UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- -
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
OR
_ _ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 1-11852
________________________
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 62 - 1507028
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
As of October 31,1999, 39,992,091 shares of the Registrant's Common Stock
and 3,000,000 shares of the Registrant's Voting Cumulative Preferred Stock,
were outstanding.
HEALTHCARE REALTY TRUST
INCORPORATED
FORM 10-Q
September 30, 1999
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Part II - Other Information
Item 1. Legal Proceedings 24
Item 6.Exhibits and Reports on Form 8-K 24
Signature 25
Item 1.
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited) (1)
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
ASSETS
Real estate properties:
Land $ 147,130 $ 140,617
Buildings and improvements 1,226,089 1,169,941
Personal property 5,328 4,825
Construction in progress 24,509 72,172
------ ------
1,403,056 1,387,555
Less accumulated depreciation (76,780) (50,116)
------- -------
Total real estate properties, net 1,326,276 1,337,439
Cash and cash equivalents 5,463 14,411
Mortgage notes receivable 266,589 238,184
Other assets, net 29,804 25,389
------ ------
Total assets $ 1,628,132 $ 1,615,423
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable 587,454 559,924
Accounts payable and accrued liabilities 19,253 25,824
Other liabilities 9,244 11,971
----- ------
Total 615,951 597,719
------- -------
Commitments 0 0
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding, 1999 and 1998 - 3,000,000 30 30
Common stock, $.01 par value; 150,000,000 shares authorized;
issued and outstanding, 1999 - 39,842,091; 1998 - 39,792,775 399 398
Additional paid-in capital 1,049,957 1,049,039
Deferred compensation (9,780) (10,662)
Cumulative net income 190,909 129,346
Cumulative dividends (219,334) (150,447)
-------- --------
Total stockholders' equity 1,012,181 1,017,704
--------- ---------
Total liabilities and stockholders' equity $ 1,628,132 $ 1,615,423
============= ===========
(1) The balance sheet at Dec. 31, 1998 has been derived from audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
(The accompanying notes, together with the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are an integral part of these financial statements.)
-1-
Healthcare Realty Trust Incorporated
Condensed Consolidated Statement of Income
For The Three Months Ended September 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share data)
1999 1998
---- ----
REVENUES:
Master lease rental income $ 22,866 $ 8,770
Property operating income 14,623 8,372
Straight line rent 1,394 0
Mortgage interest income 6,717 265
Management fees 687 425
Interest and other income 199 493
--- ---
46,486 18,325
------ ------
EXPENSES:
General and administrative 1,695 7,216
Property operating expenses 5,254 2,852
Interest 9,724 1,951
Depreciation 9,466 3,172
Amortization 117 84
--- --
26,256 15,275
------ ------
NET INCOME $ 20,230 $ 3,050
=========== ===========
NET INCOME PER SHARE - BASIC $ 0.47 $ 0.15
=========== ===========
NET INCOME PER SHARE - DILUTED $ 0.47 $ 0.15
=========== ===========
SHARES OUTSTANDING - BASIC 39,304,676 20,333,500
========== ==========
SHARES OUTSTANDING - DILUTED 39,969,686 20,771,296
========== ==========
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD $ 0.540 $ 0.520
=========== ===========
(The accompanying notes, together with the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are an integral part of these financial statements.)
-2-
Healthcare Realty Trust Incorporated
Condensed Consolidated Statement of Income
For The Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share data)
1999 1998
---- ----
REVENUES:
Master lease rental income $ 69,360 $ 27,025
Property operating income 41,980 23,341
Straight line rent 4,453 0
Mortgage interest income 18,820 570
Management fees 2,010 1,357
Interest and other income 3,353 1,095
----- -----
139,976 53,388
------- ------
EXPENSES:
General and administrative 5,492 9,714
Property operating expenses 15,135 7,586
Interest 28,366 5,406
Depreciation 29,063 9,392
Amortization 357 253
--- ---
78,413 32,351
------ ------
NET INCOME $ 61,563 $ 21,037
============ ============
NET INCOME PER SHARE - BASIC $ 1.44 $ 1.05
====== ======
NET INCOME PER SHARE - DILUTED $ 1.42 $ 1.03
====== ======
SHARES OUTSTANDING - BASIC 39,287,404 19,957,091
========== ==========
- -
SHARES OUTSTANDING - DILUTED 39,948,987 20,404,306
========== ==========
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD $ 1.605 $ 1.545
============ ============
(The accompanying notes, together with the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are an integral part of these financial statements.)
-3-
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(Dollars in thousands)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 61,563 $ 21,037
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 31,050 9,862
Deferred compensation 882 941
Increase (decrease) in other liabilities (2,727) 236
Increase in other assets (2,386) (14,847)
Increase (decrease) in accounts payable and accrued liabilities (6,653) 2,225
Increase in straight line rent (4,453) 0
Gain on sale of real estate (2,150) 0
------ -
Net cash provided by operating activities 75,126 19,454
------ ------
Cash flows from investing activities:
Acquisition and development of real estate properties (41,803) (83,828)
Acquisition and development of mortgages (32,291) 0
Proceeds from sale of mortgages 3,075 0
Proceeds from sale of real estate 27,782 0
------ -
Net cash used in investing activities (43,237) (83,828)
------- -------
Cash flows from financing activities:
Borrowings on notes and bonds payable 101,500 66,599
Repayments on notes and bonds payable (74,203) (11,300)
Dividends paid (68,886) (31,430)
Proceeds from issuance of common stock 752 37,548
--- ------
Net cash provided (used) by financing activities (40,837) 61,417
------- ------
Decrease in cash and cash equivalents (8,948) (2,957)
Cash and cash equivalents, beginning of period 14,411 5,325
------ -----
Cash and cash equivalents, end of period $ 5,463 $ 2,368
============ ============
(The accompanying notes, together with the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are an integral part of these financial statements.)
-4-
Healthcare Realty Trust
Incorporated
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Healthcare Realty Trust Incorporated (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements which are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
The results of operations for the three-month and nine-month periods ending
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
Certain reclassifications have been made for the period July 1, 1998
through September 30, 1998 and for the period January 1, 1998 through September
30, 1998 to conform to the 1999 presentation. These reclassifications had no
effect on the results of operations as previously reported.
Note 2. Organization
The Company invests in healthcare-related properties and mortgages located
throughout the United States. The Company provides management, leasing and
build-to-suit development, and capital for the construction of new facilities as
well as for the acquisition of existing properties. As of September 30, 1999,
the Company had invested or committed to invest in 291 properties (the
"Properties") located in 34 states, which are supported by 70 healthcare-related
entities. The Properties include:
-5-
Number of (in thousands)
Properties Investment
---------- ----------
Ancillary hospital facilities 63 $ 505,232
Medical office buildings 6 26,959
Physician clinics 35 157,875
Skilled nursing facilities 55 248,889
Comprehensive ambulatory care centers 14 36,832
Assisted living facilities 91 321,816
Ambulatory surgery centers 9 43,332
Inpatient rehabilitation facilities 10 157,671
Other 8 167,307
Corporate property 0 3,732
- -----
291 $1,669,645
=== ==========
Note 3. Funds From Operations
Funds from operations ("FFO"), as defined by the National Association of
Real Estate Investment Trusts, Inc. ("NAREIT") 1995 White Paper, means net
income (computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation from real estate assets. NAREIT has adopted, effective January 1,
2000, a new definition of FFO as described in the NAREIT White Paper issued
October 1999.
The Company considers FFO to be an informative measure of the performance
of an equity real estate investment trust ("REIT") and consistent with measures
used by analysts to evaluate equity REITs. FFO does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles, is not necessarily indicative of cash available to fund cash needs,
and should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flow as a
measure of liquidity. FFO for the three months ended September 30, 1999 and
1998, was $26.5 million, basic ($26.6 million, diluted), or $0.68 per basic
share ($0.67 per diluted share) and $12.4 million, or $0.61 per basic share
($0.60 per diluted share), respectively. FFO for the nine months ended September
30, 1999 and 1998, was $78.6 million basic ($78.8 million, diluted), or $2.00
per basic share ($1.97 per diluted share) and $36.3 million, or $1.82 per basic
share ($1.78 per diluted share), respectively.
-6-
Funds from Operations
(Dollars in thousands, except per share data)
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
Net Income (1) $ 20,230 $ 3,050
Non-recurring items (2) 0 6,308
Gain or loss on dispositions 32 0
Straight line rents (1,394) 0
Preferred stock dividend (1,664) 0
ADD:
Depreciation
Real estate 9,326 3,010
Office F,F&E 0 0
Leasehold improvements 0 0
Other non-revenue producing assets 0 0
- -
9,326 3,010
----- -----
Amortization
Acquired property contracts 0 0
Other non-revenue producing assets 0 0
Organization costs 0 0
- -
0 0
- -
Deferred financing costs 0 0
- -
Total Adjustments 6,300 9,318
----- -----
Funds From Operations - Basic $ 26,530 $ 12,368
Convertible Subordinated Debenture Interest 80 0
-- -
Funds From Operations - Diluted $ 26,610 $ 12,368
============ =============
Shares Outstanding - Basic 39,304,676 20,333,500
========== ==========
Shares Outstanding - Diluted 39,969,686 20,771,296
========== ==========
Funds From Operations Per Share - Basic $ 0.68 $ 0.61
============ =============
Funds From Operations Per Share - Diluted $ 0.67 $ 0.60
============ =============
(1) Net income includes $292,858 in 1999 and $315,862 in 1998 of stock based
long-term incentive compensation expense. This expense never requires the
disbursement of cash.
(2) Represents the write-off of certain capitalized software costs, leasehold
improvements, organization and other deferred costs which were deemed to have no
continuing value and incremental internal costs incurred in conjunction with the
Capstone merger.
-7-
Funds from Operations
(Dollars in thousands, except per share data)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Net Income (1) $ 61,563 $ 21,037
Non-recurring items (2) 0 6,308
Gain or loss on dispositions (3) (2,150) 0
Straight line rents (4,453) 0
Preferred stock dividend (4,990) 0
ADD:
Depreciation
Real estate 28,651 8,943
Office F,F&E 0 0
Leasehold improvements 0 0
Other non-revenue producing assets 0 0
- -
28,651 8,943
------ -----
Amortization
Acquired property contracts 0 0
Other non-revenue producing assets 0 0
Organization costs 0 0
- -
0 0
- -
Deferred financing costs 0 0
- -
Total Adjustments 17,058 15,251
------ ------
Funds From Operations $ 78,622 $ 36,288
Convertible Subordinated Debenture Interest 213 0
--- -
Funds from Operations - Diluted $ 78,835 $ 36,288
============= ============
Shares Outstanding - Basic 39,287,404 19,957,091
========== ==========
Shares Outstanding - Diluted 39,948,987 20,404,306
========== ==========
Funds From Operations Per Share - Basic $ 2.00 $ 1.82
============= ============
Funds From Operations Per Share - Diluted $ 1.97 $ 1.78
============= ============
(1) Net income includes $881,542 in 1999 and $940,950 in 1998 of stock based
long-term incentive compensation expense. This expense never requires the
disbursement of cash.
(2) Represents the write-off of certain capitalized software costs, leasehold
improvements, organization and other deferred costs which were deemed to have no
continuing value and incremental internal costs incurred in conjunction with the
Capstone merger.
(3) Represents a gain from the sale of an ancillary hospital facility in
Savannah, Georgia, the sale of a comprehensive ambulatory care center in Miami,
Florida and a loss from the sale of a partnership interest.
-8-
Note 4. Capstone Merger
On October 15, 1998, the Company completed its merger with Capstone Capital
Corporation ("Capstone"). Pursuant to the merger agreement, the Company acquired
Capstone in a stock-for-stock merger in which the stockholders of Capstone
received a fixed ratio of .8518 shares of the Company's common stock and the
holders of Capstone preferred stock received one share of the Company's Series A
Voting Cumulative Preferred Stock in exchange for each share of Capstone
preferred stock. The Company issued 18,906,909 shares of common stock and
3,000,000 shares of preferred stock. The transaction was accounted for as a
purchase and resulted in no goodwill.
The purchase price is summarized as follows (dollars in thousands):
Common stock $ 532,554
Preferred stock 72,052
Cash and cash equivalents 8,330
Liabilities assumed 424,897
-------
Total Purchase Price $ 1,037,833
===========
The assets acquired in the Capstone merger are summarized as follows
(dollars in thousands):
Real estate properties $ 804,178
Mortgage notes receivable 211,590
Cash and cash equivalents 13,767
Other assets 8,298
-----
Total Assets Acquired $ 1,037,833
===========
Note 5. Notes and Bonds Payable
Notes and bonds payable at September 30, 1999 consisted of the
following (dollars in thousands):
Unsecured credit facility $ 241,500
Term loan facility 147,700
Unsecured notes 54,000
6.55% Convertible subordinated debentures, net 73,677
10.5% Convertible subordinated debentures, net 3,598
Mortgage notes and other notes 66,979
------
$ 587,454
===========
-9-
Unsecured Credit Facility
On October 15, 1998, concurrent with its merger with Capstone, the Company
repaid the outstanding balances under both Capstone's and the Company's own
unsecured credit facilities and entered into a $265.0 million unsecured credit
facility (the "Unsecured Credit Facility") with ten commercial banks. The
Unsecured Credit Facility bears interest at LIBOR rates plus 1.05%, payable
quarterly, and matures on October 15, 2001. In addition, the Company will pay,
quarterly, a commitment fee of 0.225 of 1% on the unused portion of funds
available for borrowings. The Unsecured Credit Facility contains certain
representations, warranties, and financial and other covenants customary in such
loan agreements. At September 30, 1999, the Company had available borrowing
capacity of $23.5 million under the Unsecured Credit Facility.
Term Loan Facility
On October 15, 1998, concurrent with the Capstone merger, the Company
entered into a $200.0 million unsecured term loan (the "Term Loan Facility")
with Bank of America (formerly NationsBank). The Term Loan Facility bears
interest at LIBOR plus 1.75%, payable quarterly, and matures on January 14,
2000. The Term Loan Facility contains certain representations, warranties and
financial and other covenants customary in such loan agreements, as well as
restrictions on dividend payments if minimum tangible capital requirements are
not met. At September 30, 1999, the Company had no additional available
borrowing capacity under the Term Loan Facility.
Unsecured Notes
On September 18, 1995 the Company privately placed $90.0 million of
unsecured notes (the "Unsecured Notes") with 16 institutions. The Unsecured
Notes bear interest at 7.41%, payable semi-annually, and mature on September 1,
2002. Beginning on September 1, 1998 and on each September 1 through 2002, the
Company must repay $18.0 million of the principal. The note agreements pursuant
to which the Unsecured Notes were purchased contain certain representations,
warranties and financial and other covenants customary in such loan agreements.
Convertible Subordinated Debentures
As part of the Capstone merger, the Company assumed and recorded at fair
value $74.7 million aggregate face amount of 6.55% Convertible Subordinated
Debentures (the "6.55% Debentures") of Capstone. At September 30, 1999, the
Company had approximately $73.7 million aggregate principal amount of 6.55%
Debentures outstanding with a face amount of $74.7 million and unaccreted
discount of $1.0 million. Such rate of interest and accretion of discount
represents a yield to maturity of 7.5% per annum (computed on a semiannual bond
equivalent basis). The 6.55% Debentures are due on March 14, 2002, unless
redeemed earlier by the Company or converted by the holder, and are callable on
March 16, 2000. Interest on the 6.55% Debentures is payable on March 14 and
September 14 in each year. The 6.55% Debentures are convertible into shares of
common stock of the Company at the option of the holder at any time prior to
redemption or stated maturity, at a conversion rate of 33.6251 shares per $1
thousand bond.
-10-
As part of the Capstone merger, the Company assumed and recorded at fair
value $3.75 million aggregate face amount of 10.5% Convertible Subordinated
Debentures (the "10.5% Debentures") of Capstone. At September 30, 1999, the
Company had approximately $3.6 million aggregate principal amount of 10.5%
Debentures outstanding with a face amount of $3.4 million and unamortized
premium of $0.2 million. Such rate of interest and amortization of premium
represents a yield to maturity of 7.5% per annum (computed on a semiannual bond
equivalent basis). The 10.5% Debentures are due on April 1, 2002, unless
redeemed earlier by the Company or converted by the holder, and are callable on
April 5, 2000. Interest on the 10.5% Debentures is payable on April 1 and
October 1 in each year. The 10.5% Debentures are convertible into shares of
common stock of the Company at the option of the holder at any time prior to
redemption or stated maturity, at a conversion rate of 52.8248 shares per $1
thousand bond.
Mortgage Notes
As part of the Capstone merger, the Company assumed nonrecourse mortgage
notes payable, and the related collateral, as follows (Dollars in millions):
Book Value
Of Collateral at Balance at
Original Interest September 30, September30,
Mortgagor Balance Rate Collateral 1999 1999
--------- ------- ---- ---------- ---- ----
Life Insurance Co. $ 23.3 8.500% Ancillary hospital facility $ 42.7 $ 22.7
Life Insurance Co. 4.7 7.625% Ancillary hospital facility 10.7 4.4
Life Insurance Co. 17.1 8.125% Two ambulatory surgery centers 37.0 16.6
& one ancillary hospital
Bank 17.0 8.500% Six skilled nursing facilities 29.8 16.3
---- ---- ----
$ 62.1 $ 120.2 $ 60.0
====== ========== ========
The $23.3 million note is payable in monthly installments of principal and
interest based on a 30 year amortization with the final payment due in July
2026. The $4.7 million note is payable in monthly installments of principal and
interest based on a 20 year amortization with the final payment due in January
2017. The three notes totaling $17.1 million are payable in monthly installments
of principal and interest based on a 25 year amortization with a balloon payment
of the unpaid balance in September 2004. The $17.0 million note bears interest
at 50 basis points in excess of the prime rate, and is payable in monthly
installments of principal and interest based on a 25 year amortization with a
balloon payment of the unpaid balance in June 2000.
Note 6. Commitments
As of September 30, 1999, the Company had a net investment of approximately
$24.5 million in four build-to-suit developments in progress and one expansion
of an existing facility, which have a total remaining funding commitment of
approximately $30.7 million. The Company also has 13 mortgages under development
at September 30, 1999, which have a total remaining funding commitment of
approximately $5.6 million. The company has future
-11-
commitments to purchase or provide funding for the construction of real estate
properties totaling $37.5 million.
As part of the Capstone merger, agreements were entered into with three
individuals affiliated with Capstone that restrict competitive practices and
that the Company believes will protect and enhance the value of the real estate
properties acquired from Capstone. These agreements provide for the issuance of
150,000 shares of common stock of the Company annually to the individuals on
October 15 of the years 1999, 2000, 2001 and 2002, provided all terms of the
agreements are met. The Company issued 150,000 shares of common stock to these
individuals in October 1999.
Note 7. Asset Disposition
During the first quarter of 1999, the Company sold a 90,000 square foot
ancillary hospital facility in Savannah, Georgia for $8.1 million in net
proceeds. These proceeds were applied to the partial repayment of the Term Loan
Facility.
During the second quarter of 1999, the Company sold a 56,900 square foot
comprehensive ambulatory care center in Miami, Florida for $11.3 million in net
proceeds, sold a 51% interest in a partnership for $5.4 million in net proceeds
and received $3.1 million in net proceeds from the repayment of two mortgage
notes receivable. These proceeds were applied to the partial repayment of the
Term Loan Facility.
During the third quarter of 1999, the Company sold a 19,000 square foot
integrated delivery system facility in Mesquite, Nevada for $3.0 million in net
proceeds. These proceeds were applied to the partial repayment of the Term Loan
Facility.
Note 8. Contingencies
On March 22, 1999, HR Acquisitions I Corporation, formerly known as
Capstone Capital Corporation ("HRT"), a wholly-owned subsidiary of the Company,
filed suit against Medistar Corporation and its affiliate, Medix Construction
Company in United States District Court for the Northern District of Alabama,
Southern Division. HRT is seeking damages in excess of two million dollars
arising out of the development and construction of four real estate projects
located in different parts of the United States. Medistar and Medix served as
the developer and contractor, respectively, for the projects. HRT has asserted
claims for damages relating to, among others, alleged breaches of the
development and contracting obligations, failure to perform in accordance with
contract terms and specifications, and other deficiencies in performance by
Medistar and Medix. On June 10, 1999, Medistar and Medix filed its answer and
counterclaim asserting a variety of alleged legal theories, claims for damages
for alleged deficiencies by HRT and the Company in the performance of alleged
obligations, and for damage to their business reputation, claiming in excess of
seventy-five million dollars in damages. Attempts at mediation have not resulted
in a settlement of the disputes. The Company's prosecution of its claims and
defense of the counterclaims will be vigorous. While there is yet no ability to
predict the outcome, the Company believes that, even though the asserted cross
claims seek substantial monetary damages, the allegations made by Medistar and
Medix are not factually or legally meritorious, are subject to sustainable
defenses and are, to a significant extent, covered by liability insurance.
-12-
Note 8. Net Income Per Share
The table below sets forth the computation of basic and diluted earnings
per share as required by FASB Statement No. 128 for the three and nine months
ended September 30, 1999 and 1998.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic EPS
Average Shares Outstanding 39,835,669 20,863,443 39,818,397 20,487,034
Actual Restricted Stock Shares (530,993) (529,943) (530,993) (529,943)
Denominator - Basic 39,304,676 20,333,500 39,287,404 19,957,091
========== ========== ========== ==========
Net Income $ 20,229,670 $ 3,049,966 $ 61,563,408 $ 21,036,549
Preferred Stock Dividend (1,664,070) 0 (4,989,958) 0
---------- - ---------- -
Numerator - Basic $ 18,565,600 $ 3,049,966 $ 56,573,450 $ 21,036,549
============ =========== ============ ============
Per Share Amount $ 0.47 $ 0.15 $ 1.44 $ 1.05
============ =========== ============ =========
Diluted EPS
Average Shares Outstanding 39,835,669 20,863,443 39,818,397 20,487,034
Actual Restricted Stock Shares (530,993) (529,943) (530,993) (529,943)
Restricted Shares - Treasury 482,134 424,106 476,759 399,832
Dilution for Convertible Debentures 181,136 0 181,136 0
Dilution for Employee Stock Purchase Plan 1,740 13,690 3,688 17,808
Dilution for Warrants 0 0 0 29,575
- - - ------
Denominator - Diluted 39,969,686 20,771,296 39,948,987 20,404,306
========== ========== ========== ==========
Numerator - Basic $ 18,565,600 $ 3,049,966 $ 56,573,450 $ 21,036,549
Convertible Subordinated Debenture Interest 79,896 0 212,929 0
------ - ------- -
Numerator - Diluted $ 18,645,496 $ 3,049,966 $ 56,786,379 $ 21,036,549
============ ============ ============ ============
Per Share Amount $ 0.47 $ 0.15 $ 1.42 $ 1.03
============ ============ ============ ============
-13-
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operating Results
Third Quarter 1999 Compared to Third Quarter 1998
The results of operations of the Company were significantly impacted by the
Capstone merger. For the three months ended September 30, 1999, net income
increased $11.6 million due to the Capstone merger. As a result of the Capstone
transaction, the Company acquired 111 properties and 75 mortgages for a fair
value of $804.2 million and $211.6 million, respectively. These investments
resulted in additional master lease rental income, straight line rental income,
property operating income net of operating expenses, and mortgage interest
income for the three months ended September 30, 1999 totaling $24.2 million, as
well as additional interest and other income of $0.2 million, additional
interest expense of $4.6 million under the unsecured credit facility and term
loan facility and depreciation and amortization expense of $5.9 million. The
Company also assumed Capstone's 6.55% and 10.5% convertible subordinated
debentures and notes payable, with interest rates ranging from 7.625% to 8.50%
at September 30, 1999, which resulted in interest expense of $2.3 million for
the three months ended September 30, 1999.
Net income for the quarter ended September 30, 1999 was $20.2 million,
($0.47 basic and diluted share), on total revenues of $46.5 million compared to
net income of $3.1 million, ($0.15 per basic and diluted share) on total
revenues of $18.3 million for the same period in 1998. Funds from operations
("FFO"), basic, was $26.5 million ($0.68 per basic share), and FFO, diluted, was
$26.6 million ($0.67 per diluted share), for the quarter ended September 30,
1999 compared to $12.4 million, or $0.61 per basic share ($0.60 per diluted
share), in 1998.
Total revenues for the three months ended September 30, 1999, compared to
the three months ended September 30, 1998, increased $28.2 million, or 153.7%.
Excluding the impact of the Capstone merger, which is discussed above, total
revenues for the quarter ended September 30, 1999, compared to the same period
in 1998, increased $1.5 million, or 8.0%. This increase is primarily due to an
increase in property operating income. Excluding the effect of the Capstone
merger, property operating income increased $1.3 million, or 15.2%. Since the
third quarter of 1998, excluding the effect of the Capstone merger, the Company
has sold four buildings and three previously-owned buildings were brought under
the Company's property management services. The Company acquired two additional
buildings also under property management and four buildings were acquired under
master lease arrangements. Certain leases acquired from Capstone contain
escalating rental rates over the life of the leases; however, rental income is
recognized as earned on a straight-line basis over the life of the lease.
Therefore, $1.4 million of accrued straight-line rental income is included in
net income for the three months ended September 30, 1999. Mortgage interest
income increased $6.5 million for the three months ended September 30, 1999
compared to 1998 due mainly to the acquisition of 75 mortgages in the Capstone
merger. Management fees increased $0.3 million, or 61.7%, for the three months
ending September 30, 1999, compared to the same period in 1998 substantially due
to the addition of third party asset management contracts in Florida.
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Total expenses for the three months ended September 30, 1999 were $26.3
million compared to $15.3 million for the three months ended September 30, 1998,
an increase of $11.0 million, or 71.9%. Excluding the effect of the Capstone
merger, total expenses decreased $4.1 million, or 26.9%, for the three months
ended September 30, 1999, compared to 1998. General and administrative expenses
decreased $5.7 million, or 79.5%, for the quarter ended September 30, 1999,
compared to the same period in 1998. The three months ended September 30, 1998
includes a $6.3 million write-off of certain capitalized software costs,
leasehold improvements, organization and other deferred costs which were deemed
to have no continuing value and incremental internal costs incurred in
conjunction with the Capstone merger. During 1999, there was an increase in the
number of employees for property management, development, and other
service-based activities. Property operating expenses increased $2.4 million, or
84.2%, for the three months ended September 30, 1999 compared to the same period
in 1998. Excluding the effect of the Capstone merger, property operating
expenses increased $0.3 million, or 11.9%, for the same reasons property
operating income increased, as discussed in the preceding paragraph. Interest
expense increased $7.8 million, or 398.4%, for the three months ended September
30, 1999 compared to the same period in 1998. Excluding the effect of the
Capstone merger, interest expense increased $0.9 million, or 44.6%, for the
three months ended September 30, 1999 compared to the same period in 1998.
During the three months ended September 30, 1999, the Company had an average
outstanding debt balance of approximately $85.0 million under the unsecured
credit facility, excluding the effect of the Capstone merger, compared to $10.0
million in 1998 while the balance under the unsecured notes was $18.0 million
lower during the three months ended September 30, 1999 compared to 1998.
Depreciation and amortization expense increased $6.3 million, or 194.3%, for the
three months ended September 30, 1999 compared to the same period in 1998.
Excluding the effect of the Capstone merger, depreciation and amortization
expense increased $0.4 million, or 12.7%, for the three months ended September
30, 1999 compared to 1998, for the same reasons property operating income
increased, as discussed in the preceding paragraph.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
The results of operations of the Company for the nine months ended
September 30, 1999 were significantly impacted by the Capstone merger. For the
nine months ended September 30, 1999, net income increased $34.7 million due to
the Capstone merger. As described in the operating results for the third
quarter, the Company acquired 111 properties and 75 mortgages as a result of the
Capstone merger. These investments resulted in additional master lease rental
income, straight line rental income, property operating income net of operating
expenses, and mortgage interest income for the nine months ended September 30,
1999 totaling $72.1 million, as well as additional interest and other income of
$0.7 million, additional interest expense of $12.8 million under the unsecured
credit facility and term loan facility, and depreciation and amortization
expense of $18.4 million. The Company also assumed Capstone's 6.55% and 10.5%
convertible subordinated debentures and notes payable, with interest rates
ranging from 7.625% to 8.50% at September 30, 1999, which resulted in interest
expense of $6.9 million for the nine months ended September 30, 1999.
Net income for the nine months ended September 30, 1999 was $61.6 million
($1.44 per basic share and $1.42 per diluted share), on total revenues of $140.0
million compared to net
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income of $21.0 million ($1.05 per basic share and $1.03 per diluted share), on
total revenues of $53.4 million, for the same period in 1998. FFO, basic, was
$78.6 million ($2.00 per basic share) and FFO, diluted, was $78.8 million ($1.97
per diluted share) compared to $36.3 million, or $1.82 per basic share ($1.78
per diluted share), in 1998.
Total revenues for the nine months ended September 30, 1999, compared to
the same period in 1998, increased $86.6 million, or 162.2%. Excluding the
impact of the Capstone merger, total revenues for the nine months ended
September 30, 1999, compared to 1998, increased $7.9 million, or 14.9%. This
increase is primarily due to increases in master lease rental income, property
operating income and interest and other income. Excluding the effect of the
Capstone merger, master lease rental income and property operating income
increased $5.1 million, or 10.2%. Since the third quarter of 1998, excluding the
effect of the Capstone merger, the Company has sold four buildings and three
previously-owned buildings were brought under the Company's property management
services. The Company acquired two additional buildings, also under property
management, one property under construction was completed and began operations,
and four buildings were acquired under master lease arrangements. Interest and
other income, excluding the effect of the Capstone merger, increased $1.5
million, or 140.7%, during the nine months ended September 30, 1999, compared to
the same period in 1998. During the nine months ended September 30, 1999, the
Company sold an ancillary hospital facility, a comprehensive ambulatory care
center, and a 51% interest in a partnership for net proceeds totaling $24.8
million, resulting in a $2.2 million net gain, reflected in interest and other
income. Certain leases acquired from Capstone contain escalating rental rates
over the life of the leases; however, rental income is recognized as earned on a
straight-line basis over the life of the lease. Therefore, $4.5 million of
accrued straight-line rental income is included in net income for the nine
months ended September 30, 1999. Mortgage interest income increased $18.8
million for the nine months ended September 30, 1999 compared to 1998, due
mainly to the acquisition of 75 mortgages in the Capstone merger. Management
fees increased $0.7 million, or 48.1%, for the nine months ended September 30,
1999, compared to the same period in 1998 substantially due to the addition of
third party asset management contracts in Florida.
Total expenses for the nine months ended September 30, 1999 were $78.4
million compared to $32.4 million for the nine months ended September 30, 1998,
an increase of $46.1 million, or 142.4%. Excluding the effect of the Capstone
merger, total expenses increased $2.1 million, or 6.5%, for the nine months
ended September 30, 1999, compared to 1998. General and administrative expenses
decreased $4.5 million, or 46.2%, for the nine months ended September 30, 1999
compared to the same period in 1998. During the nine months ended September 30,
1998, the Company incurred a $6.3 million write-off of certain capitalized
software costs, leasehold improvements, organization and other deferred costs,
which were deemed to have no continuing value and incremental internal costs
incurred in conjunction with the Capstone merger. During 1999, there was an
increase in the number of employees for property management, development, and
other service-based activities. Property operating expenses increased $7.5
million, or 99.5%, for the nine months ended September 30, 1999 compared to the
same period in 1998. Excluding the effect of the Capstone merger, property
operating expenses increased $2.0 million, or 26.7%, for the same reasons
property operating income increased as described in the preceding paragraph.
Interest expense increased $23.0 million, or 424.7%, for the nine months ended
September 30, 1999 compared to the same period in 1998. Excluding the impact of
the Capstone merger, interest expense increased $3.2 million, or 58.9%, for the
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nine months ended September 30, 1999 compared to the same period in 1998. During
the nine months ended September 30, 1999, the Company had an average outstanding
debt balance of approximately $85.0 million under the unsecured credit facility,
excluding the effect of the Capstone merger, compared to $5.9 million in 1998
while the balance under the unsecured notes was $18.0 million lower in 1999 than
in 1998. Additionally, there was approximately $4.4 million less in construction
in progress, excluding the effect of the Capstone merger, throughout the nine
months ended September 30, 1999 compared to the same period in 1998 which
resulted in less capitalized interest in 1999. Depreciation and amortization
increased $19.8 million, or 205.0%, for the nine months ended September 30, 1999
compared to the same period in 1998. Excluding the effect of the Capstone
merger, depreciation and amortization expense increased $4.4 million, or 14.5%,
for the same reasons master lease rental income and property operating income
increased, as discussed in the preceding paragraph.
Liquidity and Capital Resources
On October 15, 1998, at the time of the Capstone merger, the Company repaid
the outstanding balances under both Capstone's and the Company's own unsecured
credit facilities and entered into a $265.0 million unsecured credit facility
(the "Unsecured Credit Facility") with ten commercial banks. The Unsecured
Credit Facility bears interest at LIBOR plus 1.05%, payable quarterly, and
matures on October 15, 2001. In addition, the Company will pay, quarterly, a
commitment fee of 0.225 of 1% on the unused portion of funds available for
borrowings. At September 30, 1999, the Company had available borrowing capacity
of $23.5 million under the Unsecured Credit Facility.
At the time of the Capstone merger, the Company entered into a $200.0
million unsecured term loan (the "Term Loan Facility") with Bank of America
(formerly NationsBank). The Term Loan Facility, as amended in October 1999,
bears interest at LIBOR plus 1.75%, payable quarterly, and matures on January
14, 2000. Since the Capstone merger, the Company has received net proceeds from
the sale of assets and from mortgage repayments of approximately $52.3 million
and reduced the unpaid balance of the Term Loan Facility as of September 30,
1999 to $147.7 million. The Term Loan Facility maturity date has been extended
from October 16, 1999 to January 14, 2000. The Company expects that the Term
Loan Facility will be repaid by internally generated cash flow, proceeds from
the sale of additional assets, proceeds from additional prepayments of mortgage
notes receivable and proceeds from secured financing of real estate investments.
If such sources of funds are insufficient to repay the Term Loan Facility in
full, the Company may be required to extend the maturity date or refinance any
unpaid balance. Depending upon credit market conditions existing at the maturity
date, the Company may incur higher interest costs resulting from such an
extension or refinancing.
In 1995, the Company privately placed $90.0 million of unsecured notes (the
"Unsecured Notes") bearing interest at 7.41%, payable semi-annually ($5.3
million paid during 1999), and mature on September 1, 2002. The Company must
repay $18.0 million of principal annually. At September 30, 1999, $54.0 million
was outstanding under the Unsecured Notes.
The Company assumed in the Capstone merger 10.5% Convertible Subordinated
Debentures and 6.55% Convertible Subordinated Debentures having an aggregate
principal
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balance of $78.3 million. In 1999, the Company will pay $5.3 million of interest
on these subordinated debentures.
As of September 30, 1999, the Company can issue an aggregate of
approximately $106.4 million of securities remaining under currently effective
registration statements. Due to the current market price of the Company's stock,
the Company does not presently plan to offer securities under such registration
statements. The Company may, under certain circumstances, borrow additional
amounts in connection with the renovation or expansion of its properties, the
acquisition or development of additional properties or, as necessary, to meet
distribution requirements for REITs under the Internal Revenue Code. The Company
may raise additional capital or make investments by issuing, in public or
private transactions, its equity and debt securities, but the availability and
terms of any such issuance will depend upon market and other conditions.
During the first quarter of 1999, the Company sold an ancillary hospital
facility in Savannah, Georgia for net proceeds of $8.1 million. The proceeds
were applied to the partial repayment of the Term Loan Facility.
During the second quarter of 1999, the Company sold a comprehensive
ambulatory care center in Miami, Florida for $11.3 million in net proceeds, a
51% partnership interest for $5.4 million in net proceeds, two mortgage notes
receivable were repaid for $3.1 million in net proceeds, and received $0.6
million from the purchase of a bank's participating interest in six mortgage
notes receivable. These proceeds were applied to the partial repayment of the
Term Loan Facility.
During the third quarter of 1999, the Company sold an integrated delivery
system facility in Mesquite, Nevada for $3.0 million in net proceeds. These
proceeds were applied to the partial repayment of the Term Loan Facility.
As of September 30, 1999, the Company had an investment of approximately
$24.5 million in four build-to-suit developments in progress and one expansion
of an existing facility, which have a total remaining funding commitment of
approximately $30.7 million. The Company also had 13 mortgages under development
at September 30, 1999, which have a total remaining funding commitment of
approximately $5.6 million. The Company has future commitments to purchase or
provide funding for the construction of real estate properties totaling $37.5
million. The Company intends to fund these commitments with funds available from
operations and proceeds from the Unsecured Credit Facility.
At September 30, 1999, the Company had stockholders' equity in excess of
$1.0 billion. The debt to total capitalization ratio was approximately .367 to 1
at September 30, 1999.
On July 27, 1999, the Company declared an increase in its quarterly common
stock dividend from $0.535 per share ($2.14 annualized) to $0.540 per share
($2.16 annualized) payable to stockholders of record on August 6, 1999. This
dividend was paid on August 16, 1999. In October 1999, the Company announced
payment of a common stock dividend of $0.545 per share ($2.18 annualized) to
holders of record of common shares on November 5, 1999. This dividend is payable
on November 16, 1999 and relates to the period July 1, 1999 through September
30, 1999. The Company presently plans to continue to pay its quarterly
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common stock dividends with increases consistent with its current practice. In
the event that the Company cannot make additional investments in 1999 because of
an inability to obtain new capital by issuing equity and debt securities, the
Company expects to continue to be able to pay its common stock dividends in a
manner consistent with its current practice. Should access to new capital not be
available, the Company is uncertain of its ability to increase its quarterly
common stock dividends.
During 1999, the Company expects to pay quarterly dividends on its 8 7/8%
Series A Voting Cumulative Preferred Stock in the annualized amount of $2.22 per
share.
Under the terms of the leases and other financial support agreements
relating to most of the properties, tenants or healthcare providers are
generally responsible for operating expenses and taxes relating to the
properties. As a result of these arrangements, with limited expectations not
material to the performance of the Company, the Company does not believe that it
will be responsible for any major expenses in connection with the properties
during the respective terms of the agreements. The Company anticipates entering
into similar arrangements with respect to additional properties it acquires or
develops. After the term of the lease or financial support agreement, or in the
event the financial obligations required by the agreement are not met, the
Company anticipates that any expenditures it might become responsible for in
maintaining the properties will be funded by cash from operations and, in the
case of major expenditures, possibly by borrowings. To the extent that
unanticipated expenditures or significant borrowings are required, the Company's
cash available for distribution and liquidity may be adversely affected.
The Company plans to continue to meet its liquidity needs, including
funding additional investments in 1999, paying its quarterly dividends (with
increases consistent with its current practices) and funding the debt service on
the 10.50% Convertible Subordinated Debentures, the 6.55% Convertible
Subordinated Debentures, the Unsecured Credit Facility, and the Term Loan
Facility, and the Unsecured Notes from its operating revenues, the proceeds of
mortgage loan repayments, sales of real estate investments, and debt market
financings. The Company believes that its liquidity and sources of capital are
adequate to satisfy its cash requirements. The Company, however, cannot be
certain that these sources of funds will be available at a time and upon terms
acceptable to the Company in sufficient amounts to meet its liquidity needs.
Impact of Inflation
Inflation has not significantly affected the earnings of the Company
because of the moderate inflation rate and the fact that most of the Company's
leases and financial support arrangements require tenants and sponsors to pay
all or some portion of the increases in operating expenses, thereby reducing the
risk of any adverse effects of inflation to the Company. In addition, inflation
will have the effect of increasing the gross revenue the Company is to receive
under the terms of the leases and financial support arrangements. Leases and
financial support arrangements vary in the remaining terms of obligations from
one to nineteen years, further reducing the risk of any adverse effects of
inflation to the Company. The Unsecured Credit Facility bears interest at a
variable rate; therefore, the amount of interest
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payable under the Unsecured Credit Facility will be influenced by changes in
in short-term rates, which tend to be sensitive to inflation.
Real Estate Investment Trust Tax Proposals
The Clinton Administration's Fiscal Year 2000 Budget proposal includes
three provisions of interest to REITs in general; two of which potentially
affect the Company. These provisions (i) modify the structure of businesses
which are indirectly conducted by the Company and could limit or negatively
affect the Company's future ability to engage indirectly in certain business
activities that cannot be conducted directly by the Company; and (ii) repeal
tax-free conversion of large C corporations to S corporations, which would
effectively tax the built-in gains of C corporations prospectively electing
tax-free reorganizations, thus affecting an acquisition format employed by the
Company in the past. The President's Budget proposal includes numerous other
revenue provisions, none of which would materially impact the Company in the
event of their adoption. Debate regarding the broader implications of the
President's Year 2000 Budget proposals, as well as other matters of federal
fiscal policy, is ongoing, and there is no way to predict the outcome of these
proposals or the eventual economic effect of these proposals on the Company if
these proposals are enacted.
The Senate has approved a bill extending certain expiring tax provisions.
The Senate extenders bill substantially incorporates the Real Estate Investment
Trust Modernization Bill of 1999, which has as its central feature a provision
allowing a REIT to own 100% of the stock of a taxable REIT subsidiary, similar
to the initiative contained in the Administration's Fiscal Year 2000 Budget
proposal mentioned previously. The House extenders bill, which does not
incorporate the REIT provisions, has yet to be considered by the full House and
reconciled with the Senate extenders bill. In addition, the Senate has approved
a trade bill that includes the same REIT provisions as the Senate extender bill.
It, too, has yet to be reconciled with the House trade bill which differs
substantially from the Senate version. The House Ways and Means Committee has
approved a minimum wage bill that substantially incorporates the REIT
Modernization Bill. The Senate has approved a bankruptcy reform with minimum
wage provisions but no REIT provisions pertinent to the Company. Many of these
bills contain provisions similar to the Budget proposal's provisions to modify
the structure of businesses and could have a similar, undetermined impact on the
Company's future business activities as has already been noted. As with the
President's Year 2000 Budget proposal, there is no way to predict the outcome of
these proposals or the eventual economic effect of these proposals on the
Company if these proposals are enacted.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four digits to define the applicable year.
Computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities. The Y2K issue
relating to the Company's corporate information technology systems, including
applications employed with respect to the real estate investments of the
Company, could have a material impact
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on the operations of the Company if compliance is not completed in a timely
manner. The Company's plan to resolve the Y2K issue involves four phases:
assessment, remediation, testing, and implementation.
Status of Y2K Issue - Company's Information Technology Systems
Based on the completed assessment of its own software and hardware relating
to the corporate information technology systems, the Company determined that it
was necessary to modify or replace certain portions of its software and hardware
so that those systems would properly utilize dates beyond December 31, 1999. The
Company has modified and replaced existing software and certain hardware
considered necessary based on its assessment. The Company's costs to complete
these modifications and replacements were less than $50,000.
In the ordinary course of events, the Company has purchased new file
servers and replaced many older desktop microcomputers with new equipment, all
of which is certified to be Y2K compliant by the manufacturers. Additionally,
"patches" available from the manufacturers were purchased to bring certain other
equipment into compliance, and were installed in desktop systems as necessary.
The Company's assessment of computer operating systems and software
indicated that the Company's significant information systems programs have not
required remediation. Accordingly, the Company does not believe that the Y2K
issue presents a material exposure as it relates to the Company's services. The
Company requested, and has subsequently received, certification from all of its
significant software and operating systems vendors that the versions of their
products currently installed are fully Y2K compliant.
The Company has tested 100% of its currently used systems and has found
them to be Y2K compliant in the testing environment.
Y2K Issue - Compliance of Suppliers
The Company has questioned its significant suppliers as to their respective
responses to the Y2K issue. To date, the Company is not aware of any suppliers
with a Y2K issue that would materially impact the Company's results of
operations, liquidity, or capital resources; however, the Company has no means
of ensuring that those parties will in fact be Y2K compliant. The Company has
received responses from approximately 88% of all of its inquiries and has
renewed its solicitation for written disclosures in compliance with the Year
2000 Information and Readiness Disclosure Act. 100% of the written responses
received have certified that they are or will be Y2K compliant by the end of
1999. The inability of suppliers to complete their Y2K resolution process in a
timely fashion could materially impact the Company. The Company cannot presently
determine the effect of non-compliance by the Company's suppliers.
While the Company does have ongoing relationships with third-party payors,
suppliers, vendors, and others, it has no systems that interface directly with
third party vendors other than its accounts with financial institutions and the
Company's payroll system interfaces directly with a vendor. The Company has
installed Y2K compliant software upgrades that
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have been certified by its primary financial institution and has received
notification from its payroll vendor that its systems and software with
which the Company interfaces are compliant.
Y2K Issue - Compliance of Properties
The Company will also have Y2K issue exposure in non-information technology
applications with respect to its real estate investments. Computer technology
employed in elevators, security systems, electrical systems and similar
applications involved in the operations of real estate properties may cause
interruptions of services with respect to those properties on and after January
1, 2000. The terms of agreements in place with respect to the bulk of the real
estate investments held by the Company, including many of the investments
managed by the Company, impose the economic cost of compliance upon third party
lessees and mortgagees; consequently, the costs to the Company for Y2K
remediation should not be material. The Company has received responses from
approximately 89% of its lessees and mortgagees and has renewed its solicitation
for written disclosures in compliance with the Year 2000 Information and
Readiness Disclosure Act. 98% of the responses received have certified that they
are or will be in Y2K compliance by the end of 1999. The Company manages 49 of
its owned investments, all of which have compliance plans in place. The Company
has been issued Y2K compliant letters from its Y2K consultant for 70% of these
investments and expects to have received compliant letters for the remaining
investments by the end of 1999.
Y2K Issue - Compliance of Related to the General Business Environment
Finally, the Y2K issue may affect the greater business environment in which
the Company operates. Due to the general uncertainty surrounding the Y2K
readiness of third parties, including federal and state governments, the effect
of the Y2K issue on the Company's lessees and mortgagees, as well as the Company
itself cannot be gauged. For example, the General Accounting Office has reported
that the systems employed in managing Medicare reimbursements is not likely to
be Y2K compliant in time to ensure the delivery of uninterrupted benefits and
services. Delay in reimbursements could negatively affect the Company's lessees
and mortgagees, resulting in a delay in receipt of payments owed to the
Company's lessees and mortgagees, with the further possibility of delay in
payments due to the Company. Similar consequences could result from the failure
of other parties having such an indirect relationship with the Company.
Management of the Company believes it has an effective program in place to
resolve the Y2K issue in a timely manner. Disruptions in the economy generally
resulting from Y2K issues could materially adversely affect the Company. The
Company could be subject to litigation for computer systems failure, for
example, equipment shutdown or failure to properly date business records. The
Company cannot reasonably estimate the amount of potential liability and lost
revenue at this time. The most reasonable likely worst case Y2K scenario is that
business disruption could occur with respect to third-party payors, suppliers,
or vendors who fail to become Y2K compliant, and disruptions in the economy
generally resulting from Y2K issues could adversely impact the Company.
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Market Risk
The Company is exposed to market risk, in the form of changing interest
rates, on its debt and mortgage notes receivable. The Company has no market risk
with respect to derivatives and foreign currency fluctuations. Management uses
daily monitoring of market conditions and analytical techniques to manage this
risk. The Company does not believe there have been significant changes in its
market risk since December 31, 1998. For a more detailed discussion, see pages
16 through 17 of Exhibit 13 "Annual Report to Shareholders" of the Company's
Form 10-K for the fiscal year ended December 31, 1998.
Cautionary Language Regarding Forward Looking Statements
Statements in this Form 10-Q that are not historical factual statements are
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The statements include, among other things,
statements regarding the intent, belief or expectations of the Company and its
officers and can be identified by the use of terminology such as "may", "will",
"expect", "believe", "intend", "plan", "estimate", "should" and other comparable
terms. In addition, the Company, through its senior management, from time to
time makes forward looking oral and written public statements concerning the
Company's expected future operations and other developments. Shareholders and
investors are cautioned that, while forward looking statements reflect the
Company's good faith beliefs and best judgment based upon current information,
they are not guarantees of future performance and are subject to known and
unknown risks and uncertainties. Actual results may differ materially from the
expectations contained in the forward looking statements as a result of various
factors. For a more detailed discussion of these, and other, factors see pages
25 through 29 of Item 1 of the Company's Form 10-K for the fiscal year ended
December 31, 1998.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 22, 1999, HR Acquisitions I Corporation, formerly known as
Capstone Capital Corporation ("HRT"), a wholly-owned subsidiary of the Company,
filed suit against Medistar Corporation and its affiliate, Medix Construction
Company in United States District Court for the Northern District of Alabama,
Southern Division. HRT is seeking damages in excess of two million dollars
arising out of the development and construction of four real estate projects
located in different parts of the United States. Medistar and Medix served as
the developer and contractor, respectively, for the projects. HRT has asserted
claims for damages relating to, among others, alleged breaches of the
development and contracting obligations, failure to perform in accordance with
contract terms and specifications, and other deficiencies in performance by
Medistar and Medix. On June 10, 1999, Medistar and Medix filed its answer and
counterclaim asserting a variety of alleged legal theories, claims for damages
for alleged deficiencies by HRT and the Company in the performance of alleged
obligations, and for damage to their business reputation, claiming in excess of
seventy-five million dollars in damages. Attempts at mediation have not resulted
in a settlement of the disputes. The Company's prosecution of its claims and
defense of the counterclaims will be vigorous. While there is yet no ability to
predict the outcome, the Company believes that, even though the asserted cross
claims seek substantial monetary damages, the allegations made by Medistar and
Medix are not factually or legally meritorious, are subject to sustainable
defenses and are, to a significant extent, covered by liability insurance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Exhibit 3.2. Amended and Restated Bylaws of Healthcare Realty Trust
Incorporated
(ii) Exhibit 10. Amendment No. 1 Term Loan Credit Agreement
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE REALTY TRUST INCORPORATED
By: /s/ Timothy G. Wallace
----------------------
Timothy G. Wallace
Executive Vice President, Finance
and Chief Financial Officer
Date: November 15, 1999
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