is Paid in Full
The above described increase to the Spread shall be of no further force and effect and the provisions of each Restated Adjustment Agreement shall control upon (i) payment in full of the principal amount due under the NonRecourse Note and Mortgage or (ii) foreclosure of the same pursuant to Section 6.3 hereof resulting in Net Foreclosure Proceeds to the Merrill Lynch Parties in excess of $80 million. i. In the event the Net Foreclosure Proceeds received by the Merrill Lynch Parties do not equal or exceed $80 million, the Companies shall make a subsequent payment to the Merrill Lynch Parties (which shall reduce the Reference Amount under the Unsecured Adjustment Agreement in accordance with Section 3.3 of the Unsecured Adjustment Agreement) and identify such payment as allocable to the amount by which such Net Foreclosure Proceeds were less than $80 million, in which case the abovedescribed increase to the Spread shall be of no further force and effect and the provisions of each Restated Adjustment Agreement shall thereafter control. 9 8. Preferred Stock Offering. a. General. The REIT (or the Companies, if applicable) shall use its best efforts to commence and complete one or more offerings or private placements of convertible preferred stock, common stock or other equity securities or securities convertible into equity securities on or prior to December 24, 1998. The REIT (or the Companies, if applicable) agrees that the net proceeds from such offering(s) (after underwriting discounts and other direct expenses of the offering(s)) shall be paid or otherwise delivered to MLI to reduce the Reference Amount under the Unsecured Adjustment Agreement in accordance with the provisions of Section 3.3 of the Unsecured Adjustment Agreement. b. Role of Merrill Lynch. The Parties agree that Merrill Lynch shall act as lead manager or placement agent, as the case may be, in any such public offering or private placement and shall receive usual and customary (i) lead manager or placement agent compensation and (ii) reasonable expense reimbursement. The Parties agree that the underwriting discount for such public offering or private placement shall be the usual and customary discount for such an offering or private placement at the time of such offering or placement, provided, that, such discount shall be no less than three and one half percent (3-1/2%). The Parties agree that the REIT (or the Companies, if applicable) shall have the right, in its sole discretion, to select one or more comanagers or coplacement agents, as the case may be, for any such public offering or private placement, which comanagers or coplacement agents shall receive usual and customary comanagement or coplacement agent terms (including compensation and reasonable expense reimbursement). Any one of such comanagers in a public offering may act, at the REIT's (or the Companies', if applicable) request, as a qualified independent underwriter as defined in the National Association of Securities Dealers, Inc. Conduct Rule 2720. 9. Additional Public Offerings or Private Placements. The Companies agree that until the Reference Amount under both of the Restated Adjustment Agreements has been reduced to zero (i) dollars, it shall not offer or sell any equity securities or securities convertible into equity securities (except (x) in connection with employee benefit plans, contracts or arrangements; or (y) using such equity securities (or securities convertible into equity securities) as consideration in acquisitions, joint ventures or similar transactions, which consideration may not exceed $50 million in the aggregate), unless (i) the net proceeds from such offering or placement (up to the Reference Amount under both of the Restated Adjustment Agreements) are paid or otherwise delivered to the Merrill Lynch Parties; or (ii) the Companies have provided the Merrill Lynch Parties the opportunity to include an amount of Paired Shares such that the net proceeds to the Merrill Lynch Parties from such offering or placement will reduce the Reference Amount under both of the Restated 10 Adjustment Agreements to zero (0) dollars before any other Paired Shares (on a primary or secondary basis) are included in such offering or placement. The Parties acknowledge that any such offering or placement contemplated by clause (i) above shall be subject to the approval of the requisite percentage of lenders under the REIT's credit facility. 10. Press Releases. The Parties will consult with each other before issuing, and provide each other the opportunity to review, comment upon and concur with, any press release or other written public statements with respect to the transactions contemplated by this Agreement, and will not issue any such press release or make any such public statement prior to such consultation, except as either party may determine is required by applicable law, court process or by obligations pursuant to any listing agreement with, or rules of, any national securities exchange. The Parties agree that the language substantially in the form set forth in Exhibit D hereto shall be acceptable for use in a press release by the Companies, describing, among other things, the transactions contemplated by this Agreement and the exhibits and schedules appended hereto. Notwithstanding the foregoing, each of the parties hereto shall be permitted to make press releases in the ordinary course, including those which refer generally to the existence of this transaction. 11. Representations. a. Representations of the Companies. The Companies hereby represent and warrant to the Merrill Lynch Parties that (i) this Agreement and each other agreement, document and instrument executed by each Company pursuant to or in connection with this Agreement constitutes, or when executed and delivered will constitute, the valid and binding obligation of each such Company, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium and other rights affecting creditors' rights generally, and general equitable principles; and (ii) the lenders under the REIT's senior credit facility have consented to the use of the proceeds from the sale of the Santa Anita Racetrack to pay the NonRecourse Note and Mortgage in full and to reduce the Reference Amount under the Restated Adjustment Agreements by an equivalent amount of such payment (inclusive of both $80 million payment of the NonRecourse Note and Mortgage and the excess proceeds (if any)) and no other consents of the lenders in connection with the grant of the NonRecourse Note and Mortgage, the payment of the net proceeds from the sale of the Santa Anita Racetrack to the Merrill Lynch Parties, the preferred stock offering contemplated by Section 8 hereof and the other transactions contemplated by this Agreement and the other Forward Equity Transaction Documents is necessary. Section 11.2 Representations of the Merrill Lynch Parties. The Merrill Lynch Parties hereby represent and warrant to the Companies that (i) this Agreement and each other agreement, document and instrument executed by each such Merrill Lynch Party pursuant to or in 11 connection with this Agreement constitutes, or when executed and delivered will constitute, the valid and binding obligation of each such Merrill Lynch Party, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium and other rights affecting creditors' rights generally, and general equitable principles. 12. [Intentionally omitted.] 13. General Provisions. a. Notices. All notices, consents and other communications required hereunder shall be delivered in the manner set forth in the Purchase Agreement. b. Changes. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Parties hereto. c. Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. d. Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. e. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon (i) the successors of the Merrill Lynch Parties and (ii) any assignee or transferee of rights and obligations of the Merrill Lynch Parties pursuant to the Amended Purchase Agreement, as amended by Amendment to Purchase Agreement, the Restated Adjustment Agreements or this Agreement. Any permitted transferee of the Merrill Lynch Parties pursuant to the Amended Purchase Agreement, as amended by Amendment to Purchase Agreement, the Restated Adjustment Agreements or this Agreement, and any successor, assignee, or transferee thereto, shall be held subject to all of the terms of this Agreement. Except as set forth in this Section 13, neither the Companies nor the Merrill Lynch Parties may assign any of their respective rights, or delegate any of their respective duties under this Agreement. f. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. g. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall 12 constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. h. Conflicts with Other Agreements. In the event any conflict between the provisions of this Agreement and the Amended Purchase Agreement (as amended by the Amendment to Purchase Agreement), the Restated Adjustment Agreements or the NonRecourse Note and Mortgage, the terms and provisions of this Agreement shall govern. i. Expenses. Except as specifically provided herein, the Parties shall each pay their respective fees and expenses incurred in connection with the negotiation and execution of this Agreement and the consummation of the transactions contemplated hereby; provided, that the Companies shall reimburse the Merrill Lynch Parties for their reasonable, documented outofpocket expenses incurred in connection with the transactions contemplated by this Settlement Agreement up to a maximum of $200,000. j. Escrow. This Agreement and each of the documents contemplated hereby shall be held pursuant to the terms of the Escrow Agreement attached as Exhibit E hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 13 IN WITNESS WHEREOF, the parties have duly executed and delivered this Agreement as of the date first above written. MERRILL LYNCH INTERNATIONAL By: /s/ John O'Dowd ------------------------------ Name: John O'Dowd Title: Vice President MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Onu Odim ------------------------------ Name: Onu Odim Title: Managing Director MEDITRUST OPERATING COMPANY By: /s/ William Baker ------------------------------ Name: William C. Baker Title: President MEDITRUST CORPORATION By: /s/ Michael Benjamin ------------------------------ Name: Michael S. Benjamin, Esq. Title: Senior Vice President 14 Schedule 2A ----------- See attached schedule. 15 Schedule 2B ----------- See attached schedule. 16 Exhibit A --------- See attached Form of Amendment to Purchase Agreement. 17 Exhibit B-1 ----------- See attached Form of Secured Purchase Price Adjustment Mechanism Agreement. 18 Exhibit B-2 ----------- See attached Form of Unsecured Purchase Price Adjustment Mechanism Agreement. 19 Exhibits C1 through C4 See attached form of NonRecourse Note and Mortgage (Exhibits C1 and C2) and related documents (Exhibits C3 and C4). 20 Exhibit D --------- Form of Language for Press Release ---------------------------------- Meditrust has entered into an agreement to fully settle its existing $277 million FEIT with Merrill Lynch International and certain of its affiliates. Under the agreement, Meditrust has agreed to grant a mortgage of the Santa Anita Racetrack to Merrill Lynch and anticipates repaying Merrill Lynch approximately 50% of the FEIT obligation in cash generated in part from the sale of certain assets. It is anticipated that the remaining FEIT obligation will be discharged from the proceeds of the sale of equity securities of The Meditrust Companies with terms to be finalized shortly which, if offered publicly, will be offered pursuant to a prospectus. Merrill Lynch has agreed, subject to the terms of the settlement agreement, not to sell any shares of the existing FEIT until February 28, 1999 while Meditrust completes the sale of equity securities and certain assets. Mr. Benson said, "We believe this arrangement regarding our only forward equity obligation should remove market uncertainty for Meditrust's paired common stock, with the ultimate objective of minimizing possible dilution to funds from operations (FFO) associated with this obligation." 21 Exhibit E --------- Form of Escrow Account ---------------------- See attached form of Escrow Agreement. 22 EX-10.16 10 AMENDMENT TO CREDIT AGREEMENT AMENDMENT TO CREDIT AGREEMENT THIS AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as of November 23, 1998, by and among MEDITRUST CORPORATION (the "Borrower"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Administrative Agent"), BANKERS TRUST COMPANY, as Syndication Agent, BANKBOSTON, N.A., as Co-Documentation Agent, FLEET NATIONAL BANK, as Co-Documentation Agent, and the BANKS listed on the signature pages hereof. W I T N E S S E T H: -------------------- WHEREAS, the Borrower and the Banks have entered into the Credit Agreement, dated as of July 17, 1998 (the "Credit Agreement"); and WHEREAS, the parties desire to modify the Credit Agreement upon the terms and conditions set forth herein. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement. 2. Annual EBITDA. The definition of "Annual EBITDA" is hereby deleted and the following substituted therefor: "Annual EBITDA" means, measured as of the last day of each calendar quarter, an amount derived from (i) total revenues as determined in accordance with GAAP and reflected in the combined consolidated financial statements relating to the Borrower, MOC and their Consolidated Subsidiaries or to the Borrower's or MOC's direct or indirect interest in Minority Holdings for the previous four consecutive calendar quarters including the quarter then ended, on an accrual basis, less (ii) total operating expenses and other expenses relating to the Borrower, MOC and their Consolidated Subsidiaries and relating to the Borrower's and MOC's direct or indirect interest in Minority Holdings for such period (other than interest, taxes, depreciation, amortization, and other non-cash items, as well as nonrecurring, one-time cash charges, not to exceed (together with those one-time cash charges set forth in clause (iii) below), for the period commencing October 1, 1998, $250,000,000 in the aggre gate), less (iii) total corporate operating expenses (including general overhead expenses) and other expenses of the Borrower, MOC, their Consolidated Subsidiaries and such expenses relating to the Bor rower's and MOC's direct or indirect interest in Minority Holdings (other than interest, taxes, depreciation, amortization and other non-cash items, as well as nonrecurring, one-time cash charges, not to exceed (together with those one-time cash charges set forth in clause (ii) above), for the period commencing October 1, 1998, $250,000,000 in the aggregate), for such period. 3. Applicable Margin. The definition of "Applicable Margin" is hereby deleted and the following substituted therefor: "'Applicable Margin' means, with respect to each Euro-Dollar Loan, 2.625%, and with respect to each Base Rate Loan, 1.75%; provided, however, that if the Borrower, MOC and/or any of their Subsidiaries shall fail to complete one or more offerings or private placements of convertible preferred stock, common stock or other equity securities or securities convertible into equity securities (collectively, "Securities"), in an aggregate amount not less than $100,000,000 on or before February 1, 1999, then, commenc ing as of February 1, 1999, the "Applicable Margin" shall be increased by the 2 Capital Markets Condition Spread until such time as Securities in an amount not less than $100,000,000 shall have been issued. For purposes hereof, "Capital Markets Condition Spread" means an amount equal to 0.25%." 4. Debt. The following clause "(E)" is hereby added to the definition of "Debt: ", and (E) all repurchase and similar obligations of such Person." In addition, the following sentence is hereby added to the end of the definition of "Debt": "Notwithstanding anything contained herein to the contrary, Debt shall not be deemed to include any amounts evidenced by the nonrecourse mortgage note payable to Merrill Lynch International and secured by a mortgage or deed of trust on the Santa Anita Racetrack." 5. FEITS Agreement. The following definition is hereby added after the definition of "Federal Reserve Board": "'FEITS Agreement' means the Purchase Agreement, dated as of February 26, 1998, among the Borrower, MOC, Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as agent for the account of Merrill Lynch International, as amended by Amendment Agreements, dated as July 16, 1998 and July 31, 1998, and all other agreements executed in connection therewith (a true and complete copy of which has been delivered by the Borrower to the Administrative Agent, the Syndication Agent and the Co-Documentation Agents), as the same may be amended from time to time in accordance with the provisions hereof." 3 6. Guaranty. The definition "Guarantor Subsidiary" is hereby deleted and all references thereto in the Credit Agreement and the other Loan Documents are hereby deemed to be deleted. In addition, the definition of "Guaranty" is hereby amended by substituting the phrase "all Consolidated Subsidiaries of the Borrower and/or MOC that are required to deliver a Guaranty pursuant to Section 5.22 hereof" for the phrase "a Guarantor Subsidiary". 7. Loan Documents. The definition of "Loan Documents"" is hereby deleted and the following substituted therefor: "Loan Documents" means this Agreement, the Notes, any Guaranty, the Letter(s) of Credit, the Letter of Credit Documents, the Pledges, the Subordination Agreement and any related documents. 8. Net Offering Proceeds. The definition of "Net Offering Proceeds"" is hereby deleted and the following substituted therefor: "Net Offering Proceeds" means all cash received by the Borrower or MOC as a result of the sale and/or issuance of (x) common stock, preferred stock, partnership interests, limited liability company interests, or other ownership or equity interests in the Borrower or MOC (or evidence of indebtedness of the Borrower or MOC con vertible into any of the foregoing), or (y) debt securities or any other debt instruments, whether or not securities, including, without limitation, notes and loan agreements with banks, life insurance companies and all other lenders, less, in either case, customary costs and discounts of issuance paid by the Borrower or MOC, as the case may be, and exclusive of any cash proceeds received in connection with the settlement of the Forward Equity Issuance Transaction, dated as of February 26, 1998 with Merrill Lynch International. 4 9. Permitted Liens. The following clause is hereby added to the end of the definition of "Permitted Liens": ", and (i) Liens created pursuant to the Pledges". 10. Pledges. The following definition is hereby added after the definition of "Plan": "Pledges" means, collectively, the Equity Interest Pledge and Secu rity Agreement, the Mortgage Loan Pledge and Security Agreement, and the Intercompany Debt Pledge and Security Agreement, all dated as of November 23, 1998, by the Borrower, MOC and certain of their Subsidiaries, for the benefit of the Administrative Agent, on behalf of the Banks, as well as for the benefit of the trustee(s) of the bondholders (the "Bondholders") more particularly set forth on Schedule 9 hereto. 11. Subordination Agreement. The following definition is hereby added to the Credit Agreement following the definition of "Solvent": "Subordination Agreement" means the Subordination Agreement, dated as of the date hereof, by the Borrower, Meditrust Finance Corporation and Meditrust Mortgage Invest ments, Inc., for the benefit of the Administrative Agent, on behalf of the Banks and the Bondholders. 12. Unsecured Debt Ratio. The definition of "Unsecured Debt Ratio" is hereby amended by adding the following: "For purposes of this definition, 'Unse cured Debt of the Borrower, MOC and their Consolidated Subsidiaries' shall be deemed to include the Obligations, as well as all other Debt that is secured by the Pledges." 5 13. Facility Fee. Section 2.8(a) of the Credit Agreement is hereby deleted, and the following substituted therefor: Facility Fee. During the Term, the Borrower shall pay to the Administrative Agent for the account of the Banks ratably in propor tion to their respective Commitments, a facility fee on the daily average Commitments in any given quarter at a percentage per annum equal to 0.375%. The facility fee with respect to Tranche A Loans shall be payable quarterly, in arrears, on each January 1, April 1, July 1, and Octo ber 1, as well as on the applicable Maturity Date, during the Term and any extensions thereof. The facility fee with respect to Tranche B Loans, Tranche C Loans and Tranche D Loans shall be payable on the last day of each Interest Period and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof, i.e. simultaneously with the payment of interest in accordance with the provisions of Section 2.7. 14. Financial Covenants. Section 5.8 of the Credit Agreement is hereby amended as follows: (a) Section 5.8(a) of the Credit Agreement is hereby deleted and the following substituted therefor: (a) Total Liabilities to Total Fair Market Value. As of the last day of each calendar quarter, the Total Debt Ratio will not be greater than (i) 62.5% from October 1, 1998 through March 31, 1999, (ii) 60% from April 1, 1999 through September 30, 1999, (iii) 57.5% from October 1, 1999 through the final Maturity Date, and (iv) notwithstanding the provisions of clauses (i), (ii), or (iii) to the contrary, from and after the Conversion Date, 60%. (b) Section 5.8(b) of the Credit Agreement is hereby deleted and the following substituted therefor: 6 (b) Total Debt to Annual EBITDA. As of the last day of each calendar quarter, the ratio of (i) the sum, without duplication, of (x) the Debt of the Borrower, MOC and their Consolidated Subsidiaries, and (y) the Borrower's and MOC's pro rata share of the Debt of any Minority Holdings of the Borrower or MOC to (ii) Annual EBITDA, will not be more than (A) 5.5:1 commencing as of Octo ber 1, 1998 through March 31, 1999, (B) 5.25:1 from April 1, 1999 through September 30, 1999, (C) 5.0:1 from October 1, 1999 through December 31, 1999, and (D) 4.75:1 thereafter. For pur poses of this clause (b), prior to June 30, 1999, Annual EBITDA shall be calculated on an annualized basis, commencing as of the quarter ending September 30, 1998, and from and after July 1, 1999, Annual EBITDA shall be calculated based upon the Annual EBITDA for the preceding four quarters. (c) Section 5.8(e) of the Credit Agreement is hereby deleted and the following substituted therefor: (c) Unsecured Debt Ratio. As of the last day of each calendar quarter, the Unsecured Debt Ratio will not be less than (A) 0.87:1 commencing as of October 1, 1998 through March 31, 1999, (B) 0.90:1 from April 1, 1999 through June 30, 1999, (C) 0.95:1 from July 1, 1999 through September 30, 1999, and (D) 1.0:1 thereafter. (d) Section 5.8(g) of the Credit Agreement is hereby deleted and the following substituted therefor: (d) Minimum Consolidated Tangible Net Worth. The Consolidated Tangible Net Worth will at no time be less than the sum of (i) $2,000,000,000, (ii) 75% of all Net Offering Proceeds set forth in clause (x) of the definition thereof, and (iii) in the case of convertible Debt in existence as of the Closing Date, upon conversion of any such Debt to an equity interest in the Borrower or MOC, 75% of the principal amount of such Debt so converted. (e) Section 5.8(h) of the Credit Agreement is hereby deleted and the following substituted therefor: 7 (e) Limitation on Secured Debt. Secured Debt of the Borrower, MOC and their Consolidated Subsidiaries shall at no time exceed ten percent (10%) of Total Fair Market Value, exclusive of any Mort gages delivered in connection with the Security Conversion, the Pledges, any mortgage delivered to Merrill Lynch International, encumbering the Santa Anita Racetrack to secure the Borrower's obligations under the FEITS Agreement, or any intercompany debt otherwise permitted hereunder. 15. Restriction on Fundamental Changes; Operation and Control. Section 5.9(a) of the Credit Agreement is hereby deleted and the following substituted therefor: (a) None of the Borrower, MOC or any Subsidiary shall (i)enter into any merger or consolidation (not including mergers and consoli dations with each other), unless the Borrower, MOC or such Subsid iary, as the case may be, is the surviving entity, or (ii) except in the case of a Subsidiary of either the Borrower or MOC (unless the same shall constitute a substantial part of the Borrower's or MOC's business or property), liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), discontinue its business or convey, lease, sell, transfer or otherwise dispose of (except in each case to another Subsidiary), in one transaction or series of transactions, any substan tial part of its business or property, or (iii) sell or transfer all or any substantial part, to one Person or a group of related Persons (other than a Consolidated Subsidiary of the Borrower or MOC), (A) the ownership, financing or operation of the Healthcare Properties, or (B) the ownership, financing or operation of the Hotel Properties (it being understood that such a transfer to a Consolidated Subsidiary and the subsequent dividending out of the stock thereof, or any other form of "spin-off" transaction shall be deemed to be a transfer for purposes hereof), without the prior written consent of the Banks in their sole discretion. 8 16. Use of Proceeds. Section 5.16 of the Credit Agreement is hereby amended by deleting the second sentence thereof and substituting the following therefor: The Borrower may also use the proceeds of the Tranche A Loans to repay its obligations under the FEITS Agreement, but only to the extent that the Borrower shall have previously repaid the Tranche A Loans, in accordance with the provisions of Section 2.10(b), with the Net Cash Proceeds from the sale of the Santa Anita Racetrack (including associated artwork). 17. Subsidiaries Guaranty. Section 5.22 is hereby deleted and the follow ing substituted therefor: Section 5.22. Guaranties, Pledges and Subordination Agreements. The Borrower, simultaneously herewith, shall cause MOC, as well as each of the Borrower's and MOC's Consolidated Subsidiaries (other than, in the case of the Borrower, those Subsidiaries set forth on Schedule 5.22 attached hereto, consisting of those Persons whose assets are currently contemplated to be sold to HealthSouth Corpora tion (provided, however, if such sale is not consummated on or before February 15, 1999, the Borrower promptly shall cause each such Subsidiary to deliver a Guaranty and a Pledge), and, in the case of MOC, MOC Healthcare Company, The Santa Anita Companies, Inc. and its Subsidiaries, Meditrust Acquisition Company and Meditrust Operating LLC) and, in the case of the Borrower and MOC, any Subsidiaries holding only liquor licenses, to execute and deliver to the Administrative Agent, for the benefit of the Banks, a Guaranty and the Pledges. In addition, within twenty (20) Domestic Business Days' after the creation of any Subsidiary or Minority Holding, the Borrower shall, or shall cause MOC to, cause any such Subsidiary to execute and deliver to the Administrative Agent, for the benefit of the Banks, a Guaranty and the applicable parent(s) of such Subsidiary or Minority Holding, to execute and deliver to the Administrative Agent, for the benefit of the Banks and the trustee(s) for the benefit of the Bondholders, the applicable Pledge. The 9 Banks hereby acknowledge and agree that, provided that no Event of Default shall have occurred and be continuing, the Borrower and MOC shall have the right to sell, or cause to be sold, the assets or stock of, or other ownership interests in, any such Subsidiary or Minority Holding, and to accept prepayment or repayment of any Healthcare Mortgage or intercompany loan, free and clear of the Lien of the applicable Pledge, provided further that sale, prepayment or repayment shall otherwise be in accordance with the provisions of the Credit Agreement, including, without limitation, Sections 2.10 and 5.21. In addition, the Banks further acknowledge and agree that, provided no Event of Default shall have occurred and be continuing, the Borrower and MOC shall have the right to transfer assets, stock and other ownership interests among their respective Subsidiaries and Minority Holdings, to form additional Subsidiaries and Minority Holdings, to merge Subsidiaries with each other or their parent entities, and to dissolve Subsidiaries that no longer hold any assets, provided, however, that at all times the Administrative Agent shall hold, for the benefit of the Banks and the Bondholders, a perfected first priority Lien on the stock, partnership, membership or other ownership interests in all existing Subsidiaries and Minority Hold ings of the Borrower and MOC (except as specifically set forth above). (b) The Borrower, simultaneously herewith, shall cause MOC, as well as each of the Borrower's and MOC's applicable Consolidated Subsidiaries that are the holders of any intercompany debt to execute and deliver to the Administrative Agent, for the benefit of the Banks and Bondholders, a Subordination Agreement. In addition, if at any time during the term of the Loans, any other Subsidiary shall be come the holder of any debt, the obligor of which is the Borrower, MOC or any Subsidiary or either, then such Subsidiary shall imme diately execute and deliver to the Administrative Agent, for the benefit of the Banks and Bondholders, together with the applicable Pledge, a Subordination Agreement. 18. Additional Covenants. (a) The following Section 5.23 is hereby added to the Credit Agreement: 10 Section 5.23. The FEITS Agreement. The Borrower shall not amend the FEITS Agreement as in effect as of today (the "Current FEITS Agreement") in any way that would result in (i) any addi tional cash payments to Merrill Lynch International or any of its affiliates, (ii) an increase in the Spread (as defined in the Current FEITS Agreement), (iii) the granting of any additional mortgage collateral, or (iv) convert any obligations of the Borrower under the Current FEITS Agreement into "Debt" or other recourse contractual obligation. If an Event of Default shall have occurred and be contin uing, the Borrower shall not amend or modify the Current FEITS Agreement in any way. In addition, in no event shall any preferred stock issued by the Borrower, MOC, or any Subsidiary in connec tion with the settlement of the FEITS Agreement include a put option prior to July 17, 2003. The Borrower will use its best efforts to settle the FEITS Agreement in accordance with the provisions hereof on or before November 30, 1998. (b) The following Section 5.24 is hereby added to the Credit Agreement: Section 5.24. Repurchase of Securities. The Borrower shall not, and shall not permit MOC or any of their Consolidated Subsidiaries to repurchase any of their stock or prepay any of the junior securi ties, other than in connection with the settlement of the FEITS Agreement, as contemplated by Section 5.23 hereof. (c) The following Section 5.25 is hereby added to the Credit Agreement: Section 5.25. Healthcare Investments. In the event that the Borrower, MOC or any of their Subsidiaries makes any payment to Merrill Lynch International or any of its Affiliates (collectively, "Merrill Lynch") pursuant to Sections 4.2(ii) or 4.3 of the Settlement Agreement, dated as of November 11, 1998, which constitutes part of the FEITS Agreement, or as a Black-out Period Extension Fee (as defined in the Amendment to Purchase Agreement, dated as of November 11, 1998, which constitutes a part of the FEITS Agreement) (the "Merrill Lynch Cash Payments"), then for the period from January 1, 1999 through December 31, 1999, the Borrower and/or MOC shall not, and shall not permit any of their Subsidiaries to grant mortgage loans secured by Healthcare Proper- 11 ties or acquire Healthcare Properties under transactions that are not committed to as of November 23, 1998 (by contract, commitment, lease or otherwise) (the "Healthcare Investments"), the amount of which shall exceed $125,000,000 in the aggregate, less any Merrill Lynch Cash Payments (the "Healthcare Investment Cap"). Notwithstanding the foregoing, however, (i) if the Borrower, MOC and/or their Subsidiaries complete one or more offerings or private place ments of Securities of not less than $100,000,000, the Healthcare Investment Cap shall be equal to $125,000,000, and (ii) this Section 5.25 shall be of no further force or effect at such time as the Bor rower, MOC and/or their Subsidiaries shall have completed one or more offerings or private placements of Securities equal to not less than the sum of $100,000,000 and the Merrill Lynch Cash Payments actually made. For purposes of the foregoing, (a) Healthcare Invest ments shall not include refinancings, substitutions of properties or the like, to the extent that such transactions do not constitute the investment of additional funds, and (b) the Merrill Lynch Cash Payments shall be reduced by the amount of Net Cash Proceeds attributable to the sale of the Santa Anita Artwork. 19. Events of Default. The following Section 6.1(p) is hereby added to the Credit Agreement: (p) the filing group under Section 13(d) of the Securities Exchange Act of 1934, as amended, consisting of the Bass Brothers interests, Taylor & Co., and their affiliates do not maintain ownership of at least 10 million shares of common stock of the Borrower through December 31, 1999 (unless a reduction is required to maintain the Borrower's status as a REIT). 20. Effective Date. This Amendment shall become effective when each of the following conditions is satisfied (or waived by the Required Banks) (the date such conditions are satisfied or waived being deemed the "Effective Date"): (a) the Borrower shall have executed and delivered to the Adminis trative Agent a duly executed original of this Amendment; 12 (b) the Required Banks shall have executed and delivered to the Administrative Agent a duly executed original of this Amendment; (c) MOC shall have executed and delivered to the Administrative Agent a duly executed original of the Confirmation of Guaranty; (d) each of the Guarantors (as defined in the Guaranty) shall have executed and delivered to the Administrative Agent a duly executed original of the Guaranty; (e) each of the parties thereto shall have executed and delivered to the Administrative Agent duly executed originals of each of the Pledges; (f) each of the Affiliated Lenders (as defined in the Subordination Agreement) shall have executed and delivered to the Administrative Agent a duly executed original of the Subordination Agreement; (g) Meditrust Mortgage Investments, Inc. shall have delivered to the Administrative Agent all original executed notes evidencing the Healthcare Mortgages, endorsed in blank, executed assignments in blank of the Healthcare Mortgages and related recorded documents, in recordable form, executed assignments in blank of all unrecorded documents executed in connection with the Healthcare Mortgages, together with UCC-3 Financing Statements, in blank; (h) the Borrower and Meditrust Mortgage Investments, Inc. shall have delivered to the Administrative Agent all original executed Intercompany Notes (as defined in the Subordination Agreement), endorsed in blank; (i) the Pledgors (as defined in the Equity Interests Pledge and Secu rity Agreement) shall have delivered to the Administrative Agent all original stock certificates in connection with pledges thereunder of interests in corporations, together with executed stock powers, in blank; (j) each of the pledgors under the Pledges shall have executed and delivered to the Administrative Agent UCC-1 Financing Statements; (k) the Administrative Agent shall have received an opinion of Nutter, McClennen & Fish, LLP and Goodwin, Procter & Hoar LLP, counsel for the Borrower, MOC and the other parties (the "Other Parties") to the Pledges, the Guaranty and the Subordination Agreement (other than the Administrative Agent), acceptable to the Administrative Agent, the Banks and their counsel; (l) the Administrative Agent shall have received all documents the Administrative Agent may reasonably request relating to the exis- 13 tence of the Borrower, MOC, and the Other Parties, the authority for and the validity of this Amendment, the Pledges, the Subordina tion Agreement and the other documents executed in connection therewith, and any other matters relevant hereto, all in form and substance reasonably satisfactory to the Administrative Agent. Such documentation shall include, without limitation, the certificate of incorporation and by-laws (or other organizational documents) of the Borrower, MOC, and the Other Parties, as amended, modified or supplemented prior to the Effective Date, each certified to be true, correct and complete by an officer of the Borrower, MOC or the Other Parties, as of a date not more than ten (10) days prior to the Effective Date, together with a good standing certificate from the Secretary of State (or the equivalent thereof) of the State of Dela ware with respect to the Borrower and MOC and from the applicable Secretary of State with respect to each of the Other Parties, each to be dated not more than ten (10) days prior to the Closing Date; (m) the Administrative Agent shall have received all certificates, agreements and other documents and papers referred to in this Amendment, unless otherwise specified, in sufficient counterparts, satisfactory in form and substance to the Administrative Agent in its reasonable discretion; (n) the Administrative Agent shall have received UCC-1 searches, ordered by the Borrower, with respect to the Borrower, MOC and each of the Other Parties that are parties to the Pledges; (o) the Borrower, MOC and each of the Other Parties shall have taken all actions required to authorize the execution and delivery of this Amendment, the Pledges, the Subordination Agreement, the Guaranty, the Confirmation of Guaranty and the other documents executed in connection herewith and the performance thereof by the Borrower, MOC and the Other Parties; (p) the Administrative Agent shall have received, for its and all other Banks' account, a fee equal to 0.125% of the Commitments, and the reasonable fees and expenses accrued through the Effective Date of Skadden, Arps, Slate, Meagher & Flom LLP; (q) the representations and warranties of the Borrower contained in the Credit Agreement shall be true and correct in all material re spects on and as of the Effective Date; and (r) receipt by the Administrative Agent and the Banks of a certifi cate of an officer of the Borrower certifying that the Borrower is in 14 compliance with all covenants of the Borrower contained in the Credit Agreement, including, without limitation, the requirements of Section 5.8, as of the Effective Date. 21. Post-Closing. Notwithstanding anything contained herein to the contrary, on or before December 14, 1998, the Borrower shall deliver to the Administrative Agent, (i) a complete table of contents of the mortgage loan files with respect to all the Healthcare Mortgages, (ii) recording information (which may be in the form of copies of the applicable pages of the mortgagee title insurance policies) with respect to each Healthcare Mortgage, (iii) executed amendments to any of the Subsidiary Operating Agreements set forth on Schedule 3 to the Equity Interest Pledge and Security Agreement, so as to permit the pledge pursuant thereto, as well as any transfer, whether by foreclosure or otherwise, pursuant thereto, provided, however, that with respect to those amendments to Subsidiary Operating Agreements that require the consent of a Person that is not an Affiliate of the Borrower or MOC, the Borrower and/or MOC shall only be required to use reasonable, good faith efforts to deliver the same, and (iv) copies of the Subsidiary Operating Agreements and other documents, if any, set forth on Schedule 4 to the Equity Interest Pledge and Security Agreement. In addition, at any time during the continuance of an Event of Default, upon request by the Administrative Agent, the Borrower promptly shall deliver to the Administrative Agent copies of the entire Healthcare Mortgages loan files. 15 22. Entire Agreement. This Amendment constitutes the entire and final agreement among the parties hereto with respect to the subject matter hereof and there are no other agreements, understandings, undertakings, representations or warranties among the parties hereto with respect to the subject matter hereof except as set forth herein. 23. Governing Law. This Amendment shall be governed by, and con strued in accordance with, the law of the State of New York. 24. Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same agree ment, and any of the parties hereto may execute this Amendment by signing any such counterpart. 25. Headings, Etc. Section or other headings contained in this Amendment are for reference purposes only and shall not in any way affect the meaning or interpretation of this Amendment. 26. No Further Modifications. Except as modified herein, all of the terms and conditions of the Credit Agreement, as modified hereby shall remain in full force and effect and, as modified hereby, the Borrower confirms and ratifies all of the terms, covenants and conditions of the Credit Agreement in all respects. 16 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. BORROWER: MEDITRUST CORPORATION By: /s/ Michael Benjamin ------------------------------ Name: Michael S. Benjamin Title: Senior Vice President 17 BANKS: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Bank and as Administrative Agent By: /s/ Richard Dugoff ------------------------------ Name: Richard Dugoff Title: Vice President 18 BANKERS TRUST COMPANY, as a Bank and as Syndication Agent By: /s/ G. Andrew Keith ------------------------------ Name: G. Andrew Keith Title: Vice President 19 FLEET NATIONAL BANK, as a Bank and as Co-Documentation Agent By: /s/ Cliff Mellor ------------------------------ Name: Cliff Mellor Title: Vice President 20 BANKBOSTON, N.A., as a Bank and as Co- Documentation Agent By: /s/ Douglas Novitch ------------------------------ Name: Douglas Novitch Title: 21 NATIONSBANK, N.A., as a Bank By: /s/ Forrest Scott Singhoff ------------------------------ Name: Forrest Scott Singhoff Title: Senior Vice President 22 VIA BANQUE, as a Bank By:___________________________________ Name: Title: 23 OAK BROOK BANK, as a Bank By:___________________________________ Name: Title: 24 PARIBAS CAPITAL FUNDING LLC, as a Bank By:___________________________________ Name: Title: 25 THE TRAVELERS INSURANCE COMPANY, as a Bank By:___________________________________ Name: Title: 26 TORONTO DOMINION (TEXAS), INC., as a Bank By:___________________________________ Name: Title: 27 CANADIAN IMPERIAL BANK OF COM MERCE, as a Bank By:___________________________________ Name: Title: 28 ML CLO XIX STERLING (CAYMAN) LTD. By: Sterling Asset Manager, LLC, as its Investment Advisor By:_______________________________ Name: Title: 29 MERRILL LYNCH GLOBAL INVESTMENT SERIES: INCOME STRATEGIES PORTFOLIO By: Merrill Lynch Asset Management LP, as Investment Advisor By:_______________________________ Name: Title: 30 MERRILL LYNCH PRIME RATE PORTFOLIO By: Merrill Lynch Asset Management LP, as Investment Advisor By:_______________________________ Name: Title: 31 MERRILL LYNCH DEBT STRATEGIES PORTFOLIO By: Merrill Lynch Asset management LP, as Investment Advisor By:_______________________________ Name: Title: 32 MERRILL, LYNCH, PIERCE, FENNER & SMITH INC. By:___________________________________ Name: Title: 33 VAN KAMPEN AMERICAN CAPITAL SENIOR FLOATING RATE FUND By:___________________________________ Name: Title: 34 VAN KAMPEN AMERICAN CAPITAL SENIOR INCOME TRUST By:___________________________________ Name: Title: 35 AERIES FINANCE LTD. By:___________________________________ Name: Title: 36 CERES FINANCE LTD. By:___________________________________ Name: Title: 37 STRATA FUNDING LTD. By:___________________________________ Name: Title: 38 MORGAN STANLEY SENIOR FUNDING, INC. By:___________________________________ Name: Title: 39 CREDITANSTALT CORPORATE FINANCE INC. By:___________________________________ Name: Title: By:___________________________________ Name: Title: 40 BANK ONE, ARIZONA, NA By:___________________________________ Name: Title: 41 BAYERISCHE HYPO- UND VEREINSBANK AG, NEW YORK BRANCH By:___________________________________ Name: Title: By:___________________________________ Name: Title: 42 CAPTIVA FINANCE LTD. By:___________________________________ Name: Title: 43 CAPTIVA II FINANCE LTD. By:___________________________________ Name: Title: 44 THE CHASE MANHATTAN BANK By:___________________________________ Name: Title: 45 DLJ CAPITAL FUNDING, INC. By:___________________________________ Name: Title: 46 DRESDNER KLEINWORT BENSON By:___________________________________ Name: Title: By:___________________________________ Name: Title: 47 ERSTE BANK NEW YORK BRANCH By:___________________________________ Name: Title: By:___________________________________ Name: Title: 48 FIRST UNION NATIONAL BANK By:___________________________________ Name: Title: 49 KEY CORPORATE CAPITAL INC. By:___________________________________ Name: Title: 50 KZH III LLC By:___________________________________ Name: Title: 51 KZH SHOSHONE LLC By:___________________________________ Name: Title: 52 KZH STERLING LLC By:___________________________________ Name: Title: 53 LEHMAN SYNDICATED LOAN FUNDING TRUST BY: LEHMAN COMMERCIAL PAPER INC., NOT IN ITS INDIVIDUAL CAPACITY BUT SOLELY AS ASSET MANAGER By:_______________________________ Name: Title: 54 ML CBO IV (CAYMAN) LTD. By: Highland Capital Management, L.P., as Collateral Manager By:_______________________________ Name: Title: 55 MOUNTAIN CLO TRUST By:___________________________________ Name: Title: 56 OXFORD STRATEGIC INCOME FUND By: Eaton Vance Management as Investment Advisor By:_______________________________ Name: Title: 57 PAM CAPITAL FUNDING L.P. By: Highland Capital Management, as Collateral Agent By:_______________________________ Name: Title: 58 PAMCO CAYMAN LTD. By: Highland Capital Management, as Collateral Manager By:_______________________________ Name: Title: 59 SENIOR DEBT PORTFOLIO By: Boston Management and Research as Investment Advisor By:_____________________________ Name: Title: 60 WAINWRIGHT BANK & TRUST COMPANY By:___________________________________ Name: Title: 61 SCHEDULE 9 ---------- SECURITIES 1. 7.4% Senior Notes due 2005, under Indenture, dated as of September 15, 1995, between La Quinta Inns, Inc. and U.S. Trust Company of Texas, N.A. 2. 7.25% Senior Notes due 2004, under Indenture, dated as of September 15, 1995, between La Quinta Inns, Inc. and U.S. Trust Company of Texas, N.A. 3. Medium term Notes due from 9 Months to 30 Months, under Indenture, dated as of September 15, 1995, between La Quinta Inns, Inc. and U.S. Trust Company of Texas, N.A. 4. 7.375% Notes due July 15, 2000 pursuant to the First Supplemental Inden ture, dated as of July 26, 1995, to Indenture, dated as of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as supplemented by the Eighth Supplemental Indenture, dated as of November 5, 1997, between Meditrust Corporation, formerly known as Santa Anita Realty Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank and Trust Company (successor trustee to Fleet National Bank). 5. 7.60% Notes due July 15, 2001 pursuant to the First Supplemental Indenture, dated as of July 26, 1995, to Indenture, dated as of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as supplemented by the Eighth Supplemental Indenture, dated as of November 5, 1997, between Meditrust Corporation, formerly known as Santa Anita Realty Enterprises, Inc. (succes sor by merger to Meditrust), and State Street Bank and Trust Company (successor trustee to Fleet National Bank). 6. 8.54% Convertible Senior Notes due July 1, 2000 pursuant to the Second Supplemental Indenture, dated as of July 28, 1995, to Indenture, dated as of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as supplemented by the Eighth Supplemental Indenture, dated as of November 5, 1997, between Meditrust Corporation, formerly known as Santa Anita Realty Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank and Trust Company (successor trustee to Fleet National Bank). 7. 8.56% Convertible Senior Notes due July 1, 2002 pursuant to the Second Supplemental Indenture, dated as of July 28, 1995, to Indenture, dated as of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as supplemented by the Eighth Supplemental Indenture, dated as of November 5, 1997, between Meditrust Corporation, formerly known as Santa Anita 62 Realty Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank and Trust Company (successor trustee to Fleet National Bank). 8. Medium-Term Notes due from 9 Months to 30 Years from Date of Issue, pursuant to the Third Supplemental Indenture, dated as of August 10, 1995, to Indenture, dated as of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as supplemented by the Eighth Supplemental Indenture, dated as of November 5, 1997, between Meditrust Corporation, formerly known as Santa Anita Realty Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank and Trust Company (successor trustee to Fleet National Bank). 9. 7.82% Notes due September 10, 2026, pursuant to the Fourth Supplemental Indenture, dated as of September 10, 1996, to Indenture, dated as of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as supple mented by the Eighth Supplemental Indenture, dated as of November 5, 1997, between Meditrust Corporation, formerly known as Santa Anita Realty Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank and Trust Company (successor trustee to Fleet National Bank). 10. 7% Notes due August 15, 2007, pursuant to the Fifth Supplemental Inden ture, dated as of August 12, 1997, to Indenture, dated as of July 26, 1995, between Meditrust and Fleet National Bank, as trustee, as supplemented by the Eighth Supplemental Indenture, dated as of November 5, 1997, between Meditrust Corporation, formerly known as Santa Anita Realty Enterprises, Inc. (successor by merger to Meditrust), and State Street Bank and Trust Company (successor trustee to Fleet National Bank). 63 SCHEDULE 5.22 ------------- EXCLUDED SUBSIDIARIES Northeast Arkansas Rehabilitation Limited Partnership Topeka Associates Limited Partnership Northern Louisiana Associates Limited Partnership Acadian Healthcare Associates Limited Partnership Harco Associates Limited Partnership Fort Worth Rehabilitation Limited Partnership EX-11 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11 MEDITRUST CORPORATION STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
Years ended December 31, -------------------------------------------- 1998 1997 1996 ------------ ------------- ------------- Basic: Weighted average number of shares outstanding ......... 121,820 76,274 71,445 Net income from continuing operations ................. $160,931 $162,324 $157,976 Preferred stock dividends ............................. (8,444) -- -- Income from continuing operations available to common shareholders .................................. $152,487 $162,324 $157,976 Per share amounts: Net income per share .................................. (A) $ 1.25 $ 2.13 $ 2.21 Diluted: Weighted average number of shares used in Basic calculation .......................................... 121,820 76,274 71,445 Dilutive effect of: Contingently issuable shares .......................... 4,757 -- -- Stock options ......................................... 236 733 306 Diluted weighted average shares and equivalent shares outstanding ................................... (B) 126,813 77,007 71,751 Net income from continuing operations ................. $160,931 $162,324 $157,976 Preferred stock dividends ............................. (8,444) -- -- Income from continuing operations available to common shareholders .................................. $152,487 $162,324 $157,976 Per share amounts: Net income per share .................................. (A) $ 1.20 $ 2.11 $ 2.20
- - ------------ (A) This calculation is submitted in accordance with Regulation S-K item 601(b) (11) (B) Convertible debentures are not included due to their antidilutive effect. EX-11 12 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11 MEDITRUST OPERATING COMPANY STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
Years ended December 31, -------------------------------------- 1998 1997 1996 ------------- -------------- ----- Basic: (C) Weighted average number of shares outstanding ......... 120,515 82,490 n/a Loss from continuing operations ....................... $(19,851) $ (362) Preferred stock dividends ............................. -- -- Loss from continuing operations available to common shareholders ......................................... $(19,851) $ (362) n/a Per share amounts: Net loss per share .................................... (A) $ (0.16) (0.01) n/a Diluted: Weighted average number of shares used in Basic calculation .......................................... 120,515 82,490 n/a Dilutive effect of: Contingently issuable shares .......................... -- -- Stock options ......................................... -- -- Diluted weighted average shares and equivalent shares outstanding ................................... (B) 120,515 82,490 n/a Net loss from continuing operations ................... $(19,851) $ (362) Preferred stock dividends ............................. -- -- Loss from continuing operations available to common shareholders ......................................... $(19,851) $ (362) n/a Per share amounts: Net loss per share .................................... (A) $ (0.16) $ (0.01) n/a
- - ------------ (A) This calculation is submitted in accordance with Regulation S-K item 601(b) (11) (B) Convertible debentures are not included due to their antidilutive effect. (C) From inception date of Octotober 3, 1997 to December 31, 1997 EX-21 13 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT REGISTRANT: MEDITRUST CORPORATION AS OF DECEMBER 31, 1998 State of Name Incorporation - - ------------------------------------------ -------------- Meditrust Acquisition Corporation III Delaware Meditrust of Arkansas, Inc. Arkansas Meditrust of Baton Rouge, Inc. Louisiana Meditrust of California, Inc. Delaware Meditrust Company LLC Delaware Meditrust of Connecticut, Inc. Delaware Meditrust Finance Corporation Delaware Meditrust Financial Services Corporation Delaware Meditrust of Bedford, Inc. Delaware Meditrust of Houston, Inc. Massachusetts Meditrust of Kansas, Inc. Kansas Meditrust of Louisiana, Inc. Louisiana Meditrust Management Corp. Delaware Meditrust Mortgage Investments, Inc. Delaware Meditrust of the U.K., Inc. Delaware MT General, LLC Delaware MT Limited I, LLC Delaware New England Finance Corporation Delaware Paramount Management Services, Inc. Delaware Paramount Real Estate Services, Inc. Delaware Meditrust Golf Group, Inc. Delaware Escondido Consulting, Inc. California Foothills Holding Company, Inc. Nevada Bellows Golf Group, Inc. Arizona OVLC Management Corporation California Oceanside Golf Management Corp. California
EX-21 14 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT REGISTRANT: MEDITRUST CORPORATION (Continued) AS OF DECEMBER 31, 1998 State of Name Incorporation - - ------------------------------------- -------------- Pecan Grove Country Club Texas Lakeway Golf Clubs, Inc. Texas Woodcrest Golf Club, Inc. Texas Virginia Golf Country Club, Inc. Virginia CSR Golf Group, Inc. Texas ELS Golf Group, Inc. Florida La Quinta Financial Corporation Texas La Quinta Realty Corporation Texas La Quinta Plaza, Inc. Texas La Quinta Investments, Inc. Delaware La Quinta Acquisition Corporation Delaware La Quinta of Lubbock, Inc. Texas La Quinta Inns of Puerto Rico, Inc. Delaware Meditrust Hotel Group, Inc. Delaware Meditrust Golf Group II, Inc. Delaware
EX-21 15 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT REGISTRANT: MEDITRUST OPERATING COMPANY SUBSIDIARY CORPORATIONS AS OF DECEMBER 31, 1998 State of Name Incorporation - - ------------------------------------------------- --------------- The Cobblestone Golf Companies, Inc. Delaware Cobblestone Enterprises of Arizona, Inc. Arizona Cobblestone Enterprises of California, Inc. California Cobblestone Enterprises of Virginia, Inc. Virginia Cobblestone Enterprises of Florida, Inc. Florida Texas Cobblestone Ventures, Inc. Texas Cobblestone Beverage of Texas, Inc. Texas Cobblestone Enterprises of Georgia, Inc. Georgia ELW Water, Inc. Florida Cobblestone Enterprises of North Carolina, Inc. North Carolina Club Ranch Texas The Liquor Club at Pecan Grove, Inc. Texas Lakeways Clubs, Inc. Texas Club Stonebridge Texas Sweetwater Beverage, Inc. Texas The La Quinta Company Delaware La Quinta Inns, Inc. Delaware MOC Holding Company Delaware Robert H. Grant Corporation California MOC -- Arcadia, Inc. Delaware MOC -- SAE, Inc. California
EX-23 16 CONSENTS OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Meditrust Corporation and/or Meditrust Operating Company on Form S-8 (File Nos. 333-57483, 333-39771, 333-39771-01) and on Form S-3 (File Nos. 333-48051, 33-50835, 33-45979, 333-40055 and 333-40055-01) of our report dated February 8, 1999, except for Note 21 for which the date is March 10, 1999, on our audits of the financial statements of The Meditrust Companies and Meditrust Corporation as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, and Meditrust Operating Company as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and the initial period ended December 31, 1997, and of our report dated February 8, 1999 on the financial statement schedules of The Meditrust Companies as of December 31, 1998, which reports are included in the Companies' Reports on Form 10-K. /s/ PricewaterhouseCoopers, LLP March 31, 1999 EX-27.1 17 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1998 and the Consolidated Statement of Income for the year ended December 31, 1998 of Meditrust Corporation and is qualified in its entirety by reference to such financial statements. 0000313749 MEDITRUST CORPORATION 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 292,694 0 42,039 0 0 0 4,097,553 227,970 6,320,985 0 3,301,722 0 70 3,835,499 (949,088) 6,320,985 0 518,872 0 0 0 0 178,374 160,931 0 160,931 (295,875) 0 0 (134,944) (1.18) (1.13)
EX-27.2 18 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1998 and the Consolidated Statement of Operations for the year ended December 31, 1998 of Meditrust Operating Company and is qualified in its entirety by reference to such financial statements. 0000314661 MEDITRUST OPERATING COMPANY 1,000 U.S. DOLALRS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 12,762 0 12,673 0 0 82,732 31,655 760 198,190 82,786 0 0 0 123,934 (21,906) 198,190 0 253,249 0 124,183 0 0 796 (24,651) (4,800) (19,851) 1,648 0 0 (18,203) (.15) (.15)
-----END PRIVACY-ENHANCED MESSAGE-----